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collapse of FDI activity in 2015. As to 2016, a recovery set in not only on account of the partial sale of Rosneft, which boosted FDI in Russia, but also due to large investments in Kazakhstan.

2.1 FDI in individual EU-CEE countries

FDI inflow increased while economic growth decelerated in the EU-CEE coun-tries in 2016 (figure 9.2). Decoupling of FDI from economic growth has been present in most post-crisis years (Hunya, 2015). Macroeconomic adjustments shaped the pattern of economic performance, while FDI was subject to asset restructuring by foreign investors. The 2015 economic upswing in the EU-CEE countries was primarily due to inflows of EU funds, which were several times higher than the inflow of FDI (see Adarov et al. 2016). Countries recorded a recovery in gross fixed capital formation when the final chunks of EU alloca-tions for the 2007–2013 financing period could be spent. These capital inflows, as well as vigorous household demand, were the main GDP growth drivers in 2015, rather than FDI. Countries with a positive FDI development included Romania and Bulgaria, where fluctuations have been smaller than in other countries, as well as Lithuania and Slovakia, where inflows changed from negative to positive (Hunya, 2016).2

Figure 9.2: FDI inflow in EU-CEE countries, 2013–2016, EUR million

‐2000 0 2000 4000 6000 8000 10000 12000 14000

2013 2014 2015 2016

Remark and sources: see table 9.1.

The 2016 economic slowdown occurred again mainly on account of invest-ments subsiding in most EU-CEE countries (Adarov et al. 2017). Access to EU fund under the 2007–2013 financing period expired and the preparation of new projects under the 2014–2020 financing scheme had not yet taken

2 Negative inflows occur when gross inflows are smaller than disinvestments.

off. Accelerating economic growth in Romania was an exception, triggered by fiscal measures stimulating household consumption. Demand recovery had a positive impact on certain FDI projects, namely in construction, retail and real estate activities, where Romania was the only EU-CEE country to report increasing FDI inflows in two consecutive years, 2015 and 2016. A take-off of FDI activities was recorded in 2016 in five other countries of the region:

Croatia, the Czech Republic, Estonia, Hungary and Slovakia, following very low levels in the previous year. Data for Hungary are especially tricky. The Hungarian National Bank provides three different sets of flow data, of which the one excluding special purpose entities, capital in transit and asset restruc-turing of multinational firms seems the most expressive in terms of the impact of FDI on the home economy. Similar issues may explain negative inflows in Slovakia over several years, while renewed FDI activity in the automotive sector came to dominance in 2016 including that of Jaguar, which allows to expect an upturn in the FDI inflow.

Manufacturing is the prime FDI destination in the region, accounting for more than 30% of the FDI stock in the Czech Republic, Romania, Slovakia and Slovenia, and more than 25% in Croatia, Hungary and Poland (most recent data of end-2015). The relatively low share of manufacturing in Hungary is explained by the organisation of some automotive companies into holdings.

The Czech Republic, Hungary, Poland and Slovakia comprise the Central Euro-pean manufacturing hub consisting in value chains of foreign affiliates in the automotive and electronics industries. Romania has been on the way to joining this club in recent years. Financial and insurance activities are the second most important activity in the region, ranking even first in countries with a low weight of manufacturing such as the Baltic States.

The weights of both manufacturing and finances diminished in the FDI stock in 2015 compared with the previous year. They gave way to rapidly growing FDI in real estate, retail and construction activities generated by the recovery of household demand and the overall investment activity. Foreign investment in other services including shared service centres have also expanded even if not much reflected in the FDI stocks data which are biased towards capital intensive sectors.

The most important investing country in the region is the Netherlands (18.3%

of the FDI stock in 2015). The share of this country, the headquarter location of several international holding companies, has been increasing to the detriment of many other countries. Germany holds the second place (13.5%) and Austria the third (10.7%), a sequence which has not changed for many years. German investors are dominant in the manufacturing sector, while Austrian ones in the financial sector. German investors create trade and lock subsidiaries into international value chains. The bulk of Austrian FDI target the local market of the EU-CEE countries and do not generate much trade.

2.2 FDI in individual Western Balkan economies

The countries of the Western Balkans have a respectable record in attracting FDI relative to their size and in terms of GDP or gross fixed capital formation.

FDI inflows have been on a broadly upward trend since 2012, about EUR 3.5 billion in 2013 and 2014 and about EUR 4 billion in 2015 and 2016 (figure 9.3).

The region provides abundant labour force but a backward infrastructure and fragmented markets which hinder FDI in export-oriented activities.

The size of inflows differs greatly between countries. Serbia receives about half of the regional total, reflecting its large share of population and GDP of the region. The financial sector is the most important activity of foreign inves-tors in Serbia, but manufacturing also takes an important share in the FDI stock. Albania receives the second largest amount of FDI, more than before the financial crisis, due to an improving economic and regulatory environment.

The telecommunications and the energy sector have been the primary invest-ment targets, but manufacturing and professional services are also expanding.

In 2016 the Trans Adriatic Pipeline was the major foreign investment project keeping inflows into the transportation sector high. In contrast, Bosnia and Herzegovina has been less successful than earlier, probably on account of its increasingly segmented economic and regulatory environment. Montenegro is the top FDI receiver in the whole CESEE region related to the size of the coun-try. Most of the investments have been made in the tourism and real estate sec-tors where Russian invessec-tors take a prominent role. The political re-orientation towards the EU and NATO may have discouraged those investors from invest-ing in this country, causinvest-ing the setback of inflows in 2016. Macedonia is the economy with the highest share of manufacturing in its FDI stock (35%). The country has attracted a number of automotive industry and electronics suppli-ers beyond the traditional food industry.

Figure 9.3: FDI inflow in the Western Balkans, 2013–2016, EUR million

0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200

Albania  BiH Kosovo Macedonia Montenegro Serbia 2013 2014 2015 2016

Remark and sources: see table 9.1.

Higher productivity and export competitiveness have been achieved in sectors which have received higher FDI inflows. Only Serbia and Macedonia have progressed with structural upgrading. The Western Balkans are way behind

their EU-CEE peers in attracting FDI into professional services such as shared services, R&D and other advanced services but the region is catching up in locating shared service centres.

The main sources of FDI in the Western Balkans are the Netherlands, Aus-tria, Cyprus, Greece and Russia. The high shares of the Netherlands and Cyprus reflect these countries’ role as tax havens, meaning that much of the FDI reported as coming from there actually originates somewhere else. Austria has built up strong positions in finance and other areas, reflecting its geographical proximity and historic interest in the region. These factors also broadly apply to Greek and Italian FDI in the countries more to the south. Manufacturing FDI tends to originate in Germany, which is why this country has a relatively intensive presence in Serbia and Macedonia. Russian FDI is concentrated in particular countries such as Serbia, Montenegro and Republika Srpska of Bos-nia and Herzegovina and is focused in particular on the energy industry. The stock of Turkish FDI in the region more than doubled between 2010 and 2015.

As in the case of Russian FDI, it tends to be concentrated in particular countries where historical or political links may be stronger such as Albania, Kosovo and the Federation of Bosnia and Herzegovina. Chinese FDI is minimal at present but expanded in Albania and Serbia in 2016. This country has an increasing role in infrastructure projects in which development credit, trade, non-equity links and FDI are interrelated.

2.3 FDI in Russia, Kazakhstan and Ukraine

Russian FDI, both inward and outward, peaked in 2013 and fell significantly in the following two years. Inflows suffered a major blow in 2014 and declined further in 2015 (figure 9.4). Outflows were still high in 2014, but fell in 2015 to almost the level of 2010–2012. Net FDI turned negative, as outflows surpassed inflows and thus FDI contributed to the massive capital flight from Russia (EUR 15 billion in 2015). The rapid contraction of FDI in Russia can be con-nected with the decline in economic performance, the Western sanctions on Russian companies, banks restricting their international transactions, the new Russian anti-offshore legislation and tighter EU rules governing capital trans-actions. In addition, the rouble lost close to 40% of its value in 2015, making Russian companies cheaper in euro terms.

In 2016 FDI in Russia took again an upward turn. The decline of the econ-omy levelled out and more FDI was attracted by reduced import competition into sectors affected by the sanctions (mainly food production). But the main event influencing FDI statistics took place in December, when a 19.5% stake in the giant oil company Rosneft was sold for EUR 10.2 billion to a Singapore investment vehicle, a joint venture between Qatar and the Swiss oil trading firm Glencore.3 Such one-off deals can certainly not change the trend and FDI in Russia will keep being depressed if compared with 2013 or the years before.

3 http://www.reuters.com/article/us-russia-rosneft-privatisation-insight-idUSKBN1582OH

Figure 9.4: FDI inflow in the CIS-4 and Ukraine, 2013–2016, EUR million

0 5000 10000 15000 20000 25000 30000 35000

Belarus Kazakhstan Moldova Russia Ukraine 2013 2014 2015 2016

Remark and sources: see table 9.1.

About half of the Russian inward FDI stock originates from tax havens and off-shore centres, while two-thirds of the outward FDI goes to these destinations.

Some EU members – such as Cyprus, Luxembourg and the Netherlands – as well as the offshore centres in the Caribbean are home to Russian companies and holdings, most probably for security and tax optimisation reasons; inflows and outflows are of similar size over the long run. Most of the FDI in Russia is thus originally Russian capital kept abroad which returns to Russia as FDI.

This roundtripping capital is essentially different from other FDI as it does not contribute to the capital stock, and overstates the importance of FDI in Russia.

FDI inflow into Ukraine recovered in 2015 and increased further in 2016.

It went primarily into the banking sector, in a move related to recapitalisation needs (with EBRD participation); investments in telecommunications were a consequence of the 3G mobile licence sale. The same trend continued in 2016, with further bank recapitalisation and the privatisation of some companies.

Roundtripping is a characteristic of Ukrainian capital as well, but not to the same extent as is the case in Russia.