Eurasian Integration Yearbook 2012

The Economics of the Post-Sovietand Eurasian IntegrationIn Kazakhstan, the situation is somewhat different: large volumes of Kazakhcapital flow via the Netherlands and the UK (indeed, foreign investment fromRussia and other CIS countries often reaches Kazakhstan via third countries).The proportion of investment transacted via Cyprus is not significant (see Table8.2).In Section 2 we demonstrate that, once the “transshipment” of capital used formany projects is detected by means of MMI CIS, the geographic distribution ofFDI differs dramatically from that officially recorded in post-Soviet states. It isunlikely that official bodies in the CIS countries and Georgia are prevented fromrecording FDI both at the location of initial investment and final destination byany legal or methodological barriers. To date, the Federal Bank of Germany(Deutsche Bundesbank) and other overseas agencies have separately publishedinformation on the geographic distribution of so-called unmediated andmediated direct investment. In this context, in the case of CIS countries, itbecomes more relevant to discuss the increasing volumes of registered mutualFDI, including mediated investments, since CIS countries themselves rarely actas “transshipment bases” for investing outside the post-Soviet space.Another material discrepancy between the official statistics and MMI CIS dataarises due to the inclusion of investment in project expansion and modernisation.This raises an important methodological question: whether or not FDI shouldinclude the reinvesting of profit generated by overseas subsidiaries. Where aresearcher is interested primarily in the financial aspects of direct investment,reinvested profit does not need to be included, since it has nothing to do withbalance of payments statistics. But where research is focused on the generalrole FDI plays in an economy, regional integration, technology transfer or otherpositive cross-border process, it is necessary to record not only cross-bordermovement of capital but also total investment by a particular foreign company.After all, profit may have been transferred by a TNC to its home country withoutbeing reinvested, and then the TNC may have returned to invest the samesum. Or, for example, cross-border capital movement recorded in balance ofpayments statistics may represent merely a formal exchange of shares withoutany money actually being invested.In practice, the expansion of a foreign investor’s business presence rarelytakes the form of classic FDI. A notable exception to this rule in the CIS wasGazprom’s acquisition of control over Beltransgaz in Belarus, which wasconcluded by transferring funds across the border each time it became necessary.But typically, especially in the CIS, initial investment in assets is much smallerthan subsequent investments in modernisation and expansion. In the case ofprivatisation transactions in Central Asia, foreign investors are often brought innot as part of an attempt to raise funds by selling a state-owned company, butin order to make former Soviet assets competitive internationally, which is oftenimpossible without the participation of a powerful TNC (Kuznetsov, 2008b).134 EDB Eurasian Integration Yearbook 2012