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Russian FDI to Fall 50% in 2014 on Risk, Institute Says

Foreign direct investment flows to Russia will fall to half of last year’s level in 2014 as the conflict with Ukraine prompts companies to delay expansion, the Vienna Institute for International Economic Studies said.

Russian FDI will fall to 30 billion euros ($41 billion) from 59.7 billion euros last year, the steepest decline in eastern Europe, the institute, also known as WIIW, said in an e-mailed report. Inflows to the 23 east European countries WIIW tracks will decline to 72.9 billion euros from last year’s 97.3 billion euros, the institute forecast.

“The region is exposed to two main factors that drive FDI into opposing directions,” Gabor Hunya, a researcher at WIIW, said in the report. “One is the acceleration of economic growth which spurs FDI. The other is the Ukraine–Russia conflict, which depresses economic growth and increases investment risk in the affected countries.”

Eastern Europe’s recovery from the impact of the euro area’s debt crisis is endangered as the European Union and the U.S. punish Russia for President Vladimir Putin’s actions in neighboring Ukraine. The European Bank for Reconstruction and Development last month cut its 2014 economic growth forecast for the region to 1.4 percent from 2.7 percent it predicted in January, citing the repercussions from the standoff between Russia and its former Soviet neighbor.

FDI inflows to Russia dropped in the first quarter and were “sluggish” in the Baltic nations and Bulgaria, the EU members most reliant on trade with Russia, WIIW said. In Ukraine, whose economy the EBRD predicts will shrink by 7 percent this year, investments will probably fall 47 percent to 1.5 billion euros this year.

The 11 eastern members of the EU will attract 21.6 billion euros this year, up from 12.7 billion euros in 2013, when inflows dropped 65 percent, WIIW forecast.

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