D. Investment relations between EAEU and the LAC region

Figure III.9 Selected Eurasian Economic Union member States: positive (left) and negative (right) inflows of FDI by sector, 2018

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Armenia KazakhstanKyrgyzstan Russian Federation

Positive inflow

Armenia KazakhstanKyrgyzstan Russian Federation

Negative inflow

Agriculture Extraction Manufacturing

Wholesale and retail trade Transport Inf. and comm. technology

Finance and insurance Research and development Other

Source: Eurasian Economic Commission (EEC), “Direct investments in the Eurasian Economic Union 2018” , Statistical Bulletin, Moscow, 2019c.

The divestments seen in certain technologically advanced sectors (R&D, ICT) in EAEU countries, seem to primarily be the result of the economic sanctions imposed against the Russian Federation restricting foreign capital participation in its economic activities. This may have had knock-on effects for other EAEU enterprises due to the important role of investors from the Russian Federation. For example, in 2016 in Belarus, Russian investment in the Ritzio International gambling club network was cancelled and the Russian participation in the Osipovichi automotive plant was sold. In Armenia, the Russian Federation’s Gazprombank had to sell its assets in Areximbank.37 Growing uncertainty in the world economy and international relations were present prior to the global COVID-19 pandemic that has since aggravated the problem, thereby tending to divert investors from some developing countries’ comparatively riskier markets and provoking further divestment in EAEU economies.

Before analysing FDI flows between the two regions, it is important to acknowledge substantial data challenges. Box III.1 explores three of the main challenges and explains how they are dealt with in this document.

37 It is interesting to note that the asset’s buyer, Armenian Ardshinbank is also owned by a Russian citizen, but due to its corporate structure, it is now considered to be domestically owned rather than an intra-EAEU investment.

Box III.1 Data challenges There are substantial challenges associated with the analysis of FDI. First, in all pairs of countries, there are large differences between the outflows of country A towards country B and the inflows that country B receives from country A. While these numbers should theoretically be equal, they are usually not. One major issue is the complexity of the international financial system, where financial flows may be directed through different entities to their destination. This is not necessarily done for nefarious purposes but rather has to do with the way international businesses are structured. Generally, receiving countries have stronger incentives to collect complete data and track not only the direct origin of FDI flows, but also the final origin. For that reason, whenever possible, this chapter reports data from receiving countries rather than sending countries, in line with ECLAC and United Nations data policies.

A second data challenge is that many LAC central banks do not publish data on FDI coming from any or some EAEU countries. A reason for this may be that the flows are so small that they are grouped with “other countries”, rather than published separately. A second reason could be that the flows are so specific and individualized that Central Banks remove the information for confidentiality reasons, which is more likely to happen when investments are concentrated in specialized sectors. A third reason could be that third-country routings are used that obfuscate final ownership (whether purposefully or not).

The absence of attributable data to specific countries means it is necessary to use alternative data sources. Data exists on investment announcements, for example, and in some cases sending countries’ data must be used. This challenge is dealt with on an ad-hoc basis.

The third and final data challenge is the role of offshore financial centres. The British Virgin Islands and the Cayman Islands are technically amongst the largest recipients of FDI flows in the LAC region, but these are not productive investments and they are thus not included in any LAC FDI statistics. This is more challenging for other countries that play substantial roles in the international financial system. Many of these countries, especially those located in the Caribbean, but also others, such as the Netherlands or Ireland, report domestic statistics that exclude non-productive investments, thus enabling the analyst to separate out relevant data for such countries.

However, in the case of incoming FDI in EAEU member States, a dominant presence of such financial centres can be seen. In fact, the Russian Tax Service has defined nine offshore LAC jurisdictions, which to a great extent defines the pattern of the two regions’ investment cooperation. The offshore jurisdictions are Antigua and Barbuda, the Bahamas, Belize, Dominica, Grenada, Panama, Saint Kitts and Nevis, Saint Lucia and Saint Vincent and the Grenadines. FDI originating in these jurisdictions cannot be attributed to the LAC region, but the possibility cannot be discarded.

The solution used in this document is to present the data from offshore jurisdictions separately from those from the rest of the LAC region. While the definition of these nine offshore jurisdictions originates with the Russian Tax Service, the same procedure will be applied for each of the EAEU member States.

Source: Prepared by the authors, on the basis of the Russian Tax Service [online] https://www.nalog.ru/rn77/ related_activities/megdunarodnoe/spisok_ofshor/).

Since 2015, a total of US$ 19.51 billion of FDI has been registered in the EAEU from the LAC region. However, as described in box III.1, the data is difficult to interpret. Since 99.9% of these inflows originated in offshore jurisdictions, it is not clear whether these are inflows from the LAC region, or whether these jurisdictions are used to redirect flows from other locations. Momentarily ignoring the origin of investment, table 1 shows that the Russian Federation dominates the receipt of LAC FDI, concentrating 98.6% of the total, followed at great distance by Kazakhstan. However, unique dynamics affect different countries with respect to the origin of LAC FDI. Whereas in Belarus, Kazakhstan and the Russian Federation, non-offshore FDI registered from the LAC region is, basically, non-existent, in Armenia and Kyrgyzstan, non-offshore LAC FDI makes up 87% and 100%, respectively. Looking at the results over time, following the positive trend of previous years, there was a huge drop-off in 2018. Considering only non-offshore investment, the trends are not as clear-cut, because they are far more dynamic. Armenia has seen substantial investments in 2018 and 2019, whereas both Kazakhstan and the Russian Federation saw divestments in 2018.