# United Kingdom (1950)      .16                United Kingdom (1987)             .12

Thus, while poorer regions within Russia have caught up to richer regions that look similar, the regions do not in fact look similar at all, and the forces which make them different are currently outweighing the forces making for income convergence. The finding of greater dispersion and weak convergence has been confirmed recently by Guriev and Vakulenko (2012) who also find that interregional income inequality in Russia is high relative to other countries for a more recent sample (1985-2005), even as compared to other countries at a similar level of development, and they find a lack of convergence in per capita income across Russia’s regions during the 2000s, though other measures (such as wages and unemployment rates) have converged. Guriev and Vakulenko (2015) find evidence that lower-income households in the poorest regions of Russia may have particular difficulty in moving to richer regions. These results suggest that maintaining a good business climate and being attractive to FDI are important for Russia’s growth prospects. This implies that continuing and accelerating the pace of domestic reform is important to growth and underlines that the Russian economy would benefit from normalization of international economic ties, especially an ending to the current sanctions.

Over a third of FDI in Russia may have been round-tripping—Russian investors sending capital to other countries to re-invest it in Russia (Figure 16). This is a relatively high share compared to most of the other BRICS.<sup>5</sup> Round-tripping FDI is less likely to bring the benefits of enhanced technology and productivity than genuinely foreign FDI. Round-tripping may be motivated by, among other factors, deficiencies in property rights and poor enforcement of the laws in the Russian domestic market, and to a minor extent by tax advantages (especially in terms of the choice of country of origin). If FDI firms are in fact domestic firms that earn additional rents from round-tripping, there is no reason to assume that they can help enhance technology and productivity. However, some round-tripping FDI may represent repatriation of previous capital flight. Thus, estimates of Russian capital flight that do not take this possibility into account may be overstated.

The sectoral distribution of Russia’s FDI has become more diverse over time. In 2005–12, Russia’s FDI in secondary activities (manufacturing, utilities, and construction) grew four times faster than in mining and fossil fuels, and in services it grew three times faster (Table 3). This is in part due to the reduced valuation of investments in fossil fuels after the oil price drop of 2008–09. It also reflects the fact that the FDI position in oil is of older vintage and foreign investors are now pursuing more diverse opportunities.

Sectors with the most dramatic improvements in FDI were chemical and pharmaceutical products; machinery and equipment; electrical, electronic, and optical equipment; transport equipment; utilities; construction; and financial intermediation. These investments have been linked to technological and quality upgrading (Kuznetsov 2010). Foreign producers of motor vehicles have widened the range of affordable and higher-quality cars in Russia. The expansion of FDI in chemicals leverages Russia’s

> 5 Estimated round-tripping over the sample period is about 35 percent for China, 6 percent for Brazil, and negligible for India and South Africa.

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