# 1. Introduction<sup>1</sup>

As is true worldwide, it appears that foreign orientation is an important determinant of socioeconomic development. While there is no theoretical consensus on the role of exports and foreign direct investment (FDI) in economic growth, trade and export activities, as well as inbound FDI, are expected to promote growth by enhancing the country’s capacity to import essential intermediate and capital goods, easing balance of payments constraints, and promoting specialization through better access to advanced technologies and management practices (Melitz, 2003; Helpman and Krugman, 1985).

In the Russian Federation, regions are characterized by uneven levels of development; income disparities within the country are very wide. If regions were separate countries, the highest-income regions would be considered high-upper-middle income or high income, comparable to many countries in the Organisation for Economic Co-operation and Development (OECD). The lowest-income regions are comparable to many countries in Sub-Saharan Africa. For example, in real PPP terms, the per capita income of the Far Eastern region of Sakhalin, one of Russia’s richest ($15,850) would qualify it for the World Bank’s highincome group if it were a separate country. In 2011, among all Russia’s regions Sakhalin received the fourth largest FDI inflow and reported the highest value of mineral exports. It also maintains a diversified exports basket, as evidenced by the high value of its non-mineral exports, where it ranked eighth among all Russian regions. As a result, the standard of living in the Sakhalin region is among the highest in the country—10 times better than in the region with the third lowest income, the Southern region of Kalmyk. Kalmyk’s per capita income is closer to that of Nigeria or India.<sup>2</sup> In this paper, we studied the relationship between the degree of Russia’s foreign orientation – exports of goods per capita or inbound FDI per capita - and the standards of living, as measured by real per capita income. First, we evaluated Russia’s trade potential by differentiating between fuel and non-fuel exports, and looking at orientation and growth, diversification, sophistication and survival of Russia’s exports. Next, we analyzed Russia’s ability to attract FDI - in comparison to other BRICS countries, and correcting for round-tripping – by looking at source countries, sectoral distribution, and types of recent major acquisitions.

Because of wide geographical income disparities within Russia, in our analysis, we grouped the Russian federal regions into three categories—lagging, middle-range, and leading—according to real per capita gross regional product. In the most lagging category are regions in the North Caucasus, Southern, and Volga. Those in the leading category are concentrated in the Far East, the Urals, and the North West. All 1 This paper is part of the research project on Trade and FDI Competitiveness Across Russia’s Regions in the postWTO Accession and Eurasian Customs Union Environment, prepared under the guidance of Birgit Hansl, who provided valuable comments throughout. The authors would like to thank the peer reviewers Jean-Pierre Chauffour and Borko Handjinski and would also like to acknowledge the additional support of Patrick Ibay.

2 Average PPP per capita income for all high-income regions worldwide in 2011 was $17,008. Country comparators for Sakhalin include the Slovak Republic at $17,100 and Estonia at $15,700. Kalmykia’s PPP per capita income comes to $1,556, comparable to $1,710 for Nigeria and $1,450 for India. Conversions from rubles to dollars were made using the PPP conversion factor for all of Russia. Real per capita GDP for Russian regions, from Rosstat, reflects that prices in Russia are region-specific.

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