L. V. SHKVARYA

Doctor of Economics

Key words: GCC, FDI, investment legislation, inter-Arab investment

The globalization of the world economy, as the experience of recent decades shows, has a significant impact on the development of international capital migration processes in the direction of their activation. Most of the world's countries, including developing countries in Asia and Africa, are being drawn into this process in an effort to attract foreign investment.

A striking example here is the Gulf States (GCC), which consistently take concrete measures to liberalize the flow of foreign investment (especially direct investment) and form a new organizational and legal mechanism for international economic and investment cooperation.

What are the conditions, prerequisites and, most importantly, the results of these efforts?*

INVESTMENT LEGISLATION IN THE GULF COUNTRIES

The process of attracting foreign investment to the GCC countries began after these states gained independence, i.e. in the 1950s and 1960s. During the same period, legislative acts regulating this area of activity were adopted.

Thus, the process of raising capital in the largest country in the region - the Kingdom of Saudi Arabia (KSA) - began in 1956, when the first law on foreign investment was adopted. It was amended in 1962 and 1979.1, respectively^.

Among the restrictions common to the work of foreign investors in all GCC countries in the second half of the 20th century, we can mention restrictions on the share of foreign capital (from 25 to 49%), a higher tax rate, a ban on participation in operations with shares, etc.

Due to the unattractive legislative framework (tight tax climate, quota and industry restrictions, etc.), the level of FDI in the Gulf countries was extremely low during the 1950s and 1980s. Internal socio-economic problems were also one of the reasons.

In the 1990s, the changes that took place on the world market (the transition of oil and gas producing industries to the category of high - tech ones, the intensification of international competition, the increase in the investment threshold, etc.) made it necessary to carry out reforms to liberalize the investment sphere of the Gulf countries in order to attract foreign capital, including for the purpose of diversifying and modernizing national economies.

In the 1990s and 2000s, foreign investment was gradually liberalized, both institutionally and legally, at the country and regional levels.

The first - institutional measures of liberalization - can be attributed to the creation of stock exchanges in the UAE and Qatar in 1995, because the need for them until then was simply absent. The Dubai International Financial Center (DIFC), which aims to transform Dubai into a regional financial hub, was founded in 2004.

In Saudi Arabia, the General Committee for Investment Affairs was established in 2000 in order to "develop the State's policy of encouraging investment in the national economy". By mid-2010, these investments totaled $ 194 billion. Saudi riyals, or $52 billion ².

As for legislative changes, in April 2000 the country adopted a new Law on Foreign Investment, which is based on a policy of tariff and other incentive measures and significantly expands the opportunities for foreign investors compared to the Law of 1979 (Table 1).

Foreign investors are now granted 100% ownership of capital in those industries where foreign investment is allowed, and the income tax rate is reduced from 45% to 30% for companies with a profit of more than 100 thousand saud. It guarantees the legal protection of foreign investments from expropriation, and the possibility of participating in state projects. Pre-

* This article is the second part of the research (see: Shkvarya L. V. Investment potential of the Arab countries of the Persian Gulf / / Asia and Africa Today, 2010, N 7), which will be continued by the author in one of the next issues of the journal.

Table 1

Investment legislation of Saudi Arabia

Составлена автором по: Foreign Capital Investment Law, Royal Order No. M/4 of 2.2.1399H (1 January 1979); Foreign Investment Law, Royal Decree No. M/1 of 5.1.1421H (9 April 2000) and implementing regulations issued 14.4.1423H (24 June 2002) (replacing the 1979 Foreign Capital Investment Law) // Saudi Arabian General Investment Authority (SAGIA) - www.sagia.gov.sa

The benefits provided, such as the right to receive loans from the Saudi Industrial Development Fund, ³ derive from the double taxation and investment promotion and protection agreements signed by the KSA with foreign countries4.

The reforms are also aimed at reducing the time required to start a business. They are part of a strategy aimed at making Saudi Arabia one of the top ten countries in the world with the most convenient business conditions in 2010 (in 2009, the country took the 16th place in the rating).⁵.

In 2009, new commitments were made to ease business regulation and facilitate investment in the energy sector.⁶ In particular, in the telecommunications sector, the maximum allowed share of foreign capital in enterprises has increased to 70% ^.7

In 2000, the Foreign Investment Act* was adopted in Qatar, which sought to increase the flow of foreign capital to various industries and to improve their economic efficiency.

In accordance with article 2 of the law, the share of foreign capital is allowed from 51 to 100% in agriculture, industry, healthcare, education, tourism, exploration and development of mineral resources, energy, and provided that these projects are consistent with the plans of the Qatari government in the field of economic and social development. At the same time, foreigners do not have the right to invest in the banking, insurance sectors, or purchase real estate.

In Qatar, it is planned to remove the restriction on the size of the share of foreigners in enterprises operating in the field of consulting, information technology, entertainment and sports. Since January 2010, the corporate tax rate has been reduced from 35% to 10%, and expropriation risks are very low.

At the same time, Qatar still has a number of administrative and legal barriers for foreigners, including restrictions on property. Despite recent changes, the country does not have an effective competition law, and the Qatari legal system discriminates against foreign investors, whose rights are limited in comparison with Qatari companies. This applies, for example, to procedures for concluding state contracts for the performance of contract works, in order to participate in which a foreign partner is required to work in the local market through a Qatari agent. In addition, foreigners are not allowed to purchase real estate.-

* The activity of foreign entities in Qatar is regulated by the laws of 1986, 1990, 2000 and 2002, which require a foreign company intending to operate in the country to have a Qatari agent or representative (individual or legal entity) who must search for sales channels in the local market for its products and services. The exception is made by foreign entities that supply products to the Qatari armed forces and police.

only recently were they allowed to take long-term leases of residential premises and only in designated areas). Moreover, unlike Qatari companies and firms from the GCC countries, foreign companies pay all taxes, unless they operate in free economic zones.⁸

In the UAE, unlike Qatar and KSA, there is no special law on foreign investment. They are regulated by a number of legislative acts, which primarily include Law No. 8 of 1984 on Commercial Companies (the Companies Act, last amended on July 7, 2009); Law No. 1 of 1979 - the main document regulating the activities of industrial enterprises in the UAE; the Law " On Tenders for Public Needs"(Public Tenders Law) No. 16 of 1975

These and other laws and regulations establish the following rules for foreign investors to work in the UAE.

The share of local producers must be at least 25% of the company's capital. This requirement also applies to non-governmental projects, oil and gas production and processing, mining and processing of mineral raw materials, small projects with a fixed capital of less than 250 thousand dirhams (approx. $70 thousand) and fewer than 10 employees. The only exceptions are free economic zones (FEZs) The United Arab Emirates, where a 100% share in the capital of a foreign investor is allowed, but goods entering the UAE from these FEZs have the status of imported goods.

The UAE Government encourages foreign investment in industry by offering preferential loans and other preferences to private financial institutions that want to invest in the manufacturing sector through the Emirates Industrial Bank. Since 2009, the minimum amount of capital required for starting a business has been abolished by law.

Currently, a large number of economic laws are being developed. These legislative acts, in accordance with the requirements of the UAE Competitiveness and Entrepreneurship Council, relate to the regulation of joint-stock companies, competitiveness and bankruptcy.

In Kuwait, foreign investment is regulated by Law No. 8, adopted in March 2001-foreign investors are allowed to own more than 50% of the share capital and up to 100% of the capital in certain industries. These include: infrastructure projects (water, electricity, wastewater treatment and communications); creation of investment and insurance companies; information technology and software development; investments in healthcare and pharmaceutical production; air, land and sea freight; tourism, hotels, entertainment, housing construction, etc.

Kuwait allows foreign companies to operate its oil fields and traditionally privatizes some of its gas stations. Foreign investors are allowed to operate in the Kuwait stock market, which significantly strengthens the country's status as a regional financial center. At the same time, in Kuwait, as in KSA, the operation of banks with 100% foreign capital is prohibited.

The Law on Foreign Investment in Kuwait also provides for certain benefits for foreign investors. These include: tax exemption for up to 10 years, exemption from customs duties and protection from nationalization, the right to receive loans from national banks.

Table 2

FDI flows to the GCC in 2005-2008 ($ million)

Compiled and calculated by the author on: UNCTAD, FDI/TNC database and annex table B. 1. - 2008 & 2009.

Table 3

FDI and GDP in the GCC countries, 2005-2008 ($ billion)

Compiled by the author from: UNCTAD, World Investment Report 2009.

Since 1995, Bahrain has been able to create companies with 100% foreign capital in all sectors of the economy, including those under state control-oil, gas, aluminum, communications and telecommunications, transport, in the form of joint-stock companies, etc.

Since February 2001, foreign legal entities and individuals have been granted the right to own real estate in Bahrain, but it is prohibited to own land in legally defined areas and use it for other purposes.

In 1992, a special body was established in Oman - the General Investment Committee (GIC), whose task was to help attract investment to the country through licensing investment projects, as well as help investors overcome difficulties. GIC pays special attention to investment projects in the following sectors: agriculture, fishing, tourism, health, education, technical and vocational training at all levels, transport, telecommunications, housing construction, industry.

Thus, over the past 10 to 15 years, the Gulf countries have consistently taken concrete steps to improve the investment attractiveness of their economies and liberalize the movement of capital. What are the results of these efforts?

AREAS OF ACTIVITY OF FOREIGN CAPITAL

In the 2000s, the Gulf countries actively attracted significant amounts of foreign financial resources, including in the form of FDI. FDI inflows were primarily driven by high oil prices and strong economic growth in the region. Their growth began in 2003, when they amounted to about $8 billion, and took place against the background of the liberalization of the FDI regulatory regime with an emphasis on privatization and coverage, first of all, of the service sector. For example, its segments such as electricity and water supply, transport, communications, etc. This policy has had tangible results in the following years (see Table 2).

The data in Table 2 show that the GCC countries as a whole are characterized by:

1. The growth of attracted FDI, which has significantly increased since 2005. Between 2005 and 2008, the total volume of FDI in the region almost doubled. The reasons for this, in our opinion, are:

- 2005-2006-improvement of the overall business climate and conditions-

Table

GCC countries ' FDI Performance Index, 2005-2008

Calculated by the author according to Table 3.

investment strategies in general in the GCC, in particular transparency; privatization in the service sector;

- 2007-2008 - less negative impact of the global financial and economic crisis on the GCC and significant intraregional investment.

2. Different degrees of attractiveness of the GCC countries as

the role of foreign direct investment (FDI) recipients and the unevenness of FDI to countries in different years.

The largest recipient of FDI in the region in 2005-2008 remained the UAE (for reference: in 2002, the volume of FDI in the UAE did not exceed $1 billion) and Saudi Arabia. These two countries accounted for $29 billion, $31.1 billion, $ 38.5 billion, and $ 51.9 billion, respectively, in 2005-2008, i.e. 87.3%, 79%, 75.6%, and 81.9% of total FDI inflows to the GCC countries.

At the same time, Saudi Arabia is characterized by a steady upward trend in the volume of FDI inflows. In 2008, real estate, petrochemicals and oil refining, construction and trade were the main areas attracting FDI in the KSA.

The UAE (2nd in terms of attracted FDI), like other GCC countries, is not characterized by such stability and stability. Moreover, FDI inflows to the UAE declined by 3% in 2008, as Dubai's tourism, real estate and banking sectors were particularly hard hit by the global crisis. In 2009, there was a further decline in FDI into the national economy.

Kuwait's economy remains the least attractive for FDI in the GCC, due to the decline in GDP growth and existing restrictions in the investment sector.

3. There is a high index of efficiency in the use of FDI in the countries of the region* (see Table 3).

From the presented data, it can be seen that the situation of countries and the dynamics of the indicators under consideration are ambiguous and not unidirectional. Thus, during the study period, Qatar's GDP doubled, while FDI inflows increased by more than 5 times, which indicates the growing attractiveness and sustainability of this economy.

For the GCC countries, the authors ' calculation of the FDI performance index is presented in Table 4.

* The FDI Performance Index is the ratio of a country's share of global FDI inflows to its share of global GDP, and ranks countries accordingly by the amount of FDI they receive relative to the size of the economy. It takes into account not only the size of the economy, but also other factors that affect the inflow of investment (the quality of the business climate, economic and political stability, the availability of natural resources, infrastructure, the quality of human capital, and the level of technology).

Table 5

Accumulated FDI per capita in the GCC, 2005-2008

Compiled and calculated by the author according to: UNCTAD, World Investment Report 2009.

The data show that all countries in the region (with the exception of Kuwait) have a much higher share of FDI in the global indicator than the share of each country's GDP in the global gross product. This indicates a high degree of attractiveness of direct foreign investment in the countries of the region (including the investment climate).

The volume of FDI accumulated in recipient countries per capita is an important indicator of the effectiveness of investment policies. Its calculation shows that the level of investment policy effectiveness in the GCC countries is higher (with the exception of Kuwait) than the global average (Table 5). Although the rate of accumulated FDI per capita is significantly higher in the region than in the world, this does not mean, however, that the effectiveness of investment policy

The GCC countries do not need to be further upgraded. Based on the data analysis of the table. 4 and 5 we can also conclude that certain problems remain in the investment sphere of the GCC countries. This is indicated by the differentiation of the share of FDI in the GDP of the countries of the region (Table 1). 4), as well as the unstable dynamics of these indicators in national economies in different years.

The main reason for some deterioration in the FDI-to-GDP ratio in a number of Gulf States (primarily Kuwait) in 2008 should be considered an external factor, namely, the global financial crisis (which confirms the decline in the global indicator).

At the same time, there is a significant potential for foreign investment and the growing investment attractiveness of the region (largely formed under the influence of an external factor), especially in the context of post-crisis development and the search by investors from various countries, including Russia, for new regional opportunities to diversify foreign investments of national capital.

Currently, the main donors of investment, including FDI in the Gulf States, are the United States, Japan and the EU. 2000-2008 The share of American investment declined amid the growth of Japanese and Western European ones. During this time, non-US investment flows to the KSA economy alone increased from 38% in 2000 to 47% of ^{the total in 2007.9}

Investment from other developing countries, such as China, is growing. Chinese investments in the region are 6 times higher than those in China, and the latter believes that "the structure of the GCC is probably not sufficiently streamlined to conclude comprehensive agreements with other countries. Therefore, China should seek to negotiate with individual countries. " ¹⁰

Inter-Arab investment is actively growing - an important component of the GCC countries ' investment strategy in the context of globalization. The Arab states are focused on mutual support, including in terms of cross-investment, and on jointly countering the pressure of economically developed countries. There is an increase in individual and joint actions in the region to protect national goals and priorities.

The most significant annual increase in inter - Arab investment in 2003-2008 was recorded in Saudi Arabia-329.8%; investment in this country in 2008 reached $7.1 billion. (1st place in terms of the volume of received Arab investments). KSA also invests in other Arab countries, including the Gulf.

The countries of the region are interested in diversifying their investment partners, especially in the field of FDI. This desire is caused both by objective trends in the development of the global financial market (the crisis and the reduction of investment opportunities on the part of Western countries), the need to increase the competitiveness and diversification of the national economy, and the desire to increase the level of economic security of the countries of the region in this area. The Gulf states, as already mentioned, need the latest technologies, especially in the field of oil and gas production and processing. Therefore, at present, the opportunities of third countries to increase the volume of their capital export to the region are expanding.

Of particular interest is the analysis of the areas of application of foreign capital in the economy of the Gulf States in 2005-2008.

Foreign investment in the region's countries was mainly directed to the service sector, including such segments as tourism, real estate and finance, and transport. Several major agreements were signed in the telecommunications industry.

The Gulf real estate sector is actively attracting foreign investors. The largest recipient was the UAE. Between 2005 and 2008, construction and the real estate market accounted for about 50% of Dubai's GDP. At the same time, according to Middle East Business Intelligence, the cost of investment in construction in the UAE decreased from $3.1 billion. in the first quarter, up to $1.4 billion. in the fourth quarter of 2008, it amounted to $1.8 billion dollars at the end of the year, which is 60% less than in 2007 ($2.5 billion). About 10% of the construction projects already started in 2008-2009 were frozen due to problems with financing ¹¹.

The majority of specialists assess the volume of contracts concluded in the construction industry in 2009 (approximately at the level of 2008 or slightly lower) as "normal development" of the sector ¹².

A significant part of FDI in real estate is carried out by regional investors, which indicates the strengthening of mutual cooperation between the countries under consideration.

The countries of the Persian Gulf have managed to slightly expand the flow of foreign investment in the manufacturing industry, especially in oil refining and petrochemical enterprises and in the energy sector. According to the Saudi investment agency Jadwa Investment, the increase in investment is associated with an increase in domestic demand, especially in the petrochemical industry, transport and construction sectors, which have a stimulating effect on the dynamics of economic development. ¹³

In the extractive sector, foreign investment was low, as it is not allowed in most Gulf countries, such as Kuwait and KSA. Here, a significant part of oil and gas production is carried out using well-known technologies and practically without the participation of foreign companies (and investments).

In Qatar, foreign participation in oil and gas production is possible mainly in the form of Production Sharing Agreements (PSAs). However, traditional forms of cooperation with foreign partners in the field of oil production and refining, which are limited to the conclusion of contract contracts and ensure the receipt of technologies, know-how, management services, and technical assistance, require the development of new forms of interaction.

According to OPEC experts, Arab countries need to build a number of additional refineries and gas liquefaction plants to meet the growing demand for these products, which will require investments of at least $30 billion.¹⁴

Thus, the GCC countries experienced significant changes in the sectoral distribution of foreign investment in 2000-2008. The share of these investments in the production sector has decreased; there is a significant increase in the share of services as a recipient of foreign capital, while its total volume in all areas of national economies has increased.

Forms of attracting foreign capital include the creation of joint ventures, joint-stock companies, and other forms of interaction between residents and foreign investors. This is due to the fact that the GCC countries require mainly technologies, equipment, software, etc.

They seek to attract foreign investment not so much in monetary form as in the form of fixed capital, i.e. in the form of FDI.

The motives for attracting FDI are to increase the competitiveness and efficiency of the oil and gas industry, economic diversification (sectoral and regional), improve (change) positions in the international division of labor and world trade, and increase production and exports of non-primary sectors of the national economy. This is the most important contemporary feature of the Gulf countries as recipients of FDI.

The share of portfolio investments in the region in their total volume at the beginning of the 2000s, according to UNCTAD, was only 0.3%¹⁵. However, the situation is changing. Thus, shares of Arab companies became the leaders of growth in the global stock market in 2005. The total market value of shares in the GCC countries more than doubled in 2005-2008. At the same time, most of the country's markets are more or less open to foreign portfolio investments - both private legal entities and individuals, as well as official capital. Such investors are mainly private business entities from developed countries. But investment from emerging markets is also growing.

Thus, with only 0.55% of the world's population, the region's countries produce about 2% of the world's GDP and attract about 4% of global investment. The level of GDP per capita in the GCC as a whole is more than 3 times higher than the global average, which determines the possibility of further growth of effective demand in the countries of the association. In addition, the share of FDI in the GCC GDP is also higher than the global average - almost 2 times.

* * *

Diversification of donor countries for foreign investment in the region's economies is important for the Gulf countries. In this regard, it should be noted that a number of states, primarily the KSA and the UAE, consider Russia as a potential partner, which can also become an economically and politically advantageous area of cooperation ^for our country16.

¹ Global Investment House: Saudi Arabia economic and strategic outlook http://www.menareport.com

² www.zawya.com/story.cfm/sid - Saudi Arabia General Investment Authority's economic site.

³ www.saudinf.com/main/c552.htm

⁴ The Foreign Investment Law, Royal Decree No. M/1 of 5.1.1421H (9 April 2000) and Implementing Regulations issued 14.4.1423H (24 June 2002) (replacing the 1979 Foreign Capital Investment Law) http://www.saudia-online.com/txtinvestment.htm

⁵ www.albawaba.com/en/business/global-investment-house-saudi-arabia-economic-and -strategic-outlook

⁶ Global Investment House: Kuwait-Saudi Economic and Strategic Outlook. Foreign Investment. March 2008 - http://www.mena-report.com

^{Batyrshin I. M.} 7 On the entry of Saudi Arabia into the WTO. Moscow: IBV, 2006.

^{Kasaev E. O.} 8 Qatar's investment climate - http://www.iimes.ru/rus/stat/2009/04 - 08 - 09.htm

⁹ http://www.arabianbusiness.com

¹⁰ From Chinese President Hu Jintao's speech at a meeting with Secretary General of the Gulf Cooperation Council (GCC) Abdel Rahman bin Hamad Al-Attiyah on February 11, 2009. - http://russian.people.com.cn/31520/6590718.html

¹¹ Middle East Business Intelligence (MEED)

¹² See: Middle East Demand-2009: thaw begins in autumn - www.cement-online.ru

¹³ Capital for Arabic Countries Handbook. International Business Publications, USA.

¹⁴ http://www.mideast.ru, March 9, 2006.

¹⁵ See: United Nations Conference on Trade and Development. World Investment Report: 2003 FDI Policies for Development: National and International Dimensions. UN Review. New York-Geneva, 2003.

¹⁶ This area will be the subject of a separate study (author's note).

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