Russian President Vladimir Putin is keen to play up to his international strongman image, but does this attract or deter foreign investors? (Photo by Dmitry Astakhov/AFP via Getty Images)

On a hot summer’s day in 2018, former US President Barack Obama delivered a very clear and ever relevant message to a crowded Johannesburg stadium.

“A politics of fear and resentment [is] on the move at a pace that would have seemed unimaginable just a few years ago,” he said. “Strongman politics is ascendant [and it] seeks to undermine every institution or norm that gives democracy meaning.”

Strongmen rulers are nothing new, of course, but their grip on global politics continues to grow, especially in the Covid-19 era that has endowed governments with extraordinary emergency powers.

Most dictionaries describe strongmen as rulers who lead or control by force of will and character or by military methods. This covers a lot of ground, which is why they come in many guises.

The majority of strongmen present a mixture of democratic pretence and a dictatorial underbelly, albeit to varying degrees. Compare, for example, Recep Erdoğan in Turkey, Ilham Aliyev in Azerbaijan, Alexander Lukashenko in Belarus, and Vladimir Putin in Russia, the patron saint of the strongman world, so to speak. However, some strongmen are born into power, such as the crown prince of Saudi Arabia, Mohammed bin Salman.

Although these rulers differ in diverse ways – some are also populists, for example – their personalised forms of autocracy are united by exactly that: a readiness to ignore the rule of law and behave as they like, among other factors.

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It may come as no surprise, therefore, that countries run by strongmen often have poor human rights records and frequently employ aggressive foreign policy. Nonetheless, international investment continues to flow to many of these destinations (see table below), but not as much as it might were they ruled by true democrats, so the argument goes.

The dark side of foreign investment

The academic consensus used to hold that foreign investors are drawn only to transparent, liberal and democratic regimes. Although this is true in many (possibly most) cases, foreign direct investment (FDI) also targets illiberal governments.

In short, the link between institutional quality and investment attraction is by no means clear cut. Less ethical foreign investment comes from (and to) all sectors and destinations.

“Some investors like sound institutions, in their World Bank sense, others like bad ones. It is very polarised,” says professor of economic geography at the London School of Economics (LSE) Riccardo Crescenzi. “It very much depends on the sector, country and the type of investor in question.”

For example, corruption within the oil and gas sector is a common target of criticism. Head of political risk at AKE Group Maximilian Hess summarises the sentiment well: “I think it is pretty clear that, for hydrocarbon investment, it is much easier to do it with an illiberal regime.”

China has seen its fair share of criticism too. “But it is not so much that Chinese capital is attracted to less transparent, less well-governed countries… it is just less put off by them,” says associate director at research provider Rhodium Group Agatha Kratz.

“This may be because Chinese companies are used to operating with less transparency at home, but also because [less transparent] destinations are where some of the remaining opportunities are… since all the ‘good’ countries have been taken by OECD firms,” she adds.

When China lends to countries, especially in emerging markets, it is often tied to Chinese construction companies delivering the projects for which money is being borrowed – usually large infrastructure developments. This is completely forbidden in the EU and within OECD member countries, whose legal frameworks are much more demanding.

This issue ties into a wider geopolitical fault line. Beijing is often very willing to assist strongmen with big vanity projects – white elephants that will help them stay in power, argues Kratz.

“In countries such as Belarus, strongmen want to show they are doing tangible things, and China will finance and build projects in a very short period of time,” she adds.

“Strongmen are usually really happy to team up with China since they often don’t get along with either the EU or US, and want to show they have got big power friends. Beijing is happy to assist in this,” concludes Kratz.

As tensions between China and the US-EU axis grow, this dynamic may become even more pronounced.

Putin: The patron saint of strongmen

Putin is arguably the best known strongman currently in power, and to a caricaturish degree. Already one of the world’s longest-serving leaders, the horse-riding former KGB officer (often found topless) told the Financial Times in 2019 that “liberalism has become obsolete”.

To all intents and purposes, Putin has ruled over Russia since 2000. However, a recent and highly controversial amendment to the Russian constitution could see him in office until 2036.

When looking at the past two decades, FDI to Russia peaked in 2008 at $75bn, only to fall since then to an average of $30bn annually, according to data from the UN Conference on Trade and Development (UNCTAD).

While these overall investment figures have remained fairly strong and consistent over the years, the number of greenfield FDI projects to Russia has dropped more consistently and markedly since the 2008 financial crash (see above chart). A negative trend is even more visible since the turn of the century, in terms of Russia’s intake and share of global foreign investment projects (see above chart).

“Russia’s FDI inflows have been reduced to minimal levels so that even much smaller and poorer countries surpass it in that direction,” says CEO of fund management firm Movchan Advisors Andrei Movchan. “Blaming Putin entirely would be too primitive; however, there is nothing to [praise] him for.”

For example, in 2017 Russia received around the same amount of FDI as Canada, whose population is almost five times smaller, while the vast majority of FDI into the country was related to oil and gas, large proportions of which are Chinese, adds Movchan.

Meanwhile, in terms of mergers and acquisitions (M&A) coming into Russia, capital inflows have been both mild and volatile over the past two decades (see chart below).

“FDI to Russia is heavily shaped by politics,” says Hess at AKE Group. “Look at the drastic fall off in such investment from 2013–15, following the invasion of Ukraine. The solidification of Putinism has really shifted ‘Western’ FDI so much away from Russia.

“A significant amount of what is reported as official FDI by the Russian authorities is actually just round tripping – Russian money being channelled back through Cyprus and the Netherlands, for example,” he adds.

Azerbaijan and Belarus’s shows of strength

The situation in Azerbaijan is similar to Russia. Long-term ruler Ilham Aliyev has attracted big-ticket foreign investment almost entirely in the hydrocarbon sectors, which has allowed overall FDI figures to the country to remain stable, albeit fairly modest (see chart above).

“In Azerbaijan, corruption is rife,” says Hess. “Foreign investment, [usually partnered] with state oil company Socar, sees money flow to Azeri elites. Even Russia does not invest a lot in Baku, despite the affinities, and I believe the Gulf Cooperation Council countries invest even more in Georgia, for example, than Azerbaijan.”

Belarus President Alexander Lukashenko has ruled over the country since 1994, and is often referred to as ‘Europe’s last dictator’. (Photo by Siarhei Leskiec/AFP via Getty Images)

Moving over to Belarus, Alexander Lukashenko has very much intentionally kept foreign investors at bay since coming to power in 1994.

Lukashenko casts himself as a statist who believes in the Soviet-era practice of state-ownership over the key instruments of production. Indeed, half of the country’s population works at state-run companies that are responsible for a whopping 70% of the country’s $60bn economy.

“Lukashenko has consistently opposed liberalising the economy and welcoming in foreign investment, though he occasionally flirts with the IMF and other Western financial institutions – primarily as leverage in efforts to secure financial concessions from Moscow,” says Hess.

“The FDI that he has sought most openly is from China, and he has used the traditional playbook of opening free economic zones. Belarus has had some success in getting investment into its tech sector, but far, far less than is deserved,” he adds.

Nonetheless, recent years have seen Belarus take small steps in opening itself to foreign investment. In the country’s mechanical engineering sector – for a long time the main target of FDI in the country – parts of the automotive industry have been privatised, while joint ventures are being sought in petrochemicals.

Many feel, however, that Belarus is punching far beneath its weight. For example, although Hungary has the same population as Belarus and has similar strengths in automotive manufacturing, it has attracted significantly more FDI over the past two decades, according to UNCTAD data. Belarus is among a small handful of countries in Europe not to have asked for membership of the EU.

Erdoğan’s happy medium

Turkey, on the other hand, has made significant attempts to join the EU and is a highly internationalised country. This is one reason why Erdoğan could be considered less of a strongman, so to speak, than the rulers discussed above – as reflected by the fact that FDI to Turkey has performed fairly well under his auspices (see chart above).

“Erdoğan’s antics may occasionally scare off investors, but once a country is sufficiently integrated into the globalised economic system, it is hard to go back,” says Hess. “But were he to go even further down his heterodox monetary policy path, and try shaping Turkey’s capital markets more directly, it could really scare them off.

“Moreover, for the size of its economy, Turkey could certainly move to attract a lot more FDI if it wanted to, but this would potentially challenge the local big corporations, which are themselves political players, while inflation concerns have played a big role (perhaps bigger than the political factor, although they’re related) in keeping FDI from growing faster,” he adds.

Russia President Vladimir Putin shakes hands with Saudi Arabia Crown Prince Mohammed bin Salman at the G20 Summit in 2019. The two strongmen came to power in very different ways but have displayed similar levels of ruthlessness. (Photo by Yuri Kadobnov/AFP via Getty Images)

MBS: The prince of strongmen

Mohammed bin Salman’s rise to power in Saudi Arabia since 2015 has been as spectacular as it has been disruptive.

The crown prince, only in his 30s, dislodged older heirs to the throne and initiated Saudi Arabia’s most ambitious reform programme in living memory. Known as Vision 2030, it seeks to diversify the country away from oil dependence, increase its internationalisation and modernise its highly conservative society.

In these efforts, Bin Salman (also known as MBS) has achieved success, opening up the Saudi stock market to foreign investors, the tourism market to international visitors, and cinemas to Saudi citizens. Spearheading these changes are MBS’s megaprojects, entire cities being built from scratch: NEOM, Qiddiya Entertainment City and the Red Sea Project.

It comes as a surprise, therefore, that although M&A activity in Saudi Arabia has shot up in recent years (see chart above), overall FDI to the country has dropped considerably since 2015, according to UNCTAD.

To a large degree, this is due to the impact of the oil price collapse from 2014 onwards, as reflected by plateaued greenfield FDI inflows (see chart) that only started to rise again in 2019.

Others argue that the crown prince is more to blame for the country’s poor FDI performance.

“MBS has squandered time pursuing a dangerous and aggressive foreign and domestic policy,” says director of the Centre for Law and Development at Qatar University Jon Truby.

“He continues to cause severe reputational damage to the stability of Saudi Arabia’s economy through erratic and dangerous actions,” he adds.

Indeed, little has been done to ensure the independence of Saudi Arabia’s judiciary or provide potential investors with confidence that they can access the market competitively and with legal protections for commercial disputes.

The fallout caused by MBS’s erraticism has not gone unnoticed. Following the scandalous killing of journalist Jamal Khashoggi in 2019, dozens of CEOs and other leaders boycotted Saudi Arabia’s flagship investor conference.

However, Jessica Leyland, senior intelligence analyst at AKE International, thinks much of this was just for show.

“The global FDI industry is not as scrupulous as we would like, especially when it comes to capital-heavy projects such as those in Saudi Arabia,” she says. “MBS’s reforms offset his domestic repression and foreign policy volatility. Investors are getting used to his style.”

Governments have also made ethical allowances. For example, UK foreign policy towards Saudi Arabia simultaneously sanctions individuals and condemns Khashoggi’s killing, while also selling arms to the country that are used to bomb Yemen, says Leyland.

Investors are also encouraged by the fact that MBS may sit on the throne for another 50 years, thereby giving them the ostensible security of a stable autocrat. However, despite his popularity among the Saudi youth, MBS has made numerous enemies in the royal court.

The bottom line, however, is clear: there would probably be a lot more investor appetite in Saudi Arabia if its leadership was less volatile, concludes Leyland.

This is even more true in the Covid-19 era, which has shed more light on the risks of investing in countries led by strongmen.

“When you rely on a bad institution, how safe is your investment? In times of crisis like the pandemic, good and sound institutions and rulers pay off,” contends Crescenzi at the LSE.

“Take Russia for example; we don’t really know what is going on. What are the real infection numbers? Can you trust their vaccines?” he adds.

With global uncertainty at untold highs, international investors may turn more and more towards countries that promote transparency, rule of law and geopolitical harmony. On the other hand, Covid-19 may provide them with the perfect cover to do exactly the opposite.