Foreign direct investment (FDI) inflows to Central and Eastern Europe and the Commonwealth of Independent States (CEE/CIS) fell by more than 40% in 2015, and are expected to fall further this year, according to a recent report by the Vienna Institute for International Economic Studies (WIIW).

The report, titled “FDI in Central, East and Southeast Europe: Slump despite Global Upturn”, found that, with a few exceptions, nearly all the countries in the CEE/CIS region saw a significant annual decline in inward FDI in 2015. The region as a whole experienced a 43.3% fall in inward FDI.

“FDI inflows fluctuate more wildly than before and have lost their close connection with economic growth or changes in the business environment,” according to the report, suggesting that the role FDI plays in former transition economies has changed since the 2008 global financial crisis.

FDI during the transition period, the report’s argument goes, was expected to provide the “much-needed capital and knowledge, and access to technology and markets” that was necessary for the former-Soviet emerging states to fully integrate with global markets and function after independence. Since then, “their external financing has shifted from private capital to EU funds,” the report says.

WIIW break the CEE/CIS region down into three sub-region for the purpose of the report: CEE, which is now “integrated into multinational production networks”; the Western Balkans (WB), in which FDI had been “mainly confined to domestic market-oriented sectors”; and the CIS, in which FDI has mainly taken the form of oligarchical capital transfers.

Capital transfers and tax optimisation among multinational corporations and conglomerates mean that FDI is no longer a yardstick for economic growth, with the “round-tripping” of vast volumes of capital skewing FDI data, the report says. The movement of domestic capital to offshore subsidiaries and back is technically recorded as FDI, despite the repatriated inflows balancing out as net neutral.

Particular attention in the report is given to what it called “the Russian FDI collapse,” which saw inflows decline to “a level that is unprecedented in the past 10 years – or even 20 years, if measured in percentage of GDP”. The report named the contraction of Russia’s economy, Western sanctions and the subsequent lack of access to capital markets or payment systems for banks, and new Russian anti-offshore regulations as factors that contributed heavily to the decline in FDI in 2015.

The ruble’s depreciation also made Russian assets much cheaper for investors using hard currency, meaning the value of Russian assets fell in euro terms, which FDI is measured in in the report.

The report found that roughly half of all Russian inward FDI originated from EU or Caribbean tax havens and offshore centres, with two-thirds of outward Russian FDI ending up in these destinations. “This round-tripping capital is essentially different from other FDI, and overstates the importance of FDI in Russia. FDI data reflect the restructuring of Russian assets rather than genuine foreign investment flows,” the report says.

“Genuine FDI,” it concludes, “has been ravaged”.

WIIW pointed to the United Nations Conference on Trade and Development’s (UNCTAD) outlook on 2016 FDI flows, which predicted the year to be one of a fall in global flows, with UNCTAD citing a decline in large M&A deals as the driving force behind this – largely due to capital market volatility.

Despite noting the “stable economic” growth and “booming consumer markets” of CEE and the WB, WIIW suggests that the CEE/CIS region will fail to buck the overall downward trend of global FDI flows that UNCTAD predicts.

A decrease in Western investor appetite for CEE/CIS destinations was illustrated by WIIW through figures released by the Association of German Chambers of Commerce. The data found a fall from 24% in 2014 to 21% in 2015 among German cross-border investors planning to invest in CEE, and from 25% down to 17% among those planning to invest in the CIS or WB.

WIIW singled out Poland and Hungary as risk areas, noting that “sudden changes in legislation and the related unpredictability of the business environment plague both countries”.

Poland’s recently introduced tax on the financial sector, which will see institutions with financial assets worth over PLN4bn paying an additional levy, is a cause for concern, the report says. Despite recently halving it, Hungary too imposed an unpopular tax on bank assets.