Inward investment in Russia set to continue to climb
Last five years have seen investment projects more than double London, 16 September 2011: Foreign investors are optimistic about the long-term growth possibilities that Russia presents according to Ernst & Young’s first Russia Attractiveness Survey.
Ernst & Young’s European Investment Monitor data shows that the appeal of Russia is growing for international investors. In the last five years Russia has more than doubled the number of projects attracted to the country and it was Europe’s fourth-largest FDI destination in 2010, overtaking Spain, attracting over 200 projects, up 18% on the previous year. Moscow also appeared in the top ten most attractive city investment destinations in Europe.
Increasing investor interest in Russia comes from the significant economic growth potential it can offer with its emerging middle class and growing domestic market over the next decade. In June 2011 Ernst & Young interviewed over 200 international business leaders about the potential of the Russian market. A large majority believe that by 2020 it will be a very attractive market and will be a chief rival for FDI for Asian countries, particularly China but also other major European countries.
Investor enthusiasm for companies which are already present in Russia is high with 64% saying that they would invest there again. Russia has very loyal FDI investors and is much more attractive to its current investors than Europe as a whole.
Alexander Ivlev, Managing Partner of Ernst & Young in Russia comments, “Investments in the Russian economy offer many advantages for foreign investors. The country has a large domestic market as well as a highly educated and productive labor force backed up by rich natural resources.”
Where the investment has come from
The primary investors in Russia between 2006 and 2010 have been the USA with 117 projects, Germany with 96 projects and Finland and France with 45 projects each. In 2010, German companies took the lead, originating 13% of investment projects and the biggest source of FDI jobs.
Ivlev comments, “At present the main investors in Russia are from well developed economies, with Brazil, India and China outside the top ten. But China is becoming one of Russia’s largest trading partners, and opportunities in Russia have begun to attract Chinese investment.”
Sector attractiveness
Although energy has dominated the Russian economy since the fall of the Soviet Union, industrial production has begun to increase, providing a more stable and skills-intensive basis for economic growth.
Foreign investors have been attracted by Russia’s potential across a wide range of sectors with automotive, food production, non-metallic mineral products and chemicals the most prolific with 84, 80, 61 and 57 projects respectively in the last five years.
By activity Manufacturing accounted for more than half of the total with Sales & Marketing coming second attracting 32% of the total 740 projects in the last five years.
Ivlev comments, “The emphasis on these two sectors clearly suggests that investors are targeting Russia’s emerging consumers. In both production and sale of consumer goods, Russia is attracting the type of investment that will allow it to achieve well-rounded and steady growth.”
Russia challenges emerging leaders
Russia competes with Central and Eastern Europe countries for export-oriented, high value-added manufacturing projects. Yet Russia also resembles Asian countries, with a fast-growing economy, a need to upgrade infrastructure and a large booming consumer market.
According to international business leaders interviewed for the survey, the main competitors of Russia in terms of business appeal are China (46%) and India (14%) among the rapid-growth markets and Germany (5%) and USA (4%) among the developed markets.
Although the respondents agreed that Russia had many shared characteristics it is also different to China and India in several ways. Like China and India, Russia is a rapid-growth emerging market economy with a large internal market. However, Russia also has the legacy of a developed economy, enormous natural resources and a comparatively well-educated workforce. Yet growth in Russia is currently tied to commodity prices and output volumes rather than the price of labor, making consistent fast growth more difficult to attain.
Optimistic outlook for future attractiveness
Investors are optimistic about Russia’s future attractiveness with 70% of those surveyed believing Russia will become more attractive for their company in the next three years. This compares to France (31%), Germany (47%) or the UK (47%). The only region to challenge Russia on future attractiveness as an investment destination is Africa, where 72% of investors see increasingly bright prospects.
Investors believe future growth in the Russian economy will be driven by the energy (54%), information and communication technologies (26%) and automotive (19%) sectors. The bias toward energy and utilities stems from Russia’s reputation and strength in oil and gas production. However, investors clearly see beyond energy to emerging opportunities in high value-added manufacturing and technology, including vehicles, transportation and ICT.
Ivlev comments, “Government moves to leverage the stable environment and the attractions of a large domestic market, well-educated population and natural resources are an incentive to invest. But administrative barriers, lack of transparency in business practices and a recovering financial system sometimes compromise the benefits in Russia. However, if the government addresses these investor concerns then Russia can expect to attract a growing number of FDI projects.”
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