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Russia attractiveness survey - Enhancing opportunities - EY - Russia

EY's 2011 Russia attractiveness surveyEnhancing opportunities

Marc Lhermitte
Partner, EY Advisory
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Alexey Rybnikov
Director, CIS Knowledge Leader
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Gregory Gruz
Director, EMEIA Marketing
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Petr Yudin
Russian PR Team
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Bijal Tanna
EMEIA Press Relations
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Increasing Russia’s competitiveness in a complex world

The world economic recovery continues. There are concerns about a double-dip recession and the recovery remains unbalanced. The world is no longer dominated by developed countries and the potential of emerging markets is recognized by business leaders globally.

Russia, like other BRIC countries (Brazil, India and China) has not had the lasting impact from the global economic crisis. It has a growth model based on high oil prices that has sustained its continued economic expansion. However, future drivers of growth need to be different, since there are new challenges: a demographic decline and increasing external competition.

Russia presents many advantages to foreign investors. It has abundant natural resources and a strong domestic market with a well educated and highly productive workforce. However, administrative barriers, lack of transparency in business practices and a recovering financial system often compromise the benefits of investing in Russia.

Russia's government and business community are committing to modernize institutions and technologies in order to increase Russia's attractiveness. The discussions at the St. Petersburg International Economic Forum2011 indicate that the government will do more to facilitate Russia's growth and improve its investment climate.

This report is designed to help both business leaders in their investment decisions and Russia's government in removing barriers to future growth. Russia has great development potential and is finding new ways to compete and to lead.

Alexander Ivlev,
Country Managing Partner,
Russia, EY LLC

The path is getting easier for foreign investors in Russia

"There have been clear improvements in the environment for foreign investors in the Russian economy over the past decade.

Let me give you some examples. Migration rules and laws on investment in strategic entities have become much more advanced than before. I would say the approach of several bodies and ministries, especially the Federal Antimonopoly Service, which oversees competition laws, and of the Ministry of Economic Development of the Russian Federation, is now much more sophisticated.

Our company has firsthand experience with this. Thanks to a helpful attitude and the support of the Russian Government, a governmental decree was changed so as to solve a serious issue faced by Schlumberger in our core business in Russia, that of geological assessment using the technique of wireline well-logging.

However, there are still quite a few administrative barriers and other obstacles which can complicate life for an investor. So in terms of enhancing investment attractiveness, there are a lot of things to do for today and for the future. Yet I do believe that very soon the path of an investor in the Russian economy will be both easier and brighter.

Compared with other BRIC countries, Russia has two notable positives for investors in the oil and gas sector. One is the strength of its universities, which provide a flow of potential hires with a high level of education. That is important for Schlumberger, which recruits up to 1,000 employees each year. The other is the good quality of research and development (R&D). Schlumberger collaborates with more than 50 institutes and universities in
its R&D programs.

There are challenges too, of course. I would highlight the high cost of capital projects, occasional supply shortages, logistical difficulties arising from the size of the territory and some administrativebarriers.

Should more help be given to encourage development of high tech industry in Russia? Various options are possible, including a special regime for the workforce, preferential customs treatment, tax breaks, or easier licensing and other administrative support for companies that bring cutting-edge technologyto the Russian economy.

Such initiatives would ease the way for high tech investors in Russia, but I believe the path for foreign investors,generally, is already becoming smoother."

Maurice Dijols,
President, Schlumberger Russia

A huge and welcoming market with tremendous potential

"Russia is a huge market with tremendous economic and human potential. Naturally, it is a focus country for international investment. Indeed our company, British American Tobacco, has invested almost US$1b in this market since we first came here in 1991.

Over time, Russia has gone through some economic ups and downs, but the last decade has been marked, overall, by sustainable economic growth and political stability, which always helps business planning.

So, although there are areas for improvement in the regulatory and legal infrastructure, in general, the last decade has seen an increase in the investment attractiveness of Russia for foreign businesses.

My company has three factories — in Moscow, St Petersburg and Saratov. Overall, we have found the regional authorities welcoming. They have often provided support in various areas, including regulation and our dialogue with the federal government. Generally, those regions of Russia that try to clear away bureaucratic hurdles and administrative barriers tend to attract more foreign investment. The most successful regions are those that are more broad-minded, flexible and willing to help, realizing that more investment brings more jobs, taxes and other benefits.

Constructive efforts such as these, which help create an environment in which business can thrive, are vital to Russia's high tech aspirations. The recent successful flotation of Yandex, a Russian search engine, on the NASDAQ stock market in the US shows that Russia has the potential to be one of the global leaders in the area of high tech and innovation.

The Skolkovo project to create a 'Russian Silicon Valley,' and other initiatives that the Russian government is trying to bring about, are steps in the right direction. A couple of things need to be kept in mind to help this process along. The regulatory system should create a beneficial, rather than a restrictive, environment for high tech and innovative industries. Similarly, the drive for innovation should be supported by grass roots efforts — the process should be as much bottom–up as top-down."

Alexander Lioutyi,
Corporate Affairs Director, BAT Russia

Investors remain optimistic about Russia’s attractiveness and mention the growing domestic market as key attraction.

The world economic recovery continues. Russia, like other BRIC countries (Brazil, India and China) has not had the lasting impact from the global economic crisis. The first edition of the EY's 2011 Russia attractiveness survey is designed to help both business leaders in their investment decisions and Russia’s government in removing barriers to future growth.

 Increasing Russia’s competitiveness in a complex world

Key findings

1Rapid growth in emerging economies, including that of Russia, is driving global economic expansion as developed economies lag. Emerging markets received more than 50% of global foreign direct investment (FDI) in 2010 for the first time as investors targeted large emerging consumer markets.

2Regional gaps are being reduced. In the future, no region will have a monopoly on attractiveness.

3Though China leads, rivals are closing the gap.

4The outlook for Russia's investment attractiveness is positive. Russia almost doubling its attractiveness score between 2005 and 2011. In 2010, Russia attracted US$37b of FDI, matching its 2009 inflow.

1Russia's domestic market is the country's most attractive feature for investors surveyed. Growth opportunities, especially in serving consumers, are "very attractive" for 30% of investors and appeal to 75% overall, an unusually high proportion.

2Affordable labor and improving logistics are a strong benefit for investors. Overall, 69% find that Russia has attractive labor costs.

3Investors see possibilities for productivity gains in Russian operations. These possibilities is highlighted by 67% of investors surveyed, with 27% seeing a "very" good opportunity.

4Transparency of the political, legal and administrative environment remains a concern.

5State-owned enterprises, from foreign investors' point of view, limit opportunities for new ideas and businesses.

6Investors see Russia's chief rivals for FDI as Asian countries, especially China, and European countries.

7The pace of future growth may depend on commodity prices and reform.

1In 2010 Russia was the fourth-largest recipient of FDI in Europe with over 200 projects, an increase of 18% on 2009. Russia accounts for 5% of all FDI in Europe.

2FDI projects into Russia have more than doubled over five years, growing through the crisis.

3Russia's fast-growing industrial sector attracted 54% of the country's FDI projects in 2009-10. The leading sectors for FDI were automotive and food, each accounting for 11% of projects. The USA and Eurozone countries are the chief sources of FDI into Russia.

4Moscow ranks seventh among European cities for FDI and is climbing the rankings.

551% of projects go to the regions.

6FDI investors already present in Russia are keen to invest more, but others have yet to be convinced.

1Investors see government moves to encourage inward investment as positive, but are troubled by inconsistencies.

2Investors are exceptionally optimistic about Russia's future attractiveness, with a remarkable 70% believing Russia will become more attractive for their company in the next three years. The government aims to leverage three Russia’s strength − natural resources, the size and growth of the domestic market and Russia's highly educated population.

3Rules, bureaucracy and corruption are obstacles, but partners, finance and staff are readily available.

4Investors want effective laws, less bureaucracy and fewer regulations. Energy, information and communication technologies and automotive are expected to lead economic growth.

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