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Russia’s Investment Attractiveness: Conditions for Foreign Capital - EY - Russia

Russia’s Investment Attractiveness: Conditions for Foreign Capital

Investors see Russia’s investment climate as enticing, but risky.

Russia remains a fairly complex option for inward investors, especially small and medium enterprises. However, it is beginning to correct a past over-reliance on oil and gas exports and improve its attractiveness. At the same time, government policies have improved Russia’s risk profile.

Investors see Russia’s investment climate as enticing, but risky. They fret about three key areas: transparency, political stability and interaction with public authorities. Perceptions of the investment climate in Russia have been impacted by the slow pace of structural reforms to enhance the role of the private sector, and by government efforts to reassert influence on some sectors of the economy.

During last few years Russia observed controversial times in terms of attraction of foreign capital. On the one hand, starting from 2005 the attractiveness gap between Russia and the rest of the world decreased substantially. According to the 2011 European attractiveness survey, Russia’s attractiveness has almost doubled since 2005. In the meantime, Western Europe, formerly the leading region, has lost 28 percentage points in its attractiveness.

In 2005, the most attractive region (Western Europe) scored 63% in EY’s European attractiveness survey, and the least attractive (Brazil) – 6%. In 2011 the spread was between 38% and 11%, reflecting a more polycentric world in which emerging markets have become more attractive FDI destinations.

On the other hand, in 2009 there was declining trend in Russia’s attractiveness profile, which demonstrated the country’s vulnerability to crude oil prices.

Overall, the Russian economy can be described as being in the state, which calls for cautious optimism, with the following key features in place:

  • Investors realize the need to diversify away from the traditional markets into Asian and Eastern Europe markets;
  • More Russian executives are willing to expand their workforce;
  • After the elections, respondents are generally more optimistic about Russian economic conditions;
  • Less Russian companies intend to pursue M&A deals, with more companies focusing on organic growth which is consistent with global sentiments;
  • At the same time, Russian respondents are less likely to make divestments over the next year than global respondents;
  • Respondents’ confidence in credit availability is declining;
  • Still, despite the perceived issues existing in Russian economy, according to the E&Y survey conducted in the end of 2011, 30% of potential investors found the Russian market to be “very attractive”.

Russia’s domestic market is the country’s most attractive feature for investors surveyed. With growth limited in big developed countries, investors see the best opportunities in rapid-growth economies. Many companies want to reach the emerging middle class in these economies and sell them consumer goods.

Foreign investors see a unique opportunity to establish brand loyalty and capture market share across a diverse population. Many want to introduce new consumer products into the Russian market and establish operations in a country where the population has spending power and is open to trying new and different goods.

Investors say Russian workers are affordable. Overall, 69% find that Russia has attractive labor costs. Although not a low-cost destination in global terms, Russia offers an attractive alternative to wage rates in many European countries. The average Russian wage was US$593 per month or US$7,116 per year, in line with gross national income (GNI) per capital of US$7,530. When compared to labor costs in Central and Eastern European countries, including the Czech Republic (US$14,580).

Still, investors see certain drawbacks of Russian economy, which traditionally are bureaucracy and lack of political transparency.

Another feature of the Russian economy is that it continues to remain at the crossroads of East and West, both geographically and from the viewpoint of economic characteristics. On the one hand, Russia competes with Western economies for high value added manufacturing projects. On the other, with its large and blossoming consumer market and a need to upgrade infrastructure, Russia has much in common with Asian peers, although the resemblance should not be overstressed. China remains Russia’s main competitor for investors’ capital, followed by India (14%), Germany (5%) and the US (4%).

The most and least attractive features of the Russian economy

Interestingly enough, those investors who already have an established practice in Russia, are not planning to reconsider their plans and are even looking to increase their volumes of operations (64% of respondents). On the other hand, those companies that are not yet established in Russia are, to the large extent, not planning to invest in the Russian market (86% of respondents).

In terms of the government’s measures towards improving the attractiveness of the Russian economy, investors generally view Russian government to take encouraging steps, although they are somewhat concerned with inconsistent policies. Fifty-six percent of all surveyed respondents perceive governmental steps to be rather effective than not.

And finally, according to the respondents, the three major priority measures needed to improve Russia’s investment climate are reduction of corruption (63% of all investors surveyed), reduction of bureaucracy (53%) and Improvement of transparency of business regulation (39%).

Despite certain features of the Russian economy and investment markets described above, overall it can be stated that Russia is becoming increasingly integrated in the global economy: a trend, which can hardly reverse in the future.

The table below summarizes the perception of the global economy by global respondents and contrasts it with the opinion of the Russian counterparts.

As is seen from the table, the trends are quite similar:

  • Russian respondents are less upbeat about the state of the global economy, but substantially more bullish about local economic conditions as months of political unrest in the aftermath of the December parliamentary elections and lead-up to the March presidential elections subside.
  • Russian executives responding to the April 2012 survey are also more willing to consider expanding their workforces.
  • Yet, Russian companies’ appetite for deal-making is below the global average and continues to decrease, with most preferring to grow their core businesses.
  • This is in part due to Russian respondents’ decreasing confidence in the availability of credit since October, as the Eurozone crisis has further destabilized the financial environment. A large proportion of Russian companies are still dependent on debt as a source of deal funding.
  • Russians are also less likely to be planning a divestment in the next 12 months than their global counterparts.



Published:

World Finance Review, September 2012


Author:

Leonid Saveliev,
Partner, EY Russia
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