Positioned for growth

Russia investment attractiveness: a step forward

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Improving investment opportunities

Igor Shuvalov, First Deputy Prime Minister of the Russian Federation

It might not be quite fair to assess Russia's attractiveness ourselves, as it is foreign investors who must have their say. Of course, international ratings show that we still have a lot to do. For example, although we have climbed up four positions in the World Bank's Doing Business ranking, we are still 120th.

However, I can say that all these years we have remained consistent and resolute, albeit not always as fast as we would like, in removing obstacles hindering the inflow of foreign capital into our country. We have improved our laws in line with global best practices and worked to make the system for passing court rulings more transparent. A most important achievement is the accession to the World Trade Organization (WTO). Finally, the Customs Union significantly increased the size of the domestic market.

As a result, we have a positive trend: the net inflow of foreign direct investments (FDI) amounted to US$53b in 2011. Since the autumn of 2010, when I started working as an ombudsman, we have reviewed around 100 complaints from foreign investors. We have managed to resolve most of the issues and find positive solutions.

The Foreign Investment Advisory Council (FIAC) brings together more than 40 major global companies operating in Russia. The Council provides an important and useful forum to handle issues related to investment activities in Russia.

Russia is a net exporter of capital. Last year, according to the Bank of Russia, our country invested US$76b in other countries on a net basis, i.e., net of investments in Russia.

Money is thus not the main reason why we need foreign investors. It is no secret that, in terms of their legal status, many foreign investments are, in fact, made with money that was previously taken out of Russia. We therefore need real foreign investors to signal that the situation in Russia has improved and there are proper conditions for investment.

And there is one more important thing. Foreign investments are primarily associated with innovative technologies, managerial experience, modern standards of production and market relations — and this is exactly what our economy really needs today.

What are the three most attractive regions in which to establish operations?

EY - From a general point of view, could you list, in decreasing order, the three most attractive countries in which to establish operations in Latin America?

Source: EY's 2012 European attractiveness survey. Total respondents: 840

In 2011, Russia took a step forward in the global competition to attract FDI, according to our second Russia attractiveness survey. A boost in consumption, a strong labor market and an increase in investments are the prime drivers of this growth.

Foreign investors confirm that Russia is attractive by nature. Its world-class features, such as natural resources and a huge domestic market, support Russia's leading role in the global economy.

Since 2006, Russia's investor appeal has increased nearly fourfold. Its profile for investors has been improved by its growing consumer market, expanding industrial base and recent government efforts to tackle corruption, reduce bureaucracy and decrease the country's over-reliance on oil and gas.

In 2011 particularly, there was a boost in investors' confidence in the country as a result of the agreement to join the WTO in mid-2012. Sixty-two percent of investors believe Russia's accession to the WTO will increase the country's attractiveness for investment.

Strengths that make Russia a magnet for investors

  • National resources. Forty-three percent of survey respondents named an abundance of natural resources as Russia's most globally competitive feature. Over half of respondents (56%) expect Russia to still be an energy sector leader in 2020.
  • Market opportunities. Three-quarters of all respondents, and 85% of those already present in Russia, continue to be impressed with Russia's domestic market. According to industry estimates, the country is poised to become Europe's largest consumer market by 2018.
  • Higher education advantage. Two-thirds of the respondents cited education as one of Russia's competitive advantages.
  • Balanced labor costs and skills. Nearly 56% of respondents described the availability of skilled labor as a positive factor for investing in Russia. Low labor costs were mentioned by 61% of investors.
  • Solid telecommunications infrastructure. Sixty-four percent of respondents list Russia's telecommunications infrastructure as an attractive feature. Russia has the fourth-largest number of operational land lines and cellular phones in the world. In 2011, Russia also surpassed Germany to become the largest internet user in Europe.

Russia's areas for improvement

  • Political, legislative and administrative environment. Sixty-two percent of investors highlighted this area as needing improvement.
  • Transport and logistics infrastructure. Respondents have mixed views on the current state of Russian infrastructure – while 45% do not find Russia's infrastructure attractive, 44% consider the transport and logistics infrastructure to be an advantage. However, government spending on road and railway infrastructure is growing. The need to renew transport and logistics infrastructure has now become a political priority at the highest levels.
  • Innovation and a culture of entrepreneurship. Innovation in the country suffers because of very low levels of R&D and relevant activities in corporations, weak framework conditions for innovation and inadequate infrastructure. Our G20 Entrepreneurship Barometer report highlights that access to funding continues to be one of the most significant challenges for the creation, growth and survival of small and medium enterprises (SMEs), particularly innovative ones. Entrepreneurs also complain about the lack of tax incentives to start a business.

2013: plans for investment

Investors already present in Russia continue to demonstrate their confidence in the Russian market. Nearly 80% of these investors plan to increase or maintain their operations in the country.

There is a wide gap in plans between the companies that already have operations in Russia and those that are not yet established. Seventy percent of the companies that are not established in Russia have no plans to invest in the country in the next year.