Exceptional, January 2014

Doing business in Russia

Russia is shaping its future

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Russia is experiencing an economic awakening. With vast natural resources and a huge domestic market, is Russia’s ascendancy here to stay?

With a wealth of natural resources and an expanding middle class, Russia is continuing to establish itself as a stellar prospect for international investors. Add to that the emergence of a steadying economy and you can see why this massive country is catching the eye of those looking for a good return.

Statistics from the World Bank underscore this view, confirming that Russia’s growth exceeded that of Brazil, South Korea and Turkey in 2012. The uplifting ceremony Russian President Vladimir Putin performed to start the 2014 Winter Olympics Torch Relay isn’t the only sign of perseverance and achievement evident in Moscow.

EY’s attractiveness survey series of reports analyzes international investment and considers a country’s prospects for attracting international investors. The Russia survey (in its third year) shows that, in 2012, the country had the second-highest level of employment generated from foreign direct investment (FDI) in Europe and was the sixth most attractive country for investors in the world.

“[Russia] is vibrant and complex,” says Dmitry Peskov, Press Secretary to Putin. “Its citizens are traveling across the world. Its private and public companies are working in all continents.

Russia is continuously moving forward. “We can offer international investors a unique combination of political and economic stability, a predictable mentality and highly skilled talent. We are not just sitting here waiting for a miracle. We are growing, we are changing, and we are removing the hurdles that hamper business.”

This momentum is set to increase pace with Russia’s recent accession to the World Trade Organization (WTO) and the development of an innovation city near Moscow, designed to promote the expansion of IT, energy efficiency, biomedicine, space and nuclear technologies.

“Following decades of negotiations,” says Klaus Kleinfeld, Chairman and CEO of aluminum producer Alcoa, and Chairman of the US–Russia Business Council, “Russia’s accession to the WTO and the normalization of trade relations with the US have opened new doors for economic expansion and diversification.”

Manufacturing leads the way for FDI, both in terms of project numbers and job creation — in 2012, manufacturing accounted for 98.2% of jobs created by foreign investment. Sales and marketing have bolstered its share of FDI projects from 33.2% during 2007 to 2011 to 38.3% in 2012, with nearly half of these projects originating from the US.

One of the cornerstones of Russia’s economic rejuvenation has been the automotive sector, which received 21.1% of FDI projects and 35.9% of jobs. Many of these came from western Europe, in particular Germany, and much of the activity was centered around St. Petersburg and Kaluga, which now host some of the sector’s biggest names, following Volkswagen’s decision to invest there five years ago.

“We are growing, we are changing, and we are removing the hurdles that hamper business.” – Dmitry Peskov, Press Secretary to President Vladimir Putin

While Russia’s calling card may be manufacturing, most investors see its domestic market as the country’s most attractive asset. With a population of 143 million, you can see why. Russia has the world’s ninth-largest domestic consumer market and is predicted to become Europe’s largest consumer market, and the fourth largest in the world, by 2020, according to Reuters.

With its abundant natural resources and well-developed telecoms infrastructure (it has the largest online population in Europe, with 73.8 million users), Russia has, not surprisingly, emerged as one of the world’s most attractive countries to invest in, with many seeing China as its major rival.

“Russia’s domestic market is well supported by sustainable demand,” explains Sergei Belyakov, Deputy Minister of Economic Development of the Russian Federation. “We are working hard to make sure that no positive information about us is lost.  We are not trying to look better than we are or mislead the public in any way; what is important is the image of how Russia is perceived abroad.”

Unfortunately, according to 55% of survey respondents, the country’s reputation is being tainted by political, legislative administrative shortcomings.  It is a criticism backed by recommendations from the Organisation for Economic Co-operation and Development for Russia to improve the efficiency of its public administration and to tackle corruption.

Of a possible 14 measures to improve Russia’s investment climate, 44% of potential investors questioned for the survey opted to reduce bureaucracy, 43% chose improving the effectiveness of the rule of law, and 30% suggested increasing the transparency of business regulation.

“Russia is a country where you have to understand the market and commit to a long-term investment strategy,” says Muhtar Kent, Chairman of the Board and CEO of The Coca-Cola Company. “I share the view that there are three focus areas needed to improve the country’s attractiveness. First, reduce bureaucracy and red tape. Second, address corruption. And third, improve infrastructure.”

Perhaps as telling as any statistic mentioned in the study is the one reporting that 59% of respondents believe Russia’s attractiveness will improve over the next three years. This compares favorably with the confidence shown in Europe, which reached 39%.

Much of this buoyancy may stem from Russia’s plentiful supply of natural resources, which no doubt influenced 32% of respondents to suggest the energy and environment sector will lead growth in Russia over the next two years. But this deep-seated optimism may also stem from the belief that Russia is changing, as Andrei Kostin, President and Chairman of the Management Board and Member of the Supervisory Council of VTB Bank, proposes.

“It’s gratifying to note that Russia’s image in the West is showing improvement,” he says. “[However,] Russia’s image isn’t changing fast enough, … and this is largely because international investors don’t see all the positive economic and legislative changes that are taking place.

It is important now for the Russian Government to pursue a communication policy of maximum openness.” With 2014’s Winter Olympics in Sochi providing the perfect showcase, it seems Russia has the opportunity to do just that.

More information
Visit emergingmarkets.ey.com  to download EY’s 2013 Russia attractiveness survey: Shaping Russia’s future.