22 Jun 2021
2020 European Attractiveness Survey: Russia

2020 European Attractiveness Survey: Russia

By Alexander Ivlev

EY CIS Managing Partner

Managing Partner, major participant in projects for improving the investment climate in Russia. Sports enthusiast.

22 Jun 2021
Related topics Attractiveness COVID-19

Despite the crisis caused by the COVID-19 pandemic, foreign investors continue to perceive Russia as one of the most attractive regions for investment.

In Brief 

  • Russia ranked 11th among Europe’s top 20 investment destinations.
  • Germany, China and the US topped the list of major investors in the Russian economy in 2020.
  • Manufacturing and agri-food remained the most attractive activity for foreign investors in Russia.
  • Moscow and Moscow Region are the top destinations for foreign investment in Russia.

In 2020, the turbulence and uncertainty spurred by COVID-19 caused foreign direct investment (FDI) in Europe to fall 13% compared with 2019 to 5,578 inward investment projects.

Despite that foreign businesses still see Europe as fundamentally one of the most stable, skilled and sophisticated regions around the world to invest for the long term.

Investment is set to rebound in 2021 as pent-up demand to execute projects is unleashed: 40% of executives plan to establish or expand operations in Europe in the next 12 months, compared with just 27% at the beginning of 2020.

Reflecting long-term optimism in Europe as an investment destination, 63% of respondents believe Europe’s attractiveness will improve during the next three years.

FDI projects: trending down along with Europe

With 141 FDI projects in 2020, Russia ranked eleventh among Europe’s top 20 investment destinations. FDI projects in Russia dropped by 26% compared with the previous year (191), reflecting the wider trend across Europe: the average decline in European countries with negative FDI growth was 21%.

11

Russia’s rank among Europe’s top 20 investment destinations in 2020.

The number of FDI projects attracted by Russia in 2020 was close to that in 2014, with international investors undertaking fewer projects than they would have taken on in better market conditions. The COVID-19 pandemic, coupled with fears of imminent sanctions, had the highest impact on their decisions.

Last year’s decline came off a historically high base. Moreover, the pandemic, amplified by the economic downturn, dealt a devastating blow to foreign investment, comparable only to the shock caused by sanctions in 2014.

Investors: Germany, China and the US are the perennial trio

As in 2019, Germany topped the list of major investors in the Russian economy in 2020. Half of the German funds were invested in agri-food, reflecting the sector’s growing attractiveness and profitability. Germany has always been among the leading countries investing in Russia.

German businesses undertook 418 projects over the last two decades, more than other European countries covered by our survey.

China and the US shared the second spot in 2020, with 15 projects each – 32% and 25% fewer than a year earlier. Like in the case of German investors, over half of the US businesses invested in the agri-food sector. US companies working here highlight the continued importance of Russia for their business: Russia is a leading emerging market, and having a presence here is a strategic decision for many international players.1

China remained focused on high-tech, with electronics taking over the lead from software and IT services as the most attractive sector for Chinese investments in 2020.

Italy moved up from seventh to third place, having doubled the number of projects in Russia from 6 to 13, and is now winning back its title as a leading investor in the Russian economy after slashing its project portfolio in 2019. Machinery and equipment attracted over half of Italian investments.

India and Sweden joined the top ten investors in Russia for the first time in the past decade.

Activities: manufacturing is still appealing

Manufacturing remained the most attractive activity for foreign investors in Russia. The number of manufacturing projects was unchanged from 2019 at 107, undertaken predominantly by investors from Germany, China, Italy and the US.

The number of sales and marketing projects decreased as, in the face of the pandemic, many companies were less active on the media and promotion fronts. 

With eight projects, including three from India, business services – for the first time ever – made it to the top three, ranking the third most popular activity in 2020.

Sectors: agri-food tops the ranking for the sixth year in a row

Agri-food remained the largest sector attracting foreign investment in Russia, with 42 projects announced in 2020. Among key factors contributing to its attractiveness were import substitution initiatives and the food embargo imposed in 2014. Germany and the US were the top investors in the agri-food sector.

Machinery and equipment was the second-largest sector for investment, mostly from Italy, Germany, the US and China.

Third and fourth places were shared between furniture, wood, ceramics and glass and chemicals, plastics and rubber.

Regions: Moscow and Moscow Region are ahead of the pack

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the project count in Moscow and Moscow Region, including

Moscow and Moscow Region remained the top destinations for foreign investment in Russia. The largest number of projects was established by France, Germany and the US. A year earlier, France was also the biggest investor in Moscow and Moscow Region, investing in 16 projects.

The most attractive sectors in Moscow and Moscow Region were machinery and equipment and agri-food. Moscow and Moscow Region have always been a magnet for investors and business activity. With their developed infrastructure, vast market and high position in the national investment ranking,2 Moscow and Moscow Region continue to be an attractive investment destination.

There were 16 FDI projects in St. Petersburg and Leningrad Region, with Germany as the top investor.

The third-largest investment destination was Tatarstan, with 10 projects announced in 2020 (+11% year on year). China was the leading investor in the region, putting up capital in electronics and transportation manufacturers and suppliers. Since 2015, Tatarstan has been in the top three regions with the best investment climate, and was number one in the ASI’s National Investment Ranking three times.

Kaluga Region is also in the leading pack, with furniture, wood, ceramics and glass being the largest sector attracting foreign investment.

  • Methodology

    The evaluation of the reality of FDI in Europe is based on the EY European Investment Monitor (EIM), the EY proprietary database produced in collaboration with OCO.

    This database tracks the FDI projects that have resulted in the creation of new facilities and jobs. By excluding portfolio investments and mergers and acquisitions (M&A), it shows the reality of investment in manufacturing and services by foreign companies across the continent. Data on FDI is widely available.

    An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the company’s equity and takes a role in its management. FDI includes equity capital, reinvested earnings and intracompany loans.

    To confirm the accuracy of the data collected, the research teams aim to directly contact more than 70% of the companies undertaking these investments. The following categories of investment projects are excluded from the EY EIM:

    • M&A and joint ventures (unless these result in new facilities or new jobs being created)
    • License agreements
    • Retail and leisure facilities, hotels and real estate*
    • Utilities (including telecommunications networks, airports, ports and other fixed infrastructure)*
    • Extraction activities (ores, minerals and fuels)*
    • Portfolio investments (pensions, insurance and financial funds)
    • Factory and other production replacement investments (e.g., replacing old machinery without creating new employment)
    • Nonprofit organizations (charitable foundations, trade associations and government bodies)

    *  Investment projects by companies in these categories are included in certain instances: e.g., details of a specific new hotel investment or retail outlet would not be recorded, but if the hotel or retail company were to establish a headquarters facility or a distribution center, this project would qualify for inclusion in the database.

    However, our figures also include investments in physical assets, such as plant and equipment. This data provides valuable insights into:

    • How FDI projects are undertaken
    • What activities are invested in
    • Where projects are located
    • Who is carrying out these projects

    The EY EIM is a leading online information provider that tracks inward investment across Europe. This flagship business information tool is the most detailed source of data on cross-border investment projects and trends throughout Europe. The EY EIM is frequently used by government bodies, private sector organizations and corporations looking to identify significant trends in employment, industry, business and investment.

    The EY EIM database focuses on investment announcements, the number of new jobs created and, where identifiable, the associated capital investment. Projects are identified through the daily monitoring of more than 10,000 news sources.

Summary

With 141 FDI projects in 2020, Russia ranked eleventh among Europe’s top 20 investment destinations. FDI projects in Russia dropped by 26% compared with the previous year (191), reflecting the wider trend across Europe: the average decline in European countries with negative FDI growth was 21%.

About this article

By Alexander Ivlev

EY CIS Managing Partner

Managing Partner, major participant in projects for improving the investment climate in Russia. Sports enthusiast.

Related topics Attractiveness COVID-19