Feature stories | Finance, business

EY: Russia’s still important, but regulatory instability mars the picture

20 Oct '20
The Russian market still has a strategic meaning for foreign investors, but regulatory instability undermines Russia’s investment attractiveness. These are the key findings of a new survey conducted by Ernst & Young (EY) for the Foreign Investment Advisory Council in Russia (FIAC) with the support of the federal Ministry of Economic Development.

The survey, called “The outlook for international business in Russia,” was completed in September 2020 and involved 62 foreign companies representing all sectors of the economy. The average 2019 Russia-related revenue of the polled was $1.1bn. The average staff size is 3,100 people.

Alexander Ivlev, CIS Managing Partner: “The survey results shows that Russia is a strategically important market for 92% of the foreign investors surveyed. The pandemic, the volatility of commodity prices and macroeconomic instability have done little to change this perception. The proportion of companies that regard Russia as a strategic market remains consistently high and has grown compared with last year.”

Over half of the survey participants (53%) said that they planned to increase their presence in Russia in the near future. Those most likely to report such plans were Asian companies and companies in the energy and natural resources sector, which are attracted by the large resource base, the gradual recovery of commodity prices and, in the case of Asian companies, the absence of tough sanction restrictions. The launch of new products and services is the principal way of developing business in Russia for 56% of survey participants. A further 42% of international companies reported plans to expand manufacturing.

The biggest investors are companies in the energy and natural resources sector, where one company accounted for almost $9bn of direct investments. Over the next five years, international companies that took part in the survey plan to invest $5bn in Russia. However, many companies were unable to give an exact figure owing to the uncertainty caused by the pandemic and the resulting need to revise their plans.

The respondents view the U.S., Germany and Kazakhstan as the most important economic partners for businesses in Russia. 16% of companies said that the U.S. remained a key partner in Russia. 10% of the respondents identified Germany as being of key importance for Russian business. The importance of Kazakhstan was noted by 10% of international companies.

Regional development

The majority of survey participants (53%) do not plan to expand their presence in the regions. But regional expansion plans vary greatly according to industry. The majority of manufacturers of industrial products and consumer goods, which are already well represented outside Moscow, plan to hold off on regional expansion for the time being. Those companies that do plan expansions cited Tatarstan and Krasnodar as the most attractive regions outside of Moscow and St. Petersburg.

Regulation

Frequent changes in the law are cited by half of participants in the survey as having a negative effect on Russia’s investment attractiveness. This is one of the key problems encountered by large foreign businesses in the country in terms of the legal environment.

The high level of administrative barriers (39%) and the mismatch between the law and current conditions (34%) are other problems cited by the respondents. The most frequently cited examples of negative regulatory changes included slow progress in IP protection for pharmaceuticals, and a lack of a long-term, stable approach to taxation for the oil and gas sector.

“The international companies that took part in the survey identified labor relations, taxation and financial regulation as the three best developed areas of Russian legislation. The survey participants pointed to the following examples of positive changes in the regulatory environment in Russia: the “regulatory guillotine” and the abolition of obsolete regulations, the development of labor legislation, and in particular the experiment involving the use of electronic digital signatures in personnel documents; the emergence of a special tax regime for self-employed people; the development of legislation on the protection of capital investments,” Alexander Ivlev said.

Support for victims of the pandemic is a priority for foreign businesses

76% of survey participants said that their company had given material assistance to medical, public-funded, charitable and social organizations in Russia in connection with the pandemic. Material assistance included donations of money, purchases of medical equipment and devices, or the supply of the company’s own products free of charge. The 20 companies that disclosed the exact amount spent on such support gave $15.5m worth of material assistance to Russian organizations.
Oleg Kouzbit, managing editor: “I’m glad you join us here and take The Bridge walk for Marchmont’s weekly review of the Russian regions’ innovative present and future. Stay close and you’ll find out more of how Russia is bridging the existing gap between its researchers and businesses.”
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