EY Russia Attractiveness Sept 2012

Growing Beyond

Positioned for growth
Ernst & Young’s 2012 attractiveness survey
Russia

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Positioned for growth
Ernst & Young's 2012 attractiveness survey

Russia

Contents
3 Foreword
4 Executive summary

8 An optimistic outlook
9 Global economic outlook
10 Global FDI market: dynamic and demanding

12 Russia takes a step forward
13 Russia in the global context
16 Russia’s world-class natural resources
17 Russia’s attractiveness: strengths and areas for improvement

22 Russia’s industrial progress
23 FDI in Russia in 2011: larger projects
24 Russia’s performance in the enlarged Europe
24 Activities: manufacturing
26 FDI sectors: diversification is underway
28 Little change in FDI sources
30 Russia’s top regions for FDI
32 2013: plans for investment

34 How to meet investors' expectations
35 Expectations from investors
37 Russia needs to create an investor-friendly environment
40 Reducing Russia's dependence on oil and gas
42 Sector opportunities

44 Methodology

Ernst & Young's 2012 Russian attractiveness survey Positioned for growth 1

Viewpoint

Improving investment opportunities
Igor Shuvalov, First Deputy Prime Minister of the Russian Federation

It might not be quite fair to assess Russia’s attractiveness The Foreign Investment Advisory Council (FIAC) brings
ourselves, as it is foreign investors who must have their say. together more than 40 major global companies operating in
Of course, international ratings show that we still have a lot to Russia. The Council provides an important and useful forum
do. For example, although we have climbed up four positions to handle issues related to investment activities in Russia.
in the World Bank’s Doing Business ranking, we are still
120th. Another example is the persistent outflow of capital A few examples of what it has managed to do include:
from Russia, with the Bank of Russia estimating an outflow • The Council made a decisive contribution to the drafting
of US$80b in 2011. And what is private capital outflow? of recently adopted amendments to the Law on Migration
It is, in fact, a real indication of the quality of the investment Registration of Foreign Citizens and Stateless Persons
climate. So there is plenty of room for improvement. in the Russian Federation. The law creates favorable
conditions for highly skilled foreign professionals and their
The Council provides families to enter and live in Russia.
• FIAC was actively involved in developing the Law on
an important and useful
Customs Regulation, which greatly simplified customs
forum to handle issues procedures.
related to investment • FIAC took part in drafting a law providing easier access
activities in Russia. to Russia's strategic industries for foreign investors.
• FIAC working groups put forward proposals to improve
However, I can say that all these years we have remained administrative and customs regulations (veterinary
consistent and resolute, albeit not always as fast as we would control, food regulations and technical regulations).
like, in removing obstacles hindering the inflow of foreign • Finally, in 2011, the Council prepared a list of projects
capital into our country. We have improved our laws in line to be implemented in Siberia and the Far East.
with global best practices and worked to make the system
for passing court rulings more transparent. Let me also Russia is a net exporter of capital. Last year, according to
mention the "humanization" of the Criminal Code, especially the Bank of Russia, our country — I mean the private sector,
with regard to economic crimes, and the introduction of the state and households — invested US$76b in other
tax incentives for investors in a number of sectors. A most countries on a net basis, i.e., net of investments in Russia.
important achievement in this area is the accession to the Money is thus not the main reason why we need foreign
World Trade Organization (WTO). Finally, the Customs Union investors. It is no secret that, in terms of their legal status,
significantly increased the size of the domestic market. many foreign investments are, in fact, made with money
As a result, we have a positive trend: the net inflow of foreign that was previously taken out of Russia. We therefore need
direct investments (FDI) amounted to US$53b in 2011. real foreign investors to signal that the situation in Russia
has improved and there are proper conditions for investment.
Since the autumn of 2010, when I started working as an And there is one more important thing. Foreign investments
ombudsman, we have reviewed around 100 complaints are primarily associated with innovative technologies,
from foreign investors. We have managed to resolve most managerial experience, modern standards of production
of the issues and find positive solutions. Investors most and market relations — and this is exactly what our economy
often complain about administrative barriers. really needs today.

2 Ernst & Young's 2012 Russian attractiveness survey Positioned for growth

Foreword

Foreword

Jay Nibbe Alexander Ivlev
Area Managing Partner EMEIA — Markets Country Managing Partner
Ernst & Young Russia, Ernst & Young LLC

The global economy faces many challenges. In Europe, recession Our panel of investors confirms that Russia has world-class
has returned to many economies, the Eurozone crisis continues features: an abundance of natural resources, a huge domestic
and global economic power shifts from west to east and north market and a very skilled labor force. They also note that
to south. In recent months, rapid-growth economies have Russia has made a step forward in the global competition
slowed, in some cases notably, as a result of the financial crisis. to attract FDI.

Despite this fact, many developing economies demonstrate However, our survey also underlines some critical challenges
robust growth, and the group of 25 rapid-growth markets for Russia: investors’ confidence in the future attractiveness of
(RGMs) that we monitor is expected to achieve overall GDP Russia has declined and they repeated their concerns about the
growth of 5.9% in 2013 and 6.5% in 2014. country’s uncertain investment climate and innovation capacity.

Russia has proved to be resilient, experiencing growth in 2011 This report is designed to help the Russian Government remove
and 2012. An increase in consumption, a strong labor market barriers to future growth and help business leaders make smart
and an increase in investments have been the prime drivers of investment decisions. In the report, we look at the perceived
this growth. Oil prices have supported the sustained expansion attractiveness of Russia and changes in FDI behavior, and
of the Russian economy. we propose actions and identify opportunities to address the
challenges that our country is facing.
Russia, like other countries, is facing the challenges of
increasing global competition, in which investment and Russia, with its great development potential, is now exploring
technology play crucial roles in diversification and creating new ways to compete and to lead.
sustainable growth. Our survey shows that foreign investors
are more demanding than they used to be: they now value As we present our second edition of the Russian attractiveness
efficiency and transparency of the operating environment survey, we would like to thank all the decision-makers and
as much as they do market opportunities. Ernst & Young professionals who have taken the time to share
their insights with us.


Executive summary

Executive summary
The global context Investors’ perception
An optimistic outlook Russia takes a step forward

• The global economic outlook is optimistic • Russia has joined the competition
The global economy started to show signs of recovery in 2011. The world is converging. China’s lead as the investment destination
It was weak and unbalanced, but there was optimism. As a result of with the best image is widening and Europe’s attractiveness has
the financial crisis, the growth trajectories of rapid-growth economies halved since 2006. With 19% of international investors perceiving
have declined – some notably. However, many developing economies Russia as one of the most attractive global regions in 2012,
demonstrated robust growth, and the group of 25 RGMs that we it has unquestionably joined the competition for FDI. The country’s
monitor at Ernst & Young should recover to achieve overall GDP attractiveness has grown by eight percentage points over 2011,
growth of 5.9% in 2013 and 6.5% in 2014. the largest increase of any region.

• Global FDI has increased • Russia is attractive by nature
Despite the economic and financial crisis, global FDI increased by According to our panel, Russia’s world-class features, such as its
16% to reach US$1.5t in 2011, exceeding the pre-crisis level. In natural resources (43% of respondents), domestic market (19%)
comparison, Russia’s inflow of foreign investments (FDI) increased and strong labor force, all support its leading role in the global
by 22%. According to the United Nations Conference on Trade and recovery.
Development (UNCTAD), investors were motivated by the continued
growth of local consumer markets and manufacturing opportunities. • Russia has balanced labor costs and skills
The country’s cost-competitive and skilled labor force improves its
• Investors are more demanding attractiveness. Nearly 56% of respondents described the availability
Business leaders are re-evaluating their selection criteria: at the top of skilled labor as a positive factor for investing in Russia; low labor
are now market appeal (40% of investors) and the stability of their costs were mentioned by 61% of investors.
investment destination (36%).
• Concerns remain about Russia’s operating environment
Investors’ concerns relate to the political, legislative and
administrative environment of Russia, with 62% highlighting this
Reality factor as a challenge. Other factors that make Russia less attractive
to foreign investors are its infrastructure and limited incentives for
#1 In 2011, Russia was the most attractive destination sustainable development.
for FDI in Central and Eastern Europe.

42% of investment projects are located in Moscow and
St. Petersburg.

22% inflow in terms of value resulted in a 4% increase in job
creation in 2011.

8 of the top 10 sources of FDI originate from Europe,
with over 300 FDI projects between 2007 and 2011.

51% of FDI in Russia has gone into manufacturing,
with over 400 FDI projects, the fourth-largest in Europe — while 9%
was directed to the business services sector.


Reality check A look into the future
Russia’s industrial progress How to meet investors’
expectations

• Russia attracted fewer, larger projects • Expectations from investors
The number of FDI projects declined by 36% in 2011, even though Although a majority (57%) of investors remain optimistic about
Russia led Central and Eastern Europe (CEE) at attracting FDI. Job Russia’s attractiveness in the medium term, the level of confidence
creation grew by 4% in 2011. Labor-intensive industrial activities has dropped from 70% last year.
increased the average number of jobs created per project to 65 in
2011 from 40 in 2010. • Russia needs to create an investor-friendly environment
Russia’s uncertain business climate deters investment from foreign
• Manufacturing is still central to Russia’s appeal companies. Investors chose the more effective rule of law (53%),
Manufacturing activity is key to Russia’s attractiveness, accounting for reduced bureaucracy (47%) and an improvement in the transparency
51% of investment projects and 92% of job creation between 2007 of business regulations (37%) as the top three ways to enhance
and 2011. The industrial sector was another high performer, with Russia’s investment climate.
automotive attracting 90 projects and machinery and equipment
recording 62 projects. The food sector was the second-largest • Russia’s FDI portfolio is diversifying
number of projects (86), and business services also grew in FDI. Nearly 39% of investors expect the mining, oil and gas sector
to attract the most FDI in the next two years. Information and
• Russia’s diversification is under way, driven by expansion in communication technologies (ICT) was named second-most often
business services by investors (20%), followed by energy and utilities, agriculture,
FDI activity in Russia’s business services sector has been growing consumer goods and automotive. The country’s focus on oil and gas
in recent years. It accounted for 9% of the total FDI projects in creates a large mismatch between the attention that other strategic
2011, higher than its 5% share in 2010 and above its average of 6% industries in Russia received from investors and their real potential.
between 2007 and 2011. When financial services and the software
industry are included in the business services category, this figure
rises to 14% of the projects between 2007 and 2011, compared with
the automotive industry’s 12%.

• Little change in FDI sources
The United States remains Russia’s primary investor with 122 FDI
projects between 2007 and 2011 (16% of the total), but 8 of the top
10 source countries are from Europe. European countries established
over 300 FDI projects in Russia from 2007 to 2011, 44% of the total.
FDI into Russia from emerging countries remained low between 2007
and 2011. India and China each accounted for less than 2% of FDI Perception
projects in Russia. Brazil established just two projects in the country.
These economies also made a minor contribution to employment
generation.
8 percentage point increase of international
investors who find Russia attractive compared to 2011,
the largest increase of any region.
• FDI is regionally concentrated
Russia’s two largest cities – Moscow and St. Petersburg – account for
42% of the projects. The Kaluga and Nizhny Novgorod regions are 39% of business leaders expect the mining, oil and gas sector
also attractive investment destinations. to attract the most FDI in the next two years, with 20% for the
ICT sector.
• 2013: strong plans for investment
Investors already present in Russia continue to demonstrate their 62% of investors believe Russia’s accession to the WTO will
confidence in the Russian market. Nearly 80% of these investors plan increase the country’s attractiveness for investment.
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 62% of respondents consider that the country’s political,
companies that are not established in Russia have no plans to invest legislative and administrative environment needs improvement.
in the country in the next year. This is, however, 16 percentage points
lower than 2011, signaling an improvement in potential investors’
perceptions of the Russian economy as an investment destination.
78% of respondents already present in Russia plan to maintain
or expand their operations in the country.


Executive summary


Viewpoint

Growth is not only possible, but inevitable
Kirill Dmitriev, Chief Executive Officer, Russian Direct Investment Fund

Russia has a unique opportunity to attract a record level US$1.5t, foreign investors have become increasingly
of FDI. First, Russia really delivers: in 2011 we had a interested in Russia. According to the survey, in April 2012,
budget surplus, the lowest inflation in 20 years and one 48% of FDI funds expressed the intention to expand their
of the lowest levels of state debt (11% of GDP compared dealings in Russia and the Commonwealth of Independent
with some 80% in Europe and over 100% in the US). Russia States (CIS) compared with just 25% in October 2011.
has the fourth-largest international reserves in the world There are many factors that appeal to investors in
(around US$500b) and impressive 4.3% GDP growth. Such Russia, including the country’s strong macroeconomic
results can performance, the threefold growth of the Russian middle
cause a twinge class over the last five years and prospects of lowering
There are of envy in other export barriers as Russia prepares to join the World Trade
many factors countries, Organization.
that appeal including
to investors most of the Coming to Russia primarily for high revenues, foreign
developed investors bring unique managerial expertise and knowledge
in Russia. ones. Second, of global markets. They facilitate the implementation of
initiatives advanced technology and contribute to the modernization
like the Russia Direct Investment Fund (RDIF) make it of production in Russia. It all fits very well with the
easier to invest in Russia. RDIF is a partner for direct Government’s agenda for attracting “smart” long-term
investment funds, state investment funds and transnational foreign investments.
corporations that can share risks and elucidate the finer
points of the investment machinery in Russia. In addition, While a member of BRICS, Russia has some big advantages
RDIF will attract foreign capital by showcasing real over the rest of the group. Russia possesses huge mineral
examples of successful deals made in partnership with resources and a more literate and educated population than
leading financial and strategic investors. The mere presence other BRICS countries, which, unlike Russia, have to rely on
of such investors in Russia will be very good public relations either mineral or human resources. In addition, Russia boasts
(PR) for the country. Third, Russia has a large-scale the highest GDP per capita, the best capitalized banking
government program of investment in infrastructure under system and the lowest corporate tax among BRICS nations.
way, as well as a new wave of privatizations, targeting
assets worth US$30b–US$50b, in total. Russia’s investment climate is often cited as one of this
country’s weaknesses in comparison with other BRICS
Russia has to become more competitive in the international countries (Brazil, Russia, India, China and South Africa),
capital market. The Russian Government has clearly realized but, as stated above, the Russian Government intends to take
that it needs to improve the local business environment and some serious steps to improve it.
is prepared to commit itself to state, corporate management
and regulatory reforms. There are some real problems that International experts often speak about the low
the Government has been trying to solve. It is clear that we competitiveness of Russian businesses. But the lower
still suffer from excessive bureaucracy and red tape, and efficiency of Russian companies also has an upside, as it
there are concerns about the reliability of the Russian judicial shows that there is growth potential, and, most importantly,
system, although we have recently seen some improvements where this growth may come from is clear. In spite of
in all these areas. To tackle these challenges, a special some pessimistic views of the current state of the Russian
institution, the ombudsman, has been established in Russia economy, growth is not only possible, but inevitable. Suffice
during the transition period. it to say that the Russian middle class, which, in relative
terms, is the largest middle class in the BRICS group,
According to an Ernst & Young survey of more than has emerged only in the last five years, during which time
150 executives whose companies’ combined assets exceed the number of middle-class Russians has tripled.


An optimistic
outlook
The global context 6.5% GDP growth in 2014
forecasted for the 25 rapid-growth
markets (RGMs) monitored
by Ernst & Young.

16% global FDI increase
despite the global financial crisis.

US$1.5t global FDI
in 2011, exceeding pre-crisis level.

22%
Russia.
surge in FDI inflow to

40% of investors consider
market appeal as the top criterion
for investment.


An optimistic outlook

Global economic outlook

World RGMs
3.9 3.5 3.9 6.3 4.9 5.9
Russia
4.3 4.0 3.1

UK
0.7 0.2 1.4
Euro area
1.5 -0.3 0.3
US Japan
1.7 2.0 2.3 -0.7 2.4 1.5

China
Mexico 9.2 7.5 8.4
India
3.9 3.8 3.8
7.5 5.7 7.5

Colombia
5.9 4.5 4.2

Brazil
2.7 2.2 5.1

South Africa
Argentina 3.1 2.8 3.8
Chile
5.9 4.7 4.8 8.9 3.3 3.5
Real GDP growth rates (%)
2011 2012 2013

World Economic Outlook (WEO): Growth resuming, dangers remain, April 2012, IMF 2012.
Rapid-growth markets forecast, Ernst & Young, July 2012.

The global economy began 2011 pressures in Europe are also leading to will remain strong as mature market
in recovery mode. It was weak and reduced demand for commodities and companies seek to tap into their projected
unbalanced, but there was some optimism. a slowdown in exports of manufactured growth, and the emerging markets
However, the global recovery slowed in the goods. However, many developing themselves use their favorable economic
second half of the year due to weakening economies continue to grow robustly, positioning to drive development.
investor and consumer confidence and the group of 25 RGMs monitored by
and sharply escalating risks during the Ernst & Young should achieve overall GDP National and regional differences do exist
fourth quarter. Economic growth in many growth of 5.9% in 2013 and 6.5% in 2014. between emerging market economies, and
developed economies decreased during significant growth differences are opening
the latter part of 2011 as many Western Growth in the emerging world is up this year. Asian RGMs are projected to
economies headed toward a double-dip underpinned by the emergence of a richer see growth rates of 6.2% in 2012, while
recession. Increased uncertainties in middle class, favorable demographics and, RGMs in the EMEIA and Americas regions
the Eurozone, persistently high levels of as a consequence, strong and sustained can expect to register growth of 4.0% and
sovereign debt and government austerity growth in domestic demand. Increased 3.2% respectively. Strong RGM performers
programs are all acting as a brake on trade among emerging markets will in 2013 are expected to be Brazil (+5.1%)
Gross domestic product (GDP). They are further help protect these markets from and Chile (+4.8%) in the Americas; India
the main forces holding back economic unfavorable developments in mature (+7.5%), Kazakhstan (+7%) and Qatar
recovery in the West. markets. The developing markets that (+6%) in EMEIA; and mainland China and
rely on energy exports may see some Hong Kong (+8.3%), Vietnam (+6.9%),
As a result of the financial crisis, expansion short-term variation. However, the mid- Indonesia (+6.6%) and Thailand (+6.5%)
in rapid-growth economies has slowed to long-term outlook remains positive. in Asia. Russia is projected to grow at
recently, in some cases notably. Economic Investments in emerging markets a moderate rate of 3.1% in 2013.


An optimistic outlook

Global FDI market:
dynamic and demanding

Viewpoint
Our success will depend on us
Herman Gref, Chairman of the Management Board & CEO of Sberbank

If we assess the investment climate in we still have a lot of hard work ahead of kindergarten, but all we are concerned
Russia retrospectively, we can say that, us. The World Bank and the International about is how to make sure our
at the beginning of this century, Finance Corporation have placed Russia in kindergartens can accommodate all the
the temperature was around zero. the 120th position in their recent Doing children. Nobody seems to be thinking
The nominal tax burden was twice as large Business report, which is far from about the quality of education — as if we
as real tax payments, with massive red satisfying. Making a leap from the 120th were building some sort of luggage room
tape and corruption. The macroeconomic to the 20th place is not easy, but the fact and assigning kindergarten teachers the
situation was also awful, as was the that President Vladimir Putin has declared role of luggage security officers! In the
nation’s credit history. The only attractive this as an objective is very important. morning, you deposit your kids at the
features included perhaps the size of kindergarten and in the evening you take
the market (and even this was no more them back home. Yet about 80% of a
than potentially so) and our oil and gas Russia’s main nation’s successes rest upon the quality
reserves. goal is to reform of pre-school education. Eighty percent
of a child’s potential is built during the
By the middle of the 2000s, the
its system of first seven years of their life. As for the
investment climate in Russia had changed federal and local quality of Russian secondary and higher
significantly. This climate is not only, and government. education, I would rather not speak about
not so much, about figures as it is about it at all.
how it feels to do business in the country. Russia’s main goal is to reform its system
In 2006-2007, business in Russia was in of federal and local Government. It needs The third goal is to create a system of
a state of elation at the pace of growth to improve its blatantly inefficient judicial values.
we had achieved. We simplified the tax system (all major transactions are carried
system, cut interest rates and managed to out in other jurisdictions now, which is We can also mention the need to improve
reduce red tape. We shortened the evidence of the complete lack of trust our infrastructure, etc. But above
company registration process from two in our own system); improve the law I mentioned the fundamental things.
months to three days in accordance with enforcement system and customs
the law. We amended the Civil Code and legislation; eliminate corruption and Foreign capital plays a critical, though not
adopted the Land Code, Water Code, the Government’s involvement in areas decisive, role in the modernization of the
Forestry Code and law concerning where it is unnecessary; and concentrate Russian economy. And this is true for all
minerals. All in all, we took a big step its efforts on the priority areas of Russia’s Russian industries, without exception. At
forward and, as a result, enjoyed a foreign development. Corruption is our number the end of the day, our success will
investment boom. one problem, because it, too, is a measure depend on our own preparedness to move
of the Government’s efficiency. in the direction of modernization.
Unfortunately, the pace of growth then
slowed down, primarily because of Our second goal is to reform the system I do not have enough empirical data
corruption and Russia’s crippled judicial of education. The notion that the quality yet to make any predictions concerning
system, while our competitors were of education in Russia is much better the efficiency of the modernization drive
marching forward. Governments in than in any of the other BRICS countries in Russia in the coming years. I do hope
advanced economies did not simply work is nothing but a myth inherited from that modernization will take place,
to accommodate the interests of their Soviet times. In China, the quality of yet I believe we need to wait for some
business communities; but they actually education is rising, while in our country it systemic improvements from the
tried to anticipate their needs. Therefore, is falling. Education starts in new Government.


Top 10 destinations for FDI inflows in 2011
(in US$ billion)

UK Belgium Russia
$54b 7% $89b 10% $53b 22%

France
$41b 34%

US
$227b 15% China
$124b 8%

Hong Kong
$83b 17%

Singapore
$64b 32%

Brazil
$67b 37%

Australia
$41b 16%

Note: this data includes greenfield and expansion projects, and M&As.
Source: World Investment Report 2012, UNCTAD, July 2012.

Global FDI increased by 16%

Despite the economic and financial crisis, According to UNCTAD, investors were Most important factors in deciding the
global FDI increased by 16% in 2011. motivated by the continued growth of local location in which to establish operations
At US$1t, the total exceeded the pre- consumer markets and by a new round of The country or region's domestic market
crisis level. In comparison, Russia’s inflow privatizations in Russia. 39%
of foreign investments surged 22%. Stability and transparency of political, legal
and regulatory environment
36%
Labor costs
Investors look for market opportunities as much as stability 28%
and transparency Transport and logistics infrastructure
25%
Potential productivity increase for their company
Economic volatility and lower growth this requirement was far less important. 24%
prospects around the world have caused Rapidly changing circumstances around Local labor skill level
24%
business leaders to re-evaluate their the world have triggered a radical change
Stability of social climate
selection criteria. In our 2011 survey, in sentiment. Companies want to set up
20%
investors cited transportation and operations in regions with large and strong
Corporate taxation
telecommunications infrastructure as the domestic demand. 17%
top two factors in their location decisions. Flexibility of labor legislation
Minimizing risk is the next main goal. 9%
But this year, executives clearly have market Stability and transparency in the political, Telecommunications infrastructure
appeal and the stability of their investment legal and regulatory environment is listed 8%
destination at the top of their agenda. by investors as the second-most important Source: Ernst & Young's 2012 European attractiveness
Almost 40% of investors questioned criterion (36%) when deciding where to survey. Total respondents: 840
in 2012 said that, when deciding to invest, invest. Labor costs, which used to be a
a country or region’s domestic market is compelling concern, still matter for 28% of
now their top concern. In our past surveys, respondents, but rank third overall.


Russia takes
a step forward
Investors' perception 19% of international investors
perceive Russia as one of the most
attractive global regions.

8 percentage point increase
of international investors who find Russia
attractive compared to 2011, the largest
increase of any region.

43% of respondents find natural
resources to be Russia’s most attractive
feature.

56% of investors deem availability
of skilled labor a positive factor for
investing in Russia.

61% of investors are attracted by
low labor costs.

62% of respondents consider
that the country’s political, legislative
and administrative environment needs
improvement.


Russia takes a step forward

Russia in the global context

China’s lead is widening

Investors are still focusing on rapid-growth make the country a magnet for investors. “attractiveness gap.” The gap between
markets. Business leaders see a larger Consequently, in Ernst & Young’s 2012 China and Western Europe has increased
role for emerging economies, particularly European attractiveness survey, China from one percentage point in 2010 to
China, that offer greater returns on retains its position as the most attractive three percentage points in 2011 and 11
their investments. In addition to the size FDI destination. It was named as the percentage points in 2012. Similarly, China
of its market and pace of consumption most attractive destination by 44% of has extended its attractiveness lead over
growth, China also has a broad economy, respondents — the highest level of investor CEE. In contrast, competition among the
specialized clusters in key industries, confidence since 2009. Although the pack of other leading players — Brazil, CEE,
easy access to international markets rankings of the most attractive destinations India, North America and Russia — remains
and an enduring image as a low-cost remain roughly similar to those of last keen.
production base — all of which combine to year, there is a noticeable variation in the

Russia has joined the competition

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

68% Western Europe

52% CEE
48% China
44%
41%

North America 33%
India
21%
18% 19%
Russia 18%
Brazil
5%

2006 2007 2008 2009 2010 2011 2012

Source: Ernst & Young's 2012 European attractiveness survey. Total respondents: 840

According to our 2012 European closed substantially. While Russia overtook base and recent government efforts to
attractiveness survey, Russia’s Brazil in terms of its attractiveness profile, it reduce the country's over-reliance on
attractiveness as an investment destination is also in very close competition with India, oil and gas. In 2011 particularly, there
(19%) increased by eight percentage points North America and CEE. was a boost in investors’ confidence in
over the previous year, the largest increase the country as a result of its sustained
of any region. In last year’s survey, Russia Since 2006, Russia’s investor appeal has consumer demand, its agreement to join
ranked far behind India, North America, increased nearly fourfold. Its profile for the WTO from mid-2012 and a new round
CEE and Brazil. However, this year, the investors has been improved by its growing of privatizations.
“attractiveness gap” between these regions consumer market, expanding industrial



Europe’s attractiveness has halved since 2006

Europe continues to appeal strongly to Yet the number of investors who rank Europe other rapid-growth economies, means that
investors. Western Europe is ranked as as the most attractive destination for an CEE is now competing with North America
the second-most attractive investment FDI project has fallen by more than half and emerging markets such as India and
destination for global FDI (33%), followed since 2006. In this year’s 2012 European Brazil. It is clear that the global economy has
by CEE (21%). These results, which were attractiveness survey, Western Europe’s a growing number of attractive destinations
achieved during a period of extreme attractiveness slid by two percentage in which to invest. Western Europe, however,
uncertainty in the Eurozone, confirm the points to 33% and CEE’s attractiveness is still ranked far ahead of these markets and
continent's fundamental appeal. suffered a steep decline of eight percentage is challenging China, the leading investment
points to 21%. This decline, coupled with a destination.
simultaneous rise in the attractiveness of

Mixed messages between Central and Eastern Europe

Investor confidence in CEE has declined. which contributed to the credit crunch in banks have foreign parents. Labor costs
In 2006, 52% of respondents ranked the the region — are among CEE’s problems. have risen too, making manufacturing in
region as the most attractive place in the Given the region’s strong trade and financial CEE less attractive. With the increasing
world for investment. In 2012, this figure links with Eurozone economies, it is no appeal of BRIC countries and other
is just 21%. Many factors explain this surprise that the International Monetary rapid-growth economies, CEE now finds
decline. A few years ago, CEE benefited Fund (IMF) expects CEE to be hit the itself competing with North America and
from Western Europe’s success. It was hardest by adverse knock-on effects of the emerging markets such as Brazil and
seen as a low-cost location to serve free- Eurozone crisis. India. Nonetheless, some CEE countries
spending Western consumers. Today, and regions, including the Baltic States,
Europe’s problems have hit CEE hardest. In addition, debt levels in some CEE the Czech Republic, Hungary and Poland,
A rise in non-performing loans, a very countries are high and economic growth continue to attract good FDI inflows from
high dependence on exports to Western prospects low. Banks have cut their net investors who seek relatively favorable
European economies and a weak and aggregate lending to the private sector labor costs and availability of skills.
largely foreign-owned banking system — across CEE. Also, many of the region's


Viewpoint
Russia on the way to liberalization
Yaroslav Lissovolik, Member of the Management Board, Chief Economist, Head of Research Department, Deutsche Bank Russia

Russia’s investment appeal has been resources, Russia is still ahead of all development of the Russian economy.
largely understated because of its other BRICS nations, and Russia must Key decisions must be taken by Russia to
controversial image in the world, and the learn how to capitalize on this); and move ahead with institutional reform,
Russian Government should do more to abundant natural resources. If used in create a better investment environment,
improve it. The market has overlooked the right way, these resources could help reduce red tape and fight corruption.
some important factors that have Russia address numerous development Meanwhile, foreign capital may be critical
become visible in Russia in recent years. challenges instead of weighing down on for large-scale infrastructure projects
For example, Russia is the only BRICS the country like the so called “resource such as the Sochi 2014 Winter Olympic
country that does not have any capital curse,” which is only too often the case Games or the 2018 FIFA World Cup. Such
flow restrictions. This makes the Russian with developing markets. undertakings are simply too large a claim
market more open to foreign investment. on the Government’s purse to be
Progress made by Russia while preparing financed by the state on its own,
for accession to the World Trade
A nice cushion considering their cost inefficiency and
Organization has not received due for the Russian the possible decline in oil prices in the
appreciation either. However, it is very economy would next six to eight years. A nice cushion for
important not only for the liberalization the Russian economy, which remains
of the Russian economy, but also be a stable heavily dependent on oil prices, would be
because international standards are inflow of long- a stable inflow of long-term foreign
capital and FDI.
playing an increasingly significant role in
this country (though legal matters and
term foreign capital,
the rule of law are still a matter of direct foreign investment. Incidentally, saying things like, “We don’t
concern to many foreign investors). need any short-term investment — give us
Speaking about Russia’s weaknesses in only the long-term capital in the form of FDI
Furthermore, we have recently seen comparison with the other BRICS instead” will hardly help Russia in achieving
some major improvements in corporate nations, demographics are one of them. its goals. Russia must improve the local
governance, which has never been Notwithstanding the recent years’ environment for portfolio investment,
Russia’s strong suit. In this respect, improvements in this area, population which will help attract long-term
Russia has always been behind other decline is still a formidable challenge for investment. According to our analysis,
countries, including other BRICS nations. Russia, as many investors regard there is a connection between these.
But Russian companies have recently demographic growth as a crucial
taken some important steps to modify prerequisite for long-term sustainable In general, although there is still a lot
their dividend policies, thus becoming development. Russia’s other issues are to be done in Russia, I am an optimist.
more open in many respects, including the low efficiency of production and However, given the inertia in perceptions
their financial reporting. labor, as well as inadequate investment. regarding the changes in Russia's
These issues are partly caused by the economy, our country, in certain cases,
Other advantages of Russia include a nation’s underdeveloped infrastructure. may have to put in more effort than other
stable macroeconomic situation; good nations to persuade investors that the
quality human capital (in terms of the Foreign capital plays an important, positive changes in Russia are viable and
quality of education and human though not decisive, role in the will continue.



Russia’s world-class
natural resources

An abundance of natural resources contributors to the Russian economy. What are Russia's world-class features?
continues to be Russia’s most globally The country holds the world’s largest
Natural resources/oil/gas
competitive feature, according to 43% of natural gas reserves and second-largest 43%
survey respondents. Russia’s domestic coal reserves. Over half of respondents Large domestic market/large population
market comes a distant second (19%). (56%) expect Russia to still be an energy 19%
sector leader in 2020. Although energy High education level
Investors recognize Russia as a key global dominates the country’s economy, 10%
energy player and a large market. the Russian Government is trying to Leader in the energy sector
9%
reduce its reliance on revenues from the
Strong development/good economic potential
Two-thirds of Russia’s export receipts volatile oil and gas sector, while looking for 5%
come from the oil and gas sector. a more balanced economic growth model Famous for innovation/R&D
Extractive industries thus remain key for the future. 4%
Importance of the defense industry
3%
Good geographical location
3%
Cheap labor costs/low production costs
3%
Other
9%
Can't say
22%

Source: Ernst & Young 2012 Russia attractiveness
survey. Total respondents: 208.


Russia’s attractiveness:
strengths and areas for improvement

According to our 2012 European What are the most attractive features of the Russian economy?
attractiveness survey, in the current
Domestic market
environment, a country or region's domestic 74% 18% 8%
market is foremost in the mind of investors Education
when they consider an investment location. 65% 25% 10%
Stability, labor costs, skills and infrastructure Telecommunications infrastructure
are some of the other key factors they 64% 23% 13%
consider when deciding on an investment Labor costs
61% 24% 15%
location. In the 2012 Russian attractiveness
Local labor skills
survey, investors highlight Russia’s domestic 57% 28% 15%
market as its key strength. Education, Quality of life, culture, social environment and language
telecommunications infrastructure, labor 51% 42% 7%
costs and skills are also recognized as some Entrepreneurial culture
of Russia’s most attractive features. 49% 35% 16%
R&D availability and quality
47% 36% 17%
In terms of weaknesses, investors remain
Corporate taxation
concerned about Russia’s political, legislative 46% 27% 27%
and administrative environment; its transport Transport and logistics infrastructure
and logistics infrastructure; and limited 44% 45% 11%
incentives for sustainable development. Access to funding and local partnerships
The country’s leaders continue to emphasize 44% 35% 21%
the need to improve, while holding mixed Flexibility in labor law
44% 31% 25%
views in terms of innovation and an
Government initiatives on sustainable development
entrepreneurial environment in Russia.
35% 43% 22%
Political, legislative and administrative environment
Investors already present in Russia have 27% 62% 11%
more confidence in its economy. First, they
like Russia more because they understand Attractive Not attractive Can't say

the market better and are aware of the
elements that make the country attractive. Source: Ernst & Young 2012 Russia attractiveness survey. Total respondents: 208.
Second, investors have already crossed
the preliminary hurdles to enter the
Russian market.



Viewpoint
Russia will become a more balanced economy than India or China
Alexei Kudrin, Chairman of the Committee for Civil Initiatives, Minister of Finance 2000-2011

Why are foreign companies that are but an imitation of one dominated by freedom and confidence, so that they feel
already doing business in Russia more state regulation, many procedures freer to appeal to state institutions for
optimistic about its investment climate there are set up better than in Russia. support and have greater trust in the
than those who haven’t yet entered the Take investment projects, for example. judicial system. Russia will follow this
Russian market? We don’t meet a In China, after reaching an agreement path and ultimately, I think, become a
number of standards that investors are with the central authorities, an investor more balanced market economy than
used to in other countries. They have to will face minimal problems. An investor India or China.
accommodate themselves to the specific can’t count on that in Russia. Here,
working styles of local and federal unfortunately, problems can arise at any For any BRICS country — Russia included
government bodies, and even individuals. — foreign investments are important.
They have to allow for the specifics of the But they are not decisive for successful
tax system and financial reporting, and Investors simply economic development, although
adjust to sometimes unaccustomed have to learn advanced technologies come along with
inspections. They don’t always the money, which is also very important.
understand the mentality and motivation
to manage and In recent years, China had fixed capital
behind decisions that are made here. But avoid specific investments of 30%–40% of GDP and
those who go through this “school” risks; and to higher, and the contribution of foreign
acquire an ability to resolve the issues investors accounted for approximately
facing them and, most importantly, earn devote a little more time 4% of GDP. In 2011, these figures were
a good income. Investors simply have to to this than usual. 48% and 1.5% of GDP (22% and 3% in
learn to manage and avoid specific risks; Russia). A few countries have foreign
and to devote a little more time to this investments totaling well over 10%,
than usual. I understand that big Western stage. In Brazil, there is probably no less but I wouldn’t say that these are
companies don’t like to deal with such economic crime than there is in Russia, stable countries in terms of their
fine points or with country specifics. but some market institutions function macroeconomic indicators. The main
They want everything to operate the way better there than they do in Russia. India source of investment is personal savings,
it does at home. Since they’re bringing is a very closed country. Building a deposits made by the population — and
money with them, they think everything business there is even harder. As in Russia is no exception.
should be done for them. But Russia Russia, obstacles can be encountered
doesn’t work that way yet. Even after a project has been launched. But its
businesspeople who go through this colonial past and the English language
“school” don’t always make everything bring India a little closer to Western
work. But half, or even more, do make it business in terms of mentality and the
work and are quite successful. legal system. Still, as strange as it may
seem, I believe most of all in Russia.
If we talk about Russia in the context of Russia will develop a more classical
the BRICS, it should be noted that these market model than China or India. In this
countries are all very different and hardly sense, we’re closer to Brazil. But we still
comparable. We lag behind in a number have a lot to do to make the political and
of respects. Although China isn’t a economic climate more competitive; to
market in the direct sense of the word, give market players a feeling of greater


Russia’s strengths

• Market opportunities • Higher education advantage Fifty-six percent of investors are attracted
Three-quarters of all respondents, and Two-thirds of the respondents cited to the availability of skilled labor in Russia.
85% of those already present in Russia, education as one of Russia’s competitive However, some respondents feel that
continue to be impressed with Russia’s advantages. The country’s population is there is a need to upgrade the skills of the
domestic market. With a population of relatively well educated, with a near 100% Russian labor force in order to take steps
more than 142 million,1 Russia is the ninth literacy rate and an exceptionally high toward a knowledge-based economy.
most populous country in the world and the tertiary enrollment rate of more than 75%. While outlining Russia’s long-term economic
largest in Europe. It also enjoys the highest Russia also produces one of the highest policy objectives earlier this year, President
GDP per capita (US$16,700) among all proportions of science and engineering Vladimir Putin promised to create 25 million
BRICS countries. As a result of rising wealth graduates in the world, well above the jobs for highly skilled workers by 2020.
levels over the past decade, 25% of Russia’s Organization for Economic Co-operation
population (nearly 40% of its workforce) and Development (OECD) average. • Solid telecommunications
is now part of the “middle class.” And Expenditure on higher education has more infrastructure
this percentage is growing. According to than tripled since 2005, reaching RUB390b Sixty-four percent of respondents list
the Ministry of Economic Development of (almost US$14.5b) in 2011. However, Russia’s telecommunications infrastructure
Russia, the middle class will grow to 37% of overall education spending still remains as an attractive feature. Russia has the
the population by 2020 and 48% by 2030. low compared with OECD levels. There is fourth-largest number of operational land
also a need to renew university curricula to lines and cellular phones in the world. In
The expansion of Russia’s consumer base respond better to the skill requirements of 2011, Russia also surpassed Germany to
was displayed in 2011 when it became the a market economy. become the largest internet user in Europe.
largest internet market and the largest
milk market in Europe.2 Therefore, many • Balanced labor costs and skills
international and domestic firms are now Investors come to Russia to find the right
investing in manufacturing and selling their balance between labor costs and skill levels.
products in Russia. According to industry Russia has the eighth-largest labor force in
estimates, the country is poised to become the world. In 2011, the average monthly
Europe’s largest consumer market by 2018. wage in Russia was US$806.40. Although
this is higher than in other emerging
1. IMF World Economic Outlook, April 2012. markets such as China, India and Mexico, it
2. Anna Krachenko, Ben Aris, “Russia's baby boom boosts
children's goods sector,” accessed via www.telegraph. remains substantially lower than Brazil and
co.uk, 12 June 2012; “Europe’s great exception: Why local
firms dominate the Russian internet,” accessed via www.
the developed economies.
economist.com, 14 November 2011; “Overview of European
Internet Usage in September 2011” press release, accessed
via www.comscore.com, 12 June 2012.



Russia’s areas for improvement

• Political, legislative and • Infrastructure • Innovation and a culture of
administrative environment Respondents have mixed views on the entrepreneurship
Sixty-two percent of respondents consider current state of Russian infrastructure. Russia’s performance on most of the
that Russia’s political, legislative and While 45% do not find Russia’s infrastructure innovation performance indicators is
administrative environment needs attractive, 44% consider the transport and mediocre overall and poor when it comes
improvement. Russia’s ranking of 120 out logistics infrastructure to be an advantage. to indices that involve technical achievement
of the 183 economies in the World Bank’s According to the OECD, more than 60% of or economic incentives. According to the
Doing Business 2012 report3 confirms the federal and regional highways do not meet recent OECD Innovation Review of the
operating and administrative challenges regulatory standards. The World Economic Russian Federation,8 innovation in the
faced by investors in the country. Getting Forum’s (WEF), global competitiveness country suffers because of very low levels of
electricity, dealing with construction permits report 2011-20125 ranks Russia 130 R&D and relevant activities in corporations;
and trading across borders continue to be out of 142 for the quality of its roads. weak framework conditions for innovation;
complex and costly activities in Russia. An adequate transportation infrastructure and inadequate infrastructure. According
Uncertain property rights, red tape and is only available in urban areas such as to Ernst & Young’s G20 Entrepreneurship
corruption still pose a huge challenge for Moscow and St. Petersburg. Russia also Barometer report, respondents face a
investors in the country. ranks low (94) on the World Bank’s dilemma with respect to the country’s
overall Logistics Performance Index.6 culture of entrepreneurship. Half (50%) of
Russia’s agreement to join the WTO and Russia’s current level of containerization the Russian respondents did not agree that
a new round of privatizations could provide is approximately 4%, compared with the their culture encourages entrepreneurship,
partial reassurance, helping to open up emerging markets’ average of 15%. Russia while the other 50% agreed that Russia’s
Russia’s huge energy sector to foreign has the second-largest railway network environment for entrepreneurs is supportive.
investors. Also, internal tensions that arose in the world. Its railroad infrastructure also The same report also highlighted that access
after the elections now seem to be easing, fares well in the WEF global competitiveness to funding continues to be one of the most
and Russia is also changing its system of civil report,7 ranking at 29 out of 142 countries. significant challenges for the creation,
laws in September 2012. The new draft law growth and survival of small and medium
is designed to introduce fundamental changes Government spending on road and railway enterprises (SMEs), particularly innovative
to property rights, obligations, contracts, infrastructure is growing. The need to ones. Entrepreneurs also complain about
security instruments and intellectual property. renew transport and logistics infrastructure the lack of tax incentives to start a business.
Finally, although the Russian Federation has now become a political priority at the
ranked 120 in the World Bank’s Doing highest levels. Infrastructure spending is
Business 2012 report,4 it was still ahead of expected to increase further in light of the
Brazil (126) and India (132). upcoming 2012 Asia-Pacific Economic
Cooperation (APEC) summit, the 2014
Winter Olympic Games and the 2018 FIFA
World Cup, all to be held in Russia.

5. The Global Competitiveness Report 2011–2012, World
Economic Forum, p. 307.
3. Doing business in a more transparent world, World Bank, 6. “World Bank overall Logistics Performance Index: Russian
2012, p. 14. Federation,” accessed via www.worldbank.org, 11 June 2012.
4. Doing business in a more transparent world, World Bank, 7. The Global Competitiveness Report 2011–2012, World 8. OECD Reviews of Innovation Policy: Russian Federation
2012, p. 14. Economic Forum, p. 307. 2011, p. 1.


Viewpoint
Foreign capital enhancing Russia’s competitiveness
Alexander Shokhin, President, Russian Union of Industrialists and Entrepreneurs

What should be done to improve the The priority measures to be taken right capital out of the country, foreign
investment climate in Russia? The now include the following: investors will either stay out of Russia or
question is far from simple. The acutest • Reducing the state’s involvement in the limit themselves to short-term
problems are the insufficient protection economy and leveling the playing field for investments of a speculative kind. We can
of property rights; administrative private and public companies now see this in our own case. Last year,
barriers; inconsistent legislation; • Reducing the fiscal burden on businesses direct foreign investments accounted for
difficulties in connecting to the power • Continuing efforts to improve the less than 10% of total investment, while
grid and obtaining construction permits efficacy and independence of judicial “other credits” accounted for over 70%.
as well as complicated and costly procedures And even the Federal Statistics Service
customs procedures. • Eliminating excessive administrative and the Bank of Russia cannot say what
barriers the proportion of foreign investments is.
Foreign • Promoting a formalized expert
examination procedure for all draft Alas, we have not yet become a quiet
investment regulations governing entrepreneurial harbor for a crisis period in the world
provides activities economy, and the situation is unlikely to
improve in the near future.
access to new Of course, this is not a complete list
production and of priority measures. But even Meanwhile, a lack of foreign investments
management technologies, implementing only these, will make it could make Russian economic
possible to dramatically improve the modernization too slow. Foreign
which are essential for business climate in Russia. investments provide access to new
further progress. production and management
A question that comes up periodically is technologies, which are essential for
Human resources are an even trickier how impartial our judges are when further progress.
issue, as foreign investors believe that considering disputes between domestic
Russia has enough of a qualified labor and foreign companies. According to the Here, it is enough to look at the auto
force, while Russian entrepreneurs take Russian Union of Industrialists and industry. Foreign investments changed
the opposite view. Entrepreneurs, there is no deliberate bias the rules of the game. As it turned out, it
here. Eighty percent of companies believe was not enough to make cheap cars to
The key to improving the business their chances of defending their rights are remain in the market; you also had to
environment is a balance between high and the results of a survey of Russian think about quality, design and
specific and universal measures. Some and foreign companies are virtually maintenance costs. The next leap
specific measures have either already identical. As regards disputes with control forward should be in the production of
been taken or are currently being and oversight bodies (including the tax auto parts, for which the foundations
implemented (special economic zones, authorities) or regional administrations, have already been laid out. Some new
Skolkovo). But this approach cannot be foreign companies are even more producers have appeared in Russia, who
applied to the challenges involved in optimistic. But we are now speaking make auto parts based on international
developing the financial market or be exclusively about courts of arbitration. standards, although the number of such
used to simplify the complex procedure companies is still smaller than we would
of connecting all Russian regions to the Foreign investors are very important for like it to be.
power grid at once. Large-scale economic modernization, but it is the
modernization requires universal national companies that have a key role to Success stories like this emphasize the
measures, and exempting new equipment play. If the latter do not invest in their importance of foreign capital in enhancing
from assets tax is only the first step. “native” economy and prefer to take their Russia’s ability to be competitive.


Russia’s industrial
progress
Reality check #1 FDI destination in Central
and Eastern Europe.

4%
in 2011.
increase in job creation

36% decline in the number
of projects in 2011 — but their value
has increased.

92% of job creation
between 2007 and 2011 was due
to manufacturing activity.

78% of respondents already
present in Russia plan to maintain
or expand their operations in the
country.

42% of investment projects
are located in Moscow and
St. Petersburg.


Russia’s industrial progress

FDI in Russia in 2011:
larger projects

FDI projects decline but are still close to the pre-crisis level FDI jobs increase in 2011 after a continuous decline since 2007

201 14,934
170 -36% 12,900
+18% 11,834
139 143 -14%
+19% -8%
+3% 128 8,058 8,362
-32%
+4%

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Source: Ernst & Young's European Investment Monitor 2012. Source: Ernst & Young's European Investment Monitor 2012.

In 2011, Russia attracted 128 FDI projects, Russia remained the most successful nation After a continuous decline since 2007,
a decline of 36% on the previous year. in CEE at attracting FDI, and its average FDI job creation started to pick up in 2011,
Political uncertainty caused by the electoral project size continues to increase. This is mainly due to a rise in labor-intensive
cycle, coupled with concerns arising from mainly due to the comparative advantage of industrial activities. FDI projects in 2011
the escalation of the Eurozone debt crisis, Russia over the other CEE countries. generated 4% more jobs than the previous
made companies think carefully about year. The average project created 65 jobs
investment in the country.9 in 2011, up from a low of 40 jobs in 2010.

9. Oksana Teplinskaya, Kate Ryzhkova, “Russia Business
Report — EU leaders’ informal summit took place in
Brussels,” accessed via english.ruvr.ru, 12 June 2012;
Carol Matlack, “Country report: The Peril and Promise of
Investing in Russia,” accessed via www.businessweek.com,
12 June 2012.



Russia’s performance in the enlarged Europe

• Seventh-largest for projects, sixth According to the WEF, Russia is among the Investors have also been driven by a
for jobs world's fastest-growing economies in terms desire to gain access to the country’s large
In 2011, Russia was the seventh-largest of domestic market size. This is one of the repository of natural resources.10
recipient of FDI projects in Europe, having key reasons for its increase in FDI. Russia’s
been the fourth-largest in 2010. In terms proximity to other European markets • Highest average jobs per project
of FDI job creation, Russia was the sixth- and Asia encourages international firms in Europe (in top 10 countries
largest in Europe. to set up their operations in the country. by FDI projects)
While the number of projects declined
in 2011, the average size of projects by
FDI inflows in Europe by destination country number of jobs created in Russia was
Rank Country FDI projects Number Average jobs the largest in Europe. This has largely
of jobs per project been on account of the concentration of
2010 2011 Change Share (2011) (2011)
(2011 of FDI manufacturing activity in Russia. In 2011,
vs. 2010) (2011) manufacturing accounted for 48% of the
1 United Kingdom 728 679 -7% 17% 29,888 44
total FDI projects, meaning Russia was
2 Germany 560 597 7% 15% 17,276 29
the second-largest in Europe’s top 10 FDI
3 France 562 540 -4% 14% 13,164 24
recipient countries list, ranking only behind
4 Spain 169 273 62% 7% 9,205 34
Poland. In the same year, the automotive
5 Netherlands 115 170 48% 4% 2,229 13
6 Belgium 159 153 -4% 4% 3,599 24
industry accounted for 14% of the total FDI
7 Russia 201 128 -36% 3% 8,362 65
projects in Russia, the largest share in this
8 Poland 143 121 -15% 3% 7,838 65 list.
9 Ireland 114 106 -7% 3% 5,373 51
10. The Russia Competitiveness Report 2011,” World Economic
10 Switzerland 90 99 10% 3% 1,546 16 Forum; “Global Consumer Confidence Report Q4 2011,
Others 916 1,040 14% 27% 59,344 57 Nielsen.

Total 3,757 3,906 4% 100% 157,824 40

Source: Ernst & Young's European Investment Monitor 2012.

Activites: manufacturing

FDI projects by activity Production units account for 51% of projects
Rank Activity FDI projects Share of total Jobs created
and 92% of job creation.11 Investors come to
(2007–11) (2007–11) (2007–11) Russia to manufacture goods for the local
1 Manufacturing 402 51% 51,445 market, but also distribute globally. Over the
2 Sales and marketing 259 33% 1,472 past five years, 51% of FDI in Russia has gone
3 Logistics 46 6% 287 into manufacturing, with 402 FDI projects,
4 R&D 25 3% 297 the fourth-largest in Europe. Between 2007
5 Testing and servicing 20 2% 642
and 2011, manufacturing projects created
6 Headquarters 12 2% 930
51,445 jobs, accounting for 92% of total job
7 Education and training 8 1% 15
creation. Moscow, St. Petersburg and Kaluga
8 IDC 4 1% 1,000
are the top three regions for manufacturing
9 Shared services center 4 1% –
in Russia, between them accounting for 21%
10 Contact center 1 0% –
Total 781 100% 56,088
of the Russian manufacturing projects in the
last five years.

11. “Russia to Attract More Foreign Investment,” accessed via
www.russia-briefing.com, 12 June 2012.


Viewpoint
Russia needs an “image-lift”
Alex de Valukhoff, Chief Executive Officer, Lafarge Russia

We started our operations in Russia in industry resurrect, as it was not • Has possibly the highest entry ticket
1996. We bought an old, decayed asset strangled by an overpriced currency and price among the 64 countries where
which had the advantage of being close scarce liquidities any more. Then came Lafarge operates
to Moscow. Today, it’s a very different the “period of stabilization,” with • Is an over-expensive country by all
country. regular growth, only being dented by the standards, which reflects the cost of
2008 crisis, which led to a collapse in corruption and inefficiency
both prices and construction volume. • Has an image problem, which makes
Among the 2012 sees the return of the pre-crisis our jobs particularly difficult when it
world’s large volumes, and prices should follow soon. comes to convincing boardrooms
economies,
As we predicted, among the world’s large Within Vladimir Putin's new presidential
Russia was the economies, Russia was the most hurt by term, we expect to see the implementation
most hurt by the crisis — but it was also the fastest to of what has been started and/or
the crisis — but it was also recover. This explains why, in 2009,
Lafarge decided to invest in a new
promised, such as:
• The 2020 Strategy for the construction
the fastest to recover. greenfield plant — considered to be a bold industry, which promises true innovation
move by other players but, here again, we that has yet to be seen
Back then, the construction industry was think that we are going to be proven right. • The improvement of the economy’s
at a third of what it was during the Soviet energy efficiency by 40%
times in terms of volume, prices were so Compared to 1996, Russia has: • The financing of infrastructure
low that it was not possible to turn a • A proven potential and a record of high development through innovative means,
profit and it was also plagued by a returns on investment including Public–private partnerships
bartering system (more than 90% of the • A much more stable and predictable (PPPs) and project financing
trade was non-cash). environment
• Huge reserves for growth Also, intensive work needs to be done on
After Russia’s 1998 default, many the country’s image — to which we are
investors moved away from the country, But : ready to participate in, as we have also
but we chose the opposite. To stay and • Has not been able to convert its done in the past.
grow was indeed the right thing to do: economy from oil dependence, and
the 1998 crisis helped the Russian therefore is still prone to volatility

The sales and marketing function attracted the average for R&D in the last five Approval of the Government’s long-awaited
259 projects, 33% of the total FDI projects years stands at 7%, and 3% for contact privatization plan is expected to bolster
in Russia. More than 80% of these sales centers. This highlights the need for the country’s investment prospects. The
and marketing projects were concentrated the Russian Government to introduce reduction in state ownership will create a
in the two largest Russian cities – Moscow measures to diversify its economy by more competitive environment and lead to
and St. Petersburg. promoting innovative and more value- an increased inflow of funds to develop the
added services. President Vladimir privatized enterprises.
Projects in the services sector and R&D, Putin has said that the Government will
however, have remained low in number. encourage major international companies
R&D accounted for only 3% of the total to cooperate with Russia in the area of
investment in terms of FDI projects; innovative technology, and will encourage
shared services centers constituted 1% foreign firms in various industries to
and contact centers 0.2%. For the 43 set up production lines and establish
countries in Europe, excluding Russia, technological centers in the country.



FDI sectors:
diversification is underway

A strong industrial base

Russia’s industrial sector attracts more FDI FDI projects by sector
projects than any other sector. Business
Rank Sector FDI projects Share of total Jobs created
services and machinery and equipment are (2007–11) (2007–11) (2007–11)
the two sectors in Russia that recorded a 1 Automotive 90 12% 16,787
rise in their number of FDI projects in 2011 2 Food 86 11% 9,958
compared with the previous year. Other 3 Machinery and equipment 62 8% 3,682
sectors in the top 10 have seen a decline in 4 Chemicals 57 7% 3,218
investment over the same period. 5 Non-metallic mineral products 57 7% 3,035
6 Business services 50 6% 341

• Heavy industries 12 7 Other transport services 49 6% 457
8 Financial intermediation 40 5% 263
Automotive has been the key sector
9 Plastic and rubber 32 4% 1,297
attracting FDI in Russia over the last five
10 Software 25 3% 1,918
years, with 90 projects and 16,787 jobs
Others 233 31% 15,132
created. Investor focus on the automotive
Total 781 100% 56,088
sector increased further this year, with
14% of the total FDI in Russia coming into
the sector, compared with an average of
the country. Players such as Japan-based the machinery and equipment industry
12% between 2007 and 2011. Russia is
Nissan, Honda and Toyota; French carmaker increased to 11% in 2011, up from an
the second-largest automotive market in
Renault; US-based General Motors; South 8% average over the previous five years,
Europe, and the fourth-largest in the world
Korean giant Hyundai; Italy’s Fiat; and highlighting the increase of FDI activity.
after China, the US and Germany.
German auto manufacturers Volkswagen and Rising demand for new machinery is
BMW are all present in Russia.13 fueled by infrastructure modernization,
The country’s light vehicle density stands
On the back of rising investment in the power sector construction and growth
at a moderate 250 cars per 1,000 people,
sector, regions including St. Petersburg, of industrial sectors – and has attracted
compared with more than 500 cars in France,
Moscow, Nizhny Novgorod and Togliatti have foreign investors to Russia. Moscow and the
Germany and the UK and more than 640 in
emerged as leading auto manufacturing Kaluga region are the two main locations
the US. So there is further growth potential
hubs. Other areas, such as Kaluga, Rostov, for machinery and equipment investment,
in Russia’s automotive industry. A surge in
Izhevsk and Kaliningrad are also becoming accounting for 32% of FDI projects between
consumer spending and readily available car
centers for the automotive industry.14 2007 and 2011.15
loans has helped stimulate the country’s auto
industry. Striving to attract FDI, in February
Machinery and equipment emerged as Various leading equipment manufacturers
2011, the Government reduced import tariffs
the third-largest sector in Russia in terms including Alstom, Danieli, Deere & Company,
for foreign corporations on components in
of FDI projects (62 projects) and the General Electric, Siemens and Toshiba
return for investment agreements to produce
fourth-largest in job creation (3,682 jobs) Corporation have established operations
cars locally. A new industrial assembly regime
between 2007 and 2011. The share of in Russia.
was established, which aims to augment
localization in the automotive sector, and
encourage enterprises to construct or enlarge
13. An overview of the Russian and CIS automotive industry, Ernst
their production facilities and set up R&D & Young, February 2012; Dave Leggett, “Analysis: Russia
centers in Russia. car industry set for investment wave as market rebounds,”
accessed via www.just-auto.com, 12 June 2012; “Automobile
industry in Russia,” accessed via www.oxbridgewriters.
com, 12 June 2012; Getting up to speed: Russian economy
The Russian people’s preference for foreign and automotive industry, Ernst& Young, April 2011; Doug 15. “Construction machinery market in Russia 2012:
Palmer, “U.S. hunts for exports in Russian auto parts market,” Development forecasts for 2012-2014,” accessed via
brands has lured almost all the major accessed via www.reuters.com, 12 June 2012; Ekaterina www.pmrpublications.com, 8 June 2012; “Demand for new
international car manufacturers to establish Shatalova, “Russian Car Market May Grow 6% This Year, construction machinery rising in Russia,” accessed via
Industry Ministry Says,” accessed via www.bloomberg.com, www.oxstones.com, 9 June 2012; “An analytical review by
and expand their manufacturing base in 12 June 2012; “Russia April auto sales up 14 pct y/y — AEB,” Pavel Gagarin,” accessed via www.business-money.com,
accessed via www.reuters.com, 12 June 2012; “World's 10 8 June 2012; “Government Initiatives to Promote General
Largest Auto Markets,” accessed via www.cnbc.com, Purpose Test Equipment Market in Russia and the CIS,”
12 June 2012; ”Renault-Nissan to Take Control of Russian accessed via www.frost.com, 9 June 2012; “Shelf projects
12. “Prime Minister Vladimir Putin chairs a meeting at AvtoVAZ Automaker,” accessed via www.nytimes.com, 12 June 2012. to attract 500 bln dollars to Russia-Putin,” accessed via
(Togliatti) on the development of the automotive industry in 14. “Kaliningrad To Become New Autos Hub With Magna- www.itar-tass.com, 10 June 2012; “Siemens to grow steel-
the context of Russia’s accession to the WTO,” accessed via Avtotor Investment,” Industry News, April 2012, BMI intensive production in Russia by €1bn,” 4 January 2012,
www.premier.gov.ru, 12 June 2012. Industry Insights — Automotives, Emerging Europe. via Factiva © 2012 Steel Business Briefing.


Viewpoint
Stability: Russia’s biggest advantage
Laurent Kleitman, Chief Executive Officer, JSC Concern Kalina (Unilever)

I always personally believed that the Kalina, one of the best and most successful of Russia is the excellent quality work
Russian market would be highly attractive Russian companies. While demonstrating force, and increasing global mindset of the
for Unilever and foreign investment in consistency in developing a solid, long- younger generations of managers.
general. The appetite for consumption, term presence in Russia, we also continue
the attractiveness of brands, the desire to to show our determination to serve the On the downside, infrastructure is not
access high-quality consumer goods — all needs of Russian consumers across a wide developing as fast as it should and
these trends were already apparent in the range of brands and categories. legislation is often still complex and
early 1990s. somewhat bureaucratic.
I believe that Russia will continue to grow
At that time, the Russian consumers were steadily in the coming years and remain However, I firmly believe that there is no
already very demanding, knowledgeable, attractive to Unilever and other foreign fundamental obstacle that a company like
educated and savvy in their choices. They investors. Unilever cannot overcome, as the desire
expected quality, consistency and to win in Russia is bigger.
superior value when consuming branded As a foreign
goods. Since then, we have seen the investor, I would As a foreign investor, I would welcome
explosion of the consumer goods market.
welcome progress progress towards more transparency in
conducting business. A further simplified
The attractiveness of Russia has never toward more process for obtaining work permits for
really been questioned, despite its growth transparency in foreign employees would also be welcome,
rate being lower than China’s. as would simplification of visa legislation
conducting business. and continuous reduction of imports tariffs
Today, Russia is essential to our strategy. The biggest advantage of Russia is its in line with World Trade Organization
Twenty years ago, Unilever became one of stability. I am confident that the country is membership. These measures will help
the first movers into the Russian market going to continue its slow but steady integrate Russia into global trade, and will
when it bought its first business in St. modernization. Patience and resilience also enable foreign investors to contribute
Petersburg, Severnoye Siyanie. Twenty have always been strong qualities of the to the economy’s growth and the
years later, Unilever purchased Concern great Russian people! The other big plus development of a solid local market.

• Consumer products driving growth16 The industry created employment for 9,958 have further paved the way for the food
The food sector accounted for the second- people between 2007 and 2011. Rising levels sector’s growth. This has been particularly
largest number of FDI projects (86) in Russia. of disposable income among consumers in prominent in Moscow, St. Petersburg and
Russia has led this growth. The development Novosibirsk. Major global food and beverage
16. “Russia's food industry to be opened to foreign investors,”
accessed via www.telegraph.co.uk, 10 June 2012; Andrew of modern infrastructure including malls, giants present in Russia include Burger King,
E. Kramer, “Russia Becomes a Magnet for U.S. Fast-Food
Chains,” accessed via www.nytimes.com, 11 June 2012;
specialty suppliers of frozen foods and Carlsberg, Coca-Cola, Heineken, McDonald’s,
“Timeline: Wal-Mart eyeing Russian market,” accessed via drive-through establishments in many cities Nestlé, PepsiCo and Yum! Brands.
www.reuters.com, 11 June 2012.

Business services

Russia’s business services sector has seen The growing strength of the services than their contribution in 2010 (11%) and
a growth in FDI activity in recent years. industry is also shown by the increase in over the last five years (14%).
It accounted for 9% of the total FDI projects the share of financial intermediation and
in 2011, higher than its share of 5% in software sector projects. Financial services Moscow has developed as a hub for business
2010 and above the average of 6% between FDI has mainly gone into development of services in the country. The capital city alone
2007 and 2011. FDI projects have been new offices and branches, and expansion attracted 75% of FDI projects in the sector
primarily directed at areas including sales of subsidiaries in the areas of banking, between 2007 and 2011. The city also acted
and marketing, data centers, laboratories, insurance and financial leasing. The software as the prime location for financial services and
headquarters, representative offices, industry has seen growth in development software sector projects in the last five years.
and technology and innovation centers. centers, programming facilities, IT training The Russian Government’s plan to expand
This represents a slow but gradual sign of centers and R&D centers. Along with Moscow as a financial center is expected to
services sector-led growth, in a country business services, these sectors accounted boost foreign investment in the city.17
that has primarily had a manufacturing- for 17% of all the FDI projects undertaken
driven economy. by investors in Russia in 2011, much higher 17. Growing opportunities Russia FDI report, Ernst & Young, 2011.



Little change in FDI sources

The US continues to be the largest source of FDI

The US remains Russia’s leading investor providing financing to US companies for oil and gas. These include Boeing, Cisco,
with 122 FDI projects (16% of the total) them to undertake projects in Russia, ExxonMobil, Ford, Hewlett-Packard, Intel
that created 6,043 jobs. The Overseas thus supporting the investment climate and Kraft Foods.
Private Investment Corporation, an between the two countries. Leading US
organization that aims to promote multinationals are present in various
American companies overseas, has been sectors such as automotive, IT, food and

Viewpoint
In many ways, Russia is already a free market
Andrew Somers, President & Chief Executive Officer, American Chamber of Commerce in Russia

I arrived in Moscow at the end of 2000 and issues are being solved in a quiet way, here in the short and medium term.
I must say that the quality of the there is a better environment for long-
investment environment has been term strategic deals, like the one signed The only challenge I would consider
improving here, year in year out. Since by Rosneft and ExxonMobil. Hopefully, concerning the rapid economic
then, the attitude of the Russian recent differences on some issues will be development of Russia is its dependence
Government to foreign investment, resolved or discussed privately between on oil. Russia needs to diversify its
particularly American investment, has the two Governments. economy and, hopefully, the Russian
changed significantly for the better. Government will continue to work upon it.
In many ways, Russia is already a free
market. Yes, there is a lot of state In terms of Russia’s advantages in
Russia needs influence in some strategic sectors, which comparison with other emerging markets, I
to diversify is not unusual around the world. But some see, first of all, that the level of the
its economy of the fast-growing sectors in the last 10 population’s education is pretty high,
years, like consumer goods retail and, in a relative to other BRICS countries. That is
and, hopefully, certain sense, automobile, are basically very important. One can find a very
the Russian left alone by the state. We do sometimes well-educated population throughout the
run into bureaucratic hurdles but are able country and that gives companies a
Government will continue to resolve the problems in an open way. platform on which to train people. You
to work upon it. don’t have that same magnitude of
I expect that Russia’s WTO entry will education in Brazil, China or India. The
Russia’s recent drive for modernization nudge those American companies who second big advantage is, of course, the
has attracted a number of American refused to even look at the market to at mineral wealth. Third — the amount of
Chamber of Commerce (AmCham) least start to study it. There are very few arable land for agriculture. Russia is going
member-companies, including large opportunities for growth in the world, to play a key role in feeding the world
companies but also global leaders in their certainly few in the US and Europe. Russia population by 2050 or even earlier. The
niche, aiming, for example, to improve the is one of those places that offer significant disadvantages are well known: image,
extraction of oil or the processing of steel. growth. If the Russian Government corruption and bureaucracy. In some
It’s a new trend of the last two to three continues to try to modernize the American and Russian circles, you can still
years. A second positive trend is the economy, as I believe it will, there are see the hangover of the Cold War. But I am
changed tone in relations between the US many sectors where US companies can confident that the greater the economic
and Russia. When companies, whether play an important role. So, I feel pretty relationship between Russia and the US,
Russian or American, feel that geopolitical positive about the growth going forward the shorter this old view will last.


Eight of the top 10 source countries are from Europe

Europe continues to have the largest number FDI projects by country of origin
of realized FDI projects in Russia. This region
Rank Country FDI Projects Share of total Jobs created
has provided 8 of the top 10 source countries (2007–11) (2007–11) (2007–11)
in the last five years. European countries 1 United States 122 16% 6,043
originated 343 FDI projects between 2007 2 Germany 99 13% 6,254
and 2011, 44% of the total in Russia.18 3 United Kingdom 46 6% 1,125
The European Union (EU) and Russia have 4 France 45 6% 2,070
the Partnership and Cooperation Agreement 5 Finland 43 6% 1,700
(PCA) in place, which forms the basis for 6 Switzerland 38 5% 1,238
bilateral trade and investment relations. 7 Japan 35 5% 3,443
The EU plans to advance its relations with 8 Austria 25 3% 620
Russia by replacing the PCA and signing 9 Sweden 24 3% 2,010

a new agreement with substantial provisions 10 Denmark 23 3% 2,399
Others 281 34% 29,186
related to trade and investment.19
Total 781 100% 56,088

Germany20 emerged as the second- Source: Ernst & Young's European Investment Monitor 2012.
largest investor globally and the largest The UK created employment for 1,125 French investment into Russia. French
from Europe in terms of FDI projects (99 people in Russia through 46 projects (6% of investment is centered in sectors such as
projects) in Russia, although it was the the total), making it the third largest country retail, energy, construction, automotive,
largest creator of jobs in Russia (6,254) of FDI origin between 2007 and 2011. The insurance and banking. Several French
between 2007 and 2011. Germany’s Russian economy has been collaborating companies have established a presence in
relationship with Russia has primarily been more closely with the UK to assess Russia, such as Accor, Auchan, GDF Suez,
built on Russia supplying Germany with a investment opportunities in Russia and invite L'Oréal, Louis Dreyfus, Peugeot, Saint-
huge proportion of its energy needs. Several British corporate and financial investors to Gobain, and Sanofi-aventis.22
German companies are established in Russia set up businesses in the country. More than
in industries ranging from oil and gas to 600 UK firms are doing business in Russia; After Russia’s formal accession to the WTO,
banking and consumer goods. Leading including AstraZeneca, BP, GlaxoSmithKline, the Russian economy should push toward
German companies that have invested in Pilkington and Shell, all of which have a attracting a larger share of investment from
the Russian market include adidas, Bayer, strong presence in the Russian economy.21 its leading source regions such as the US
Bosch, Deutsche Bank and Siemens. and Europe.
Other leading investing countries from
18. Russia offers French cos to expand participation in Baltic
nuke proj,” Prime Energy Service, 18 November 2011, Europe include France and Finland, with
via Factiva, © 2011 Prime ZAO. “UK Trade & Investment 45 and 43 FDI projects, respectively.
and Russian Direct Investment Fund Host Joint "Invest in 22. “MAP: French Investments in Russia's Regions,” accessed via
Russia" Conference,” accessed via www.prnewswire.com, Russia has been increasing its cooperation www.themoscowtimes.com, 11 June 2012; “Ties at the Top,”
12 June 2012. accessed via www.themoscowtimes.com, 12 June 2012;
19. “Countries: Russia,” accessed via ec.europa.eu, accessed and dialogue with France to encourage Kumaran Ira , “Russian President Medvedev signs strategic,
11 June 2012. business deals in France,” accessed via www.wsws.org, 12
20. George Friedman, “Germany and Russia Move Closer,” June 2012; “UK in Russia: Business strengths — The UK's
accessed via www.stratfor.com, 12 June 2012; “The Bavarian economic and business strengths,” accessed via ukinrussia.
Representative Office in Russia,” accessed via www.invest- 21. “UK Trade & Investment and Russian Direct Investment fco.gov.uk, 12 June 2012; Damion Potter, “Supporting UK
in-bavaria, 12 June 2012; “More German companies come to Fund Host Joint "Invest in Russia" Conference,” accessed companies doing business in Russia,” accessed via www.
Russia,” accessed via english.ruvr.ru, 12 June 2012. via www.prnewswire.com, 12 June 2012. modernrussia.com, 12 June 2012.

In search of new investors from emerging markets

FDI activity into Russia by emerging However, Russia has recently started These entities would also seek to raise
economies remained low between 2007 negotiations with China to develop a another US$1b to US$2b from third parties.
and 2011. China and India each accounted mutually beneficial investment climate. More than 70% of the fund's capital would
for under 2% of FDI project creation in During President Vladimir Putin’s recent be targeted at projects across Russia and
Russia. Brazil originated just two projects visit to China, the two nations began other CIS members, with the rest focusing
in the country in the same period. These negotiations for opening a joint investment on China. In June 2012, a few Chinese
countries remained minor contributors on fund worth approximately US$2b — with the companies provisionally agreed to invest
the employment generation front too. RDIF and the China Investment Corporation US$2.5b to US$3b in construction projects
contributing US$1b each to the fund. in southern Russia.



Russia’s top regions for FDI

The two largest cities attract most of the projects

FDI projects by destination city/region the presence of special economic zones
within the region: Zelenograd and Dubna
Rank Region FDI Projects Share of total Jobs created are located in the Moscow area and offer
(2007–11) (2007–11) (2007–11)
1 Moscow (Federal City) 231 30% 3,735
investors an appealing combination of
2 St. Petersburg (Federal City) 92 12% 9,843 corporate tax incentives, easy access to real
3 Kaluga (Region) 39 5% 7,260 estate and lower VAT on imports.23
4 Nizhny Novgorod (Region) 14 2% 550
5 Kazan (City) 13 2% 416 St. Petersburg, Russia’s second largest city,
6 Yekaterinburg (City) 13 2% 630 is another prominent FDI location. Between
7 Voronezh (Region) 12 1% 1,462 2007 and 2011, the largest number of
8 Novosibirsk (City) 10 1% 753 FDI jobs were created there (9,843) by
9 Krasnodar (City) 9 1% 880 92 projects. St. Petersburg is a major
10 Togliatti (City) 9 1% 2,105 financial and industrial center in Russia. Its
Others 339 43% 28,454 convenient proximity to Europe, modern
Total 781 100% 56,088
transport infrastructure and educated
Source: Ernst & Young's European Investment Monitor 2012. workforce have led numerous international
corporations to set up their business in
Forty-two percent of FDI projects are intermediation, machinery and equipment, the city. St. Petersburg has attracted more
concentrated in the Moscow and and software. companies from European neighbors,
St. Petersburg regions. Investors see including France, Germany and the UK, as
Moscow, the biggest city in Russia, as a Moscow's surge in FDI is based on a highly well as from countries in the Middle East.24
key destination for FDI. The capital city has qualified workforce, supportive local
23. Growing opportunities Russia FDI report, Ernst & Young, 2011.
attracted 231 projects that have led to the authorities, subsidies and tax benefits and 24. “Business Guide: Investment Laws,” accessed via
creation of 3,735 jobs in the last five years. convenient residential options for foreign petersburgcity.com, 13 June 2012; “Business Guide:
Investment Laws,” accessed via petersburgcity.com,
FDI in Moscow has been concentrated in nationals. Moscow’s attractiveness to 13 June 2012; “Advantages,” accessed via www.
doingbusiness.ru, 13 June 2012; “New strategy:
sectors such as business services, financial foreign investors is further enhanced by Department is a gateway for all foreign investors,”
accessed via www.investinmoscow.ru, 12 June 2012.

The Kaluga and Nizhny Novgorod regions are increasing their appeal

The Kaluga region is becoming established Foreign corporations that want to establish food and non-metallic mineral products
as a hub for international enterprise in themselves in Russia have been drawn to the sectors. The region is also one of the main
Russia.25 From 2007 to 2011, Kaluga was region's favorable business climate, tax reliefs centers for IT and software, and boasts the
the third-largest region in terms of FDI and close proximity to Moscow. Also, business presence of players such as Auriga, Intel,
projects (39), which created the second- and industrial parks in the region such as MERA Networks and Teleca.
highest number of jobs in the country Grabtsevo, Rosva and Vorsino have amenities,
(7,260). Sectors that received major which make them popular locations for Supportive government policies on tax
investment include automotive, machinery foreign business operations. benefits and the decision to allow the
and equipment, transport, food and implementation of investment projects
pharmaceuticals. using the “single window” mechanism
Nizhny Novgorod is another developing
to reduce waiting periods are among its
area for foreign investment. It recorded 14
appealing features.26
25. Alexander Bratersky, “L'Oreal Adds a French Face To Kaluga's FDI projects from 2007 to 2011. These
Business Hub,” accessed via www.themoscowtimes.com,
12 June 2012; Maria Antonova, ”The Kaluga region in Russia projects have primarily been directed at the
offers economic opportunities,” accessed via www.telegraph. 26. “Outsourcing to Russia: Nizhny Novgorod,” accessed via
co.uk, 12 June 2012. automotive, metals, financial intermediation, goaleurope.com, 12 June 2012.


Viewpoint
Huge long-term potential
Joseph Jimenez, Chief Executive Officer, Novartis

Novartis’ predecessor company, Geigy, industry. This is reflected in the Pharma One of the biggest competitive
first established trade relations with 2020 strategy. We are committed to advantages of modern Russia is its
Russia in the middle of the 19th century, helping Russia to achieve those economic stability and a growing
on the eve of Russia’s first leap into aspirations, particularly in the health care professional workforce capacity. Together
industrialization. In 1890, Geigy rented a sector. We are currently building a new with increased government effort to
site with production buildings in full-scale pharmaceutical manufacturing improve the investment climate and
Karavayevka, close to Moscow, where it plant in the special economic zone in create a friendly business environment,
began to manufacture dyewood extracts. this will become an important stimulus to
The company also sold products directly attract foreign investments to Russia.
from Basel, Switzerland, through its
One of the Obstacles are similar in all fast-growing
subsidiaries. At that time, government biggest countries — unpreparedness and cost of
reforms attempted to stimulate inflow of competitive infrastructure, bureaucratic hurdles and
foreign capital, and growth of domestic often the absence of transparency in the
industrial production made Russia’s advantages of regulatory sphere.
market attractive for many foreign modern Russia
companies, especially from Europe.
is its economic stability We stand ready to support the new
Presidential Administration and Cabinet in
Since that time, our interest in expanding and a growing professional their actions to establish a regular and
operations in Russia has significantly workforce capacity transparent two-way dialogue between
increased. At Novartis, we believe that the Government and business community.
today’s Russia will remain a fast-growing St. Petersburg. This facility is part of the We believe this will help overcome current
country with huge long-term economic company’s US$500m, five-year strategic obstacles and create new, mutually
potential. Moreover, Russia’s Government investment plan in Russia. The investment beneficial PPP opportunities.
has announced an ambitious economic will address three core areas — local
modernization agenda, which manufacturing, R&D partnerships and
encompasses the pharmaceutical public health development.



2013: plans for investment

What are your plans for the next year in Russia? the belief that the number of leaders who
view Russia as one of the key markets
Companies already present in Russia Companies not established in Russia to invest in are, in fact, increasing. The
percentage of respondents looking to enter
Increasing/maintaining operations in Russia Not to invest in Russia
78% 70% the Russian market also increased from
Relocating to another country Entering the Russian market 7% in our 2011 survey to 12% this year.
2% 12%
Withdrawing from Russia/closing operations Can't say More than 40% of the investors that are
1% 18% keen to establish or increase operations
Can't say in Russia plan to do so in the short term.
19%
Twenty-seven percent plan to invest
Source: Ernst & Young 2012 Russia attractiveness survey. Source: Ernst & Young 2012 Russia attractiveness survey. within 6 months and 14% in 6 to 12
Total respondents: 135. Total respondents: 73.
months. They chose organic growth as
the preferred mode of investment,
Despite the wave of negativity around the There is a discrepancy between the given their familiarity with the rules and
Eurozone crisis, investors continue to display plans of companies that already have regulations of the Russian market. Twenty-
confidence in the Russian market and operations in Russia and those that are six percent of leaders plan to expand their
optimism about the future. Nearly 80% of not yet established. Seventy percent of existing facilities while 17% will increase
investors that are already present in Russia the companies that are not established in their employee numbers in Russia. However,
plan to increase or maintain their operations the Russian market have no plans to invest only 2% of respondents have acquisition
in the country. Only 3% of these respondents in the country in the next year. This is, plans in Russia, highlighting the country's
are not optimistic and plan to relocate or however, 16 percentage points less than in difficult and lengthy approval process.
withdraw their operations from the country. the previous year’s survey. This reinforces


How do you plan to invest? When do you plan to invest?

Expansion of facility
Longer than Can’t say
26%
12 months 29%
Increasing labor force 30%
17%
Joint venture/alliance
8%
Greenﬁeld investments
6%
41%
Equity investment Less than
6% 12 months
Acquisition
2% Source: Ernst & Young 2012 Russia attractiveness survey.
Source: Ernst & Young’s113 (considering maintaining,
Total respondents: 2012 Russia attractiveness survey.
Other establishing or developing activities in Russia)
1%
Can't say
34%
Source: Ernst & Young 2012 Russia attractiveness survey.
Total respondents: 113 (considering maintaining,
establishing or developing activities in Russia)


How to meet investors' expectations

How to meet
investors'
expectations
A look into the future 57% of investors remain
confident about Russia’s future.

53% of respondents suggest
improvement in the effectiveness
of the rule of law.

47% of respondents would
like to see bureaucracy reduced.

62% of investors believe
Russia’s accession to the WTO
will increase the country's
attractiveness of investment.


Expectations from investors

Confidence has declined this year …

The majority of investors continue to as a result of instability in global markets Over the next three years, do you think
believe that Russia’s attractiveness will and the Eurozone crisis. Thirty percent say the attractiveness of Russia as a place
improve in the medium term. However, only that Russia’s attractiveness will remain the for your company to establish or develop
57% are optimistic about Russia's future same in the medium term, while only 7% are activities will...?
attractiveness, compared with 70% last pessimistic about Russia’s future.
year. It appears that confidence has fallen Deteriorate Can’t say
7% 6%
Neither improve,
… but remains at a comparatively high level nor deteriorate
30%
57%
Russia’s numbers, however, are very that it will remain the same. This suggests Improve

positive compared with Europe as a whole. that while the Russian economy will be
In our 2012 European attractiveness affected by the crisis in Europe, the effect
survey, only 38% of respondents said they will be modest compared with the European Total respondents: 208.
believe the continent’s attractiveness will economies.
improve, while a similar percentage believe

WTO deal has boosted confidence

What will be the impact of Russia's country. More than 60% of respondents The past experience of nations that have
accession to the WTO on its investment believe Russia’s accession will have a acceded to the WTO, and the assessment
appeal? medium-to-high impact on the country’s of the likely consequences of Russia’s
investment appeal. accession, show that FDI in Russia’s
Low or no Can’t say
impact liberalized service sector may eventually
16%
22% According to the World Bank, in the medium deliver growth in production of up to 11%
term, the gains should be about 3% of GDP of GDP. To enhance that effect, Russian
per year, with wages rising 4%-5% and more authorities, at all levels, should regard an
than 99% of households gaining income. In improvement in the investment climate as
62% the long run, the gains should be about 11% a key policy priority.
High or
medium impact
of Russian GDP per year, with wages rising
13%–17%. Accession to the WTO, renewed privatization
Source: Ernst & Young 2012 Russia attractiveness survey. and Government initiatives to reduce reliance
Total respondents: 208.
To ensure that Russia maximizes the benefits on energy exports are all reasons why we
of its accession to the WTO, the Government expect investor confidence in Russia to rise.
After almost 18 years of negotiations, should take urgent steps to restructure
Russia is set to become a fully fledged uncompetitive Russian industries. Measures
member of the WTO. The overall should first and foremost be taken to achieve
consequences of Russia’s accession to the a shift in manpower from uncompetitive
WTO are expected to be positive and to industries and enterprises to regions and
boost foreign investors’ confidence in the industries that have the capacity to develop.



WTO opportunities?
According to a recent Ernst & Young report,* the following measures should be taken in order to exploit the opportunities
that stem from Russia’s accession to the WTO:
* Russia’s success in the WTO: What The Opportunities, Ernst & Young, April 2012.

• Restructure the town-forming enterprises in the Russian • Train and retrain the residents of distressed towns,
monotowns (towns with only one industry) that are in cities and regions. Human capital should be developed
the high-risk zone of reduced production. This can be substantially to make those cities, towns and regions
done with the withdrawal of non-core assets and their more attractive for investors.
privatization.
• Support exports by extending regional programs to aid
• Develop transportation, postal and communications small and medium enterprises.
infrastructure to reduce the costs of connecting cities and
towns in the heightened risk zone with other regions and • Reduce administrative obstacles relating to customs
countries. procedures for exporters. Customs procedures can
be improved by reducing the number of documents,
• Offer incentives to draw major investors into regions, simplifying the procedure for formalizing export permits,
towns and cities in the heightened risk zone. Big businesses and optimizing the time limits for customs clearance and
that operate on the basis of state order should be obliged to the issue of permits for the export and temporary import-
acquire goods and services from small- and medium-sized export of goods for warranty repairs.
companies in distressed regions, towns and cities.
• Improve the business climate in the country and
• Allow small and medium-sized companies in the distressed regions by reducing administrative obstacles, investing
regions, towns and cities to receive financial support. in infrastructure, counteracting corruption and creating
conditions of equal competition for all businesses.
• Improve tax administration and the procedure
to reimburse VAT for exports.


Russia needs to create
an investor-friendly environment

Investors are looking for a better and more efficient operating environment

In your opinion, what should be the three Russia offers investors a high-growth with last year (when improving the
priority measures to take to improve economy, a large domestic market and effectiveness of the rule of law scored
Russia's investment climate? highly skilled labor at moderate cost. 63%, reducing bureaucracy 53% and
But its enduring reputation for difficult improving transparency 39%), suggesting
Improve the effectiveness of business conditions deters investors. some improvement in Russia’s operating
the rule of law
53% Doing business in Russia is fraught with environment in the last 12 months. In
Reduce bureaucracy challenges associated with corruption, their push to accelerate WTO and OECD
47% government bureaucracy, complex membership, Russian leaders have
Improve the transparency of business regulatory requirements and a lack of adopted new regulations to combat the
regulation
37%
transparency. Investors continue to challenging business environment, and
Promote economic growth and SME development suggest that improving the effectiveness successful accessions will further improve
21% of the rule of law (53%), reducing the environment. Finally, although
Stimulate R&D and innovation bureaucracy (47%) and improving the goals are ambitious, the Russian
17% transparency of business regulations Government aims to climb up the Doing
Lighten companies' legal and ﬁscal obligations (37%) are the top three priority measures Business index from the current rank
16%
to enhance Russia’s investment climate. of 120 to 50 by 2015, and 20 by 2018.
Renew the training and education system
14% However, investors’ emphasis on these
Reform the social model measures has reduced in comparison
9%
Promote an entrepreneurial and
initiative-taking culture
8%
Encourage companies' initiatives
in environmental protection and
sustainable development
5%
Improve the infrastructure
2%
Reform the political system/
have political stability
2%
None/none in particular
2%
Other
1%
Can't say
6%




1. Russia is tackling corruption and increasing transparency

Currently, investment in Russia is hindered and bribery, also pledging to sign the amount of the bribe. Also, in March
by corruption that undermines the rule of international anti-corruption treaties. 2012, the former President signed a bill
law. According to Transparency Russia was ranked 143 out of 182 approving Russia's National Anti-
International’s Corruption Perception Index economies in Transparency International’s Corruption Plan for 2012-13. The bill also
(CPI), Russia is perceived to be far more 2011 CPI ranking, a huge improvement made amendments to certain acts of the
corrupt than any OECD country and is also from its ranking of 154 in the previous President of the Russian Federation on
the most corrupt BRICS country. The year. countering corruption in the country. He
average size of bribes and commercial also announced a draft law which compels
payoffs in reported crimes increased by In 2011, the Russian Interior Ministry's public officials and members of their
approximately 250% in 2011 to economic security department reported a families to explain the origin of funds
RUB236,000 (US$7,866). In 2011, 50% increase in funds recovered from spent on major purchases.28 Russia’s
Russian law enforcement agencies corruption cases involving government current President Vladimir Putin has also
detected 37,831 incidents of corruption contracts awarded in the health care, affirmed his plans to tackle corruption by
against the Government, services in the utilities, construction and education highlighting a need to introduce legislation
public sector and local authorities. sectors. The Russian Government signed a to establish anti-corruption standards in
Although Russia is a member of the bill in February 2012 to accede to the the law enforcement practices. These
Council of Europe Group of States Against OECD Anti-Bribery Convention. This measures and examples illustrate that
Corruption (GRECO), the country has legislation subjects Russia to peer reviews Russia’s fight against corruption is on.
fulfilled only about one-third of the of its compliance with the convention.
anti-corruption obligations set by the Under former president Dmitry Medvedev, 28. “Dmitry Medvedev's new assault on corruption in Russia,”
accessed via www.telegraph.co.uk, 5 July 2012; “Russia
GRECO.27 However, the Government was Russia undertook a series of initiatives to Signs OECD Anti-Bribery Convention,” accessed via www.
themoscowtimes.com, 5 July 2012; “Putin points out
active in 2011 to curbing corruption cases deal with corruption. These included the importance of public anti-corruption audit of all legal acts,”
establishment of the Anti-Corruption Interfax: Russia & CIS General Newswire, 30 May 2012,
via Factiva © 2012 Interfax Information Services, B.V.;
Council and the institution of an anti- “Executive Order on National Anti-Corruption Plan for
27. "Over 37,000 cases of corruption registered in 2011 — 2012-2013,” accessed via eng.kremlin.ru, 5 July 2012;
prosecutors,” Interfax: Russia & CIS Military Newswire, corruption law that raises fines for officials “Russian paper details provisions of anti-corruption draft
28 April 2012, via Factiva © 2012 Interfax Information law,” BBC Monitoring Former Soviet Union, 14 March 2012,
Services, B.V.
caught taking bribes to up to 100 times via Factiva © 2012 The British Broadcasting Corporation.


2. Russia is reducing bureaucracy

Investors complain about the pervasive including measures to fight corruption. In April 2012, Russia officially expressed
influence of government bureaucracy in Russia’s 2020 Strategy also details its intention to join the Open Government
business operations and unofficial barriers measures to reduce bureaucracy. The Partnership (OGP), a global initiative that
imposed by regional authorities. However, Russian President has proposed the promotes transparent, effective and
it would be unfair to say that the Russian creation of an anti-bureaucracy filter for accountable government around the
Government is doing nothing about this. In business legislation as part of the world.29
early 2012, the “open government” country’s long-term economic policy
project was introduced to attract outside objectives. 29. “About OGP,” accessed via www.opengovpartnership.org,
5 July 2012; “Country commitments: Russia,” accessed
experts to discuss government decisions, via www.opengovpartnership.org, 5 July 2012.

3. Building an environment conducive to SME development

Russia has an underdeveloped SME starting a business, a drop of five places the country. In 2011, the Agency for
market. According to the OECD, SMEs from the previous year. This low ranking Strategic Initiatives was created to help
account for about one-fifth of employment explains the reason for the low numbers of talented people, especially young people,
in Russia and an even smaller share of new firms setting up in Russia. To make promote new and innovative ideas, and to
output. This is very low in comparison with the country attractive for new SMEs a lot help businesses overcome bureaucratic
most OECD economies, in which both has to be done to improve the business barriers. Russian banks have also shown
figures are over a half. Russia ranked environment for entrepreneurs. The more interest in lending money to SMEs
111th of 183 countries in the World Bank Russian Government has been developing because it is more profitable than lending
2012 Doing Business rankings for ease of initiatives to promote entrepreneurship in to large businesses.



Reducing Russia's dependence on oil and gas

Overdependence on the oil and gas How do you see Russia in 2020?
sector and an unfavorable environment
A leader in the energy sector
for innovation and SMEs are among of 56%
the biggest challenges that the Russian Surpassed by strong competition from more dynamic countries
economy faces today. These challenges 18%
make apparent the need for structural Challenged on its social and economic model
reforms. On the positive side, a reduced 16%
One of the world leaders in strategic industries
percentage of investors think that Russia
14%
will be surpassed by strong competition A leader in R&D and innovation
(18% in 2011 vs. 29% in 2010) and will 13%
be challenged because of its social and A country with one of the best education and higher learning plural
economic model (16% vs. 31%). 7%
Can't say
15%
Source: Ernst & Young 2012 Russia attractiveness survey. Total respondents: 208.

1. The diversification challenge

Fifty-six percent of respondents — compared a large mismatch in Russia between the completely from the energy sector, which
with 51% last year — believe that Russia will attention that other strategic industries remains Russia’s greatest strength.
be a leader in the energy sector in 2020. receive from investors and their real However, there should be a more balanced
This indicates that Russia’s dependence on potential. Although the Russian approach, and other key industries should
the oil and gas sector has strengthened in Government has recognized the need for be given due attention. Investors highlight
the last year. Energy products currently diversification for over a decade, there has ICT (20%), agriculture (13%), consumer
account for approximately two-thirds of not been much action yet to balance the goods (13%), and transport and automotive
Russian exports. On the other hand, as a country’s economic growth. This does not (11%) sectors as the keys for growth in the
result of this focus on oil and gas, there is mean that focus should be shifted next couple of years.

2. The R&D and innovation challenge

While there is little or no doubt about the development of science cities, published its revised strategy “Innovative
the abilities of Russian scientists and technoparks and venture capital funds. Russia–2020,” which will drive economic
technicians, investors are more concerned The Skolkovo Innovation Centre (also development. The success of these
about the unfavorable environment for R&D. known as Russia’s Silicon Valley) will government initiatives is apparent in
Inadequate infrastructure and a lack of benefit from innovative companies and will the GE Global Innovation Barometer 2012
government incentives are two of the provide them with the necessary business survey. More than 87% of the top Russian
hindrances that are holding back and innovation support. In March 2012, managers surveyed said they had seen
innovation and R&D in Russia. The country Cisco signed a strategy document with an improvement in Russia’s innovative
is behind Western economies when it the Skolkovo Foundation that outlined environment over the past five years.
comes to R&D and innovation expenditure its R&D plans, marking an important However, they continued to highlight weak
(1.3% of GDP), and business openness milestone in Cisco's multi year, US$1b government and private sector support for
toward innovation. Russian authorities investment in sustainable innovation innovative companies, as well as the poor
have recently pursued a series of in Russia. In February 2012, Russia’s quality of the regulatory environment.
innovation-related initiatives, including Ministry of Economic Development


Viewpoint
Business ethics in a global world
Andrei Volkov, Dean, The Moscow School of Management Skolkovo

Looking at Russia's investment Regrettably, sometimes we contribute If major Russian businesses do not learn
attractiveness from an historical ourselves to the investors' negative how to work in the global market, they
perspective, it appears that we fall perception of Russia by breaking the are doomed to fail within 10-15 years. It
somewhat short of foreign investors' rules of business ethics. Ethics and takes cooperation to avoid a fiasco:
expectations. We are certainly moving in confidence that business partners follow raising investments, investing abroad
the same code of conduct can sometimes and successfully working on a global
"Investment" be much more important for improving scale. "Investment" is not just money
the business environment than financial that lands in a bank account. It means
is not just indicators or prospects of returns on getting engaged with other people and
money that invested capital. working as partners in a broader sense.
lands in a bank I would like to emphasize the role of Foreign investment is extremely
account. It foreign capital in the development of the important — I would even go so far as to
means getting engaged Russian economy. And I do not mean say critical — for the Russian economy.
merely financial investments, though Either we join the big leagues of global
with other people and such capital inflow is certainly very business or become a third-rate operator,
working as partners in a important. I mean the whole educational which would be a shame.
broader sense. process, obtaining knowledge and skills
for working in the globalized market.
the right direction, but not as fast as they Globalization is a relatively new burden
would have like us to do. On the other on business which has emerged during
hand, the Russian authorities the past 25 to 30 years. However, the
now have a far better understanding of success of almost every company worth
how to work with these investors than more than US$100m depends on how
they did five or ten years ago. well it tackles this challenge.

3. The education challenge

A larger proportion of Russian high school • Bring industry and academia closer modernize its higher education system to
students go on to tertiary education than together by encouraging collaboration meet current global education standards.
in any OECD economy. The country has To ensure preparedness for the market In 2011, Vladimir Putin announced that the
a literacy rate of nearly 100%. Russia environment, the current curricula of Government will allocate RUB70b
also produces a substantial number of universities and colleges require (US$2.4b) to build an innovative
scientists, technicians and other skilled upgrading. The new curricula should be educational infrastructure in Russian
workers. Yet only 7% of respondents see designed in collaboration with the business universities in the next five years. However,
Russia as a country with one of the best sector so that the skills learned are those we believe this might not be enough. More
education and higher learning systems. that business requires. The Government needs to be done to improve the current
What explains this perception, and what should also seek ways of strengthening quality and infrastructure of Russian
can be done to improve it? vocational training. universities.

• Increase government spending • Develop universities of a global standard
Overall education spending in Russia According to the 2011–12 Times Higher
remains low compared with OECD standards. Education rankings, no Russian university
There is a need to increase government is in the world’s top 200. Moscow State
spending on all levels to improve the quality University is listed in the top 300 and
of teachers, infrastructure and the overall St. Petersburg State University in the top
standard of education. 400. The Russian Government needs to



Sector opportunities

Extraction has the strongest potential

Which business sectors will attract the Unsurprisingly perhaps, a large majority of respondents view extractive industries as having
most foreign investments in Russia over the greatest potential to attract foreign investments into Russia in the next two years.
the next two years? According to 39% of the investors, the mining, oil and gas sector is expected to attract the
Mining, oil and gas most FDI in the next two years. The distant second choice of investors was the information
39% and communication technologies (ICT) sector followed by energy and utilities, agriculture,
Information and communication technologies, ITC consumer goods and automotive.
20%
Energy and utilities

1.
18%
Agriculture Strong ICT sector
13%
Consumer goods
13% Beyond the extraction industries, investors There is a significant demand in Russia
Transports industry and automotive see ICT as the prominent sector that will for subsectors within ICT, such as data
11% attract most FDI in the next two years. transfer, telephone systems and data
Real estate and construction Russia has made rapid advances in ICT network optimization, information security,
8% in recent years. It has recorded marked business process management(BPM)
The pharmaceutical industry and biotechnologies
growth in internet connections and cell systems and software development. The
6%
phone usage. In 2011, the number of growth of some technologies has stemmed
Banking/ﬁnance/insurance
5% Russians online went up by 14% to from the fact that technology-oriented
Clean techs 53 million, making the country’s online applications, including process
4% population the largest in Europe. However, management systems, are now being
B to B services excluding ﬁnance internet penetration is still comparatively implemented in various functional areas
3%
low at 37.1%, indicating huge potential. of large organizations.
Aircraft manufacturing

2.
3%
Logistics and distribution channels
3% Renewed interest in food and agriculture
Cultural activities
2% Rapidly rising disposable income is driving open new business opportunities for
R&D the food and agriculture sector in Russia. foreign companies that had been held back
1%
Defense sector
Russia's membership of the WTO will have from entering the Russian market by high
1% a positive impact on this sector. The WTO tariffs. The Government is also trying to
None/none in particular will give added impetus to the growth of encourage investment in the grain sector,
2% agricultural exports, encouraging new ruling out restrictions on exports and
Can't say strategic investors to enter the sector. preparing for privatization of the state
16%
This membership will lower tariffs and grain trader.
Source: Ernst & Young 2012 Russia attractiveness
survey. Total respondents: 208.


Viewpoint
One of the best markets for local manufacturing
Irene Rosenfeld, Chairman & Chief Executive Officer, Kraft Foods

Kraft Foods entered the Russian market Western Europe. All these, combined with We expect that many of our suppliers
in 1994, at about the same time as many the continued growth in consumers’ will also come to Russia with their
of our global competitors. In that way, disposable income, lead us to view Russia own manufacturing facilities, making
we were pioneers in post-Soviet Russia today with great optimism. our supply chain even more balanced
and benefited from the positive image and efficient.
that foreign manufacturers’ brands had Russia has enormous potential in terms
at that time. In the 1990s, Russian of the scale of its internal market, which On the other hand, property tax is
consumers were interested in trying is one of the largest in the world. Russia’s a constraint to greater investment in
new things, which provided new market purchasing power is four to eight times manufacturing facilities based in Russia.
players like Kraft Foods vast opportunities greater than in China, India and certain This tax, which is ultimately reflected
to quickly develop and grow. Eastern European countries. By 2023, in the cost of products, can put Russia
Russia is forecast to become the largest at a disadvantage to other jurisdictions,
By 2023, Russia consumer market in Europe. That’s why such as neighboring Ukraine, which
Russia is such an attractive market for does not collect a property tax on
is forecast to an investor like Kraft Foods. manufacturing facilities.
become the
largest consumer For us, Russia is also among the most The current Russian Government has
favorable markets for the development of committed to the implementation of
market in Europe. local manufacturing facilities. A large structural reforms that will make
domestic market provides the justification important changes to the country’s
Since 1994, GDP per capita in Russia has for locating the biggest manufacturing economy. The declared focus is on raising
increased more than three-and-a-half lines in Russia, enabling lower unit costs capital for the economy, the development
times. Russian consumers have become and future expansion of capacity for of competition and infrastructure, and the
much more demanding. But they’re still export. Our freeze-dried coffee plant near reduction of administrative red tape.
open to trying something new. The St. Petersburg is on track to become the Kraft Foods supports these priorities and
market has not reached the level of biggest freeze-dried production facility in expects that the pace of positive
maturity and saturation as that of the world this year. transformation will be maintained.

3. Automotive flourishes

The automotive sector is already the manufacturer. Renault-Nissan and Avtovaz Russia’s accession to the WTO will see
largest recipient of FDI projects in Russia. are targeting market share of 40% in a considerable reduction of customs
The country’s automotive industry Russia by 2016. In October 2011, Ford duties on vehicles from 2012 to 18, which
experienced a milestone year in 2011: and Russia’s Sollers OJSC entered into will accelerate the shift in demand in favor
sales rose by approximately 40% year on a 50:50 joint venture for vehicle and of foreign vehicles and increase their share
year, almost reaching the pre-crisis level. engine production in Russia. In June 2011, in overall sales.
Sales were driven by pent-up demand, Volkswagen also signed an agreement
recovery of consumer confidence, credit with Russian carmaker GAZ to produce
availability and government incentives. 110,000 light vehicles annually for
Sales of Russian-made foreign brands Volkswagen. These alliances help foreign
have recorded a significant increase. companies to share risks, provide
Recently, more and more alliances have immediate access to the Russian market,
been forged between Russian and foreign develop inter-market ties and gain
auto manufacturers. In May 2012, necessary local experience. The Russian
Renault-Nissan confirmed a US$750m companies, on the other hand, benefit
deal to acquire a controlling stake from modernization, and new and
in Avtovaz, Russia’s leading auto innovative technology.


Appendix

Methodology

Ernst & Young’s 2012 Russia attractiveness survey is based on a two-fold, original methodology that reflects:

• The “real” attractiveness of Russia for foreign investors. • The “perceived” attractiveness of Russia and its
Our evaluation of the reality of FDI in Russia is based on Ernst & competitors by foreign investors.
Young’s European Investment Monitor (EIM). This unique database We define the attractiveness of a location as a combination
tracks FDI projects that have resulted in new facilities and the of image, investors’ confidence and the perception of a country
creation of new jobs. By excluding portfolio investments and M&A, or area’s ability to provide the most competitive benefits for FDI.
it shows the reality of investment in manufacturing or services The field research was conducted by CSA Institute in April and
operations by foreign companies across the continent. May 2012, via telephone interviews with a representative panel
of 208 international decision-makers.

Mapping the real attractiveness of Europe

Data is widely available on FDI. An investment in a company is carried out in Europe, Ernst & Young created the Ernst & Young
normally included if the foreign investor has more than 10% of its EIM in 1997. The EIM is a leading online information provider
equity and a voice in its management. FDI includes equity capital, tracking inward investment across Europe. This flagship business
reinvested earnings and intracompany loans. But many analysts are information tool from Ernst & Young is the most comprehensive
more interested in evaluating investment in physical assets, such source of information on cross-border investment projects and
as plant and equipment, in a foreign country. These figures, rarely trends throughout Europe. The EIM is a tool frequently used by
recorded by institutional sources, provide invaluable insights as to government and private sector organizations and corporations
how inward investment projects are undertaken, in which activities, wishing to identify trends, significant movements in jobs and
by whom and, of course, where. To map these real investments industries, and business and investment.

The Ernst & Young European Investment Monitor

Researched and powered by Oxford Intelligence, EIM is a highly is carefully noted so that any subsequent job creation from later
detailed source of information on cross-border investment projects phases of the project can be cross-checked and to avoid double-
and trends in Europe, dating back to 1997. The database focuses counting in later years.
on investment announcements, the number of new jobs created
and, where identifiable, the associated capital investment, thus The following categories of investment projects are excluded from
providing exhaustive data on FDI in Europe. It allows users to EIM:
monitor trends and movements in jobs and industries, and identify • M&A or joint ventures (unless these result in new facilities and
emerging sectors and cluster development. Projects are identified new jobs created)
through the daily monitoring and research of more than 10,000 • License agreements
news sources. The research team aims to contact directly 70% of • Retail and leisure facilities, hotels and real estate investments
the companies undertaking the investment for direct validation • Utility facilities including telecommunications networks,
purposes. This process of direct verification with the investing airports, ports or other fixed infrastructure investments
company ensures that real investment data is accurately reflected. • Extraction activities (ores, minerals or fuels)
• Portfolio investments (i.e., pensions, insurance and financial
The employment figures collected by the research team reflect the funds)
number of new jobs created at the start-up date of operations, as • Factory and production replacement investments (e.g., a
communicated by the companies during our follow-up interview. In new machine replacing an old one, but not creating any new
some cases, the only figures that a company can confirm are the employment)
total employment numbers over the life of the project. This • Not-for-profit organizations (e.g., charitable foundations, trade
associations, governmental bodies)


Interviews

A series of interviews was conducted between May and June 2012, Russia’s business, academic and government spheres, presented
to discuss the views of a group of esteemed local leaders from in the “Viewpoint” sections of this report.

The perceived attractiveness of Russia and its competitors

An international panel of decision-makers of all origins, with clear We built a global panel from all business models and sectors
views and experience of Europe: to guarantee a representative opinion on the diversity of
• 39% Western European businesses international strategies:
• 18% Northern European businesses • SMEs (small and medium enterprises)
• 7% Central and Eastern European businesses • Multinationals
• 2% Middle Eastern businesses • Industrial companies as well as service providers
• 20% North American businesses
• 14% Asian businesses Divided into five main sectors, the businesses surveyed are
representative of the key European and global economic sectors:
Of the companies, 65% (135 out of 208) have established • Industry, automotive, energy
operations in Russia. • Private and business services
• Consumer
• Chemical and pharma industries
• Hi-tech and telecom infrastructure and equipment

Profile of companies surveyed Profile of companies surveyed Profile of companies surveyed
Geography Size of the company Job titles
Western Europe More than Financial Director
39% Less than €1.5 billion
€150 million 49%
North America 21%
32% Marketing Director
20% 21%
Northern Europe
Managing Director/Senior Vice President/COO
18% 8%
Asia
Director of Development
14%
5%
CEE
47% Export Manager/Overseas Manager
7% From €150 million
3%
Middle East to €1.5 billion
Director of Strategy
2%
3%
Source: Ernst & Young 2012 Russia attractiveness survey. Source: Ernst & Young 2012 Russia attractiveness survey. Director of Investments
Total respondents: 208. Total respondents: 208. 3%
Chairman/President/CEO
Profile of companies surveyed 2%
Sector of activities Purchasing Manager
2%
Sectors Respondents Director of Production
1%
Industry, automitive, energy 35%
Logistics Manager/Transport Manager
Private and business services 30% 1%
Consumer 21% Human Resources Manager
Chemical and pharma industries 6% 1%
Hi-tech and telecom infrastructure and equipment 4% Other
Others 4% 1%
Total 100% Source: Ernst & Young 2012 Russia attractiveness survey.


Ernst & Young in Russia
In 1989 Ernst & Young was the first professional services • Country and institutional development
organization to establish operations in Russia. Our Russian practice
has 2,500 employees working in nine offices located in Moscow, Ernst & Young actively supports the development of the institutions
St. Petersburg, Ekaterinburg, Novosibirsk, Togliatti, Kazan, and economics where we operate. We participate and support
Krasnodar, Vladivostok and Yuzhno-Sakhalinsk. the Foreign Investment Advisory Councils (FIAC) in Russia, which
Ernst & Young co-chairs with the Prime Minister of the Russian
Ernst & Young is dedicated to helping its clients identify and Government.
capitalize on business opportunities throughout Russia and the
world. Our key market sectors are: financial services; retail and Ernst & Young also demonstrates its leadership by being involved
consumer products; industrial products; energy; technology and in the Russian business community, as an active member of the
communications; government, real estate, transportation and Russian Union of Industrialists and Entrepreneurs, the Association
infrastructure. of Russian Banks, the International Tax and Investment Center,
the Association of European Businesses, the American Chamber
Our professionals are recognized for their leadership, know-how of Commerce and the US-Russia Business Council. We also play an
and understanding of our clients’ business. In more than 20 years important role in the Russian legislative and ministerial processes
in Russia, we have provided critical information and resources affecting business.
to improve business performance and profitability.
• Our clients

We know that growing markets require innovative thinking and
evolving practices for businesses to succeed. Many leading
companies in Russia and the CIS have chosen Ernst & Young to
advise them on the most demanding aspects of the fast-evolving
business climate. Ernst & Young provides audit services to a large
number of Russian and CIS companies listed on Forbes Global 2000.
St. Petersburg

Moscow

Kazan

Ekaterinburg

Togliatti

Krasnodar

Novosibirsk


• Our publications

Doing business in Russia: Exceptional CIS magazine
employee aspects
Exceptional CIS is a part of Ernst & Young’s
In this guide, we provide an overview of
Exceptional magazine, an award-winning
employee-related issues to be considered
publication distributed to business
when entering the Russian market.
leaders of high-growth companies.
It includes inspirational interviews with
the markets’ top success stories.

Russian retail industry survey 2011 Development of industrial parks in
Russia
Our retail industry survey shows how
Russian and international companies The industrial parks market in Russia has
established in Russia assess the current continued to develop rapidly over the past
market situation, and what plans they year: the quality of projects has improved;
are making for the future. We also look at the degree of awareness among market
various aspects of the retail companies’ participants has significantly increased
activities and provide a summary of and professional developers, as well as
respondents’ opinions on the most management companies, have emerged.
pressing issues retailers are facing today.

How to make PPP work in Russia: Ernst & Young’s Rapid-Growth
2012 overview Markets Forecast. July 2012
Our new survey on public-private This edition of Ernst & Young’s quarterly
partnership (PPP) summarizes federal Rapid Growth Markets Forecast highlights
and regional state officials’ opinions on a that despite recession, stalling growth
variety of legal, financial and commercial and high unemployment, the overall
issues related to PPP projects. It also prospects for RGMs remain strong. The
promotes a better understanding of the rise of the rapid-growth markets’ middle
prospects for PPP development in Russia class, with the number households more
for both local and foreign organizations. than doubling by 2020, is forecasted to
boost domestic demand and transform
the global economy.

Yuzhno-Sakhalinsk

Vladivostok


Ernst & Young's 2012 Russian attractiveness survey Positioned for growth C

Ernst & Young

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About Ernst & Young Contacts
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and advisory services. Worldwide, our 152,000 people are united Partner, Ernst & Young Advisory
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