Growing BeyondPositioned for growthErnst & Young’s 2012 attractiveness surveyRussia
Emerging Markets CenterThe Emerging Markets Center is Ernst & Youngs “Centerof Excellence” that quickly and effectively co...
Positioned for growthErnst & Youngs 2012 attractiveness surveyRussia                          Contents                    ...
ViewpointImproving investment opportunities    Igor Shuvalov, First Deputy Prime Minister of the Russian FederationIt migh...
ForewordForeword                    Jay Nibbe                                                                Alexander Ivl...
Executive summaryExecutive summaryThe global context                                                           Investors’ ...
Reality check                                                              A look into the futureRussia’s industrial progr...
Executive summary6    Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
ViewpointGrowth is not only possible, but inevitable Kirill Dmitriev, Chief Executive Officer, Russian Direct Investment F...
An optimisticoutlookThe global context                                                             6.5%          GDP growt...
An optimistic outlookGlobal economic outlookWorld             RGMs3.9 3.5 3.9       6.3 4.9 5.9                           ...
An optimistic outlookGlobal FDI market:dynamic and demanding  Viewpoint  Our success will depend on us     Herman Gref, Ch...
Top 10 destinations for FDI inflows in 2011(in US$ billion)                                                   UK          ...
Russia takesa step forwardInvestors perception                                                           19%          of i...
Russia takes a step forwardRussia in the global contextChina’s lead is wideningInvestors are still focusing on rapid-growt...
Russia takes a step forwardEurope’s attractiveness has halved since 2006Europe continues to appeal strongly to           Y...
ViewpointRussia on the way to liberalization Yaroslav Lissovolik, Member of the Management Board, Chief Economist, Head of...
Russia takes a step forwardRussia’s world-classnatural resourcesAn abundance of natural resources                contribut...
Russia’s attractiveness:strengths and areas for improvementAccording to our 2012 European                      What are th...
Russia takes a step forward  Viewpoint  Russia will become a more balanced economy than India or China     Alexei Kudrin, ...
Russia’s strengths•	 Market opportunities                                         •	 Higher education advantage           ...
Russia takes a step forwardRussia’s areas for improvement•	 Political, legislative and                                 •	 ...
ViewpointForeign capital enhancing Russia’s competitiveness Alexander Shokhin, President, Russian Union of Industrialists ...
Russia’s industrialprogressReality check                                                                   #1      FDI des...
Russia’s industrial progressFDI in Russia in 2011:larger projectsFDI projects decline but are still close to the pre-crisi...
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
EY Russia Attractiveness Sept 2012
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EY Russia Attractiveness Sept 2012

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Russia is proving to be resilient in the current climate, according to our latest survey. Looking to the future, Russia’s entry into the World Trade Organization (WTO) and the diversification of its FDI portfolio are expected to increase the country’s investment appeal.

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EY Russia Attractiveness Sept 2012

  1. 1. Growing BeyondPositioned for growthErnst & Young’s 2012 attractiveness surveyRussia
  2. 2. Emerging Markets CenterThe Emerging Markets Center is Ernst & Youngs “Centerof Excellence” that quickly and effectively connects youto the worlds fastest-growing economies. Our continuousinvestment in these markets allows us to share the breadthof our knowledge through a wide range of initiatives,tools and applications, thus offering businesses, in bothmature and emerging markets, an in-depth and cross-border approach, supported by our leading and highlyglobally integrated structure.For further information on emerging markets,please visit: http://emergingmarkets.ey.com
  3. 3. Positioned for growthErnst & Youngs 2012 attractiveness surveyRussia 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 Russias dependence on oil and gas 42 Sector opportunities 44 Methodology Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 1
  4. 4. ViewpointImproving investment opportunities Igor Shuvalov, First Deputy Prime Minister of the Russian FederationIt might not be quite fair to assess Russia’s attractiveness The Foreign Investment Advisory Council (FIAC) bringsourselves, as it is foreign investors who must have their say. together more than 40 major global companies operating inOf course, international ratings show that we still have a lot to Russia. The Council provides an important and useful forumdo. 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 still120th. 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 draftingof US$80b in 2011. And what is private capital outflow? of recently adopted amendments to the Law on MigrationIt is, in fact, a real indication of the quality of the investment Registration of Foreign Citizens and Stateless Personsclimate. 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 Russias strategic industries for foreign investors. • FIAC working groups put forward proposals to improveHowever, I can say that all these years we have remained administrative and customs regulations (veterinaryconsistent 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 projectscapital 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 systemfor passing court rulings more transparent. Let me also Russia is a net exporter of capital. Last year, according tomention 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 othertax 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 foreignWorld 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 moneyAs a result, we have a positive trend: the net inflow of foreign that was previously taken out of Russia. We therefore needdirect 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 investmentsombudsman, 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 productionof the issues and find positive solutions. Investors most and market relations — and this is exactly what our economyoften complain about administrative barriers. really needs today.2 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  5. 5. ForewordForeword Jay Nibbe Alexander Ivlev Area Managing Partner EMEIA — Markets Country Managing Partner Ernst & Young Russia, Ernst & Young LLCThe global economy faces many challenges. In Europe, recession Our panel of investors confirms that Russia has world-classhas returned to many economies, the Eurozone crisis continues features: an abundance of natural resources, a huge domesticand global economic power shifts from west to east and north market and a very skilled labor force. They also note thatto south. In recent months, rapid-growth economies have Russia has made a step forward in the global competitionslowed, 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 challengesrobust 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 thegrowth 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 removeand 2012. An increase in consumption, a strong labor market barriers to future growth and help business leaders make smartand an increase in investments have been the prime drivers of investment decisions. In the report, we look at the perceivedthis growth. Oil prices have supported the sustained expansion attractiveness of Russia and changes in FDI behavior, andof 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 ofincreasing global competition, in which investment and Russia, with its great development potential, is now exploringtechnology play crucial roles in diversification and creating new ways to compete and to lead.sustainable growth. Our survey shows that foreign investorsare more demanding than they used to be: they now value As we present our second edition of the Russian attractivenessefficiency and transparency of the operating environment survey, we would like to thank all the decision-makers andas much as they do market opportunities. Ernst & Young professionals who have taken the time to share their insights with us. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 3
  6. 6. Executive summaryExecutive summaryThe global context Investors’ perceptionAn optimistic outlook Russia takes a step forward• The global economic outlook is optimistic • Russia has joined the competitionThe global economy started to show signs of recovery in 2011. The world is converging. China’s lead as the investment destinationIt was weak and unbalanced, but there was optimism. As a result of with the best image is widening and Europe’s attractiveness hasthe financial crisis, the growth trajectories of rapid-growth economies halved since 2006. With 19% of international investors perceivinghave 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’smonitor 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 natureDespite the economic and financial crisis, global FDI increased by According to our panel, Russia’s world-class features, such as its16% 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 globalby 22%. According to the United Nations Conference on Trade and recovery.Development (UNCTAD), investors were motivated by the continuedgrowth 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 availabilityBusiness leaders are re-evaluating their selection criteria: at the top of skilled labor as a positive factor for investing in Russia; low laborare 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.4 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  7. 7. Reality check A look into the futureRussia’s industrial progress How to meet investors’ expectations• Russia attracted fewer, larger projects • Expectations from investorsThe number of FDI projects declined by 36% in 2011, even though Although a majority (57%) of investors remain optimistic aboutRussia led Central and Eastern Europe (CEE) at attracting FDI. Job Russia’s attractiveness in the medium term, the level of confidencecreation 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 in2011 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 transparency51% of investment projects and 92% of job creation between 2007 of business regulations (37%) as the top three ways to enhanceand 2011. The industrial sector was another high performer, with Russia’s investment climate.automotive attracting 90 projects and machinery and equipmentrecording 62 projects. The food sector was the second-largest • Russia’s FDI portfolio is diversifyingnumber 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 oftenbusiness 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 gasin recent years. It accounted for 9% of the total FDI projects in creates a large mismatch between the attention that other strategic2011, 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 softwareindustry are included in the business services category, this figurerises to 14% of the projects between 2007 and 2011, compared withthe automotive industry’s 12%.• Little change in FDI sourcesThe United States remains Russia’s primary investor with 122 FDIprojects between 2007 and 2011 (16% of the total), but 8 of the top10 source countries are from Europe. European countries establishedover 300 FDI projects in Russia from 2007 to 2011, 44% of the total.FDI into Russia from emerging countries remained low between 2007and 2011. India and China each accounted for less than 2% of FDI Perceptionprojects in Russia. Brazil established just two projects in the country.These economies also made a minor contribution to employmentgeneration. 8 percentage point  increase of international investors who find Russia attractive compared to 2011, the largest increase of any region.• FDI is regionally concentratedRussia’s two largest cities – Moscow and St. Petersburg – account for42% of the projects. The Kaluga and Nizhny Novgorod regions are 39%  of business leaders expect the mining, oil and gas sectoralso attractive investment destinations. to attract the most FDI in the next two years, with 20% for the ICT sector.• 2013: strong plans for investmentInvestors already present in Russia continue to demonstrate their 62%  of investors believe Russia’s accession to the WTO willconfidence 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 widegap in plans between the companies that already have operations inRussia 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 pointslower 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. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 5
  8. 8. Executive summary6 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  9. 9. ViewpointGrowth is not only possible, but inevitable Kirill Dmitriev, Chief Executive Officer, Russian Direct Investment FundRussia has a unique opportunity to attract a record level US$1.5t, foreign investors have become increasinglyof 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 theirof the lowest levels of state debt (11% of GDP compared dealings in Russia and the Commonwealth of Independentwith 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 modernizationlike the Russia Direct Investment Fund (RDIF) make it of production in Russia. It all fits very well with theeasier to invest in Russia. RDIF is a partner for direct Government’s agenda for attracting “smart” long-terminvestment funds, state investment funds and transnational foreign investments.corporations that can share risks and elucidate the finerpoints of the investment machinery in Russia. In addition, While a member of BRICS, Russia has some big advantagesRDIF will attract foreign capital by showcasing real over the rest of the group. Russia possesses huge mineralexamples of successful deals made in partnership with resources and a more literate and educated population thanleading financial and strategic investors. The mere presence other BRICS countries, which, unlike Russia, have to rely onof 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 bankinggovernment program of investment in infrastructure under system and the lowest corporate tax among BRICS nations.way, as well as a new wave of privatizations, targetingassets 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 BRICSRussia 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 takethat it needs to improve the local business environment and some serious steps to improve it.is prepared to commit itself to state, corporate managementand regulatory reforms. There are some real problems that International experts often speak about the lowthe Government has been trying to solve. It is clear that we competitiveness of Russian businesses. But the lowerstill suffer from excessive bureaucracy and red tape, and efficiency of Russian companies also has an upside, as itthere 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 ofin all these areas. To tackle these challenges, a special some pessimistic views of the current state of the Russianinstitution, the ombudsman, has been established in Russia economy, growth is not only possible, but inevitable. Sufficeduring 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 time150 executives whose companies’ combined assets exceed the number of middle-class Russians has tripled. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 7
  10. 10. An optimisticoutlookThe 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.8 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  11. 11. An optimistic outlookGlobal economic outlookWorld RGMs3.9 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 2013World 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 marketin recovery mode. It was weak and reduced demand for commodities and companies seek to tap into their projectedunbalanced, but there was some optimism. a slowdown in exports of manufactured growth, and the emerging marketsHowever, the global recovery slowed in the goods. However, many developing themselves use their favorable economicsecond 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 byand sharply escalating risks during the Ernst & Young should achieve overall GDP National and regional differences do existfourth quarter. Economic growth in many growth of 5.9% in 2013 and 6.5% in 2014. between emerging market economies, anddeveloped economies decreased during significant growth differences are openingthe latter part of 2011 as many Western Growth in the emerging world is up this year. Asian RGMs are projected toeconomies headed toward a double-dip underpinned by the emergence of a richer see growth rates of 6.2% in 2012, whilerecession. Increased uncertainties in middle class, favorable demographics and, RGMs in the EMEIA and Americas regionsthe Eurozone, persistently high levels of as a consequence, strong and sustained can expect to register growth of 4.0% andsovereign debt and government austerity growth in domestic demand. Increased 3.2% respectively. Strong RGM performersprograms 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; Indiathe main forces holding back economic unfavorable developments in mature (+7.5%), Kazakhstan (+7%) and Qatarrecovery 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 atrecently, in some cases notably. Economic Investments in emerging markets a moderate rate of 3.1% in 2013. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 9
  12. 12. An optimistic outlookGlobal 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.10 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  13. 13. 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 theglobal FDI increased by 16% in 2011. motivated by the continued growth of local location in which to establish operationsAt US$1t, the total exceeded the pre- consumer markets and by a new round of The country or regions domestic marketcrisis 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 costsInvestors look for market opportunities as much as stability 28%and transparency Transport and logistics infrastructure 25% Potential productivity increase for their companyEconomic 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 climateselection 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 taxationtelecommunications 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 infrastructureappeal 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 & Youngs 2012 European attractivenessAlmost 40% of investors questioned criterion (36%) when deciding where to survey. Total respondents: 840in 2012 said that, when deciding to invest, invest. Labor costs, which used to be aa country or region’s domestic market is compelling concern, still matter for 28% ofnow their top concern. In our past surveys, respondents, but rank third overall. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 11
  14. 14. Russia takesa step forwardInvestors 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.12 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  15. 15. Russia takes a step forwardRussia in the global contextChina’s lead is wideningInvestors are still focusing on rapid-growth make the country a magnet for investors. “attractiveness gap.” The gap betweenmarkets. Business leaders see a larger Consequently, in Ernst & Young’s 2012 China and Western Europe has increasedrole for emerging economies, particularly European attractiveness survey, China from one percentage point in 2010 toChina, that offer greater returns on retains its position as the most attractive three percentage points in 2011 and 11their investments. In addition to the size FDI destination. It was named as the percentage points in 2012. Similarly, Chinaof its market and pace of consumption most attractive destination by 44% of has extended its attractiveness lead overgrowth, China also has a broad economy, respondents — the highest level of investor CEE. In contrast, competition among thespecialized 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 — remainsand 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 theRussia has joined the competitionWhat are the three most attractive regions in which to establish operations?68% Western Europe52% CEE48% China 44%41% North America 33% India 21%18% 19% Russia 18% Brazil 5% 2006 2007 2008 2009 2010 2011 2012Source: Ernst & Youngs 2012 European attractiveness survey. Total respondents: 840According to our 2012 European closed substantially. While Russia overtook base and recent government efforts toattractiveness survey, Russia’s Brazil in terms of its attractiveness profile, it reduce the countrys over-reliance onattractiveness 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 inover the previous year, the largest increase the country as a result of its sustainedof any region. In last year’s survey, Russia Since 2006, Russia’s investor appeal has consumer demand, its agreement to joinranked far behind India, North America, increased nearly fourfold. Its profile for the WTO from mid-2012 and a new roundCEE and Brazil. However, this year, the investors has been improved by its growing of privatizations.“attractiveness gap” between these regions consumer market, expanding industrial Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 13
  16. 16. Russia takes a step forwardEurope’s attractiveness has halved since 2006Europe continues to appeal strongly to Yet the number of investors who rank Europe other rapid-growth economies, means thatinvestors. Western Europe is ranked as as the most attractive destination for an CEE is now competing with North Americathe second-most attractive investment FDI project has fallen by more than half and emerging markets such as India anddestination for global FDI (33%), followed since 2006. In this year’s 2012 European Brazil. It is clear that the global economy hasby CEE (21%). These results, which were attractiveness survey, Western Europe’s a growing number of attractive destinationsachieved 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 andcontinents 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 ofMixed messages between Central and Eastern EuropeInvestor confidence in CEE has declined. which contributed to the credit crunch in banks have foreign parents. Labor costsIn 2006, 52% of respondents ranked the the region — are among CEE’s problems. have risen too, making manufacturing inregion as the most attractive place in the Given the region’s strong trade and financial CEE less attractive. With the increasingworld for investment. In 2012, this figure links with Eurozone economies, it is no appeal of BRIC countries and otheris just 21%. Many factors explain this surprise that the International Monetary rapid-growth economies, CEE now findsdecline. A few years ago, CEE benefited Fund (IMF) expects CEE to be hit the itself competing with North America andfrom Western Europe’s success. It was hardest by adverse knock-on effects of the emerging markets such as Brazil andseen as a low-cost location to serve free- Eurozone crisis. India. Nonetheless, some CEE countriesspending 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 fromhigh dependence on exports to Western prospects low. Banks have cut their net investors who seek relatively favorableEuropean 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 regions14 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  17. 17. ViewpointRussia on the way to liberalization Yaroslav Lissovolik, Member of the Management Board, Chief Economist, Head of Research Department, Deutsche Bank RussiaRussia’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 tocontroversial 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 criticalbecome visible in Russia in recent years. challenges instead of weighing down on for large-scale infrastructure projectsFor example, Russia is the only BRICS the country like the so called “resource such as the Sochi 2014 Winter Olympiccountry that does not have any capital curse,” which is only too often the case Games or the 2018 FIFA World Cup. Suchflow restrictions. This makes the Russian with developing markets. undertakings are simply too large a claimmarket more open to foreign investment. on the Government’s purse to beProgress 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 andOrganization has not received due for the Russian the possible decline in oil prices in theappreciation either. However, it is very economy would next six to eight years. A nice cushion forimportant not only for the liberalization the Russian economy, which remainsof the Russian economy, but also be a stable heavily dependent on oil prices, would bebecause international standards are inflow of long- a stable inflow of long-term foreign capital and FDI.playing an increasingly significant role inthis 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’tconcern 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 FDIFurthermore, we have recently seen comparison with the other BRICS instead” will hardly help Russia in achievingsome major improvements in corporate nations, demographics are one of them. its goals. Russia must improve the localgovernance, 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-termRussia 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 crucialtaken some important steps to modify prerequisite for long-term sustainable In general, although there is still a lottheir 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 perceptionstheir financial reporting. labor, as well as inadequate investment. regarding the changes in Russias 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 otherstable macroeconomic situation; good nations to persuade investors that thequality human capital (in terms of the Foreign capital plays an important, positive changes in Russia are viable andquality of education and human though not decisive, role in the will continue. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 15
  18. 18. Russia takes a step forwardRussia’s world-classnatural resourcesAn abundance of natural resources contributors to the Russian economy. What are Russias world-class features?continues to be Russia’s most globally The country holds the world’s largest Natural resources/oil/gascompetitive 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 populationmarket comes a distant second (19%). (56%) expect Russia to still be an energy 19% sector leader in 2020. Although energy High education levelInvestors 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 potentialTwo-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&DExtractive 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% Cant say 22% Source: Ernst & Young 2012 Russia attractiveness survey. Total respondents: 208.16 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  19. 19. Russia’s attractiveness:strengths and areas for improvementAccording to our 2012 European What are the most attractive features of the Russian economy?attractiveness survey, in the current Domestic marketenvironment, a country or regions domestic 74% 18% 8%market is foremost in the mind of investors Educationwhen they consider an investment location. 65% 25% 10%Stability, labor costs, skills and infrastructure Telecommunications infrastructureare 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 skillssurvey, investors highlight Russia’s domestic 57% 28% 15%market as its key strength. Education, Quality of life, culture, social environment and languagetelecommunications infrastructure, labor 51% 42% 7%costs and skills are also recognized as some Entrepreneurial cultureof Russia’s most attractive features. 49% 35% 16% R&D availability and quality 47% 36% 17%In terms of weaknesses, investors remain Corporate taxationconcerned about Russia’s political, legislative 46% 27% 27%and administrative environment; its transport Transport and logistics infrastructureand logistics infrastructure; and limited 44% 45% 11%incentives for sustainable development. Access to funding and local partnershipsThe 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 developmententrepreneurial environment in Russia. 35% 43% 22% Political, legislative and administrative environmentInvestors already present in Russia have 27% 62% 11%more confidence in its economy. First, theylike Russia more because they understand Attractive Not attractive Cant saythe market better and are aware of theelements that make the country attractive. Source: Ernst & Young 2012 Russia attractiveness survey. Total respondents: 208.Second, investors have already crossedthe preliminary hurdles to enter theRussian market. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 17
  20. 20. Russia takes a step forward 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 greater18 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  21. 21. Russia’s strengths• Market opportunities • Higher education advantage Fifty-six percent of investors are attractedThree-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 thatcontinue to be impressed with Russia’s advantages. The country’s population is there is a need to upgrade the skills of thedomestic market. With a population of relatively well educated, with a near 100% Russian labor force in order to take stepsmore 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 economiclargest in Europe. It also enjoys the highest Russia also produces one of the highest policy objectives earlier this year, PresidentGDP per capita (US$16,700) among all proportions of science and engineering Vladimir Putin promised to create 25 millionBRICS 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-operationpopulation (nearly 40% of its workforce) and Development (OECD) average. • Solid telecommunicationsis now part of the “middle class.” And Expenditure on higher education has more infrastructurethis percentage is growing. According to than tripled since 2005, reaching RUB390b Sixty-four percent of respondents listthe Ministry of Economic Development of (almost US$14.5b) in 2011. However, Russia’s telecommunications infrastructureRussia, the middle class will grow to 37% of overall education spending still remains as an attractive feature. Russia has thethe 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. InThe expansion of Russia’s consumer base respond better to the skill requirements of 2011, Russia also surpassed Germany towas displayed in 2011 when it became the a market economy. become the largest internet user in Europe.largest internet market and the largestmilk market in Europe.2 Therefore, many • Balanced labor costs and skillsinternational and domestic firms are now Investors come to Russia to find the rightinvesting 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 inestimates, the country is poised to become the world. In 2011, the average monthlyEurope’s largest consumer market by 2018. wage in Russia was US$806.40. Although this is higher than in other emerging1. IMF World Economic Outlook, April 2012. markets such as China, India and Mexico, it2. Anna Krachenko, Ben Aris, “Russias baby boom boosts childrens 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. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 19
  22. 22. Russia takes a step forwardRussia’s areas for improvement• Political, legislative and • Infrastructure • Innovation and a culture of administrative environment Respondents have mixed views on the entrepreneurshipSixty-two percent of respondents consider current state of Russian infrastructure. Russia’s performance on most of thethat Russia’s political, legislative and While 45% do not find Russia’s infrastructure innovation performance indicators isadministrative environment needs attractive, 44% consider the transport and mediocre overall and poor when it comesimprovement. Russia’s ranking of 120 out logistics infrastructure to be an advantage. to indices that involve technical achievementof the 183 economies in the World Bank’s According to the OECD, more than 60% of or economic incentives. According to theDoing Business 2012 report3 confirms the federal and regional highways do not meet recent OECD Innovation Review of theoperating and administrative challenges regulatory standards. The World Economic Russian Federation,8 innovation in thefaced by investors in the country. Getting Forum’s (WEF), global competitiveness country suffers because of very low levels ofelectricity, 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. AccordingUncertain property rights, red tape and is only available in urban areas such as to Ernst & Young’s G20 Entrepreneurshipcorruption still pose a huge challenge for Moscow and St. Petersburg. Russia also Barometer report, respondents face ainvestors 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%) ofRussia’s agreement to join the WTO and Russia’s current level of containerization the Russian respondents did not agree thata 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’sRussia’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 accessafter the elections now seem to be easing, fares well in the WEF global competitiveness to funding continues to be one of the mostand 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 mediumis designed to introduce fundamental changes Government spending on road and railway enterprises (SMEs), particularly innovativeto property rights, obligations, contracts, infrastructure is growing. The need to ones. Entrepreneurs also complain aboutsecurity 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 theranked 120 in the World Bank’s Doing highest levels. Infrastructure spending isBusiness 2012 report,4 it was still ahead of expected to increase further in light of theBrazil (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. 1.20 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  23. 23. ViewpointForeign capital enhancing Russia’s competitiveness Alexander Shokhin, President, Russian Union of Industrialists and EntrepreneursWhat should be done to improve the The priority measures to be taken right capital out of the country, foreigninvestment climate in Russia? The now include the following: investors will either stay out of Russia orquestion is far from simple. The acutest • Reducing the state’s involvement in the limit themselves to short-termproblems are the insufficient protection economy and leveling the playing field for investments of a speculative kind. We canof 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 fordifficulties in connecting to the power • Continuing efforts to improve the less than 10% of total investment, whilegrid 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 Servicecustoms 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 investmentsmanagement technologies, implementing only these, will make it could make Russian economic possible to dramatically improve the modernization too slow. Foreignwhich are essential for business climate in Russia. investments provide access to newfurther progress. production and management A question that comes up periodically is technologies, which are essential forHuman resources are an even trickier how impartial our judges are when further progress.issue, as foreign investors believe that considering disputes between domesticRussia has enough of a qualified labor and foreign companies. According to the Here, it is enough to look at the autoforce, while Russian entrepreneurs take Russian Union of Industrialists and industry. Foreign investments changedthe 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 toThe key to improving the business their chances of defending their rights are remain in the market; you also had toenvironment is a balance between high and the results of a survey of Russian think about quality, design andspecific and universal measures. Some and foreign companies are virtually maintenance costs. The next leapspecific measures have either already identical. As regards disputes with control forward should be in the production ofbeen taken or are currently being and oversight bodies (including the tax auto parts, for which the foundationsimplemented (special economic zones, authorities) or regional administrations, have already been laid out. Some newSkolkovo). But this approach cannot be foreign companies are even more producers have appeared in Russia, whoapplied to the challenges involved in optimistic. But we are now speaking make auto parts based on internationaldeveloping the financial market or be exclusively about courts of arbitration. standards, although the number of suchused to simplify the complex procedure companies is still smaller than we wouldof 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 themodernization requires universal national companies that have a key role to Success stories like this emphasize themeasures, and exempting new equipment play. If the latter do not invest in their importance of foreign capital in enhancingfrom assets tax is only the first step. “native” economy and prefer to take their Russia’s ability to be competitive. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 21
  24. 24. Russia’s industrialprogressReality 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.22 Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth
  25. 25. Russia’s industrial progressFDI in Russia in 2011:larger projectsFDI 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% 11,834139 143 -14% +19% -8% +3% 128 8,058 8,362 -32% +4%2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Source: Ernst & Youngs European Investment Monitor 2012. Source: Ernst & Youngs 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-intensivecycle, coupled with concerns arising from mainly due to the comparative advantage of industrial activities. FDI projects in 2011the escalation of the Eurozone debt crisis, Russia over the other CEE countries. generated 4% more jobs than the previousmade companies think carefully about year. The average project created 65 jobsinvestment 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. Ernst & Youngs 2012 Russian attractiveness survey Positioned for growth 23

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