Russia as a Business Environment

Anna Abalkina

Aspects of business environment in Russia

State of business environment in Russia Potential and competitiveness of Russia in comparison with other emerging markets

Economic and political performance in Russia

Last years were favorable for sustained growth in the longer term. Russia achieved its development level registered in 1990. Favorable market situation
resulted export growth allowed to increase International reserves that account for $581,6 bln and allowed to organize Reserve fund (142,6 $bln) and Sovereign Welfare Fund (31,92 $bln).

Russia achieved macroeconomic stability that allowed to have relative protection from financial crisis Political environment has become more stable under Putin presidency Some measures have been taken to reduce taxes, improve business environment Macroeconomic development trends and institutional reforms result good incentives for business expansion

Positive trend in investments inflow

140000 120000 100000 80000 60000 40000 20000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$ mln

Direct investments

Portfolio investments

Other investments

Rosstat

Positive trend in investments inflow

(Central bank estimates)
250 000 200 000 150 000 100 000 50 000 0 2003 -50 000 direct investments portfolio investments other investments 2004 2005 2006 2007

Central Bank

Positive trend in FDI inflow

(UNCTAD estimates)
35000 30000 25000 20000 15000 10000 5000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI stock achieved 200 $bln in 2006

Due to different estimates FDI vary from 22 to 55 $bln in 2007 Portfolio investments started to be noticeable due to IPO High share of other investments (loans) is explained by weak financial intermediation on local market Main investors originate from EU Russian reinvestments from off-shore territories

Sector structure of foreign investments

other; 14,6 mining; 14,4 wholesale and retail trade ; 39,1

manufactury; 26,4

transport and communication; 5,5

Different estimates of business environment

Index (Agency) Doing business 2009 (World Bank) Corruption Perceptions Index 2008 (Transparency International) Global Competitiveness Index 2007-2008 (World Economic Forum) Inward FDI potential index 20042006 (UNCTAD) FDI Confidence Index 2007 (AT Kearny) Global retail development index 2006 (AT Kearny) Bank Financial Strength Ratings by Country Sept 2007 (Moodys) 9 2 72 Top 25 30 92 Russias place 65 147 58 20 Total countries 180 180 131 141 Trend

Market attractiveness
Positive trend and high rating are registered only in those reports which analyze market potential and macroeconomic performance. This results that the main reason to expand in Russia is to have market access to growing demand (automobile production, goods importation, retail networks, retail banking). Investments allow to overcome tariff barriers Access to recourses
Energy sector 2nd main reason Labor resources. Labor cost is less competitive with consideration of grey salary schemes. Brain-drain. Foreign R&D projects are few. Intel example.

Negative estimates
International agencies explain low position by corruption, low institutional development, crime, tax regulation, inefficient government bureaucracy. Corruption
1-2% (up to 6% in medium size enterprises) of expenses Corruption limits the quality of investments and reduces the probability of expansion of high-technological companies which are sensitive to institutional problems. They are replaced by investors in energy sector which are less sensitive. (Libman, Heyfets, 2006).

Democratic institutions. There are autocratic countries that attract investments (China). This results that the main problem is not the lack of democratic institutions that reduce opportunism but the role of the state that guarantees investments and provides law and order.
Key point is the lack of transparency, certain economic policy and selective measures in Russia

Crime. Different attitude of potential and real investors. Russian image abroad is worse than reality.

Competitiveness of Russia in comparison with other emerging markets

Russian business environment loses the competition with other emerging markets European investors tend to invest in CEE and East Asia for production outsourcing Outsourcing projects in Russia are few.
Caterpillar example Polls show that just 2% of businessmen are ready to invest in Russia for outsourcing (PBN 2006)

Potential Investors already operate in other emerging markets

Conclusions
Russia is not the market for 'dilettantes'. Modern strategy to attract investments has its limits Russia needs top down approach towards foreign investments Modernization policy