Positive Outlook for Russian Inward Investment As It Joins WTO
Despite the global economic uncertainty investors remain positive about the long-term attractiveness of Russia as an investment destination according to Ernst & Young’s second Russia Attractiveness Survey.
The report combines an analysis of international investment into Russia over the last year with a survey of more than 200 global executives on their views about how and where global investment will take place in the next 10 years. Russia’s natural resources, growing domestic consumer market, strong labor force and recent accession to the World Trade Organization (WTO) make it an investment destination of choice over the next decade.
Although concerns remain around bureaucracy and infrastructure, a large majority of investors believe that Russia has made a step forward in closing the gap with other rapid-growth markets. The country’s attractiveness has grown by eight percentage points over 2011, the largest increase of any region.
According to Ernst & Young’s European Investment Monitor project numbers have increased by over 50% in the last decade with 83 foreign direct investment (FDI) projects recorded in 2002 increasing to 128 in 2012. Russia also remains in the top 10 investment destinations in Europe coming in seventh place and is the premier destination for investment in Central and Eastern Europe.
Investors already present in Russia continue to demonstrate their confidence in the Russian market. Nearly 80% of these investors plan to increase or maintain their operations in the country. However, 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 companies that are not established in Russia have no plans to invest in the country in the next year. This is, however, 16 percentage points lower than 2011, signalling an improvement in potential investors’ perceptions of the Russian economy as an investment destination.
Alexander Ivlev, Managing Partner of Ernst & Young in Russia comments, “Russia has proved to be resilient, experiencing growth in 2011 and 2012. A boost in consumption, a strong labor market and an increase in investments have been prime drivers of this growth. However, Russia is facing the challenges of increasing global competition, in which investment and technology play crucial roles in diversification and creating sustainable growth.”
The US 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 343 FDI projects in Russia from 2007 to 2011, 44% of the total. Germany emerged as the second-largest investor globally and the largest from Europe with 99 FDI projects followed in third place by the UK with 46 projects. Other leading investing countries from Europe include France and Finland, with 45 and 43 projects, respectively.
Following Russia’s recent accession to the WTO, the Russian economy should push toward attracting a larger share of investment from its leading source regions such as the US and Europe.
FDI into Russia from emerging countries remained low between 2007 and 2011. India and China each accounted for less than 2% of FDI projects in Russia. Brazil originated just two projects in the country in the same period. These countries remained minor contributors on the employment generation front too.
However, Russia has recently started negotiations with China to develop a mutually beneficial investment climate.
Manufacturing at heart of Russia’s attractiveness
Manufacturing activity remains at the heart of Russia’s attractiveness, accounting for 51% of investment projects and 92% of job creation between 2007 and 2011. The industrial sector was another high performer, with automotive attracting 90 projects and machinery and equipment recording 62 projects. The food sector brought in the second-largest number of projects (86) and business services also witnessed a marked growth in FDI.
FDI activity in Russia’s business services sector has been growing in recent years. It accounted for 9% of the total FDI projects in 2011, higher than its 5% share in 2010 and above its average of 6% between 2007 and 2011. When financial services and the software industry are included in the business services category, this figure increases to 14% of the projects between 2007 and 2011, compared with the automotive industry’s 12%.
Nearly 39% of investors expect mining, oil and gas sector to attract most FDI in the next two years. Information and communication technologies (ICT) was named second-most often by investors (20%), followed by energy and utilities, agriculture, consumer goods and automotive. The country’s focus on oil and gas creates a large mismatch between the attention that other strategic industries in Russia received from investors and their real potential.
Russia’s domestic market is its key strength
In this year’s survey investors highlight Russia’s domestic market (74%) as its key strength. As a result of rising wealth levels over the past decade, 25% of Russia’s population is now part of the “middle class”.
And this percentage is growing. Education (65%), telecommunications infrastructure (64%), labor costs (61%) and skills (57%) are also recognised as some of Russia’s most attractive features.
Although a majority (57%) of investors remain optimistic about Russia’s attractiveness in the medium term the level of confidence has waned slightly since last year. Investors remain concerned about Russia’s political, legislative and administrative environment (62%); its transport and logistics infrastructure (44%); and limited incentives for sustainable development.
Alexander comments, “However, investors already present in Russia have more confidence in its economy. Firstly, they like Russia more because they understand the market better and are aware of the elements that make the country attractive. Secondly, investors have already crossed the preliminary hurdles to enter the Russian market.”
Despite the wave of negativity around the Eurozone crisis, investors continue to display confidence in the Russian market and optimism about the future. Russia’s numbers are very positive compared with Europe as a whole. In Ernst & Young’s 2012 European Attractiveness Survey 38% of respondents said they believe the continent’s attractiveness will improve, while a similar percentage believe that it will remain the same.
Jay Nibbe, Area Managing Partner EMEIA – Markets at Ernst & Young comments, “While the Russian economy will be affected by the crisis in Europe, the effect will be modest compared with other European economies. However, Russia’s recent accession to the WTO as well as the upcoming 2012 Asia-Pac Economic Cooperation (APEC) summit, the 2014 Winter Olympic Games and the 2018 FIFA World Cup should position the country as even more attractive for foreign investment.”