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Ernst & Young Publishes Results of Russia Attractiveness Survey

October 27, 2011

Ernst & Young has recently published results of its Russia Attractiveness Survey. Below is a summary of the report, and an executive summary with key headlines.  Full report can be downloaded from E&Y (PDF).

Key findings from Ernst & Young’s Russia Attractiveness Survey:

  • Russia was Europe’s fourth-largest Foreign Direct Investment (FDI) destination in 2010.
  • That’s an 18% increase year-on-year
  • The number of FDI projects in Russia is up 130% since 2006
  • 75% of survey respondents said that Russia’s growing domestic market is ‘attractive’
  • Investors are exceptionally optimistic about Russia’s future – more than 70% believe Russia will become more attractive in the next three years.

Increasing Russia’s competitiveness in a complex world

The world economic recovery continues. Even though fears of a double-dip recession have not proven themselves right, the recovery remains unbalanced. The world is no longer dominated by developed countries and the huge potential of emerging markets is recognised by business leaders globally.

Russia, like other BRIC countries (Brazil, India and China) has not had the lasting impact from the global economic crisis. It has a growth model based on high oil prices that has sustained its continued economic expansion. However, future drivers of growth need to be different, since there are new challenges: a demographic decline and increasing external competition.

Russia presents many advantages to foreign investors. It has abundant natural resources and a strong domestic market with a well educated and highly productive work force. However, administrative barriers, lack of transparency in business practices and a recovering financial system often compromise the benefits of investing in Russia.

Russia’s government and business community are committing to modernise institutions and technologies in order to increase Russia’s attractiveness. The discussions at the St Petersburg International Economic Forum 2011 indicate that the government will do more to facilitate Russia’s growth and improve its investment climate.

This report is designed to help both business leaders in their investment decisions and Russia’s government in removing barriers to future growth. Russia has great development potential and is finding new ways to compete and to lead.

Executive summary

The global context: Russia competes among global regions

Rapid growth in emerging economies, including that of Russia, is driving global economic expansion even as developed economies lag. Emerging markets received more than 50% of global foreign direct investment (FDI) in 2010 for the first time as investors targeted large emerging consumer markets. Though China leads, rival global regions have closed the attractiveness gap, with Russia almost doubling its attractiveness score between 2005 and 2011. In 2010 Russia attracted US$37bn of FDI, matching its 2009 inflow.

Russia as it is perceived: Russia’s attractiveness profile

Investors say Russia’s biggest attraction is its growing domestic market, which is ‘very attractive’ for 30% of respondents in Ernst & Young’s survey of 205 international business leaders and ‘attractive’ for 75% overall, an exceptionally high score. Though wealth is unevenly distributed, the opportunity to manufacture consumer goods and sell them to Russia’s emerging middle class appeals to foreign and domestic investors. Affordable labour, improving logistics and opportunities for productivity gains in Russian operations add to the country’s attractiveness.

Investors’ concerns relate to the perception of an uncertain investment climate. For 29% of investors, the lack of ‘transparency of the political, legislative and administrative environment’ creates unease. The Russian business environment is a concern for 64% of investors overall, making this Russia’s least attractive feature. Investors also highlight concerns about long-term predictability. Investors see Russia’s chief rivals for FDI as Asian countries, especially  China, and European countries.

Russia as it really is: Europe’s number four FDI destination

According to Ernst & Young’s European Investment Monitor, 2011, Russia was Europe’s fourth-largest FDI destination in 2010, attracting over 200 projects, up 18% on 2009. Russia accounts for 5% of all FDI in Europe. The number of projects has grown in each of the past five years, and is up 130% since 2006.

Investors already present in Russia are keen to invest more. Among companies established in Russia, executives of 66% are considering increasing their operations.

Reforms and expectations: Roadmap for Russia’s future attractiveness

Investors are exceptionally optimistic about Russia’s future attractiveness, with a remarkable 70% believing Russia will become more attractive for their company in the next three years.

Government moves to leverage natural resources and the attractions of a large domestic market and a well-educated population are welcome. So are steps to increase competition and limit instability and corruption, which investors note among their concerns when considering investing in Russia. If investor concerns are effectively addressed, Russia can expect to attract a growing number of FDI projects.

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