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Ernst & Young's 2011 Russia attractiveness survey

Enhancing opportunities

Ernst & Young's 2011 Russia attractiveness

survey is based on an original two step

methodology that reflects, first, Russia's real

attractiveness for foreign direct investors,

based on Ernst & Young's European

Investment Monitor (EIM) and second,

the “perceived” attractiveness of Russia for

a representative panel of 205 international

decision makers who we would like to thank

for taking time to share their thoughts

with us.

We would like to extend our gratitude to

the selected panel of global observers from

the business, political and institutional

communities who expressed their views

on the future of Russia: Maurice Dijols

(President, Schlumberger Russia),

Sergei Guriev (Professor of Economics

and Rector of the New Economic School,

Moscow), Igor Ignatiev (Deputy Country

Chair, Shell Russia), Anatoly Karachinsky

(President of IBS Group), Alexander Lioutyi

(Corporate Affairs Director, BAT Russia),

Lou Naumovski (Vice President and General

Director, Moscow Representative Office,

Kinross Gold Corporation), Natalia

Schneider (Deputy Head of Telenor Russia,

Director of Corporate Affairs), Andrei

Sharonov (Deputy Mayor of Moscow),

Igor Titov (Deputy General Director, Director

for Government Relations and Corporate

Affairs at Renault Russia), Ruben Vardanian

(Chairman, Troika Dialog), Yevgeny Yasin

(Founder, Higher School of Economics).

The success of this unique survey is directly

attributable to their participation and

commitment.

For more information:

www.ey.com/attractiveness

1Enhancing opportunities Ernst & Young's 2011 Russia attractiveness survey

Ernst & Young's 2011 Russia attractiveness survey

Editorial 2

Executive summary 4

Part. 1 - Global context 6

Understanding the economic context: Russia competes among global regions 8

Part. 2 - Russia as it is perceived 12

Russia’s attractiveness profile 14Competition: Russia, the only rapid-growth challenger in Europe 18

Part. 3 - Russia as it really is 20

Russia is the number four FDI destination in Europe 22Russia’s industrial sectors attract the most investment 24Russia’s European client base 26Russia’s top regions for FDI 28Investment plans 31

Part. 4 - Reforms and expectations 32

Drawing the roadmap for Russia’s future attractiveness 34Strong expectations for more 36Opportunities and challenges 40

Methodology 44

Ernst & Young in Russia 46

2 Enhancing opportunities Ernst & Young's 2011 Russia attractiveness survey

Editorial


Increasing Russia’s competitiveness

in a complex world

The world economic recovery continues. There are

concerns about a double-dip recession and the

recovery remains unbalanced. The world is no

longer dominated by developed countries and the

potential of emerging markets is recognized 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 workforce. 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 modernize 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.

Alexander IvlevCountry Managing Partner, Russia, Ernst & Young LLC


Executive summary


The global context: Russia competes among global regions

Rapid growth in emerging economies, including that of

Russia, is driving global economic expansion 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$37b 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 labor, improving

logistics and opportunities for productivity gains in Russian

operations add to the country’s attractiveness.

Investors' concern relates 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.

Russia’s fast-growing industrial sector attracted 54% of

the country’s FDI projects in 2009-10. The leading sectors

for FDI were automotive and food, each accounting for 11%

of projects. The USA and Eurozone countries are the chief

sources of FDI into Russia.

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.


Part. 1 Global context


Summary

1 Rapid growth in emerging markets and increasingly diverse flows of investment have created a world in which opportunities, capabilities and competition are spread more evenly.

2 In the future, no region will have a monopoly on attractiveness.

3 Though China leads, rivals are closing the gap.

4 The outlook for Russia’s investment attractiveness is positive.


+2.8%

+7.5%

USA

Brazil

+1.5%France

+1.3%UK

+3.5%

+10.4%

Germany

+4.0%Russia

+10.3%China

India+3.9%

Japan

Understanding the economic context: Russia competes among global regions

Defining an interconnected worldRapid growth in emerging markets and the increasingly multi- directional flows of trade and investment have created a world in which opportunities, capabilities and competition are spread more evenly.

In January 2010, Ernst & Young launched a report at the World Economic Forum in Davos which examined the impacts of globalization on the world economy.1 The report showed that the globalization of the world’s 60 largest economies will continue to deepen between 2010 and 2014. This interconnected world — with many but divergent spheres of influence — is the global context within which we evaluate Russian attractiveness.

In the wake of the economic crisis, many developed economies are still growing only slowly. Rapid growth in key developing markets has driven global recovery. In 2010, GDP in India grew by 10.4%, China by 10.3%, Brazil by 7.5% and Russia by 4.0%. Growth in the European Union, by contrast, averaged only 1.8% in 2010, though the pace varied between countries.2 Emerging markets are seen as an increasingly important source of growth. They offer surging numbers of accessible consumers, and often attractive investment opportunities.

Looking forward, some markets will continue to outperform dramatically. By 2015, China and India will have grown by 83% and 74% respectively while the Eurozone is forecast to have grown by only 7% .3

1. Winning in a polycentric world: globalization and the changing world of business, Ernst & Young, 2011.

2. IMF World Economic Outlook (WEO), April 2011.3. Competing for growth: winning in the new economy, Ernst & Young, 2010.

What are the most attractive places in which to establish operations?

63%

35%

55%

29%

45%

23%

18%

52%

38%

6%

16%

7%

11%

2005 2006 2008 20102007 2009 2011

Western Europe

Central & Eastern Europe

USA & Canada

India

China

Brazil

Russia

Respondents gave 3 responses (this graph shows responses since 2005).Total respondents: 812.Source: Ernst & Young's 2011 European attractiveness survey.

Regional gaps are being reducedIn the future, no region will have a monopoly on attractiveness.

In 2005, the most attractive region scored 63% in Ernst & Young’s European attractiveness survey, and the least attractive 6%. In 2011 the spread was between 38% and 11%, reflecting a more polycentric world in which emerging markets have become more attractive FDI destinations.

Global FDI flows rose by just 0.7% in 2010, but this figure hides significant differences in performance. Rapid growth economies received more than 50% of world FDI for the first time. The developed economies suffered a decline in FDI of -7% (despite US FDI inflows surging 43%).


+2.8%

+7.5%

USA

Brazil

+1.5%France

+1.3%UK

+3.5%

+10.4%

Germany

+4.0%Russia

+10.3%China

India+3.9%

Japan

China leads global rankingsThough China leads, rivals are closing the gap.

The convergence of attractiveness for FDI between the main global destinations was highlighted by Ernst & Young’s European attractiveness survey 2011. China led with 38% of votes, slightly down from 39% in 2010. No longer just a low-cost production site, China has the attributes to be a leading FDI destination. After an extended period of rapid growth, it has overtaken Japan to become the world’s second-largest economy. Investors still saw Western Europe as the second-most attractive region though its share of votes continued to decline. Central and Eastern Europe ranked in third place.

Russia consolidates and growsThe outlook for Russia’s investment attractiveness is positive.

According to the European attractiveness survey, Russia’s attractiveness has almost doubled since 2005. In the meantime, Western Europe, formerly the leading region, has lost 28 percentage points in its attractiveness.

In Russia, although investors remain cautious against a variable global economic background, investment projects have begun to flow again. Russia’s economic fundamentals stabilized in 2010, and the economy grew by 4%.4 The value of FDI into Russia in 2010 was steady at US$37b, a positive sign when compared to the decline of 2009.5

Russia remains a fairly complex option for inward investors, especially small and medium enterprises. However, it is beginning to correct a past over-reliance on oil and gas exports and improve its attractiveness. At the same time, government policies have improved Russia’s risk profile.

4. IMF World Economic Outlook (WEO), April 2011.5. Doing Business in Russia, Ernst & Young, February 2011.

GDP growth by country in 2010

Source: IMF World Economic Outlook, April 2011.


Maurice DijolsPresident, Schlumberger Russia

The path is getting easier for foreign investors in Russia

“There have been clear improvements

in the environment for foreign investors

in the Russian economy over the past

decade.

Let me give you some examples.

Migration rules and laws on investment

in strategic entities have become much

more advanced than before. I would

say the approach of several bodies

and ministries, especially the Federal

Antimonopoly Service, which oversees

competition laws, and of the Ministry

of Economic Development of the

Russian Federation, is now much more

sophisticated.

Our company has firsthand experience

with this. Thanks to a helpful attitude

and the support of the Russian

Government, a governmental decree

was changed so as to solve a serious

issue faced by Schlumberger in our core

business in Russia, that of geological

assessment using the technique of

wireline well-logging.

However, there are still quite a few

administrative barriers and other

obstacles which can complicate life for

an investor. So in terms of enhancing

investment attractiveness, there are

a lot of things to do for today and for

the future. Yet I do believe that very

soon the path of an investor in the

Russian economy will be both easier

and brighter.

Compared with other BRIC countries,

Russia has two notable positives for

investors in the oil and gas sector.

One is the strength of its universities,

which provide a flow of potential hires

with a high level of education. That is

important for Schlumberger, which

recruits up to 1,000 employees each

year. The other is the good quality of

research and development (R&D).

Schlumberger collaborates with more

than 50 institutes and universities in

its R&D programs.

There are challenges too, of course.

I would highlight the high cost of capital

projects, occasional supply shortages,

logistical difficulties arising from the size

of the territory and some administrative

barriers.

Should more help be given to encourage

development of high tech industry in

Russia? Various options are possible,

including a special regime for the

workforce, preferential customs treatment,

tax breaks, or easier licensing and other

administrative support for companies

that bring cutting-edge technology

to the Russian economy.

Such initiatives would ease the way

for high tech investors in Russia, but

I believe the path for foreign investors,

generally, is already becoming smoother.”Vie

wpo

int



Part. 2 Russia as it is perceived


Summary

1 The opportunity for investors is to make consumer goods and sell them to Russia’s emerging middle class.

2 Affordable labor and improving logistics are a strong benefit for investors.

3 Investors see possibilities for productivity gains in Russian operations.

4 Transparency of the political, legal and administrative environment remains a concern.

5 State-owned enterprises, from foreign investors' point of view, limit opportunities for new ideas and businesses.

6 Investors see a mixture of Asian and European investment appeal.

7 The pace of future growth may depend on commodity prices and reform.


Russia’s attractiveness profile

Attractive for its promising marketThe draw for investors is the opportunity to make consumer goods and to sell them to Russia’s emerging middle class.

With growth limited in big developed countries, investors see the best opportunities in rapid-growth economies. Many companies want to reach the emerging middle class in these economies and sell them consumer goods.

Russia’s domestic market is the country’s most attractive feature for investors surveyed. Growth opportunities, especially in serving consumers, are “very attractive” for 30% of investors and appeal to 75% overall, an unusually high proportion.

During the Soviet era and well into the 1990s, Russian consumers had limited disposable income and a restricted choice of goods on

which to spend their money. Today, though wealth is unevenly distributed, the Russian middle class has more disposable income and greater access to consumer products than ever before.

Foreign investors see a unique opportunity to establish brand loyalty and capture market share across a diverse population. Many want to introduce new consumer products into the Russian market and establish operations in a country where the population has spending power and is open to trying new and different goods.6

6. “Investing in Russia, Pepsi’s Russian Challenge: An American icon becomes Russia’s biggest food firm”, The Economist, 9 December 2010.

What are the most attractive features of the Russian economy?

75%

69%

69%

68%

67%

67%

55%

54%

52%

51%

51%

Russia's domestic market

Telecommunication infrastructure

Labor costs

Local labor skills level

Possibility of increasing my company's productivity in Russia

Russia's culture and language

Russia's performance in sustainable development

Labor law flexibility regarding hiring, termination and duration of work

Quality of life

Access to Russian investors

Transport and logistics infrastructure

Respondents ranked each in terms of attractiveness.Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.


Cost competitive laborAffordable labor and improving logistics are a strong draw for investors.

Investors say Russian workers are affordable. Overall, 69% find that Russia has attractive labor costs. Although not a low-cost destination in global terms, Russia offers an attractive alternative to wage rates in many European countries. The average Russian wage was US$593 per month or US$7,1167 per year, in line with gross national income (GNI) per capita of US$7,530. When compared to labor costs8 in Central and Eastern European countries, including the Czech Republic (US$14,580),

7. World Bank 20118. Approximated by GNI per capita

Poland (US$9,850), or Turkey (US$8,030),9 Russia is very competitive.

This cost-competitive labor pool is close to major markets in Europe and the Middle East. Manufacturing goods in Russia and shipping them to nearby markets makes sense: 51% of investors find Russia’s transportation and logistics infrastructure “fairly attractive” for work.

9. Regional Fact Sheet from the World Development Indicators 2009, Europe and Asia, WDI Data Base, 2009

Improving productivity to increase market shareInvestors see big possibilities for productivity gains in Russian operations.

The potential for productivity gains is also a big appeal of locating in Russia. The possibility of improving corporate productivity in Russia is highlighted by 67% of investors surveyed, with 27% seeing a “very” good opportunity. Investors also understand that opportunities are greatest in sectors with the least government intervention,10 where private companies can use efficiency to gain a competitive edge over rivals.

Investors clearly see opportunities to bring more advanced manufacturing techniques to Russia and use these advances to win market share. Although Russia has experienced solid productivity

10. The Russian Competitiveness Report 2011: Laying the foundation for sustainable prosperity, World Economic Forum, 2011.

growth over the last decade,11 the productivity gap between Russia and OECD countries remains large. Rapid growth and investment are essential to raise productivity in the Russian economy.12

The Russian government is beginning to create incentives that attract high-end manufacturing. It is improving the business environment and creating favorable conditions for the development of a high technology industry. Such manufacturing would allow Russia to develop leading-edge industrial production, while enhancing its internal market and service sector.




“Foreign investors believe that Russia

has promise because living standards

and the market continue to grow.

Our experience shows that the investment

climate in Russia is stable and attractive

for investors, at least in Moscow, where

we have our company, despite the

somewhat high labor costs, which are

not a critical issue.

Our company has been successfully

working in Moscow for a long time.

Moscow is a large city and its advantages

include a highly qualified workforce,

access to data, support given by the local

authorities and residency convenience

for foreign specialists. The Moscow

government has actively supported

our investment project: it assumed

responsibility for all the work in preparing

the construction site, made infrastructure

available and provided free connection

to the power lines. It has cleared,

at its own expense, the site of the former

Moskvich car plant that utilized hazardous

waste. We were provided with suitable

startup conditions and the necessary

project support by the city’s specialists.

The Mayor of Moscow, Sergey Sobyanin,

has visited our plant and promised

to provide all-out support in resolving

the pressing issues of our enterprise.

The Ministry of Industry and Trade of

the Russian Federation also provides

assistance to foreign companies.

There is a federal system of measures

to stimulate foreign producers. In other

words, there is essentially “one stop

shopping” for investors in Moscow.

This is very convenient.

Our plant is a joint venture between

the Moscow government and Renault

Russia. We enjoy various subsidies and

tax benefits provided by the Moscow

government, which supports young

professionals who work at production

sites with higher education and

vocational training. We receive subsidies

that are used to pay bonuses to such

professionals. This important contribution

is highly appreciated by our employees.

Fifty-five percent of our workforce

is under the age of 30.

Certainly, we know that corruption is

a top concern in Russia. However,

I would like to emphasize that we have

never had to deal with corruption cases

in Moscow, probably because our

enterprise is large. We are satisfied

with our cooperation with Moscow and

recommend foreign investors to locate

their production sites, especially if they

use high tech, in the city. Moscow has

industrial areas and industrial parks,

which are ready to be used.

One area that, in my opinion, lacks state

support is investments in high tech

development. The Russian government

offers various orders and subsidies only

to Russian manufacturers, institutes

and design offices. However, it would be

reasonable to provide such support

to foreign investors in research and

development with a view to attracting

them. This is evident from our experience

involving Turkey. Such research could

be carried out jointly. Moreover,

the mechanism for acquiring intellectual

property according to the results

of work with the Russian party could

be considered.

Finally, I believe that other investors

will be interested to know that

the Moscow government has created

a technology park near our plant with

sites ready for foreign investors.

Moscow offers comfortable living

conditions for foreign employees as

well as streamlined administrative

procedures. We recommend that foreign

companies take a closer look at such

investment opportunities in Moscow.”

Igor TitovDeputy General Director,

Director for Government Relations and Corporate Affairs, Renault Russia

The Moscow Government actively supports investment projects

Vie

wpo

int


A complex operating environmentTransparency of the political, legal and administrative environment remains a concern.

Investors see Russia’s investment climate as enticing, but risky. They fret about three key areas: transparency, political stability and interaction with public authorities.

Twenty–nine percent of investors say the “transparency of the political, legislative and administrative environment” is not attractive. This ranking highlights a fear among investors about protecting their investment in Russia.

Russia’s legal system is uncertain for investors. Various Russian government bodies are implementing new regulations and decrees on diverse topics, including the tax code and regulatory requirements. Contract negotiations and due diligence on investments remain complex and lengthy, and do not always provide clear answers. Investors increasingly realize they must take extra care that their

contracts comply with Russian law and protect investors from possible complications.13

Twenty–one percent of investors perceive the “stability of the political, legislative and administrative environment” as unattractive. They worry that changes in legislation, the administration, or government policy may harm their investment projects or that they may lose control of their investment.

Perceptions of the investment climate in Russia have been impacted by the slow pace of structural reforms to enhance the role of the private sector, and by government efforts to reassert influence on some sectors of the economy.

13. 2010 Investment Climate Statement – Russia, Bureau of Economic, Energy and Business Affairs, US Department of State, March 2010.

Seeking innovation and entrepreneurship

Among foreign investors, there is the perception that state-owned enterprises limit opportunities for new ideas and businesses.

Entrepreneurship and R&D capabilities get mixed reviews. Almost half of investors (47%) do not perceive Russia as having an environment attractive for entrepreneurs and 44% do not find its R&D capabilities attractive. This view is exemplified by a perceived lack of dynamism in Russia’s economy, attributed to the large role of state–owned enterprises (SOEs).

Despite large-scale privatization, SOEs still play a part in the economy. They compete with private companies, but in practice they operate at an advantage. Although SOEs are commercial organizations, they receive preferential “case-by-case” legal treatment (there

is no unified legal frame work) and can lobby the government directly for preferential treatment.14

Investors, when comparing Russia objectively with alternative investment destinations, frequently believe they should expect different treatment from SOEs. A company entering a market dominated by state-sponsored groups may struggle to gain market share, even if it offers innovative products or services. Therefore, many investors only come to Russia if an opportunity outweighs the risk of a hostile reception from some competing state-owned enterprises.

14. 2010 Investment Climate Statement – Russia, Bureau of Economic, Energy and Business Affairs, US Department of State, March 2010.

What are the least attractive features of the Russian economy?

64%

56%

56%

47%

44%

35%

Transparency of the political, legislative and administrative environment

Stability of the political, legislative and administrative environment

Aid, subsidies and support measures from public authorities

Entrepreneurial culture, entrepreneurship

Research and development availability and quality

Corporate taxation

Respondents ranked each criteria in terms of attractiveness.Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.


Competition: Russia, the only rapid-growth challenger in Europe

Russia challenges emerging leaders by showing the same patterns of growthInvestors see an interesting combination of Asian and European investment perspectives.

Russia competes with Central and Eastern European countries for export-oriented, high value-added manufacturing projects. Yet Russia also resembles Asian countries, with a fast-growing economy, a need to upgrade infrastructure and a large and blossoming consumer market.

Investors see Russia increasingly in competition with Asian countries: 64% of investors identified an Asian country as its main competitor, while only 15% said Russia’s main competitor was in Europe. Forty–six percent of investors chose China as Russia’s main competitor, and 14% suggested India as its main investment rival.

Russia’s closest EU competitor is GermanyRussia’s attractiveness lies at the crossroads of East and West.

Although a majority of investors perceive Russia’s main competitors to be emerging market Asian countries, Russia shares many important characteristics with European economies. Investors recognize this and say Germany (5%) and the US (4%) are its next closest competitors.

Russia is not a cheap labor destination such as China or India. Average Russian salaries are high compared to those of fast-growth Asian economies, though lower than those in Western Europe. Russian labor productivity is also higher than that of China or India. But per dollar of wage, a Russian worker produces half the output of a Chinese or an Indian worker. To attract more FDI, Russia needs to adopt a strategy similar to that of many Central and Eastern European countries. It must focus on improving its business environment, increasing efficiency and aligning productivity with international wage-productivity ratios.15


What countries are Russia's major competitors in terms of attractiveness?

46%

14%

5%

4%

4%

3%

2%

2%

1%

1%

1%

1%

1%

1%

1%

1%

1%

11%

China

India

Germany

USA

Brazil

Ukraine

Poland

Kazakhstan

South Korea

The UK

France

Estonia

Iran

Azerbaĳan

Netherlands

Finland

Other

Can't say

Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.


Commodities complicate growthThe pace of future growth may depend on commodity prices and reform.

Russia had demonstrated rapid growth before the recent crisis, "but economic instability over the past decade, the result of a dependence on commodities, poor governance and weak pro-cyclical economic policies, does not parallel with the Chinese or the Indian economies."16

Russia’s apparent similarities to China and India are overestimated. Like China and India, Russia is a rapid-growth emerging market economy with a large internal market. But Russia also has the

16. Russian Federation – Concluding Statement for the 2011 Article IV Consultation Mission, International Monetary Fund, 14 June 2011.

legacy of a developed economy, enormous natural resources and a comparatively well-educated workforce. Growth in Russia is tied today to commodity prices and output volumes rather than the price of labor, making consistent fast growth more difficult to attain.


Summary

1 In 2010 Russia was the fourth-largest recipient of FDI in Europe with over 200 projects, an increase of 18% on 2009.

2 FDI projects into Russia have more than doubled over the last five years.

3 Russia’s fast-growing industrial sector is drawing FDI from the USA and Eurozone.

4 Moscow ranks seventh among European cities for FDI and is climbing the rankings.

5 51% of projects go to the regions.

6 FDI investors already in Russia are keen to invest more, but others have yet to be convinced.

Part. 3 Russia as it really is



Russia is the number four FDI destination in Europe

Russia ranks fourth in the European league tableIn 2010, Russia was the fourth-largest recipient of FDI in Europe with over 200 projects, an increase of 18% on 2009.

Russia has achieved clear success as an FDI destination, with a rate of growth in project numbers during 2010 outpacing the European average of 14%. Yet, its share of total European projects was little changed at 5% in a recovering European FDI market. The UK and France remained Europe’s FDI leaders, but they lost market share to more cost-competitive countries, notably Germany, Poland and Russia.

The US, Germany and the UK were the leading source countries for FDI projects in Europe; China and India provided 6% of all FDI projects in the region. European inward FDI was focused on three sectors: automotive, business services and software, and innovation activities (R&D).

FDI in Europe by country

Rank Country FDI projects 2010

Change 2009-10

Share of total

Jobs created*

1 United Kingdom 728 7% 19% 21,209

2 France 562 6% 15% 14,922

3 Germany 560 34% 15% 12,044

4 Russia 201 18% 5% 8,058

5 Spain 169 -2% 4% 7,723

6 Belgium 159 9% 4% 4,010

7 Poland 143 40% 4% 12,366

8 Netherlands 115 6% 3% 958

9 Ireland 114 36% 3% 5,785

10 Italy 103 3% 3% 627

11 Switzerland 90 30% 2% 673

12 Hungary 88 38% 2% 8,572

13 Sweden 77 33% 2% 1,125

14 Czech Republic 71 16% 2% 4,815

15 Turkey 64 10% 2% 3,830

16 Romania 62 -17% 2% 4,789

17 Slovakia 58 76% 2% 6,251

18 Serbia 55 162% 1% 8,519

19 Austria 33 -20% 1% 741

20 Lithuania 31 210% 1% 1,635

Total 3,757 14% 100% 137,337

Source: Ernst & Young's European Investment Monitor, 2011.*Job creation for projects for which the information is available.


FDI projects into Russia grow steadily FDI projects into Russia have more than doubled over five years, growing through the crisis.

Although the value of FDI into Russia fluctuated significantly, especially during the global economic crisis of 2008-09, Russia has attracted more projects every year since 2006. The number of projects in Russia multiplied by 2.3 from 2006 to 2010. During this period, Europe experienced highly volatile FDI levels, ranging from -11% to +14%. FDI growth into Russia slowed, but was always positive.

Since 2004, Russia has pursued macroeconomic stability and sound fiscal policy. It has managed external debt well and accumulated foreign reserves. Government investments in infrastructure have also encouraged inward investment. Finally, higher prices for oil and other natural resources have attracted new investors. The combination of high natural resource prices and policies that promote stability has underpinned an increase in the number of investments projects.17

17. Russian Trade and Foreign Direct Investment Policy at the Crossroads, The World Bank Development Research Group Trade and Integration Team, David Tarr and Natalya Volchkova, March 2010.

FDI growth in Russia by investment project

Source: Ernst & Young's European Investment Monitor 2011.

+50%

+3%+19%

+18%

2006 2007 2008 2009 2010

87

139 143

170

201

Russia has a huge strategic advantage

Regarding Russia's pluses and minuses

from the standpoint of attracting foreign

investment:

“Russian economic performance is strong

and seems sustained. The economic

outlook is favorable based on the

assumption that there will not be a sharp

fall in the oil price. Current investors in

Russia are predominantly positive about

their returns on investment and most

of them are increasing their operations.

But there are still concerns about lack

of reform in legislation, uncertain

property rights, red tape and, of course,

corruption.

Russia is too focused on itself. Despite

its ambitions, the country sometimes

thinks locally when there is a need for

a global outlook.

The demand for well-qualified professionals

is overwhelming in Russia — not just in

business but in the government as well.

Russia has a huge strategic advantage.

Its geographical position is unmatched.

The most important markets in terms

of energy production and consumption

meet there.”

Igor IgnatievDeputy Country Chair, Shell Russia

Vie

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FDI in Russia by sector from 2006-2010

Rank Sector FDI projects 2006-10

Share of total 2006-10

Jobs created* 2006-10

1 Automotive 84 11% 17,690

2 Food 80 11% 9,766

3 Non-metallic mineral products 61 8% 3,785

4 Chemicals 57 8% 3,169

5 Machinery & Equipment 50 7% 1,959

6 Transport Services 45 6% 294

7 Financial Intermediation 43 6% 268

8 Business Services 39 5% 278

9 Plastic & Rubber 29 4% 1,914

10 Software 25 3% 1,284

Other 227 31% 15,379

Total 740 100% 55,786


Russia’s industrial sectors attract the most investment

Growth rates in manufacturing exceed growth rates in natural resourcesThough Russia is a major global energy exporter, its growing industrial sector is drawing FDI investors.

Two thirds of Russia’s export receipts come from oil and gas,18 and extractive industries remain key contributors to the Russian economy. But natural resources are becoming less dominant. In 2010, manufacturing provided 60% of aggregate GDP growth in Russia. Russian manufacturing grew by 13.4% in 2010, almost 2.8 times faster than extractive industries (natural resources), which grew by 4.8%.19 Although energy has dominated the Russian economy since the fall of the Soviet Union, industrial production has begun to increase, providing a more stable and skills-intensive basis for economic growth.

Foreign investors are attracted by Russia’s industrial potential and have supported its growth. In 2009-10 manufacturing projects accounted for 54% of Russian FDI.20 Strong growth of foreign investment in the automotive sector was encouraged by government policies to promote vehicle production. Significant investment also flowed into manufacturing of mineral products, food, chemicals, logistics and equipment.

18. Doing Business in Russia, Ernst & Young, February 2011.19. Russian Economic Report, The World Bank in Russia, March 2011.20. Ernst & Young European Investment Monitor 2011, Ernst & Young, 2011.

Data from the third quarter of 2010 confirms that domestic demand is growing in importance, especially in the industrial economy. Manufacturing is being reinforced by gradually rising investment and inventory restocking.21

Over the past five years, FDI projects in Russia were focused on the automotive sector, where 84 FDI projects created 17,690 jobs. Food production came in second, with 80 projects generating 9,766 jobs. Non-metallic mineral products ranked third, with 61 projects hiring 3,785 people.

Although by value, the largest share of FDI in Russia targets natural resource extraction, Russia’s manufacturing potential clearly appeals to investors. The state policy to promote vehicle production has paid off. But Russia lags behind European averages in the race to develop a knowledge-based economy. Investment in business services and software averaged 25% of the total for 44 countries in Europe, but only 8% of investment in Russia.

21. Growth with moderation and uncertainty, Russian Economic Report 23, The World Bank Group, November 2010.




Supplying Russia’s consumers

Over the past five years, 52% of FDI in Russia has gone into

manufacturing, reaching 54% in 2010. Sales and marketing

accounted for 32% of projects. The emphasis on manufacturing

and sales and marketing clearly suggests investors are targeting

Russia’s emerging consumers. In both production and sale of

consumer goods, Russia is attracting the type of investment

that will allow it to achieve well-rounded and steady growth.

But Russia’s success in attracting investment aimed at

consumer markets does not carry over into services or R&D.

Only 3% of Russian inward FDI projects are in R&D, and 1% in

business support services, whereas for the 44 countries in

Europe, the average for R&D is 8% and for business support

services, 3%.

FDI in Russia by activity from 2006-2010

Rank Activity FDI projects 2006-10



1 Manufacturing 386 52% 51,001

2 Sales & Marketing 234 32% 1,409

3 Logistics 48 6% 537

4 Research & Development 23 3% 277

5 Testing & Servicing 17 2% 87

6 Business Support Services 6 1% 10

7 Education & Training 8 1% 165

8 IDC 3 0% 1,000

9 Headquarters 15 2% 1,300

Total 740 100% 55,786


FDI by origin country in Russia from 2006-2010

Russia’s European client base

The difference between value and projectsTo understand Russia’s investment profile, it is important to distinguish the value of investment flows from the number of projects. Measuring FDI flows into Russia by value and country of origin gives a distorted picture of Russian investment. Much direct investment in Russia (measured in dollars) originates in Cyprus and the Netherlands. Transactions from Cyprus often originate from Russian nationals who have capital in Cyprus and seek to reinvest in their home economy. The disproportionate number of transactions

from the Netherlands arises from its expertise in managing cross-border oil and gas deals.22

Looking at investment project numbers enables us to identify the true attractiveness of the country for different types of activity that are directly affected by its political and economic situation.


Europe and the USRising inflows from the Eurozone and the US are the hallmark of Russian FDI.

Russia is beginning to attract FDI, develop closer relationships with the USA and the EU and make a serious effort to join the World Trade Organization. This effort has been positive; FDI in Russia was US$11.6b in the first quarter of 2011, almost twice the US$6.7b recorded during the first quarter of 2010. EU countries remain the primary source of FDI into Russia, providing most of the investors.23

23. “Russian economy: Opening up?”, The Economist Intelligence Unit, 07 June 2011.

From 2006-10, Eurozone countries originated 259 projects, 35% of the Russian total. By country, the USA, Germany, Finland and France have been the primary investors in Russia. In 2010, German companies took the lead, originating 13% of investment projects. German companies have been the biggest source of FDI jobs in Russia. To diversify its economy and create more jobs through investment, Russia should focus on Eurozone and US investors.

Rank Country FDI projects 2006-10



1 USA 117 16% 5,589

2 Germany 96 13% 8,296

3 Finland 45 6% 1,733

4 France 45 6% 1,620

5 United Kingdom 43 6% 1,125

6 Switzerland 39 5% 1,568

7 Japan 37 5% 3,541

8 Austria 25 3% 620

9 Sweden 23 3% 2,000

10 Denmark 20 3% 2,277

Other 250 34% 27,417

Total 740 100% 55,786



Seizing the Chinese opportunityStarting small, Chinese investors are exploring Russia.

The main investors in Russia are from advanced economies. Brazil, India and China (BIC) do not make the top 10 list of project investors. But China is becoming one of Russia’s largest trade partners, and opportunities in Russia have begun to attract Chinese investment. Most of these investments are in Moscow and St. Petersburg, but the Chinese also look for opportunities in the Russian Far East and in Siberia.24

Many Chinese investments are in forestry, wholesaling and trade and often come from small enterprises. But Chinese investors also

24. China’s Investments into Russia: Where do they go and how Important are they?, Central Asia-Caucasus Institute & Silk Road Studies Program, China and Eurasia Forum Quarterly, Volume 6, No 1, 2008.

seek opportunities in real estate and manufacturing. Russia is attractive to Chinese investors because its market is big and close to China. Chinese investors often import labor from China to complete their projects.25

To encourage Chinese investment, the Russian government should work with investors and guide their projects. To benefit from the jobs created, Russia needs to ensure there is enough labor in regions where Chinese investors set up projects.

25. China’s Investments into Russia: Where do they go and how Important are they?, Central Asia-Caucasus Institute & Silk Road Studies Program, China and Eurasia Forum Quarterly, Volume 6, No 1, 2008.

Vie

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int “Russia is a huge market with tremendous

economic and human potential. Naturally,

it is a focus country for international

investment. Indeed our company, British

American Tobacco, has invested almost

US$1b in this market since we first came

here in 1991.

Over time, Russia has gone through some

economic ups and downs, but the last

decade has been marked, overall,

by sustainable economic growth and

political stability, which always helps

business planning.

So, although there are areas for

improvement in the regulatory and legal

infrastructure, in general, the last decade

has seen an increase in the investment

attractiveness of Russia for foreign

businesses.

My company has three factories — in

Moscow, St Petersburg and Saratov.

Overall, we have found the regional

authorities welcoming. They have often

provided support in various areas,

including regulation and our dialogue

with the federal government. Generally,

those regions of Russia that try to clear

away bureaucratic hurdles and

administrative barriers tend to attract

more foreign investment. The most

successful regions are those that are

more broad-minded, flexible and willing

to help, realizing that more investment

brings more jobs, taxes and other benefits.

Constructive efforts such as these, which

help create an environment in which

business can thrive, are vital to Russia’s

high tech aspirations. The recent

successful flotation of Yandex, a Russian

search engine, on the NASDAQ stock

market in the US shows that Russia has

the potential to be one of the global

leaders in the area of high tech and

innovation.

The Skolkovo project to create a ‘Russian

Silicon Valley,’ and other initiatives

that the Russian government is trying

to bring about, are steps in the right

direction. A couple of things need to be

kept in mind to help this process along.

The regulatory system should create

a beneficial, rather than a restrictive,

environment for high tech and

innovative industries. Similarly, the drive

for innovation should be supported by

grass roots efforts — the process should

be as much bottom–up as top-down.”

Alexander LioutyiCorporate Affairs Director, BAT Russia

A huge and welcomingmarket with tremendouspotential


Russia’s top regions for FDI

Moscow in the European top 10Ranked seventh among European city FDI destinations, Moscow is climbing the rankings.

Although Russia is relatively new to the FDI market, Moscow ranks seventh out of the top 10 European cities* for FDI projects. Investors now see Moscow as a major FDI destination in Europe, competing with European FDI hubs. It is closing the gap with Europe’s leaders, London and Paris, which have achieved their level of attractiveness to foreign investors as a result of efforts spanning many decades.

Investors coming to Moscow invest in business services, financial intermediation, telecoms and postal services, machinery and equipment and software.

Moscow’s attractiveness to foreign investors is strengthened by two special economic zones within the surrounding region. They offer investors an appealing combination of corporate tax incentives, easy access to real estate and lower value added tax on imports.26

26. Invest in Russia, Ministry of Economic Development of The Russian Federation. http://invest.gov.ru/en/government_support (accessed 28 April 2011)

Top 10 urban regions for FDI in Europe

Source: Ernst & Young's European Investment Monitor 2011.*City includes urban regions, defined by Ernst & Young’s analysis of urban regions based on NUTS 2 and NUTS 3 classification.

Rank City FDI projects 2010

Change 2009-10

1 London 289 9%

2 Paris 162 -5%

3 Lyon 122 51%

4 Dusseldorf 73 0%

5 Madrid 71 8%

6 Frankfurt 68 31%

7 Moscow 65 20%

8 Dublin 62 35%

9 Belgrade 55 162%

10 Antwerp 55 104%

On the changes in the Russian foreign

investments landscape for the last 10 years:

“There is no single answer. We can see

considerable progress in terms of

technology. There are significant

improvements in Russian stock market

infrastructure and changes in legislation

regarding both portfolio and direct

investments. But there are no substantial

improvements in law enforcement.

As compared to 2000, we are witnessing

a sharp increase in the government share

in the economy and, more likely than not,

aggravation of the business environment

(corruption etc.). Speaking about foreign

investors, the position of large investors

has improved while the position of small

investors has deteriorated.”

On the barriers to foreign investments

existing in Russia:

“There is an issue of instability. Foreign

investors assert that they are willing to

accept the existing rules of the game in

their everyday lives, including the informal

rules; they also face these challenges in

other countries. But the problem is

that in Russia the legal and regulatory

system is unpredictable and biased.

There is ‘cronyism.’ This phenomenon

is very common. As regards legislation,

there are still decisions to be made in

order to create a sophisticated financial

infrastructure associated, inter alia, with

the Central Securities Depository, with

the recognition of Russian Securities

Depositories by international regulators.

This increases risks and, consequently,

transaction costs for investors operating

in the Russian market.”

On the prospects of establishing an

international financial center (IFC)

in Moscow:

"I certainly welcome the creation of an

international financial center in Moscow.

It’s a great opportunity for the city.

The situation reminds me of the story

of stone soup. The IFC concept may

become the stone that will be removed

from the soup, but the soup will taste

delicious after all the ingredients have

been added in the course of cooking.

The idea of IFC helps us address the

issues that are important per se, and

for the Russian investment climate

and for increasing foreign investments

irrespective of whether the IFC is created

or not. This process is useful, and it has

to be looked after. The ingredients of

the ‘soup‘ may be divided into three

groups. The first one, the most complex,

is the business climate in general;

the second is the financial infrastructure;

and the third is municipal infrastructure.

We should properly cook all these three

components to set up the IFC."

Andrei Sharonov Deputy Mayor of Moscow

Working together for an International Financial Center

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Kaluga Oblast

Tver Oblast

Leningrad Oblast

St. Petersburg City

Yaroslav Oblast

Nizhny Novgorod Oblast

Tartarstan Republic

Krasnodar Krai

Vladimir Oblast

Moscow City

21 1,261

1,640

2,289

9,479

3,915

2,680

8,858

6,954

3,174

1,460

27

18

24

16

39

272

20

20

91

New frontiers for Russian FDIInvestors who venture beyond Moscow and St. Petersburg tend to stay close to the borders.

As a European-class investment destination, Moscow is the only administrative region in Russia that attracts a significant number of projects.

Investors who come to Russia do not venture very far inland: 49% of investment projects are in Moscow or St. Petersburg. Moscow leads with 37% of projects. The other top 10 regions are all in western Russia, often near borders with neighboring countries.

The Russian Government has been looking to introduce investors to opportunities in the Far East. Despite abundant natural resources, no administrative area in Eastern Russia ranks in the top 10 for FDI.

Administrative regions attracting the most FDI from 2006-2010

Source: Ernst & Young's European Investment Monitor, 2011.*Job creation for projects for which the information is available.Administrative regions, are the regions defined by the Constitution of the Russian Federation (Federal City, Oblast, Republic, Krai, etc.)

Rank Administrative region FDI projects 2006-10

Share of total

2006-10


1 Moscow (Federal City) 272 37% 6,954

2 St Petersburg (Federal City) 91 12% 9,479

3 Kaluga (Oblast) 39 5% 8,858

4 Nizhny Novgorod (Oblast) 27 4% 1,640

5 Leningrad (Oblast) 24 3% 3,915

6 Tatarstan (Republic) 21 3% 1,261

7 Vladimir (Oblast) 20 3% 1,460

8 Krasnodar (Krai) 20 3% 3,174

9 Yaroslavl (Oblast) 18 2% 2,289

10 Tver (Oblast) 16 2% 2,680

Other 192 26% 14,076

Total 740 100% 55,786

Investment in Russia stays west of the Urals


Diversifying investment in the Far EastRussia’s investment ombudsman is looking at how to draw investment to the Far East.

The east of Russia lacks investment projects, not capital. Per inhabitant, investment in the Russian Far East Federal District is second highest only to the Urals Federal District.27 But that is because the Far East Federal District has a small population. Most Far East investment is in the Sakhalin Region (69%), and concentrated in oil and gas (90%).28

The Russian government has created a council, and the position of the Investment Ombudsman, to attract FDI into the East of Russia. Ombudsman is examining opportunities and drafting proposals

27. “Office of the Presidential Envoy in the Far East Federal District of Russia,” News Vladivostok on VL.ru. http://news.vl.ru/society/2011/04/07/86532/ # ixzz1QAxLo4Dz

28. “Creation of Investment Ombudsman”, News Vladivostok on VL.ru., April 2011. http://news.vl.ru/society/2011/04/07/86532

for investment activity in the region.29 Vnesheconombank is working alongside the ombudsman, creating an investment fund for the Far East and Baikal Region. This fund, initially closed to outside investors, will provide seed money to create investment opportunities that can be opened to foreign investors later when sufficiently attractive.30

29. “Creation of Investment Ombudsman,” News Vladivostok on VL.ru, April 2011. http://news.vl.ru/society/2011/04/07/86532

30. “The first meeting of the Council on Foreign Investment in the Far East Envoy held in Khabarovsk”, RIA Vostok-Media November 2010.

“The economic crisis of 2008 was a turning

point for the development of Russia’s

economy. Previously, Russia relied on oil

and gas money and did little to modernize

its economy. After the 2008 shock, Russia

took an implicitly positive attitude toward

foreign investment, especially in the high

tech area. Today, leading political circles

see high tech development as savior

and solution to all problems under the

mantra of ‘modernization and innovation’.

That concern is underpinned by growing

competition with China.

The development of the high tech

industry requires openness as well as

stability, predictability and protection of

investments and intellectual property.

The scale of state control has been

considerably reduced, but still exists.

It has to go. In addition, bureaucracy

and biased court decisions can frighten

investors.

Russia and Russian companies also

have to engage foreign partners abroad

actively, both as messengers and

ambassadors, looking for cooperation

and collaboration. That is probably the

best way to draw high tech into Russian

industry. Russia can’t do this alone.

Right now, Russia is improving, but the

world is moving faster still, so the gap

is actually widening.

Russia must be aware that it is in global

competition to offer the best investment

conditions and attract the best brains.

General and unquestioned openness,

cooperation with the world, favorable

financial conditions, and a bureaucracy

striving for the best possible investment

climate are the way to go and should be

a top priority for every public official.

Setting aside the hydrocarbon and

mining industries, would-be investors in

Russia’s regions face similar challenges

to those in many other countries.

Talented human resources are Russia's

most valuable asset and the most

interesting for foreign investors. They are

concentrated in a handful of traditional

industrial areas, and this concentration

is reinforced by investors’ need for

a minimum of infrastructure. A single

opaque, corrupt or less-than-speedy

bureaucratic procedure is enough

to deter a foreign investor from a region.

It’s no surprise that most foreign

investors are naturally drawn toward

Moscow as a base.

We must remember that Russia still has

to overcome its historic image. Its efforts

to improve will take time, and more time

still to be recognized.”

Natalia Schneider Deputy Head, Director of Corporate Affairs, Telenor Russia

High tech ambitions depend upon openness

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Investment plans

Russia’s long-term investorsAs Russia gears up to attract FDI, investors already present are very keen to invest more, but those who are not need to be convinced.

For many investors, Russia is a new market. Prior to the recession, Russia was perceived as turning its back on investors and the reforms they desired. Important natural resources and large companies were kept in national hands or government owned. Now investment is increasing and the government has eased rules on the industries in which foreigners can invest.31

31. Economist Intelligence unit 07/06/2011.

Russian Prime Minister Vladimir Putin announced to parliament that Russia will actively attract US$60b to US$70b in the near term. This goal is ambitious for a country that attracted US$37b of FDI in 2010. Russia will need to develop a clear plan to improve its attractiveness to new investors if it is to achieve the goal set by Putin.32

32. According to Putin, Russia plans to attract up to US$70b per year , Agence France Presse, 20 April 2011.

Investor enthusiasm for Russia is deeply divided according to experience of the country. Among companies that have already invested in Russia 64%, a strikingly high proportion, say that they would invest in Russia again. But 86% of companies that do not know Russia say they would not invest.

Russia’s numbers are very positive when compared with those for Europe as a whole. In Europe, only half as many investors who know the region, 31%, plan to increase operations; while 72% of investors who do not know the region do not plan to invest. For France, which ranks second in Europe for FDI projects, only 19%

of investors who know the country plan to invest, while 88% who do not know the country say they would not invest.

Russia has very loyal FDI investors and is much more attractive to its current investors than either France or Europe as a whole. Russia’s attractiveness for investors who do not know it well is similar to levels recorded elsewhere in Europe. Companies that understand the Russian economy and the nuances of investing find very profitable opportunities. But companies that have merely looked into investing in Russia appear non-committal.

Companies established in Russia

Is your company considering... ?

64%

31%

1%

1%

3%

Increasing operations in Russia

Maintaining operations in Russia

Withdrawing from Russia/closing operations

Relocating to another country

Can't say



86%

7%

7%

Not to invest in Russia

Entering the Russian market

Can't say

Companies not established in Russia


Summary

1 Investors see government moves to encourage inward investment as positive, but are troubled by inconsistencies.

2 Investors are exceptionally optimistic about Russia’s future attractiveness; the government aims to leverage Russia’s strengths and tackle problem areas.

3 Rules, bureaucracy and corruption are obstacles, but partners, finance and staff are readily available.

4 Investors want effective laws, less bureaucracy and fewer regulations. Energy, information and communication technologies and automotive are expected to lead economic growth.

Part. 4 Reforms and expectations



Drawing the roadmap for Russia’s future attractiveness

Feedback from the investor community is broadly positiveInvestors see government moves to encourage inward investment as helpful, but are concerned with inconsistencies.

Globally, investors still need to be convinced that Russia wants FDI: only 12% of investors believe that current Russian government policy to attract foreign investment is efficient. Another 44% think that it is probably effective, but 38% of investors think it does not

encourage foreign investors, and 6% of investors cannot make up their minds on whether these policies are working.

Inconsistencies in Russian foreign investment attractiveness policy make it harder to improve the investment climate and investor confidence. In a positive development, the government recently allowed foreign investors to access strategic sectors, and to control private banks. But it has become more difficult for foreign car companies to operate in Russia and the government is planning to increase taxes on petroleum companies.33

Overall though, investors see Russian government initiatives to improve the investment climate as positive. They believe there is

“a lot going on under the surface that we don't see in the news.”34

33. “The Russian Government’s inconsistent policy towards investors,” Center for Eastern Studies, 30 March 2011. http://www.osw.waw.pl/en/publikacje/eastweek/2011-03-30/russian-government-s-inconsistent-policy-towards-investors

34. Mark Dampier: “Look East, where streets are still paved with gold”, The Independent, 8 January 2011. http://www.independent.co.uk/money/spend-save/mark-dampier-look-east-where-streets-are-still-paved-with-gold-2179079.html

Does Russia's current attractiveness policy incite foreign investors?

12% 13%

6%

44% 25%

Yes definitely

Yes probably Probably not

Not at all

Can't say

Respondents choose among 5 responses.Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.

On three main components that may help

improve Russia's investment appeal:

“Business transparency. Acquiring

undisputed independence by our judicial

system. Currently, this system is

inconsistent with our ambition to become

a country attractive to investors. And

decisive and stringent anti-corruption

measures.”

On changes in the attitude toward foreign

investors in Russia in the last decade:

“There was no absolute trend. Sometimes

the attitude changed from positive to

negative, sometimes vice versa. A lot

depended and depends on particular

people in different state institutions

(government, the Federal Financial Markets

Service etc.). The attitude followed a sine

curve, but the general trend is positive.”

On the strengths of the Russian IT sector:

“Russia is one of the major players on

the software development market.

A high percentage of our people have

a university degree in Engineering.

As a result, there are many programmers.

And the demand for such specialists

in foreign countries (both the US and

European countries) is constantly

increasing due to the development of

technologies, while Russia is ranked

third or fourth in the world in terms

of software development.”

On the types of foreign investments

that are in greatest demand in the Russian

IT sector:

“The primary objective of foreign

investors in any country is to make

money from their investments. In this

respect, I rely less on direct foreign

investments into the Russian IT sector,

and more on investments into the public

market abroad. We need more public

companies in Russia. There are very few

such companies now. But I believe that

the trend set by Mail.ru and Yandex will

be developing and, in five or six years,

the major part of our market will become

public and transparent. And foreign

investors will have a perfect opportunity

to make money from the capitalization

of such companies.”

Russian technology listings are good for all

Anatoly Karachinsky President, IBS Group

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A high level of confidence in the future attractiveness of RussiaInvestors are exceptionally optimistic about Russia’s future attractiveness and the government has identified strengths to build on and problems it wants to tackle.

Investors believe in Russia’s opportunities: 70% are confident of the future attractiveness of Russia. This is a very positive score. It is more than double that of France, where 31% of investors are confident in France’s future, or Germany and the UK where 47% of investors express confidence. The only region to challenge Russia on future attractiveness as an investment destination is Africa, where 72% of investors see bright prospects.

Investor confidence in the future attractiveness of Russia is confirmed by the Doing Business 2011 report. Although Russia ranks 123 among 183 economies,35 the report says doing business in Russia has become much easier in the past five years, largely due to reforms that remove regulatory obstacles, such as streamlined procedures for land use.

Recognizing that further reform is necessary, the Russian government has outlined its objectives in the “3+5” formula, which builds on three strengths and addresses five priority challenges facing Russia.

35. Doing Business 2011. Russian Federation. Making a Difference for Entrepreneurs, The World Bank and the International Finance Corporation.

The three strengths that the Russian government wants to leverage are natural resources, the size and growth of the domestic market and Russia’s highly educated population. Reminding investors why investing in Russia is profitable, and highlighting the skills of Russian workers, will improve perceptions among investors who don’t know the Russian market and eventually attract investment projects.

The five challenges that the government wants to tackle are reforming the inefficient and corrupt institutional framework; improving the quality of education; boosting competition to increase efficiency; stabilizing financial markets and facilitating businesses’ access to finance and increasing the sophistication of business practices. The Russian economy has many factors that attract investors. Lack of competition, instability and corruption can make investors nervous. By energetically and publicly tackling these problems, the government will boost Russia’s long-term attractiveness to foreign investors.

Over the next three years, do you think the attractiveness of Russia as a place for your company to establish or develop activies will... ?

19%

51%

3% 1%

23%

3% Significantly improve

Slightly improve

Slightly deteriorate Significantly deteriorate

Neither improve, nor deteriorate

Can't say



Strong expectations for more

Building a more flexible, transparent and efficient investment climateRules, bureaucracy and corruption are obstacles, but partners, finance and staff are easy to find.

Foreign companies see some major obstacles to investing in Russia. Their chief concerns are the complexity of administrative procedures (25%), corruption (21%) and strict rules regulating business practices (14%). But finding business partners or

finance is seen as relatively straightforward. Investors also perceive Russia as an investment destination with a competitive environment where it is easy to hire staff.

What are main obstacles to investing in Russia?

25%

21%

20%

14%

10%

9%

8%

8%

7%

6%

6%

5%

5%

4%

4%

3%

3%

3%

3%

1%

1%

3%

13%

Complexity of administrative procedures

Too much corruption

No international project

Strict regulations, approval or license to practice business

National market only (local market)

Low size of the marketBad geographical location : it is too far/We have investments

in other areas of the world

Lack of information and services

Low consumer consumption

Lack of transparency in business practices

Dissatisfaction with infrastructure

High business costs

Political instability

Uncomfortable living environment for foreigners

Too much cultural difference/language barrier

Difficulty in financing

Competitive environment

Difficulty in securing staff

Lack of attractive business partner

Insufficient support after investment

Unsatisfactory preferential treatments and incentives

Other

Can't say



Complex administrative procedures challenge foreign investorsCompanies find it hard to keep to the rules because they are complicated and may change often.

Many investors complain about the complexity of legal, customs and fiscal procedures in Russia. Investors must make great efforts to ensure that contracts comply with Russian law and they find it hard to keep up–to–date with legislative changes, presidential decrees and government resolutions.

According to Elvira Nabiullina, Russian Minister of Economic Development, Russia-based exporters must provide eight documents on average, and importers 13 – twice the amount of paperwork required in developed countries. Customs procedures in Russia are also perceived to be more complex than those of Kazakhstan or Belarus, Russia’s partners in the Customs Union.

However, customs procedures are changing and new legislation of the Customs Union will help accelerate the movement of goods. The integration processes that are currently under way will streamline efficiency and the customs environment overall. The removal of all customs borders between Russia, Belarus and Kazakhstan, effective 1 July 2011, is expected to have a positive influence on trade and investment. Overall, the Customs Union, which will create a common market from Europe to Central Asia, is a step in improving the business competitiveness of each of the Union member countries.36

36. “Russian President Dmitry Medvedev orders customs reforms to boost foreign investment”, The Moscow Times, September 2010. http://www.telegraph.co.uk/sponsored/russianow/business/7979669/Russian-President-Dmitry-Medvedev-orders-customs-reforms-to-boost-foreign-investment.html

On changes in the attitude to foreign

investors in Russia in the last decade:

“The attitude to foreign investors in

Russia has generally not changed in the

last decade. A lot of effort has ensured

the continuation of growth in foreign

investment. They haven't always been

a success, but that's a different story.

The situation varies, both between

industry sectors and regions. For example,

the Kaluga Region has been successful

on this front, showing very good,

and even unexpected, results. In food

processing, foreigners dominate the

industry. So, the situation is generally

quite favorable.”

On the future of Moscow as the

international financial center:

“I think that Moscow does have a chance,

considering it has close attention from

Dmitry Medvedev who is set to move

ahead in that direction. However, this

process will take longer than he originally

thought – around five years at best.

Although, life today moves so fast and

everything changes so quickly…”

On what needs to be done to attract

foreign innovation technologies to Russia:

“Any investment, regardless of whether

or not it is directed towards innovation,

likes clear rules of the game, both formal

and informal. Judicial predictability and

the rule of law is a must. Everything

else is not that important. Just like in

sport, it's a matter of rules. If you play

basketball, you can't hit the ball with

your foot — it's common knowledge.

Try that — you'll get a technical foul right

away, and everyone should realize that

punishment is unavoidable.

Russia, despite its enormous bureaucracy,

remains a very judgmental country,

if I can put it this way. For as long as

we remain dependent on subjective

attitudes of a given decision maker…

From the investor’s point of view,

it's very dangerous.”

Foreign players like clear rules for the game

Ruben Vardanian Chairman, Troika Dialog

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The potential for anti-corruption measures to improve Russia’s attractivenessCorruption and bribes have increased.

According to Transparency International’s 2010 Corruption Perceptions Index (CPI), Russia ranked 154 out of 178 countries. Russia’s score worsened from 2.2 points in 2009 to 2.1 points in 2010, placing it behind countries such as Pakistan, Zimbabwe and Nigeria.37

37. Corruption Perceptions Index 2010 Results, Transparency International. http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

Corruption has increased as transparency has declined. According to Russia’s Interior Ministry, the value of the average bribe rose by 30% between 2009 and 2010 to reach approximately US$1,000, almost equal to the monthly wage of a state official.38

38. “Medvedev Recommends Raising Fines for Bribery a Hundredfold”, Russia Today, February 2011. http://rt.com/politics/medvedev-recommends-fines-bribery/

In your opinion, what should be the three priority measures to take to improve Russia's investment climate?

63%

53%

39%

25%

25%

15%

15%

13%

12%

7%

1%

2%

3%

3%

Improve the effectiveness of the rule of law(reduce corruption)

Reduce bureaucracy

Improve the transparency of business regulation

Promote economic growth and SME development

Lighten companies' legal and fiscal obligations

Promote an entrepreneurial and initiative-taking culture

Reform the social model

Renew the training and education system

Stimulate R&D, innovation

Encourage companies' initiatives in environmentalprotection and sustainable development

Improve the transport infrastructures

Other

None/None in particular

Can't say

Respondents choose 3 among 14 responses and ranked them in order of importance.Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.

Concrete measures to improve the investment climateInvestors want effective laws, less bureaucracy and fewer regulations.

Investors identify three key steps needed to improve perceptions of Russia’s investment climate: improving the effectiveness of the rule of law (63%), reducing bureaucracy (53%), and improving the transparency of business regulation (39%). But investors seem confident about Russia's transport infrastructure (1%),

environmental protection (7%), R&D and innovation (12%), the education system (13%) and Russia’s entrepreneurial culture (15%). However, these low ratings may reflect investors’ concern with issues of law, regulation and bureaucracy.


Russian initiatives to promote foreign investment and combat threats to attractivenessA new plan aims to partner private investment and renew the drive against bad practices.

The Russian government has launched initiatives to enhance Russia’s appeal for investors. In March 2011, President Dmitry Medvedev announced a 10-step plan to improve Russia’s investment climate.

One element is a government-backed investment fund, designed in a way likely to change investor perceptions of Russia.39 This Russian Direct Investment Fund will invest in IT, health care, infrastructure and other sectors — excluding energy — that could serve Russia’s rapidly growing middle class.40 The Fund will be capitalized with US$2b a year for the next five years. It will invest US$50m

39. “Meeting of the Commission for Modernisation and Technological Development of Russia’s Economy”, Russian Presidential Executive Office, March 2011. http://eng.news.kremlin.ru/news/1981

40. “FACTBOX-The Russian Direct Investment Fund”, Reuters, June 2011. http://www.reuters.com/article/2011/06/13/russia-rdif-idUSLDE75C08H20110613

to US$500m in deals, with private investors matching the Fund’s investments dollar for dollar.

This 10-step plan also focuses on fighting corruption, increasing transparency and improving the rule of law. These three issues have been major concerns for the Russian government and are among its top priorities.41 Medvedev set up the Council for the Fight against Corruption and introduced anti-corruption legislation in 2008 when he came to power. It requires state officials to report their incomes and those of their family members.

41. “2010 Investment Climate Statement - Russia”, Bureau of Economic, Energy and Business Affairs, US Department of State, March 2010. http://www.state.gov/e/eeb/rls/othr/ics/2010/138134.htm

“Russia has strong potential for

economic development and growth.

However, compared to other

countries with similar levels of per

capita income and to other BRIC

countries, Russia still has unresolved

issues with its investment climate.

The evidence of this is the net capital

outflow that took place in late 2010

and early 2011. Even though oil

prices have been high, capital has

been leaving Russia. I believe the

main problem undermining the

investment climate is corruption.

There are some encouraging signs

too. It now seems likely that Russia

will join the World Trade Organization

(WTO) within a year. Of course, Russia

has been close to joining the WTO

several times in recent years. However,

the experience of June 2009, when

Russia abruptly decided to join as

a single customs union with Belarus

and Kazakhstan, suggests that

the Russian government can change

its views overnight.

WTO accession will have both direct

and indirect benefits for the Russian

economy. The direct benefits

will include openness to trade and

investment, predictable rules of

the game and stronger competition.

The main indirect benefit is the fact

that WTO accession is also a credible

signal that Russia is committed to

openness and reform.

Russia can also do more to develop

high technology sectors. It has

substantial human capital and,

in principle, can significantly raise

levels of innovation. For this to

happen, however, Russia needs to

solve a number of major institutional

problems: it must improve protection

of property rights and also intellectual

property rights, privatize, deregulate,

promote competition and openness,

and finally, it must reform its

education and research system.”

Trade, openness and reform

Sergei Guriev Professor of Economics and Rector of the New Economic School, Moscow

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Opportunities and challenges

OpportunitiesEnergy, information and communication technologies and automotive are expected to lead economic growth.

Investors believe future growth in the Russian economy will be driven by the energy, information and communication technologies (ICT) and automotive sectors. The bias toward energy and utilities (54%) stems from Russia’s reputation and strength in oil and gas production. But investors clearly see beyond energy to emerging opportunities in high value-added manufacturing and technology, including vehicles, transportation and ICT.

The Russian government is opening access to the energy sector, which had gained a reputation for being difficult to access, to foreign investors.42 Three major foreign investments had been made in

42. “Controlled opening-up of Russia’s energy sector to foreign investors”, Center for Eastern Studies, 09/03/2011. http://www.osw.waw.pl/en/publikacje/eastweek/2011-03-09/controlled-opening-russia-s-energy-sector-to-foreign-investors

Russia’s energy sector by mid-2011. The government recognizes the need for foreign expertise, technology and capital in its energy sector, especially to optimize the performance of oil fields.43 It realizes that foreign investors will transfer technology and knowledge to Russian companies, strengthening Russian energy sector capabilities.

43. “Controlled opening-up of Russia’s energy sector to foreign investors”, Center for Eastern Studies, 09/03/2011. http://www.osw.waw.pl/en/publikacje/eastweek/2011-03-09/controlled-opening-russia-s-energy-sector-to-foreign-investors

“Government policies in support of foreign

investment now clearly signal the goals

of modernization and innovation. The

government has also responded to foreign

investor concerns with migration rule

changes that encourage highly skilled

foreign specialists to come and work in

Russia.

In the minerals sector, amendments to

legislation related to the Strategic Sectors

Law and to the Sub-Soil Law adopted in

2008, show the authorities are increasingly

willing to reshape laws and rules to reverse

a decline in geological exploration and

investment in hard rock mining.

That is wise because Russia’s rich natural

resources are unparalleled and one of

its three competitive advantages among

the BRICS countries. Russian policy makers

must not retreat from encouraging even

more investment in the natural resources

sector. Russia also has the best human

capital among the BRICS thanks to growth

in business and financial education and

a strong tradition in mathematics and

science. And it has a sizeable domestic

market with an effective rail network and

improving air links.

These are a good base on which to develop

the role of high technology in the Russian

economy.

The Skolkovo research hub near Moscow

is an excellent step, although it must not

be limited to a single location. The ‘Skolkovo

mindset’ must be adopted across the

country. All levels of government and all

public and commercial institutions should

encourage young people to pursue

technical as well as business education,

establish and protect favorable conditions

for indigenous growth of innovative

companies and popularize and reward

new initiatives in science and technology.

This mindset should also be spread into

public and government attitudes to

freedom of expression and information.

Greater openness and transparency are

the foundation upon which modernization

and innovation are built. One other

fundamental requirement is that

government and business institutions

must redouble their efforts to protect

intellectual property.

Tax and financial investment incentives

are probably less appreciated by investors

than a reduction in bureaucracy and red

tape. The Skolkovo mindset must include

lowering these barriers across the country,

and not just in one innovation center or

selected free trade or economic zone.

Finally, modernization and innovation

should be applied in the broadest sense

to include all sectors of the economy.

While IT, software, microelectronics and

nanotechnology are very compelling

subsectors, a country as rich in natural

resources as Russia must begin by

attracting, promoting and encouraging

investments that help to modernize and

apply innovation in resource exploration,

development and processing.”

Modernization and innovation in the heart of Russia's development

Lou Naumovski Vice President and General Director, Moscow Representative Office, Kinross Gold Corporation

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Which business sectors will be driving Russia's growth in the next two years?

54%

26%

19%

11%

11%

9%

7%

7%

5%

5%

4%

3%

1%

1%

1%

2%

17%

Energy and utilities

Information and communication technologies

Transports industry and automotive

Consumer goods

Bank/Finance/Insurance

Real estate and construction

B to B services excluding finance

Logistics and distribution channels

Pharmaceutical industry and biotechnologies

Agriculture

Clean tech

Natural resources (oil and gas)

Defense sector

Heavy industry

Other

None/None in particular

Can't say

Respondents choose 3 among 17 responses. Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.

Beyond energy, investors see:

• Telecommunications, technology and industry as Russian growth sectors.

• Capabilities in technology, and believe proactive government policy and the creation of R&D clusters will help build capacity and a market.

• Russia’s scientific tradition and resources can make it a leader in technology. But resources are underexploited and the current business environment does not nurture these businesses, while scientists and engineers are still learning to collaborate with business.44

44. “Russia’s Modernization and Innovation from the Perspective of Foreign Investors”, FIAC White Paper, October 2010.

• Telecoms opening up to competition. “Russia agreed to terminate the Rostelecom monopoly on long distance fixed line telephone services as part of the Russia-EU bilateral agreement.”45 Multinationals are already working in the Russian mobile telephone market.

• Rapid growth in manufactured goods and a rise in internal consumption.

• "...Domestic demand is beginning to replace external demand as the main growth engine. The industrial sector, supported by a gradual pickup in investment, and inventory restocking in particular, has continued healthy growth in the third quarter (6.4% ) led by manufacturing (9.5%).”46


46. “Growth with moderation and uncertainty”, Russian Economic Report 23, The World Bank Group, November 2010.


ChallengesBuilding R&D capabilities, renewing education and leading in strategic industries are among Russia’s main challenges.

Only 16% of investors see Russia as a leader in R&D and innovation, widely regarded as key to long-term growth in Europe. The government is striving to create a more supportive framework for innovative technology in Russia, yet many investors still have to be convinced of its potential there. Russia has able scientists and technicians, but investors find the legal environment difficult. Russia also lacks tax incentives for R&D and intellectual property protection is seen as weak.47

Russia has built upon the Soviet education system and has a well- educated workforce, but investors do not perceive its education system as world class. Only 9% of investors see it as a leader. According to the Russia Competitiveness Report 2011,“ Russia will have to address the low and deteriorating quality of education” even though it is one of the three strengths mentioned in the “3+5” formula set out by economist Herman Gref.48 Education is an asset that needs to be constantly modernized and one where competitiveness must be maintained.

Investors continue to see Russia as a leader in the energy sector (51%). The government has not done enough to convince many of the country’s wider potential. Only 19% of investors see it as a leader in strategic industries and 29% of investors think that it will be outstripped by more dynamic countries (such as China

47. Doing Business in Russia: Investors Dislike Uncertainty. Valdai Discussion Club, June 2011. http://en.rian.ru/valdai_op/20110617/164675467.html

48. Russia Competitiveness Report 2011, World Economic Forum.

and India). Even though Russia is expected to be the leader of economic prosperity in the Commonwealth of Independent States, it is challenged on a global level by rival BRIC countries.49

Russia needs to see the scale and urgency of the challenges and reform faster. Being a leader in energy production is a strength, but one that may have obscured the need to develop other sectors. The stabilization fund was a good first step for the Russian economy. Now the government needs to go further.

Broader reforms are needed, especially in tackling corruption and strengthening property rights and the rule of law; in reforming the judicial system and civil service and in implementing privatization plans. Accession to the WTO could also improve the investment climate by making government actions more predictable.50

Russia offers investors rapid growth, a new market and high-quality labor at moderate cost. But its enduring reputation for difficult business conditions deters some investors. If the investment climate were better, Russia’s vibrant opportunities would almost certainly attract more projects.

49. "Investing in Russia : Economic Prospects for 2011", Modern Russia, January 2011. http://www.modernrussia.com/content/investing-russia-economic-prospects-2011

50. Russian Federation – Concluding statement for the 2011 article IV Consultation Mission, IMF. June 2011.

How do you see Russia in 2020?

51%

31%

29%

19%

16%

9%

10%

A leader in the energy sector

Challenged on its social and economic model

Surpassed by strong competition from more dynamic countries

One of the world leaders in strategic industries

A leader in R&D and innovation

A country with one of the best education and higher learning systems

Can't say

Respondents choose 3 among 7 responses. Total respondents: 205.Source: Ernst & Young's 2011 Russia attractiveness survey.


On how much Russia has changed in

terms of its investment appeal over

the past decade:

“In my opinion, Russia has become less

attractive as an investment destination,

primarily due to a certain pressure

exerted by law enforcement agencies

on businesses. I believe the growing

fears cause businesses to avoid large

investments, to narrow their strategic

planning horizon and to take capital out

of the country on a large scale. This last

development became apparent following

the 2008–09 crisis because before

this a significant inflow of oil money and

cheap loans in the world market had

made Russia quite an attractive country,

at least for portfolio investments and

loans. There had also been foreign direct

investments, but in a limited number of

industries.”

On what the Russian government has to do

to implement its plans for building an

innovative economy:

“An innovative economy should provide,

first and foremost, a feeling of confidence,

protection of proprietary rights and

personal security; secondly, government

intervention with doing business must

be reduced to its minimum. And thirdly,

competition must be stronger, as it

creates a real demand for innovations.

So far, the state prevails and the effect

of competition is insufficient.”

On whether legislative changes are

driving the implementation of

innovations:

“No, I believe that legislation in Russia

has but a limited effect on the behavior

of businessmen and their customers.

That is because there is no certainty

in Russia that the law is the last resort

that will shape future developments.

As it was put by an Englishman, Russia

has interpretative law. The wording of

laws in itself is such that each time it

suggests that there must be a new

interpretation, and the best interpretation

is the one given by top officials.”

On where the economic growth

opportunities in Russia are situated:

“The economic growth opportunities are

associated with changes in the business

climate, including the investment climate.

To a certain extent, they can come from

legislation, where it is possible to make

the wording of a law more precise.

Mainly, it’s all about political changes.

It should be clear that the state is not

to interfere with businesses, and its

policy is to take tough action against

all law enforcement agencies and to fire

those officers who are involved in

corruption. If the environment does not

change, the corruption issue will remain

unsolved. Progressing piecemeal, with

justice winning in one case while allowing

someone's private interests to outweigh

in other cases, is not a way out. There

must be a clear understanding that

the law is the same for all.”

On what future there is for Russia — driven

by raw materials or innovations:

“I think that it will be a combination of

both, because the country has large

natural resources which are growing in

value and are in demand. My estimates

show that the share of mineral resources

in Russia’s exports will never be less

than 40%; it’s just a gift of nature.

Secondly, I believe that Russia has no

other choice but building an innovative

economy. We have to understand that

Russia will not be able to compete with

developing countries so long as they

have a cheaper labor force. Beside,

we cannot compete with developed

countries because they have stronger

innovative economies. Our natural and

intellectual potential is what gives us

a competitive edge, which is quite

sufficient to keep up with the most

advanced achievements of world science.

For this, we only need to create favorable

conditions, so that it is clear to everyone

that there is only one way to grow

prosperity: an increase in productivity.”

Creating an innovative economy

Yevgeny Yasin Founder HSE (Higher School of Economics)

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Methodology


29%

70%

1% Yes

No

Can't say

Has your company established an activity in Russia?*

17%

6%

7%

41%

29%

Private & Business services

Infrastructure and equipment

Chemical & Pharmaceuticalindustries

Industry, Automotive, Energy

Consumer

Sector of activity of the interviewed companies

34%

40%

26% Less than €150m

From €150m to €1,5b

More than €1,5b

Size of the interviewed companies in terms of sales tunrover

45%

16%

9%

18%

12%

WesternEurope

Northern Europe

Central & EasternEurope

NorthAmerica

Asia

Geography of the interviewed companies

44%

14%

9%

9%

8%

6%

3%

3%

4%

Financial director

Marketing director

Managing director/Senior vice President/COO

Director of development

Chairman/President/CEO

Director of strategy

Director of investments

Export Manager/Overseas manager

Other (HRM, Risk manager, Communication director…)

Job title of the respondents




Total respondents: 103.* This question refers to the 103 companies interviewed outside of Russia. It does not refer to the 102 companies interviewed in Russia.Source: Ernst & Young's 2011 Russia attractiveness survey.


Ernst & Young’s 2011 Russia attractiveness survey is based on a twofold, original methodology that reflects:

• The “real” attractiveness of Russia for foreign investors. Our evaluation of the reality of FDI in Russia is based on Ernst & Young’s European Investment Monitor (EIM). This unique database tracks FDI projects that have resulted in new facilities and the creation of new jobs. By excluding portfolio investments and M&A, it shows the reality of investment in manufacturing or services operations by foreign companies across the continent.

• The “perceived” attractiveness of Russia and its competitors by foreign investors. We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country or area’s ability to provide the most competitive benefits for FDI. The field research was conducted by Institute CSA in May and June 2011, via telephone interviews, based on a representative panel of 205 international decision makers.

Mapping the real attractiveness of Europe

Data is widely available on FDI. An investment in a company is normally

included if the foreign investor has more than 10% of its equity and a voice

in its management. FDI includes equity capital, reinvested earnings and

intracompany loans. But many analysts are more interested in evaluating

investment in physical assets, such as plant and equipment, in a foreign

country. These figures, rarely recorded by institutional sources, provide

invaluable insights as to how inward investment projects are undertaken,

in which activities, by whom and, of course, where. To map these real

investments carried out in Europe, Ernst and Young created the

Ernst & Young EIM in 1997. The EIM is a leading online information

provider tracking inward investment across Europe. This flagship business

information tool from Ernst & Young is the most detailed source of

information on cross-border investment projects and trends throughout

Europe. The EIM is a tool frequently used by government and private sector

organizations and corporations wishing to identify trends, significant

movements in jobs and industries, and business and investment.

The Ernst & Young European Investment Monitor, researched and powered

by Oxford Intelligence, is a highly detailed source of information on cross-

border investment projects and trends in Europe, dating back to 1997.

The database focuses on investment announcements, the number of new

jobs created and, where identifiable, the associated capital investment,

thus providing exhaustive data on FDI in Europe. It allows users to monitor

trends, movements in jobs and industries and identify emerging sectors and

cluster development. Projects are identified through the daily monitoring and

research of more than 10,000 news sources. The research team aims to

contact directly 70% of the companies undertaking the investment for

direct validation purposes. This process of direct verification with the

investing company helps ensure that real investment data is accurately

reflected.

The employment figures collected by the research team reflect the number

of new jobs created at the startup date of operations, as communicated by

the companies during our follow-up interview. In some cases, the only

figures that a company can confirm are the total employment numbers

over the life of the project. This is carefully noted so that any subsequent

job creation from later phases of the project can be cross-checked, and to

avoid double-counting in later years.

The following categories of investment projects are excluded from EIM:

• M&A or joint ventures (unless these result in new facilities, new jobs created)

• License agreements• Retail and leisure facilities, hotels and real estate investments• Utility facilities including telecommunications networks, airports,

ports or other fixed infrastructure investments• Extraction activities (ores, minerals or fuels)• Portfolio investments (i.e., pensions, insurance and financial funds)• Factory and production replacement investments (e.g., a new

machine replacing an old one, but not creating any new employment)• Not-for-profit organizations (e.g., charitable foundations, trade

associations, governmental bodies)

Participants' profile

An international panel of decision makers of all origins, with clear views

and experience of Europe:

• 45% Western European businesses• 16% Northern European businesses• 9% Central & Eastern European businesses • 18% North American businesses• 12% Asian businesses

Of the companies, 64% have established operations in Russia (131 of the

205 companies interviewed).

We built a global panel from all business models and sectors to provide

a representative opinion on the diversity of international strategies:

• SMEs (small and medium enterprises)• Multinationals• Industrial companies as well as service providers• Companies from BRIC countries made up 11%

Divided into five main sectors – the businesses surveyed are representative

of the key European and global economic sectors:

• Industry/Automotive/Energy• Private and business services• Consumer• Chemical and pharmaceutical industries• Infrastructure and equipment

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Ernst & Young was the first globally integrated professional service

organization to establish operations in Russia in 1989. Our Russian

practice has 2,400 employees working in eight offices located in Moscow,

St. Petersburg, Ekaterinburg, Novosibirsk, Togliatti, Kazan, Krasnodar,

Yuzhno-Sakhalinsk.

Ernst & Young is dedicated to helping its clients identify and capitalize

on business opportunities throughout Russia and the world. Our key

market sectors are: Financial Services; Retail and Consumer Products;

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Our professionals are recognized for their leadership, know-how and

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improve business performance and profitability.

Country and institutional development

Ernst & Young actively supports the development of the institutions and

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Ernst & Young has also demonstrated its leadership in the Russian business

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We know that growing markets require innovative thinking and evolving

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• Doing business in the Russian Federation

The new edition of the guide Doing Business in the Russian Federation

gives valuable information on the

Russian economy as well as the

taxation and accounting systems and

on other important aspects that may

be needed to succeed in business in

the Russian Federation.

• Russian food and beverage industry survey 2010

Although there have been no major

economic upheavals and the peak of

the crisis is over, market participants

are still cautious about the current

economic situation. What factors

affected industry development in

2010? In the survey we analyze key

legislative changes, current trends

and prospects.

• Next generation innovation policy

The future of EU innovation policy to support market growth The future of European organizations

and corporations is interlinked with

the ability of Europe’s policymakers

to create the environment for

innovation to flourish. This report

demonstrates that innovation policy

around the world is becoming

increasingly complex, and such

complexity is even more visible in

a multi-level government framework

such as the European Union.

• Exceptional magazine

Issued twice a year, Exceptional CIS

is a part of the Exceptional magazine,

an award-winning publication.

Read on to learn from some of

our inspirational interviews with

the markets’ top success stories.

In the July 2011 issue, Arkady

Novikov, founder of the Novikov

group, the most famous restaurant

developer in Russia, tells us about

the secret of his success and future

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and opportunities facing the mining

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some of the innovative methods that

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Ernst & Young's 2011 Russia attractiveness survey€¦ · · 2014-05-20respondents in Ernst & Young’s survey of 205 international business leaders and “attractive” for 75