Moscow - Russia is becoming more competitive than before with China, India, Brazil, and other emerging markets as a magnet for Foreign Direct Investment (FDI), according to the full report on a survey of 155 current and potential investors released by the Foreign Investment Advisory Council (FIAC) and The PBN Company. Summary findings of the survey were presented this spring to Minister German Gref and other government officials at a FIAC Standing Committee meeting in Moscow.
The survey found that most current investors in Russia experienced significant year-on-year growth in both sales and profits. Four in 10 reported that 2005 sales increased more than 30 percent, and nearly three in 10 said profits grew in excess of 30 percent. More than 90 percent said they plan on increasing both their business operations and investments in the next three years. Russia: Investment Destination II is the second consecutive survey of foreign investors commissioned by MEDT and FIAC to ascertain why some international companies are investing in Russia, while others are not.
Nearly two thirds of companies currently not investing in Russia said they plan to do so in the next three years. Only one third said they have no plans to invest in Russia. Both current and potential foreign investors said that they are most attracted to Russia because of the size of the market (90%), the country’s sustained economic growth (82%), the high quality and low cost of human resources (57%), and the overall political (48%) and macroeconomic (46%) stability.
The survey identified encouraging trends in the views of perceived risks of investing in Russia compared to other investment destinations. While foreign investors continue to believe that the competitive rate of return on investments remains high in Russia, few investors think that Russia’s investment risk remained as high as it was a year ago. 35 percent of foreign investors in 2006 said that Russia had a higher risk of investment compared to other emerging markets, a marked decrease since last year’s statistics of 54 percent. Improvements were especially noticeable when Russia was compared with China, India, and Brazil. While Russia had a 33.6 percent increase in FDI in 2005, China’s FDI growth was flat; India had modest growth of 15.2 percent and Brazil’s foreign investment declined from $ 18.2 billion to $ 15.6 billion.
At the same time, investors continue to urge the Russian government to fight corruption and reign in bureaucracy and red tape – the two top barriers cited by foreign investors in both the 2005 and 2006 surveys. Investors ranked the biggest disincentives to investment as administrative barriers (84%), corruption (78%), inadequate and inconsistent legislation (71%), and selective interpretation and application of the law (67%).
Almost two thirds of current foreign investors said that their company had been directly affected by corruption, with tax authorities most often named (33%). However, the most common problem that international businesses face on a daily basis is excessive regulations for visas, work permits, and other business operations – it was cited by 58 percent of current investors. “A common theme in this year’s survey is that investors are looking for clarity and consistency from the Russian government,” said Herman Verstraeten, Chairman of the FIAC Image of Russia Working Group and Chairman of Unilever CIS.
“Investors want clear policies that would welcome economic and industrial sector foreign investors. They want consistent application and enforcement of laws and regulations. Providing clarity and consistency on these issues could unleash significantly more foreign investment in Russia.”
The majority of investors believe that the Russian state’s involvement in the economy will be limited to strategic sectors and industries, such as natural resources, while another 43 percent said the state will become more involved in manufacturing, transportation, and telecommunications.
More than half of foreign investors expect that Russia’s eventual admission into the World Trade Organization will yield positive results for their companies.
As in 2005, foreign investors this year again urged the Russian government to be more active in promoting Russia as an investment destination. Three quarters of all respondents said that the government should do a better job of communicating with investors and should invest more time and resources in foreign investment promotional activities. “There is clearly a frustration among investors that Russia’s image abroad does not match the realities on the ground,” said Verstraeten. “Foreign companies are succeeding in Russia – a fact that is not readily apparent to their non-investing counterparts in the United States, Europe, and Asia.”
Most investors gave Russia low marks for its foreign investment promotional efforts as compared to China, India, Brazil, and other countries. “However, this is a problem that can be resolved, and foreign investors are ready to do our part in helping to spread the word about the business opportunities and return on investment available in Russia,” said Alexander Ivlev, FIAC Coordinator and Partner at Ernst & Young. “More than half (51%) of those surveyed believe that the investment climate and opportunities in Russia will get better, which allows us to face the future with optimism,” he added.
The survey is clear. There’s a need for more effective communication, not only abroad, but for investors already active in Russia,” said Peter B. Necarsulmer, Chairman and CEO of The PBN Company, which conducted the survey. “But more and better communication is only a part of the answer. For Russia to achieve its outstanding competitive investment potential, there must be substantial progress in resolving the real problems on the ground faced by domestic and foreign investors alike.”
About the Russia: Investment Destination II survey
The Russia: Investment Destination II survey was conducted for the Foreign Investment Advisory Council and the RF Ministry of Economic Development and Trade for the second consecutive year by The PBN Company. CEOs or senior decision-making executives responsible for company investment strategy from 155 current and potential investors in Russia completed confidential questionnaires between 15 March and 20 April 2006.
About FIAC - www.fiac.ru
The Foreign Investment Advisory Council was established in June 1994 as a result of the combined efforts of the Russian government and foreign businesses to improve the investment climate in Russia. The key task of the council is to assist Russia in forging and promoting a favorable investment climate based on global expertise and the experience of international companies operating in Russia. FIAC’s working groups are continuously involved with state ministries and departments on changes in current law-enforcement practice with a view to improving investment policy.
About The PBN Company - www.pbnco.com
The PBN Company is the leading international strategic communications firm specializing in Russia, Ukraine, and the Baltic States. The firm helps Western clients design and implement strategies to maximize their investments in Russia, Ukraine, and the other countries of the former Soviet Union, and works with regionally-based companies to expand their domestic market share and to build their businesses into global enterprises. The PBN Company offices are located in Moscow, Kyiv, London, Washington DC, and Riga.