European Business Investors Gloomy On Russian Prospects

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The Association of European Businesses in Russia (AEB) have issued an annual report that shows few see Russia as a growth market in coming years, and are concerned that business operations in Russia are becoming increasingly difficult for foreign  investors. Alarmingly, AEB members said that the increasing bureaucracy was hindering efforts and is a greater longer term challenge than either Covid-19 or sanctions.

Regulatory Environment 
Almost seven in ten Association of European Businesses (AEB) members said regulations were a significant challenge to operating in Russia — the highest reading for nine years. More than half said they do not expect the regulatory environment or problems with corruption to improve over the next few years.

Covid Impact 
Meanwhile, the coronavirus pandemic was cited by 57% of AEB members as the main obstacle, with most saying their sales had fallen as a result of the crisis. However, firms were hopeful that they could bounce back from the crisis relatively quickly, with more than eight in ten expecting their business to have recovered by the end of next year.

Weak Economic Investment Outlook 
Despite an upbeat outlook on the economy over the medium-term, the survey revealed that few businesses have plans to increase their investment into Russia in the near future. Only one in four of the 90 AEB members surveyed plans to increase investment in Russia this year, and the same proportion expects Russia to be able to boost investments over the next three years. That’s the weakest forecast since 2015.

Maintaining Employee Levels 
Cutting back investment is seen as one of the most favorable ways of dealing with the short-term economic challenges of the coronavirus pandemic, the survey also revealed. Only 9% of businesses said they had reduced staff numbers, and 14% had cut employee salaries. The Russian government has stated repeatedly that companies’ top priority during the pandemic should be maintaining jobs. It has offered low-interest “salary loans” to firms to help cover a small portion of staff wages, which it promises to write-off if companies manage to keep 90% of their staff. However, actually obtaining such loans has proven problematic with Russian banks making it difficult to complete documentation.

Ruble Volatility
More than seven in ten firms said volatility in the value of the ruble — which has deteriorated dramatically in recent weeks on a combination of geopolitical fears and weak fundamentals — and Western sanctions against Russia are having a negative effect on their business.

The AEB Audit Chamber Chairman Alexei Kudrin said on Monday that he expects a second wave of the coronavirus to knock as much as another full percentage point from Russia’s GDP this year — taking the annual contraction towards 5% — and forecast that it could drag down the economy well into 2021.

The AEB report on the business climate in Russia is however in contrast to the developing trade and investment Russia is experiencing with China, where 2020 has seen a trade growth increase of about 5-6%.

A copy of the AEB report in English can be downloaded here.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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