Increasing Numbers of Euro Expats Heading for Russia

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Op/Ed by Chris Devonshire-Ellis

Sanctions placed on Russia by the European Union and the subsequent tit-for-tat banning of EU imports into the country are having an unforeseen and positive impact on Russia. Already poor economic growth, disenchantment with the EU, and problems with migrants are encouraging many European entrepreneurs to look to Russia for growth and security. Countries such as Italy, that have a long trading and cultural history with Russia, are reaching breaking point. High taxes, laws preventing the sale of fine dining products such as wines, cheeses and meats to Russia, and unemployment issues linked to recession and the North African migrant influx are persuading many Italians to uproot and invest in Russia. With the IMF stating that the Italian economy will take twenty years to recover to pre-2007 levels, many have had enough and are looking north-east for opportunities.

The EU stands to lose Euros 100 billion in export sales and about 2 million jobs from lost Russian purchases of EU products since the sanctions were introduced, and has resulted in misery for all EU based businesses that had invested in developing the Russian consumer market. A growing realization that the Russian consumer market may never return to buy EU goods at pre-sanction levels is resulting in Italian, French and other EU entrepreneurs to engage in developing production facilities directly in Russia themselves. Faced with bans on exporting produce to Russian consumers, they are now setting up in Russia itself to get around the sanctions, and in nearly all cases, keep their existing businesses, many of them long established family concerns, alive.

The motivation to transform businesses based in Europe and exporting to Russia, to being directly involved in the Russian consumer market is huge. European products are well known to Russian consumers, and to date face little domestic Russian quality competition. Taxes are far lower in Russia, and the government is keen to attract FDI.
With many Europeans aware that the Russian consumer market may never return to pre-sanctions levels, the only route out is to invest in Russia directly, and transfer technologies and know-how to Russia. Leading the way in this trend are the Agricultural and Dairy industries. These have never been especially competitive in Russia, and quality is low. Russians wanting European made products such as wines and cheeses have typically imported them. Sanctions have put an end to this, and desperate to keep family businesses in Europe alive, many owners are now setting up Joint Ventures in Russia to manufacture these products for the Russian consumer market instead.

Whereas two years ago the only Russian produced cheese was bland and insipid, now locally made variants of Parmesan, Gorgonzola and Brie are on the shelves – and selling well. They may have a few years to go to get to standards of French, British and Italian cheeses, but the investments are being made and quality will improve over time. The same is true of wines, with Russia’s shores on the Black Sea home to some of the worlds greatest potential in quality wine production. Italian and French know how is already upgrading the previously patchy quality of Russian Black Sea viniculture. What is important is that these industries develop their own infrastructure. With subsidiary supply chain suppliers now being asked to join them, these EU economic sanctions refugees are finding a new home in Russia.

The mood in Europe is also changing. Intense dissatisfaction with EU policies against Brussels has already lead to Brexit, while serious concerns over a prolonged period of very low or even negative growth, enforced absorption of millions of non-European migrants, coupled with high taxes and declining services and standards of living are resulting in a resurgence of admiration of Russian President Putin, who in contrast is seen as sticking up for and defending his country.

Country Individual Income Tax Rate Corporate Income Tax Rate VAT Rate
Austria 25% 55% 20%
Belgium 33.99% 50% 21%
France 36.6% 49% 20%
Germany 33.325% 45% 19%
Greece 29% 53% 24%
Italy 31.4% 45% 22%
Netherlands 25% 52% 21%
Portugal 21% 46.5% 23%
Spain 28% 42% 21%
Sweden 22% 56.6% 25%
United Kingdom 20% 47% 20%
Russia 13% 20% 18%

* rates shown are the top rates per country. Lower earners may be subject to lower rates. However most businesses and professionals will be subject to the rates shown. Rates may not include additional mandatory pension or other state insurance schemes.

As can be seen, the tax regime in Russia is attractive, one reason why high income earners have in some cases even given up EU citizenship and reduce their tax bills. The case therefore for investing in Russia, and especially in the consumables market, is becoming increasingly attractive. The Russian economy is expected to have shrugged off the worst of the sanctions impact by next year, having moved supply chains elsewhere. Additionally, the Rouble remains low, an attractive proposition for holders of Euros in an economy that is only expected to grow by 1.9% next year. In contrast the World Bank
is expecting Russia to move out of a decline in growth in 2017 and start to show growth initially at similar levels and then higher for the period 2017-20.

It is fast becoming an irony that the sanctions imposed on Russia by the EU are shortly to be seen to have benefited Moscow rather more than EU members. The opportunities are there for European businesses now prepared to engage with a resurgent Russia at the same time that the EU seems likely to remain mired in slow growth, economic fault lines, mass internal migration, increased welfare spending, high taxes and political sanctions against its largest neighbour. The answer, for EU businesses looking to sell to growth markets is obvious: Russia is next door.

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