Russia’s Pro-Investment Policies, Post-Ukraine Conflict

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Russia’s manufacturing PMI is at 52% while the Eurozone is in recession. Moscow’s planning ahead is narrowing the development gap.

Russia has begun planning for business development and attracting foreign investment in the period following an end to the current Ukraine conflict, with Russian President Vladimir Putin making it clear that he does not intend to slow down the country’s economic and infrastructural development.

Authorities in Moscow are looking for opportunities to stimulate investment activity, according to a meeting of the Russian cabinet and economics concerning Russia’s economic issues last Thursday (November 3). According to reports, these include planning and absorbing sanctions, and the impact of the departure of foreign companies from the Russia market.

The implementation of investment support tools, aimed at both domestic Russian businesses and foreign investors is now the key Presidential topic with the Russian government, with Putin saying last week that “Maintaining the required level of investment is important at all times. Today it is even more relevant.”

The Minister of Economic Development, Maxim Reshetnikov, presented a package of measures to support investment activity in Russia. Certain problems in this area are already being dealt with, such as a reduction in Corporate and Personal Income Tax. However, the “business uncertainty factor” also intervenes, which is why Russian and some foreign businesses are afraid to take on new risks.” Reshetnikov noted. “The task of the Russian state is therefore to guarantee investment projects” the minister said.

Special Economic Zones, Public-Private Partnerships

Some of the support measures announced were implemented before the start of the Ukraine conflict and reaching back to plans put in place to protect the economy during the Covid pandemic. For example, budget infrastructure loans, special conditions for the restructuring of budget loans, and circumstances when Russian regions can direct the regional funding to new infrastructure projects have all been put into place, with the largest projects supported by the Russian National Welfare Fund. Businesses will also be able to receive assistance through the Project Finance Factory of VEB.RF, Russia’s State Development Corporation. New Russian Special Economic Zones are being developed, and other projects implemented within the framework of public-private partnership, where the private sector and government funding meet.

Duty-Free Importation, Tax Reductions & Rebates

Reshetnikov also called for the introduction of a mechanism for investment tariff benefits, which will allow the duty-free import of equipment for priority industries. A number of business support tools will be upgraded, such as the investment tax deduction. “A wide range of tools has been created to support investments. Taking into account the current situation, we are fine-tuning it together with business and the regions” Reshetnikov emphasized.

Increase In Fixed Asset Investment

These initial development measures to support investment activity appear to already having some impact. According to Rosstat data published in the review “On the current situation in the Russian economy in July-August 2022”, the measures already in place in crisis conditions are producing results: the growth of Russian investment in fixed assets in the first half of the year increased by 22.4% compared to 2021. Public utilities projects remain a priority.

This emphasis on investment, maintains a state policy that has long-term goals, according to Aleksey Zudin, at the Department of Comparative Political Science at the Faculty of Management and Politics, MGIMO, of the Russian Foreign Ministry. “State policy is guided by strategic goals, and actions that are operational, tactical in nature continue to be subordinate to strategic goals. Investments are not something that has been postponed. It is synonymous with the future. This is a contribution to the development of the Russian economy. The goal remains to ensure both the security and well-being of Russia.”

Need For Technological Advancement

President Putin understands that, technologically, Russia is “not hopelessly behind,” and investments in new technologies and innovations will give the desired effect. says Andrey Maksimov, a political scientist and head of the Maksimov Consulting agency. “The economy needs to be developed. If it begins to crumble, if investments leave the sphere of production, we will become North Korea. If we want to be a modern civilization, we need finance and technology. Investments make it possible to produce high-tech products not in a single copy, but to introduce them into mass production.” Maksimov said.

Dmitry Zhuravlev, scientific director of the Institute of Regional Problems, has stated that “If we forget about investments, after the conflict in Ukraine, we will fall behind as long as the hostilities go on. Investments are not just money; they are investments in something new. These are innovations, these are new technologies, and as a result, new products. It’s not easy: there was one plant for the production of automatic machines, now there are two. This is an investment in a plant for the production of something fundamentally new, which has not yet been manufactured in Russia. That is why such investments and such attention of the country’s leadership to this direction are justified.”

Summary by Chris Devonshire-Ellis

Contemporary Western media tends to dumb down Russian capabilities in technology, and many of the sanctions imposed have been put in place to stop Russian scientists acquiring Western technologies. However, it should be remembered that Russia is one of only two countries (the other being the United States) to have maintained long-term capabilities for human beings in space and to maintain – since 1998 – the International Space Station. It is also the only sovereign nation regularly operating crewed earth-space shuttle vehicles. NASA at present is restricted to sending unmanned cargo supplies.

Sanctions Impact On Russian & Chinese IT: A Double Edged Sword?

The West’s sanctions are a double-edged sword as although the immediate impact will slow down both Russia and Chinese advances in IT technologies and the ability to manufacture items such as semi-conductors, they will not stop the process. Both nations are now committed to spending far more on R&D in these fields now that Western cooperation has ceased, and they will instead develop their individual systems. This can be measured in terms of new IT patent applications, in which during 2021, China led the way, followed by the United States, with India, Germany and Russia all close behind. This means that the IT technology gap existing today can be expected to narrow over time. Another factor is that the bulk of the world’s raw materials now used in hi-tech processes, such as various rare metals, rare earths and their refining capabilities, now exist in rather larger quantities in Russia, China and their immediate vicinities than they do in the West. The current short-termism in terms of sanctions today may yet come back to bite should the likes of Russia and China decline to share their natural resources for Western technological advancement in the future.

More Russian State Involvement In Tax Incentives & Disincentives

Meanwhile, typical business incentives such as the development of Special Economic Zones and other tax incentives are more likely to become prevalent in Russia. Unlike China, the business community has tended to be fairly free of Government interference from Moscow, but this can be expected to change. The Chinese government have long used a ‘carrot and stick’ approach to direct its domestic businesses in the way in which State planning policies prefer, and Moscow can be expected to develop along a similar path: rewarding businesses investing in preferred areas and discouraging those that do not. This will be achieved by the lifting, or imposition of various tax schemes – and the same will apply to Foreign Investors.

Energy Supplies: Russian Manufacturing PMI Is Positive, Eurozone Negative

Another element in Russia’s overall business environment is the low cost of energy – an issue that EU businesses must now contend with as energy costs has risen – and taken away some of their competitive advantages. The US ratings agency Standard & Poors have just released data showing that the Eurozone Purchasing Managers Index (PMI) in the manufacturing sector dropped to 46.4% on October, itself a retraction from Septembers 48.6%. Anything below 50% is a retraction, signaling that EU output is slowing and a recession (three consecutive months of decline) already occurring. Higher energy bills are a primary reason – a problem Russia does not have. In contrast, according to Statistica Russia’s PMI hit 52% in September – indicating growth, while S&P valued it at just above 50% in October, 5 percentage points above Germany.

Major European PMI (S&P) October 2022

France 47.4
Germany 45.1
Italy 46.5
Russia 50.7
Spain 44.7
United Kingdom 48.8

The key to all of this is of course the ending of the Ukraine conflict, something I am sure all readers will be wishing for. Personally, I expect the outcome to be a negotiated settlement and that Ukraine will have to cede territory – the West will only support the conflict politically and financially for so long, and with recession already occurring, money and fiscal policies will become increasingly tight. It will be interesting to see the development of Russia post-conflict – it can be viewed as potentially positive news that Moscow has already turned its attention to this. A peaceful Russia is in everybody’s interest. How the cards fall onto the table after that can be partially determined, at least from the Russian perspective – the economy and a recovery is already showing green shoots, whereas the coming Euro elections from 2024 onwards will surely be about doing the exact same thing – only two-three years later than Russia is currently planning for.

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Russia Briefing is written and produced by Dezan Shira & Associates. During these uncertain times and sanctions imposition, our firm assists Russian companies relocate to Asia, and provides financial and sanctions compliance services to foreign companies operating in Russia. We also provide market research and advisory services to foreign exporters interested in Russia as the economy looks to replace Western sourced products. Please contact us at russia@dezshira.com or visit us at www.dezshira.com.