russiaasabusinessenvironment_abalkina

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RussiaRussia asas aa BBusinessusinessEE nvironmentnvironment

AnnaAnna AbalkinaAbalkina


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Aspects of business environment inAspects of business environment inRussiaRussia

State of business environment in RussiaState of business environment in RussiaPotential and competitiveness of Russia inPotential and competitiveness of Russia in

comparison with other emerging marketscomparison with other emerging markets


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Economic and political performanceEconomic and political performancein Russiain Russia

Last years were favorable for sustained growth inLast years were favorable for sustained growth in the longerthe longerterm. Russia achieved its development level registered in 1990.term. Russia achieved its development level registered in 1990.Favorable market situationFavorable market situation

resulted export growthresulted export growthallowed to increase International reserves that account forallowed to increase International reserves that account for $$581,6581,6 blnbln andand

allowed to organize Reserve fund (142,6 $allowed to organize Reserve fund (142,6 $ blnbln ) and Sovereign Welfare) and Sovereign WelfareFund (31,92 $Fund (31,92 $ blnbln ).).Russia achieved macroeconomic stability that allowed to haveRussia achieved macroeconomic stability that allowed to haverelative protection from financial crisisrelative protection from financial crisisPolitical environment has become more stable under PutinPolitical environment has become more stable under Putinpresidencypresidency

Some measures have been taken to reduce taxes, improveSome measures have been taken to reduce taxes, improvebusiness environmentbusiness environmentMacroeconomic development trends and institutional reformsMacroeconomic development trends and institutional reformsresult good incentives for business expansionresult good incentives for business expansion


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Positive trend in investments inflowPositive trend in investments inflow

0

20000

40000

60000

80000

100000

120000

140000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Direct investments Portfolio investments Other investments$ mln

Rosstat


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Positive trend in investments inflowPositive trend in investments inflow(Central bank estimates)(Central bank estimates)

-50 000

0

50 000

100 000

150 000

200 000

250 000

2003 2004 2005 2006 2007

direct investments portfolio investments other investments

Central Bank


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Positive trend in FDI inflowPositive trend in FDI inflow(UNCTAD estimates)(UNCTAD estimates)

0

5000

10000

15000

20000

25000

30000

35000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI stock achieved 200 $bln in 2006


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Due to different estimates FDI vary from 22 toDue to different estimates FDI vary from 22 to55 $55 $ blnbln in 2007in 2007Portfolio investments started to be noticeablePortfolio investments started to be noticeable

due to IPOdue to IPOHigh share of other investments (loans) isHigh share of other investments (loans) isexplained by weak financial intermediation onexplained by weak financial intermediation onlocal marketlocal market

Main investors originate from EUMain investors originate from EURussian reinvestments from off Russian reinvestments from off --shore territoriesshore territories


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Sector structure of foreignSector structure of foreigninvestmentsinvestments

wholesale andretail trade ; 39,1

transport and

communication;5,5

manufactury; 26,4

mining ; 14,4

other; 14,6


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Different estimates of businessDifferent estimates of businessenvironmentenvironment

92

30

Top 25

141

131

180

180

Totalcountries

2Global retail development index2006 (AT Kearny)

TrendRussiasplace

Index (Agency)

65Doing business 2009 (WorldBank)

147Corruption Perceptions Index2008 (Transparency International)

72Bank Financial Strength Ratingsby Country Sept 2007 (Moodys)

9FDI Confidence Index 2007 (ATKearny)

20Inward FDI potential index 2004-2006 (UNCTAD)

58Global Competitiveness Index2007-2008 (World EconomicForum)


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Market attractivenessMarket attractiveness

Positive trend and high rating are registered only in those repoPositive trend and high rating are registered only in those repo rtsrtswhich analyze market potential and macroeconomicwhich analyze market potential and macroeconomicperformance.performance.

This results that the main reason to expand in Russia is to have This results that the main reason to expand in Russia is to havemarket access to growing demand (automobile production,market access to growing demand (automobile production,goods importation, retail networks, retail banking). Investmentsgoods importation, retail networks, retail banking). Investmentsallow to overcome tariff barriersallow to overcome tariff barriersAccess to recoursesAccess to recourses

Energy sectorEnergy sector 22ndnd main reasonmain reasonLabor resources. Labor cost is less competitive with consideratiLabor resources. Labor cost is less competitive with considerati on of greyon of greysalary schemes. Brainsalary schemes. Brain --drain. Foreign R&D projects are few. Intel example.drain. Foreign R&D projects are few. Intel example.


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Negative estimatesNegative estimatesInternational agencies explain low position by corruption, lowInternational agencies explain low position by corruption, lowinstitutional development, crime, tax regulation, inefficientinstitutional development, crime, tax regulation, inefficientgovernment bureaucracy.government bureaucracy.CorruptionCorruption

11--2% (up to 6% in medium size enterprises) of expenses2% (up to 6% in medium size enterprises) of expensesCorruption limits the quality of investments and reduces the proCorruption limits the quality of investments and reduces the pro babilitybability

of expansion of highof expansion of high

--technological companies which are sensitive totechnological companies which are sensitive to

institutional problems. They are replaced by investors in energyinstitutional problems. They are replaced by investors in energy sectorsectorwhich are less sensitive. (which are less sensitive. ( LibmanLibman ,, HeyfetsHeyfets , 2006)., 2006).

Democratic institutions. There are autocratic countries thatDemocratic institutions. There are autocratic countries thatattract investments (China). This results that the main problemattract investments (China). This results that the main problem isisnot the lack of democratic institutions that reduce opportunismnot the lack of democratic institutions that reduce opportunismbut the role of the state that guarantees investments andbut the role of the state that guarantees investments andprovides law and order.provides law and order.

Key point is the lack of transparency, certain economic policy aKey point is the lack of transparency, certain economic policy a ndndselective measures in Russiaselective measures in Russia

Crime. Different attitude of potential and real investors. RussiCrime. Different attitude of potential and real investors. Russi ananimage abroad is worse than reality.image abroad is worse than reality.


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Competitiveness of Russia inCompetitiveness of Russia incomparison with other emergingcomparison with other emerging

marketsmarketsRussian business environment loses theRussian business environment loses thecompetition with other emerging marketscompetition with other emerging markets

European investors tend to invest in CEE andEuropean investors tend to invest in CEE andEast Asia for production outsourcingEast Asia for production outsourcingOutsourcing projects in Russia are few.Outsourcing projects in Russia are few.

Caterpillar exampleCaterpillar examplePolls show that just 2% of businessmen are ready toPolls show that just 2% of businessmen are ready toinvest in Russia for outsourcing (PBN 2006)invest in Russia for outsourcing (PBN 2006)


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Potential Investors already operate inPotential Investors already operate inother emerging marketsother emerging markets


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ConclusionsConclusions

Russia is not the market for 'dilettantes'.Russia is not the market for 'dilettantes'.Modern strategy to attract investments has itsModern strategy to attract investments has itslimitslimits

Russia needs top down approach towardsRussia needs top down approach towardsforeign investmentsforeign investmentsModernization policyModernization policy

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