Executives are bullish about Russia in 2008-09

Friday, 15 June 2007, 12:06 am
Press Release: Economist Intelligence Unit

Executives are bullish about Russia in 2008-09, despite difficulties in the business environment, according to Economist Intelligence Unit survey

Despite the many challenges of doing business in Russia, executives from companies worldwide expect to increase their presence in the market in 2008-09. In fact, most of the 455 executives surveyed in Hidden gem?: perceptions of business risk and opportunity in Russia, conducted by the Economist Intelligence Unit and sponsored by Clifford Chance, think the outlook for Russia is significantly better than that of several other leading emerging markets for the coming two-year period.

Executives are, however, wary of corruption and policy uncertainty, as well as complexity in the tax and legal systems. “Firms across industries suffer from bureaucratic interference, and even direct state intervention, in their daily operations,” says Matthew Shinkman, the author of the survey. “However, executives seem to be treating this interference as a cost of doing business in Russia.”

The survey finds that perceptions differ significantly between firms that are active in the market and those that have yet to enter—the latter being much more concerned about political risk and the former more likely to cite “everyday” issues such as weaknesses in distribution and the inflexible labour code. More broadly, perceptions tend to vary by region: companies from the Americas (most of which hail from the US) are both significantly more sceptical about market prospects and more concerned about the ambiguous relationship between the public and private sectors in Russia.

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“It is significant that companies already operating in Russia are more confident about its future than those watching from the outside”, says Michael Cuthbert, Clifford Chance’s managing partner for Central and Eastern Europe. “Despite the headlines about a return to state control, Western companies in sectors such as consumer goods and financial services, for example, operate in a relatively free and open market with potentially higher returns available than in continental Europe.”

Key findings of the survey include:

Bullish on Russia: When asked about the profit growth potential of the Russian market over the coming two-year period, 54% of respondents called it “high” or “very high”. This was less than the 69% who rated India as highly or the 73% who were most bullish about China over the coming two-year period. However, Russia’s share outpaced the 42% who see Brazil as a “high” or “very high” potential market, and was well ahead of the EU, Japan, and the US.

Challenges remain: While overall growth prospects appear good, Russia is still a difficult place in which to do business, and companies cited a number of constraints they face either in their daily operations or with respect to their plans to invest in Russia. Corruption overwhelmingly was the most-cited problem in the business environment (53% of respondents), followed closely by political risk (44%) and the inefficient bureaucracy (28%). One-fifth of respondents felt that contract enforcement and legal issues represent significant problems for doing business.

Outside looking in: Global perceptions of the Russian market differed in several key areas from the perceptions of those working in Russia today. Of firms with no operations or trading relationships in Russia, 53% considered political risk a significant constraint on business, well ahead of the 40% of companies that are active in the market. Firms operating in Russia were much more concerned about the complexity of the tax system, the scarcity of qualified staff, and bureaucratic inefficiency than those not yet in the market.

Not a bad place for business: After excluding those respondents who have no direct knowledge, over half of respondents rated the operating environment in Russia as either the same or better than that in India, China, and Brazil. Over 40% of respondents suggested it is at least as easy to do business in Russia as in Poland, one of Central Europe’s leading investment destinations, and 9% of respondents (12% of those operating in Russia) felt that the operating environment in Russia is either the same or better than in the EU as a whole.

Mind your own business: The relationship between government and the private sector remains an area of frustration for many businesses operating in or considering investing in Russia. Almost two-thirds of respondents suggested that direct government intervention is either a “major problem” or a “minor problem” for their businesses, while over 80% of companies said bureaucratic hassles are a problem for them as well. Unsurprisingly, firms in the energy sector—which is clearly considered “strategic” by the Kremlin and therefore under its direct control—were significantly more likely to cite direct state intervention in their operations as a major problem.

North American jitters: North American respondents were more wary of the market than those based in Europe or Asia. Of companies currently doing business in Russia, almost 40% expect to increase their investment “substantially” in 2008-09, while only 12% of North American firms will do so. While 11% of respondents expect the operating environment to improve substantially in 2008-09, and a further 51% expect it to improve moderately, just 4% and 33%, respectively, of North American executives share these views.

ENDS

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