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.
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