A balanced budget spurring on economic growth, with good transport links and education – no wonder Russia looks good to European companies. Grant Thornton senior tax manager Olga Bondar reviews the business landscape for UK companies looking east
How does the Russian economy look?
It is clear that the emerging markets are still outshining developed countries. The so-called BRIC countries (Brazil, Russia, India and China) have demonstrated their ability and potential to grow and we can expect more in the next 10 years. For obvious reasons, the BRIC economies have slowed down in recent years, but the momentum is still very much there.
Although Russia, like many other major global economies, was adversely affected by the 2008-2009 financial crisis (with 2009 GDP dropping by 7.9%), its economic and business results have been very positive in comparison with the other European and global economies. For example, Russia’s economy grew 4% in 2010 and further picked up in 2011, with annual growth reaching 4.2%-4.5%.
Between 2004 and 2008, foreign direct investment (FDI) inflows picked up substantially, rising to $75 billion in 2008. During 2012, the Russian economy has grown at a reasonable pace, foreign debt was almost non-existent and the budget (for time being) is roughly in balance. With this in mind, it is safe to say that Russia’s economy is growing much more quickly than some of its Eastern European neighbours which have joined the EU. Because of the size of their economies, the BRICs are considered the most accessible countries for investing in emerging markets. For example, Moscow is only a four-hour flight away from London.
There is a good rail network for freight transportation in place and a number of easily accessible ports. With its rich natural resources, well-educated workforce and a reforming industrial base, Russia has great potential for substantial future growth.
Opportunities for trade in Russia
Western goods and expertise remain in high demand among the Russians. The most promising opportunities for UK business are likely to be in the following sectors: advanced engineering, financial services, ICT, power/energy, sports and leisure infrastructure, airports, construction, creative industries, rail and water.
‘Western goods and expertise remain in high demand among the Russians’
The Government’s economy modernisation and infrastructure development agenda (particularly the Sochi 2014 Winter Olympics, Universiade in Kazan in 2013, F1 Grand Prix in October 2014), underpinned by 140 million consumers’ appetite for quality services and goods produces a need for international expertise and products.
Current UK-Russia trade relationship
Many UK investors are not aware that Russia is the UK’s fastest-growing major export market, and the third largest export market outside Europe and North America, with favourable cross-sector opportunities, some unique in scale.
UK exports to Russia in 2011 increased by 39% from 2010, and equated to £4.78 billion. Since 2001 UK-Russia trade has been growing by an average of 21%. In the past couple of years, the UK has been one of the largest foreign direct investors into Russia, with Russian companies accounting for approximately one quarter of all foreign IPOs on the London Stock Exchange.
‘UK exports to Russia in 2011 increased by 39% from 2010, and equated to £4.78 billion’
Russia’s vast natural resources have already attracted some of the largest players in the energy sector. Both Shell and BP have invested heavily in oil and gas extraction and exploration in Russia. AstraZeneca and GSK have major investments in Russia’s growing pharmaceuticals market. Glass manufacturer Pilkington has its largest factory outside the UK in Russia.
English law seems to be also one of the UK’s popular exports to Russia, with several British law firms having already established offices in major Russian cities and looking to expand across the country. There are more than 600 UK companies already doing business in Russia, with dozens more looking at the market each month.
According to Russia Business Outlook 2013-16, by CEEMEA Business Group, four to five years ago, when most Central and Eastern Europe (CEE) markets were booming, Russia often represented approximately 25% of regional CEE sales for the average manufacturing company.
Since then, Russia has survived the economic downturn and performed well, while other markets have tumbled badly. In fact, the portion of total CEE sales taking place in Russia has risen to 35%-40% for the large majority of companies. For the big players with sales of $1-$2 billion in Russia, the market now accounts for 45%-55% of regional sales. For some service companies and executive search firms, Russia currently represents 65%-70% of business activity.
CEEMEA Business Group research also shows, in 2013 75% of companies interviewed are planning to expand their headcount in Russia. Every self-respecting financial controller cannot ignore the fact that Russia is increasingly becoming an important BRIC economy.
There are great opportunities to explore in Russia that may involve exports or direct investment into the country. Doing business with Russia, as with any other emerging country, is likely to bring some challenges and take time to develop. However, the potential rewards once the teething problems are resolved can be substantial and should not be disregarded.
Image: Getty Images