Successfully investing in the Russian Federation

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last updated on 27 May 2020 | reading time approx. 2 minutes

 

 

 

How do you assess the current economic situation in Russia?

The Russian economy grew by 1.4 per cent in 2019 – contrary to analysts’ forecasts. However, the economic situation has become considerably worse in Russia as well because of the current Covid-19 pandemic. In addition to the Covid-19 crisis, crude oil prices have fallen and the Rouble has weakened, reducing the purchasing power of the local population and imposing certain restrictions on consumer behaviour.
 
The fundamental problems of the Russian economy existing alongside the Covid-19 crisis – the economy’s strong dependence on crude oil exports and the lacking structural reforms – have not yet been solved and are additionally slowing down its growth.
 

How would you describe the investment climate in Russia? Which sectors offer the largest potential?

The steadily improving investment conditions offer incentives. German companies are very welcome in Russia, although they have been made subject to certain requirements depending on the industry since the introduction of the localisation policy. But this circumstance does not weaken the market’s high promise. There are good opportunities for German companies – especially those from the “Mittelstand” segment – in particular in these industries:
  • Automotive industry;
  • Mechanical engineering industry;
  • Energy;
  • Chemical industry;
  • Textile industry;
  • Food industry.

 

However, the persisting geopolitical tensions and sanctions – especially from the USA – cause uncertainty and deter prospective investors and market participants.
 

What challenges do German companies face during their business ventures into Russia?

The sanctions currently in effect against Russia and the weakening economy are a challenge for German companies. Therefore, German businessmen should ensure that their company management complies with the sanctions if they have operations in Russia or offer cross-border goods and services. This applies to military and dual-use goods as well as goods for oil extraction and related services. The US sanctions against Russian individuals and companies can also affect business carried on by German companies. Moreover, market protection policies make it more difficult for German companies to bid in public procurement tenders. Next to this, the well-known challenges of red tape and corruption should also be taken into account.
 

To what extent have the developments with Nord Stream 2 influenced Russia’s economy?

Considering that revenues from oil and gas exports account for approx. 40 per cent of the Russian state budget, the project Nord Stream 2 will bring a number of benefits to Russia. Firstly, it will cut down the costs of transit through the Baltic States and Ukraine, thus increasing the producer’s profits. Secondly, Russia will now be able to supply gas selectively to different regions of Europe on different terms and conditions, thus gaining additional room for manoeuvre in negotiation situations.
 

In your opinion, how will the Russian Federation develop?

Further export impetus can be expected from the commissioning of the new gas pipelines to Europe and China (Nord Stream 2 and Sila Sibirii). The completion of Nord Stream 2 (expected closer to the end of 2020) could deliver annually 55 bio. cubic metres of natural gas directly to one of the most important outlet markets.
 
Considering the positive profit developments in companies in 2019, there is basically a prospect for more private investments. The underlying reason is that Russian capital has been accumulated abroad on a significant scale during the last few years.
 
A return inflow of this capital will depend on improving business climate and the revival of corporate confidence in the government.
 
According to current information, a longer-lasting recession in the global economy as a result of the Covid-19 pandemic presents the greatest risk because this is associated with a decline in demand for raw materials and dramatically falling (which is already evident in case of crude oil prices) and would hit Russia hard as an exporter of raw materials.

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+7 495 9335 120
+7 495 9335 121

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