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Successfully investing in the Russian Federation

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last updated on 19 May 2021 | reading time approx. 2 minutes

 

 

 

How do you assess the current economic situation in Russia?

The Russian economy experienced a major drop in 2020: the GDP fell by about 45 billion Euro within a single year. This drop was mainly due to the spread of Covid-19 and the restrictive measures in the economy, which were intended to control the pandemic. Moreover, foreign trade also became much more complex. The IMF estimated the decline in exports of goods and services at -8.8 per cent, while the drop in imports was -12.6 per cent. The worldwide decline in demand for raw materials led to falling crude oil prices and curtailments in the population’s consumption behaviour. By contrast, the GDP growth is forecasted at 3 to 4 per cent year-on-year in 2021.
 

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

Economic incentives are offered through continuous improvement of investing conditions. German companies are very welcome in Russia, but after the launch of the localisation policy they have been made subject to certain requirements, which depend on the industry where the company operates. Nonetheless, this does not weaken the high prospects of this market. Major opportunities for German companies – especially for “Mittelstand”-shaped ones – can be found in the following sectors:

  • Automotive industry,
  • Mechanical engineering,
  • Energy sector,
  • Chemical industry,
  • Textile industry,
  • Food industry.


However, the persisting geopolitical tensions and sanctions – especially those coming from the USA – give rise to uncertainty and deter prospective investors and market participants. Still, given the outcome of the USA elections at the end of 2020 and the expected change in political direction after Joe Biden’s victory, greater predictability can be expected in relations with Russia.

Moreover, Covid-19 is a temporary obstacle that is not able to affect the attractiveness of the Russian market for foreign investors in the long run.
 

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

Next to the persisting pandemic, the sanctions imposed on Russia, the weakened economy and the conflicts in global trade are a challenge for German companies. This state of affairs affects large corporations as well as medium-sized (“Mittelstand”-shaped) and family-owned companies with operations in Russia. They have to ensure sanction-compliant corporate governance when operating in Russia or offering goods and services across borders. Above all, the sanctions concern the manufacture of and trade in armaments and dual-use goods as well as goods for oil production and related services. In addition, the USA has introduced sanctions against certain Russian individuals and companies connected to the Russian government. For example, the so-called “sanctions from hell” impose the following bans:
  • a ban on the operation of the largest Russian state-owned banks,
  • a ban on transactions involving new issues of Russian government bonds,
  • a ban on investments in the Russian energy sector, etc.

These far-reaching sanctions also have an impact on the business of German companies. In addition, a certain degree of protectionism complicates access to public tenders for foreign companies. Apart from that, the well-known challenges of red tape and corruption are still in place.
 

The IT sector is considered the fastest-growing industry in Russia (according to Redaktionsnetzwerk Deutschland). What opportunities does this present for German companies?

Last year the Russian government drafted certain legislative changes affecting companies in the IT sector with an intent to counter, starting in this year, the economic consequences of Covid-19. Mandatory social security contributions and income tax will be reduced to this end and the value-added tax will be cancelled for the IT sector. However, the reductions in tax and charges will only apply to Russian software producers and are intended primarily to discourage local IT companies from leaving Russia as a business location. These reductions and exemptions should be viewed critically in case of German and international companies since they will still have to pay VAT at the rate of 20 per cent. Thus, foreign companies will continue to be taxed at the standard rates and thus feel stronger competitive and innovative pressure than Russian companies, whose financial burden will be somewhat relieved through these legal amendments.
 

In your opinion, how will the Russian Federation develop?

The Russian market will continue to be affected by the impact of the Covid-19 pandemic till at least the end of 2021. However, the state will continue supporting the population and the economy through aid packages and an action plan to revive the economy. Therefore, recession and a declining economy are not expected to persist permanently. Rather, new export drivers can be expected from the commissioning of new gas pipelines to Europe and China (“Nord Stream 2” and “Sila Sibirii”). Despite the temporary suspension of the “Nord Stream 2” project at the end of 2019 due to the threat of further US sanctions, pipe-laying work was resumed at the end of 2020. According to the most recent reports, 94 per cent of the pipeline has already been completed – only about 120 km of the pipeline in Danish waters and 30 km in German waters are still lacking. “Nord Stream 2” is expected to transport annually 55 billion cubic metres of natural gas from Russia to Germany. A section of “Sila Sibirii” was already commissioned into operation at the end of 2019. The pipeline will reach the annual capacity of about 61 billion cubic metres and is primarily intended for gas transportation to China.

Despite last year’s decline in investments and the global economic crisis, the investment climate is expected to improve at a slow rate. Economists forecast step-by-step growth in consumer spending by 5.3 to 6.3 per cent year-on-year against 2020. Foreign trade will still need resuscitation time after the pandemic. In any case, the overall picture remains optimistic. The next year will be challenging, but the end of the pandemic will bring with it a pent-up surge in the demand in the economy, which will bring German companies back to the forefront in Russia.

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Dr. Andreas Knaul, LL.M., d.i.a.p. (E.N.A.)

Attorney at Law (Germany)

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+7 495 9335 120
+7 495 9335 121

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