An increasing number of companies have decided to move their production to locations in Central Europe.
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| Why to enter this market? |
- Ninth largest country in the world in terms of population
- Seventh largest country in the world in terms of GDP (PPP)
- Variety of investment opportunities
- Existing players are unable to meet demand in most industries
- Gateway to other CIS countries and part of Asia
- Low average salaries
- Low utility and operational costs
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Business and economic environment
Russia, which is the ninth largest country in the world in terms of population and the seventh largest in terms of GDP (PPP), offers enormous investment opportunities in various industries, both on the domestic market, in the CIS and as a production, service or R&D location for companies from outside the country. However, this is not a market which a Western businessman will find familiar at first glance, and the 19th century saying that “one cannot understand Russia, Russia is something in which one should believe” still resonates. Despite the fact that the Soviet era is a distant memory, the country’s economy is still controlled to a vast extent either directly by the state or through companies which are dependent on the state and which enjoy various privileges. Simultaneously, sensitive areas such as defence and mining are either closed to non-Russian investors or are available only as minority stake in a joint venture, with a controlling stake held by the Russian partner. The cases of TNK/BP and Yukos have not helped to encourage foreign investors. Nevertheless, Russia offers a unique investment opportunity, and one must accept certain operational rules on the market as additional costs of market entry. The problems include a still substantial amount of red tape, an underdeveloped infrastructure, strict regulations, local competitors and the lingering shadow economy. It is generally advisable to enter by means of a joint venture or the takeover of a Russian company which knows the local conditions and can provide effective trouble-shooting expertise. The high oil prices brought in revenue for Russia between 2005 and 2008 and continue to do so in light of the North Africa and Middle East crisis of 2011, which prompted a very substantial increase in oil prices. However, the country has yet to tackle the limited domestic demand and its heavy dependence on foreign markets, which contributed to the contraction of its economy by 7.9% in 2009. The industries which are particularly attractive include mining, construction, aerospace, research and development, ICT, food and beverages, agriculture, logistics, timber and metal processing. The average salary is still low, but in certain areas a vast skilled workforce is available. Last but not least, Russia is not a homogeneous country – it has a variety of nationalities, along with developed and poor areas with different needs. High end, luxury goods will sell very well in Moscow, whose affluent population exceeds that of the Czech Republic pro rata, but would find few customers in the more remote areas of Russia.
Russia’s GDP is slowly recovering from the recession of 2009, when it fell by a surprisingly substantial 7.9% for such a robust economy. In 2010 growth returned to 4.3% and is expected to stay at the same level in 2011. Between 2000 and 2008 Russia’s current account balance reached almost 10% of GDP. However, it has been declining gradually, from 18% in 2000 to 6.1% in 2008, as the value of GDP in current prices recorded in USD increased sixfold. In 2010 Russian exports grew by 24.15% and imports by 23.7%, an increase in comparison with 2009, when demand on both the domestic and foreign markets was depressed and trade suffered as a result.
Inflation in the Russian Federation reached 14.1% in 2008 and 11.7% in 2010, which was high for an economy in recession. In 2010 it fell to 6.2% and is expected to continue to fall in 2011 (5.7%).
In terms of corruption, its perception in 2010 as measured by Transparency International stood at 2.1 (the CPI – the Corruption Perception Index), which left Russia in 154th place among the 180 countries surveyed. Russia’s CPI has been falling in recent years, at a time at which many countries have been making progress in this arena. The country is regarded as the most corrupt major economy. Corruption is Russia’s most serious economic problem, and it is difficult to tackle now that it has become endemic, despite some attempts by the government to curb it.
The unemployment rate in Russia reached 6% in 2010, an increase in comparison with 4% in 2009 and 6.2% in 2008. However, we believe that the available statistics do not reflect the real situation and that the number is actually higher.
Social environment
In 2010 the population of Russia was 138.9m, the 9th largest in the world. The average age in 2010 was 38.7 -35.5 for men and 41.9 for women. In Russian society women outnumber men by approximately 11 million. In terms of nationalities, the major groups are: Russian 79.8%, Tatar 3.8%, Ukrainian 2%, Bashkir 1.2%, Chuvash 1.1%, and others/unspecified 12.1% (2002). Most people declare themselves to be atheists or non-practicing believers (unspecified 8.8%, unaffiliated 59%), a possible consequence of 70 years of Soviet rule. Those who claim to be practicing worshipers make up between 27% and 35% of the population and are Russian Orthodox (15-20%), Muslim (10-15%), and other Christian (2%). The average salary paid in the Russian Federation in 2010 was EUR 445.
Infrastructure and technological environment
Russia has a well-developed and, in some areas, outstanding, research and development base. This applies in particular to industries developed during the Soviet era: heavy industry, defence, aviation, aerospace, nuclear energy, chemicals, etc. Some of these are closed to foreign companies for security reasons. However, these restrictions are sometimes eased if a Russian partner company is involved in the project.
The total installed generating capacity in Russia has been estimated to be 215m kW. Of this, 68% is accounted for by fossil fuel power plants, 21% was generated by hydroelectric units and 11% by the 31 nuclear power stations, making this the most extensive electricity industry in Europe and the fourth largest in the world. The country is rich in fossil fuels and accounts for 40% of global gas resources, 12% of oil deposits and 16% of confirmed coal resources. However, the Russian economy is the least energy effective of all of the ten foremost energy consuming countries (in terms of energy used per unit of GDP). It has been estimated that possible gains from emphasising the more effective use of energy in Russia could reach between EUR 90bn and EUR 115bn per annum. This would address an increasing demand problem by 2020 at a third of the cost of building the capacity required to meet demand. Whereas the extensive use of energy might be explained by the size of the country, the harsh climate or the importance of heavy industry, the greatest potential for savings is in residential consumption. This issue is becoming more important, because, in terms of gas, Russian domestic consumption is increasing more rapidly than production – and demand in Western Europe, a traditional export market, is expected to increase by more than 50% between now and 2030. Oil output is also expected to start declining in the near future. The achieving of a balance between energy supply and demand will be a key problem for the Russian economy in the next few years. In addition to fossil fuels, Russia is also abundant in other mineral deposits, such as aluminium, arsenic, asbestos, bauxite, boron, cadmium, cobalt, copper, diamond, gold, iron ore, lithium, magnesium, mica, nickel, nitrogen, palladium, phosphate, pig iron, potash, rhenium, silicon, sulphur, titanium sponge, tin, tungsten and vanadium.
Russia still has a very low internet penetration rate, 29.% in 2009 (data vary in accordance with the source and methodology). However, demand is growing rapidly, and, given the size of the population, and the low living standards, this means that the internet industry has the potential to develop as the economy grows, which makes it an attractive market for potential investors. The mobile phone penetration rate was estimated to be 166% in 2009.
The transport network of the Russian Federation consists of 87,157 km of broad gauge railways and 1.16m km of roads, of which 41,000 km are major roads of federal importance. There also exists an extensive network of domestic and international airports, as flying is sometimes the only efficient way of travelling because of the size of the country.
Political environment
Russia is a federal presidential republic, with the President as head of state. The Prime Minister is nominated by the President. However, the approval of the two chamber Parliament (the Duma and Federation Council) is necessary. Despite the fact that legislative power is represented by the Federal Assembly, both the President and the government may rule by issuing ordinances. Since November 2008, the term of Parliament has been extended to 5 years and that of the president to 6 years. The position of the President was weakened when Mr Putin became Prime Minister.
Russia is a member of all major international organisations and has a permanent seat on the United Nations Security Council.
General data
Area: 17.075m sq km
Population: 138.9 m (2010)
Capital: Moscow (Moskva)
Language: Russian
Ethnic groups: Russian 79.8%, Tatar 3.8%, Ukrainian 2%, Bashkir 1.2%, Chuvash 1.1%, others or unspecified 12.1% (2002)
National boundaries: North Korea 17.5km, China 3,645 km, Mongolia 3,441 km, Kazakhstan 6,846 km, Azerbaijan 284 km, Georgia 723 km, Ukraine 1,576 km, Belarus 959 km, Latvia 292 km, Estonia 290 km, Finland 1,313 km, Norway 196 km
Major economic indicators
| |
2007 |
2008 |
2009 |
2010 |
2011 |
| GDP (EUR bn) |
942.2 |
1139.8 |
910.9 |
1070 |
1113.8 |
| Population (m) |
142 |
141.7 |
140.8 |
138.9 |
138.7 |
| GDP per capita (EUR) |
6635 |
8044 |
6470 |
7700 |
8030 |
| GDP (constant prices y-o-y %) |
8.1 |
5.6 |
-7.9 |
4.3 |
4.1 |
| Exports, real, y-o-y (%) |
6.4 |
0.2 |
-7.2 |
24.15 |
|
| Imports, real, y-o-y (%) |
27.3 |
17.7 |
-18.1 |
23.7 |
|
| CPI (average, y-o-y %) |
9 |
14.1 |
11.7 |
6.2 |
5.7 |
| Central bank reference rate |
6.1 |
13 |
11 |
8 |
|
| Monthly wage, nominal (EUR) |
386 |
369 |
393 |
445 |
|
| Unemployment rate (%) |
6.1 |
6.2 |
9 |
7.5 |
|
| Net FDI (EUR bn) |
38.3 |
44 |
27 |
33.9 |
|
| FDI % GDP |
4.1 |
3.9 |
3 |
3.3 |
|
| FX reserves (EUR bn) |
325.4 |
302.9 |
317.1 |
404.4 |
|
| Exchange rate to USD AVG |
25.54 |
24.78 |
35.2 |
31.3 |
29.1 |
| Exchange rate to EUR AVG |
35.01 |
36.46 |
45.65 |
42.35 |
39.62 |
Last update: Q1 2011
Useful data
Currency: RUB
Exchange rate: (21.03.2011): 1 RUB = 0.025 EUR
Time zone: GMT +2 to GMT +12
Area code: +7
If you would like to find out more on the Russian market opportunities please do not hesitate to contact us directly:
phone: (48 12) 292 22 50
faks (48 12) 292 22 99
e-mail: info@pmrconsulting.com
PMR Business Solutions in Russia
Market reports Russia
To purchase or find detailed information on PMR Publications reports covering the general economy, construction, retail, pharmaceutical, and ICT sectors in Russia.
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Consulting in Russia
PMR Consulting offers a wide range of consulting services in Central and Eastern Europe for foreign companies interested in the region. The typical projects include: competitive intelligence, sourcing, strategic advisory, consulting at foreign direct investments and mergers & acquisitions.
Market research in Russia
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Case studies for Russia
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