Geography/Population
Geography
By far the largest country in the world, spanning 17,075,400square kilometres (6,592,800sqmiles) and covering more than a ninth of the planet's surface area, Russia is a developing market with major investment opportunities and massive geographical clout. The country extends across the whole of northern Asia and 40% of Europe, spanningnine time zonesand incorporating a wide range of environments and landforms. Alongside this, Russia shares land borders with fourteen countries including China, North Korea and Norway, and shares maritime borders with two of the world's foremost developed markets, the USA and Japan. Russia has a wide natural resource base, including major deposits oftimber,petroleum,natural gas,coal,oresand othermineral resources.
With access to three of the world's oceans- the Atlantic, Arctic, and Pacific- Russian fishing fleets are a major contributor to theworld's fish supply with the Caspian Sea the source of some of the world's finestcaviar.Agriculture is a booming industry in Russia, with a massive 10% of the world'sarable land being contained within the country. The mineral-richUral Mountains form a range which covers the country from north to south, a range that is commonly considered the divide between Europe and Asia.
Throughout much of the country only two distinct seasons exists, winter and summer. Consequently, spring and autumn usually act as brief periods of change between extremely low temperatures and extremely high ones.
Population
Russia is theninth most populous nation in the world with an official population of 141,927,297 as of January 2010. Ethnic Russians comprise 79.8% of the population; however the Russian Federation is also home to several sizeable minorities. In total, 160 different other ethnic groups live within its borders. While Russia's population is large, its density is low because of the country's enormous size. The population peaked at 148,689,000 in 1991, just before thebreakup of the Soviet Union before experiencing a rapid decline which started in the mid-90s. The decline has slowed to near stagnation in recent years due to reduceddeath rates, increasedbirth ratesand increasedimmigration.According to data published by the Russian Federal State Statistics Service, the mortality rate in Russia declined 4% in 2007, compared to the previous year, while the birth rate grew 8.3% year-on-year to an estimated 1.6 million births.
Society and Culture
Language
Russia's 160 different ethnic groups speak some 100 languages. According to the 2002 census, 142.6 million people speak Russian, followed byTatar with 5.3 million andUkrainianwith 1.8 million speakers. Russian is the only official state language, but the Constitution gives the individual republicsthe right to make their native language co-official next to Russian.
Over a quarter of the world's scientific literature is published in Russian. Russian is also applied as a means of coding and storage of universal knowledge. Indeed, according to the Russian Language Centre of the Moscow State University, between sixty and seventy percent of all world information is published in the English and Russian languages. The language is one of the sixofficial languages of theUnited Nations.
Religion
Christianity,Islam,BuddhismandJudaismare Russia's traditional religions, deemed part of Russia's "historical heritage" in a law passed in 1997. Russian Orthodoxyis the dominant religion in Russia, with 95% of the registered Orthodox parishes belonging to theRussian Orthodox Church.
Health
The Russian Constitution guarantees free,universal health carefor all citizens. While Russia has more physicians, hospitals, and health care workers than almost any other country in the world on aper capitabasis,since the collapse of theSoviet Unionthe health of the Russian population has declined considerably as a result of social, economic, and lifestyle changes. As of 2007, the averagelife expectancyin Russia is 61.5 years for males and 73.9 years for females.The combined average Russian life expectancy of 67.7 years at birth is 10.8 years shorter than the overall figure in the European Union.
Education
Russia has afree educationsystem guaranteed to all citizens by theConstitution, and has aliteracyrate of 99.4%. Entry tohigher education in the country is highly competitive and consequently a large emphasis is placed on science and technology in education, with medicine, mathematics, science, and space and aviation research generally being amongst the most popular fields of study.
Culture
The 160 plus different ethnic groups and indigenous peoples in Russia contribute to a very rich and diverse cultural melting pot. Multiculturalism aside, a Russian brand of 'higher culture' has long been in existence, with many of the most proclaimed musical composers of the twentieth century including Stravinsky, Rachmaninoff, Prokofiev and Shostakovich all hailing from Russia. Alongside this, Russian literatureis considered to be amongst the most influential and developed in the world, contributing many of the world's most famous literary works.Russia's literary history dates back to the 10th century. By the early 19th century a modern native tradition had emerged, producing some of the greatest writers of all time. This period and theGolden Age of Russian Poetrybegan with Alexander Pushkin, considered to be the founder of modern Russian literature and often described as the"Russian Shakespeare". Following theRussian Revolutions of 1917and the ensuingcivil war, Russian cultural life was left in chaos. Prominent writers and philosophersleft the country, while a new generation of talented writers joined together in different organizations with the aim of creating a new and distinctive working-class culture appropriate for the Soviet Union.
In more recent times many new activities whose origins lie in the West have become popular in Russia, includingcheerleading,auto racing,snowboardingandskateboarding. Many subcultures have become popular among Russian youth, likerappers,Goths,Emo,Anime fansandLive action role-playing gamers. The Russian Internet, or Runet, has seen a rapid development in the last years and the rise of a variety of Internet subcultures.
Government
According to theConstitution, which was adopted by national referendum on 12 December 1993 following the1993 Russian constitutional crisis, Russia is afederationand formally asemi-presidentialrepublic, wherein the President is thehead of state with thePrime Minister acting ashead of government. The Russian Federation is fundamentally structured as arepresentative democracy with executive power exercised by the government. The current incumbents of the top positions are President Dmitriy Anatolyevich Medvedev (since 7 May 2008) and Prime Minister Vladimir Vladimirovich Putin (since 8 May 2008).
Legislative power in Russiais vested in the two chambers of theFederal Assembly.The government is regulated by a system ofchecks and balances which have been defined by the Constitution of the Russian Federation. This body serves as the country's supreme legal document and as asocial contractfor the people of the Russian Federation. The Russian federal government is composed of three branches:
Legislative
TheFederal Assembly, made up of theState Dumaand theFederation Councilholds the power to pass federal laws,declare war, approves treaties. On top of this it has thepower of the purse, and has power ofimpeachment, by which it can theoretically remove the President.
Executive
The president acts ascommander-in-chiefof the military, has the power to vetolegislative billsbefore they become law, and appoint the Cabinet and other officers, who administer and enforce federal laws and policies.
Judiciary
TheConstitutional Court,Supreme Court,Supreme Court of Arbitrationand lower federal courts, whose judges are appointed by the Federation Council on the recommendation of the president, interpret laws and can overturn laws that are deemed unconstitutional.
According to the Constitution, the justice in the court is based on the equality of all citizens,judges are independent and subject only to the law,trials are to be open and the accused is guaranteed a defense. Since 1996, Russia has suspended thedeath penalty, although capital punishment has not been abolished by law.
The president is elected by popular vote for a six-year term (eligible for a second term but constitutionally barred for a third consecutive term as is the case with former President and now current Prime Minister Putin); Ministries of the government are composed of the premier and his deputies, ministers, and selected other individuals; all are appointed by the president on the recommendation of the Prime Minister (whereas the appointment of the latter requires the consent of the State Duma). The rights and liberties of the citizens of theRussian Federationare granted by Chapter 2 of theConstitution. Russia is a signatory to theUniversal Declaration of Human Rightsand has also ratified a number of otherinternational human rights instruments.
The Russian Federation is recognised in international law assuccessor stateof the formerSoviet Union with Russia continuing to implement the international commitments of the USSR, having assumed their permanent seat on theUN Security Council. Russia has a comprehensive foreign policy and as of 2009 maintained diplomatic relations with 191 countries and has 144 embassies.
Russia assumed control of Soviet assets abroad and most of the Soviet Union's production facilities and defense industries. The Russian military is divided into theGround Forces,Navy, andAir Force. There are also three independent arms of service:Strategic Rocket Forces,Military Space Forces, and theAirborne Troops.
Russia hasthe largest stockpile of nuclear weaponsin the world and also possesses the second largest fleet of ballistic missile submarines. Russia'stankforce is the largest in the world, while its surfacenavyandair forceare among the strongest. The country has a large and fully indigenousarms industry, producing most of its own military equipment with only few types of weapons imported. Russia is the world's top supplier of arms, a title that it has held since 2001, accounting for around 30% of worldwide weapons sales and exporting weapons to about 80 countries.
Economy
Russia's economy registered significant changes since the collapse of the Soviet Union in 1991. It moved from a globally-isolated, centrally-planned to a market-based and globally-integrated economy. In the 1990s economic reforms privatized most of the industry. Exceptions were found in the energy and defense sectors. The privatization process included a loans-for-shares system that turned over major publicly owned firms to politically-connected oligarchs. This left equity ownership highly concentrated. Property rights are still weakly protected and the private sector remains subject to heavy state interference.
Export/Import
In 2009 Russia was the world's largest exporter of natural gas (245 billion cu m, 2008), the second largest exporter of oil (4.93 million bbl/day in 2009), and the third largest exporter of steel and primary aluminum. Russian industry includes these globally-competitive producers and other less competitive heavy industries which are still dependent on the Russian domestic market.
The latter include mining and extractive industries (which produce coal, oil, gas, chemicals and metals), all forms of machine building industries (from rolling mills to high-performance aircraft and space vehicles), defense industries (including radar, missile production, and advanced electronic components, shipbuilding), road and rail transportation equipment, communications equipment, agricultural machinery (tractors and construction equipment), electric power generating and transmitting equipment, medical and scientific instruments and consumer durables (textiles, foodstuffs, handicrafts).
Lately Russia underwent a revival of its agricultural sector and also became a net grain exporter for agricultural products, like grain, sugar beets, sunflower seed, vegetables, fruits, beef and milk. Since 2007 the government also pursued the strategy to build up the country's high technology sectors (to be followed up in more detail bellow).
Russian exports altogether made $ 295.6 billion in 2009. Other commodities include petroleum and wooden products, metals, chemicals and a wide variety of civilian and military manufactures. Main exports partners are the Netherlands with 12.2 %, Italy with 9 %, Germany with 6.9 % and Turkey with 5.9 % (2008). Russian imports in 2009 lay with $ 196.8 billion below its Exports. Commodities range from vehicles, machinery and equipment, plastics, medicines, iron and steel to consumer goods, meat, fruits and nuts. Main imports partners are China with 12.9 %, Germany with 12.6 %, Japan with 6.9 %, Ukraine with 6 % and the US with 5.1 %.
Economic growth
The International Monetary Fund (IMF) estimated in 2008, that Russia's gross domestic product (nominal) will grow from $ 1.289 trillion in 2007 to $ 2.016 trillion in 2009 and further to $ 3.462 trillion by 2013, which would result in an increase of 168 %. In fact, the Russian GDP in 2009 turned out to be $1.232 trillion, due to the global economic crisis (to be followed up in more detail bellow). This still represents position 8 in the country comparison to the world. Russia's GDP PPP (purchasing power parity) was estimated by the IMF to grow from $ 2,087 in 2007 to $ 2,461 in 2009 and to $ 3,330 trillion in 2013. This would make Russia the second largest economy in Europe in terms of purchasing power. Actually in 2009 the GDP PPP was stated at $ 2.116 trillion, so under the estimations, too.
The GDP composition by sector includes agriculture with 5.2 %, industry with 37 % and services with 57.9 %. Russia's Labor force represents 75.81 million people, of which 10% are occupied in agriculture, 31.9% in the industrial sector and 58.1 % in services (2008). The unemployment rate lies at 8.9 % and the inflation rate (consumer prices) at 11.9 %. Russia's external debt comprises $369.2 billion, which ranks Russia place 20 worldwide. Concerning the stock of direct foreign investment at home Russia is ranked only on place 18 with $255.6 billion, regarding the stock of direct foreign investment abroad Russia ranked 17 with $196.7 billion. Furthermore Russia comes in second concerning reserves of foreign exchange and gold with $439 billion (data from 2009).
Financial crisis & Outlook
The global financial crisis of 2008 and 2009 had a huge impact on Russia, resulting in the plummeting of oil prices and the drying up of foreign credits that Russian banks and firms were in need of. Concrete measures to overcome the crisis followed by the Central Bank of Russia, which spent $ 600 billion of its international reserves in 2008 to slow down the devaluation of the ruble. Additionally the government devoted $ 200 billion in a rescue plan for the banking and industrial sector.
The industrial production growth rate in 2008 was -11 %. The World Bank states in the Russian Economic Report November 2009, that Russia finally returned to a modest growth rate of 2 % in the third quarter of 2009 compared to the second one, due to ongoing recovery in the global demand and commodity prices and growth in export-oriented industries. Further the World Bank forecasts in the latest statistics an increase of the GDP of 3.2 % in 2010. Although the economy started growing again end of 2009, challenges remain, like a shrinking workforce, poor infrastructure and a high level of corruption. Moreover bigger parts of the non-tradable sectors still endure little consumer demand and missing credit availability.
The Russian President Dmitry Medvedev stated towards TV Channel One on the 11th of October 2009 that the global financial crisis had a bigger impact on the Russian economy than expected, but with concrete governmental measures (to be followed up in more detail bellow) it could be modernized within 10 to 15 years, in order to compete with the world's largest economies.
Vice Minister for Economic Affairs Andrej Klepatsch optimistically predicts in 2010 economic growth for Russia of up to 6% by 2011. Indicators are 47.1 % growth of imported of container loads in Russian harbors in 2010 compared to 2009. The newspaper Kommersant reports of a 37.1 % growth of exports in the same time. The Russian railway also has an 18.3 % increase in container transportation compared to 2009.
However challenges will continue to affect fiscal, financial and social issues. This will result in controlling and increasing the efficiency of public expenditures in order to reduce the fiscal deficit. The World Bank argues, that Russia could have, with the development of a productive, diversified and competitive basis, returned to pre-crisis levels by the end of 2010.
Infrastructure
Communications
Over 1000 companies in Russia currently offer communication services. Russia undertook important steps in order to build up its telecommunication infrastructure and improve the general access to digital lines and internet and e-mail services necessary for a market economy. Concerning internet hosts Russia is worldwide ranked 13 with 7.663 million operating in 2009. 45.25 million Russians actually use the internet, which is about one third of the total population and rank 8 worldwide (2008).
Regarding a total population of 140.04 million people, 44.2 million telephones main lines and 187.5 million mobile cellulars are in use (2008/2009). While the rural Russian areas still lack of modern digital infrastructure and are generally outdated, the telephone systems in 60 regional capitals provide cellular services. More than 50,000 lines are operating for international calls, satellite earth stations provide access to Intelsat, Intersputnik, Eutelsat, Inmarsat and Orbita systems (2008).
Technology
Russias most successful field is space technology and space exploration. Despite the global economic crisis and an adjusted budget, Russia will not cut down its spending for the space industry in 2009 and invested $2.4 billion on three federal programs. $ 609 million were spent in the last two years, half of them to technically upgrade its production facilities. Russian politicians emphasize that efficiency should be further raised. $ 232 million alone are spent to increase the charter capital of the Khrunichev research and production space. To support the project the government is willingly to subsidize expenditure costs to some extent in order to secure loan payments in the space and rocket industry.
Furthermore Russia historically owns technological achievements in the fields of nuclear technology, aircraft production and arms industry. Stagnation and the economic crisis in the 1990s resulted in a decrease of state support for sciences and high technology and lowered Russia's competitive capability. Following the economic growth in the 2000s the Russian government again implemented a campaign for the modernization and innovation in the field of science and technology. The Russian President Dmitry Medvedev stated in an interview at the TV Channel One on the 11th of October 2009 that Russia should not only rely on oil and gas, but also play a major role in high technologies. In that sense priority for the domestic economy's modernization would include energy efficiency to reduce the general consumption, information technology regarding earth and space, civilian nuclear energy to generally raise the quality of life and pharmaceuticals to no longer be dependent on imported medical drugs.
In the field of information technology progresses have already been achieved, concerning the Russian development of GLONASS, which after completing will be the only global satellite navigation system apart from the US GPS.
Regarding nanotechnologies Russia today also claims to become the largest global leader. Historically Russian scientists pioneered in some sectors of nanotechnology and Russia still is among the best in the production of nanomembranes and nanopowders. In 2008 Russia planned to spend more than $ 8 billion in the following five years for nanotechnology and the construction of the necessary infrastructure.
On the global market of nuclear energy competition is high, but Russia acts confident and expects growth, too, regarding its leadership in several areas, like mobile nuclear power plants. Russia's atomic industry offers cooperation with potential partners for peaceful nuclear energy usage. Still leading global players remain the US, Japan, Germany and South Korea.
Transportation
Big Russian cities generally have a well-developed public transport system, with busses, trams and some of them underground metros operating. Russia's huge territory and widespread natural resources require a broad railway system. The Russian Railways is a state-owned joint-stock company and the second largest network in the world with 85,500 km of track, 43,000 km of them electrified. The company is responsible for 43 % of Russia's total freight traffic (including pipelines) and employs more than one million people, what makes it the country's biggest employer. The most popular transport axis is the Trans-Siberian Railway with a length of nearly 10,000 km.
Russia's Roadways combine altogether 933,000 km, including public, local and departmental roads. 754,984 km of these are paved (includes 30,000 km of expressways) and 178,016 km are unpaved (2006).
In Russia 1,216 airports are operating, 595 of them with paved runways and 52 of these over 3,047 m long. 621 airports are with unpaved runways and only three of them over 3,047 m long. Additionally Russia owns 48 heliports (2009).
By 2009 122 km of condensate pipelines in Russia were in use, additionally to 159,552 km gas and 127 km liquid petroleum gas pipelines, as well as 74,285 km of oil and 13,658 km pipelines for refined products (2009).
Waterways in Russia make 102,000 km (including 33,000 km with guaranteed depth), which makes it the second largest worldwide. 72,000 km of the Russian waterway system are placed in European Russia and link the Baltic Sea, White Sea, Caspian Sea, Sea of Azov and Black Sea (2007). The merchant marine in Russia consists totally 1,074, placing Russia under the top ten. Among these 25 bulk carriers are in use, 25, 663 cargos, 2 carriers and 27 chemical tankers. 112 vessels are foreign-owned: 80 by Turkey, 11 by Ukraine, four by Belgium and one by Germany. 486 of Russia's marine are registered in other countries: 94 in Liberia, 83 in Cambodia, 58 in Malta and 50 in Cyprus 50 (2008). Ports and terminals include Azov, Kaliningrad, Kavkaz, Nakhodka, Novorossiysk, Primorsk, Saint Petersburg and Vostochnyy.
Business Customs
Russia is a country in transition and so is its business environment. When dealing with Russian companies it is necessary to keep this in mind. Russian industries are still in the process of changing from command/soviet practices to more modern/European ones. Therefore, business customs reflect some of the characteristics of the communist epoch.
Strict hierarchies in company structures is one of these characteristics . There is a strong subordination in Russian companies. It is usually the case in the companies where top positions are occupied by elder people. The significant difference in age between a boss and an employee makes it harder for them to communicate. Furthermore, those bosses tend to have more soviet ways of doing business. For example, as one young managers working in Russia shares: "When you have a meeting with client and you have to decide on something fast, it is not always possible to go and speak to your boss. Basically you have to wait for someone with higher job position to organize a meeting with the decision maker. And that is how the clients can be lost."
Particular Russian characteristics exist in business negations:
During first stage of negotiations Russian business customs can be regarded as implicit. Russians can often relate the subject under discussion to other issues which are outside the scope of the negotiations. This may not be clear to the other side. However, during further discussions the subject can become more explicit because of the growing trust into counterparty.
Another important issue in Russian business world is personal relations. In the beginning it might seem that Russians are cold and closed people. However, it is only the case until they maintain a certain level of trust in your business relations. After that working with Russians become much easier. Personal relations can do miracles when something goes wrong and it is particularly true with Russians. They are far more people-oriented than deal-oriented. It is important that they like the person they doing business with. Russians are prepared to reject the deal if they don't like the people involved, even if it brings real money. Try to build good personal relations with Russians between the formal meetings and business deals will go much smoother.
Personal relations are also important when dealing with Russian bureaucracy. In order to bypass these obstacles and achieve results, key people and personal alliances are used. As head of an agricultural enterprise, Viatcheslav Bykov shares: "If you want to do some serious business you have to establish personal connections with so-called local 'business elite'. If they don't like you, you are in trouble. I had many troubles with previous head of our region as we were not good friends. I even had to pay for professional security to protect the lands and crops of my enterprise. However, there is now a new local head of the region after recent elections and he is the person I know. At present it is much easier for me to negotiate all kinds of administrative and bureaucratic questions. And no more security is needed!"
Cultural Etiquette
Cultural etiquette in Russia was driven by two powers: Soviet norms from the one hand and by national characteristics from the other. The characteristics which are coming from socialist times and still can be found in some of the businesses are:
Collectivism prevailing over individualism. The whole entity's stability is more important than the interests of one individual.
Discipline prevails over creativity. Russians are conservative and resistant to any kind of change.
The prevailing determinants of national characteristics were two important factors: harshness of the Russian climate and vastness of the country's territory. Throughout the history of Russia long-suffering peasants, ill-favoured by cruel geography and denied chances to communicate among themselves, were easy prey for those with ambitions to rule. These factors have lead to such characteristics as passivity, high level of corruption, and low legal consciousness.
In terms of norms of behaviour the following could be identified:
These rules vary when it comes to informal meetings with Russian business partners. If a person is invited for a diner at home it is polite to bring either some sweets, a bottle of wine or flowers for the hostess. When entering the place, shoes are supposed to be taken off (unless you are asked not to do so). Another issue is concerned with drinking habits. It is considered a serious breach of etiquette if you reject an offered drink or a toast. "If you don't drink alcohol, you'd better start if you deal with Russians. I know a person who went back on a deal after his partner refused to go for drinks to celebrate it."
Primary Imports and Exports
Since the fall of Soviet Empire, the Russian economy has seen some massive changes. It has transformed from being a state controlled socialist structure to a more market based, and globally integrated economy. Privatization of most industries happened as a consequence of economic reforms. Gradually, the share of commodities exports in the GDP has been increasing which made Russia succumb to the global economic recession. The economists could see the signs of recovery in the second half of 2009. This recovery could be majorly attributed to the rising oil and commodity prices and government's bailout package to pump some liquidity in the market.
Russia is fairly rich in natural resources, has a well educated population and a developed industrial base. However, the transformation to a complete transparent market economy is far from being complete yet. The following are Russia's major exports:
The percentage of foreign trade of Russia with the non CIS countries has been continuously rising and China has sprung up as a major trade partner in the recent times. Major exports markets for Russia are Ukraine, Germany, Belarus, Netherlands and China and the major import markets for Russia are Germany, Ukraine, Belarus and United States of America.
Since oil, gas, metal and timber account for a large proportion of the total foreign trade, the Russian economy has always been vulnerable to the fluctuations in the world prices.
Market challenges and opportunities
Russia poses an immense opportunity for investors - foreign and domestic. There has been tremendous positive increase in the investments coming into Russia. Russia has enormous wealth in terms of natural resources, technology and skill force. Russia has been relatively unsuccessful during the 1990s in attracting footloose FDI, as compared with her fellow transitional economies in Central and Eastern Europe. Both the volume of FDI inflows and the net benefits derived from FDI entering Russia have been constrained by infrastructural factors and government policies. There is an increased interest from foreign investors in the Russian economy, which has seen a continuous growth over the past three years - a turnaround after a decade of declines in the 1990s. FDI has the ability to contribute to the success of Russia's economic transition and to enhance the country's economic performance in three main ways:
Many factors have been responsible for increment in investment scenario. The following factors have played a major role:
In spite of all the positive developments, the problems of strategic nature still remain which pose major obstacles for long term economic revival. Some of the challenges or recommendations for improvement can be summarized as follows:
Improving Policy Environment for FDI
Russia should take full advantage of benefits associated with inflows of FDI, but it lacks a clear strategic vision of how FDI could fuel its growth and modernise some of its industries. Previously, policy framework was not clearly defined but the change is evident with clear policy definitions helping in integration of regional investment framework.
Banking Sector Reform is Critical
Legislative reforms in banking sector and oil, gas and rail monopolies have been the weakest element in the reform program so far. The banking system, insurance industry and pension funds are highly protected from foreign competition. The key points of the government's three year
programme in banking sector reform include: (i) a mandatory deposit insurance system starting in 2004; (ii) capital requirements for newly created banks to be increased to Euros 5 million; (iii) international standards for accounting and reporting to be adopted by 2004; (iv) the government to disinvest its stakes in a number of banks and (v) equal conditions for resident and non-resident banks.
A federal guarantee of retail deposits is a key step with regard to restoring confidence in the banking system.
Public and Private Sector Governance Issues
The nature of privatisation in Russia has been an obstacle to the development of FDI, preserving pre-competitive forms of management and operation. the levels of foreign participation through share ownership in former Russian state-owned enterprises (SOE) remain low, due in part to a natural aversion to a risky market, but also due to the particular outcome of Russian privatization. The main features of ownership structure are: the dominance of insider shareholders, both managerial and non managerial; a slow growth in the shareholding of small share holders from outside of the organisations; the relatively small growth of large outsider shareholders; and the failure of market infra-structure and dynamics to re-distribute shares in ways that might enforce organisational change from the outside.
The combination of complex laws, government control over key assets, low level of remuneration of government agents, along with weak enforcement and control mechanisms, provides a breeding ground for corrupt practices. Most businesses are in violation of some regulation or other and can thus be free game for pressures for bribes by officials.
These circumstances create major difficulties for potential foreign investors in Russia, since even if it were easy to acquire the ownership of companies, there remains the danger of inheriting the responsibility of paying a large social wage and considerable debts. Associated with that is the need to participate in an economy whose business practice is based substantially on responding to the needs of, and within the limits of the demand of the state, even after privatisation.
Tax Policy
Foreign investors have continually complained of excessive tax burdens imposed on their operation in the Russian Federation, which has ultimately led to fewer foreign investor willing to come in the market. Many reports have pointed to the fact that the Russian tax system consistently discourages investment, both through its structure and the manner in which it has been implemented. An excessive tax burden on oil and gas production has curtailed new investment in the energy sector. The many unresolved issues in the field of inter-budgetary relations and arrangements for revenue sharing between the federal and regional governments have brought added uncertainty to the tax environment. Many regions and local governments continue to introduce taxes that are not provided for in the federal legislation.
Thus, while strong federal presence seems likely to remain necessary in the near future, it should not simply take the form of increasingly rigid federal regulation, which could risk backfiring as sub-national authorities continue to seek loopholes for every restriction. A workable revenue-sharing system clearly requires consensus about its fairness in order to be genuinely effective
Federal vs. Regional Governments: Implications for Investment
The business in Russia suffers from the absence of a unified economic space and the frequent regulatory changes, discriminatory implementation of existing legislation resulting from unclear and contested separation of powers. What is needed is a clear-cut definition of state functions, transparency of official actions and the determination of what every level can and cannot do. Depending on the region investors encounter different conditions for business, different degrees on interference by the authorities.
But, the change is being brought about and is visible too. It is being aimed to give priority to restoring authority to the central government and dismantling power bases and conflicting administrative and other structures at regional level. It is yet to be seen how sincerely the government takes up the issue and works to create conducive environment which encourages the investor and also to what extent investor perceives the changing environment to be willing to come into the country to invest.
Crime, Corruption and Oligarchy
FDI inflows into modern Russia are also impeded by the growth of the oligarchy, crime and corruption. Oligarchy has emerged as one of the major threats to free and fair investment opportunities. Its importance is reflected in its ability to exercise state power on its own behalf. The oligarchs' relationship to the state and influence over the dispositions of state property, as well as their power over the media and business, places them in a strong position to decide the conditions in which the processes of economic change will take place. The existence of widespread criminal and corrupt practices is important deterrents to FDI, especially where they relate directly to business or to competition. Foreign-owned companies are frequently denied legal redress against those which harm their interests, while widespread corruption is frustrating the mechanisms for achieving a market economy in Russia.
Need for Corporate Responsibility
A degree of scepticism exists in regional administrations as to the positive effects of foreign investment at regional and local levels. This is one of the ideological issues which has prevented massive inflow of investment into the country. Also, local administrations are more likely to give green light to investors which take social responsibility and "not only think about global profits but also take care of local matters". The burden of bureaucratic procedures and poor public governance at local and regional level is considered as a "nuclear threat to business". There is also considerable concern among Russian authorities that competition to attract FDI will intensify between Russia and neighbouring countries in the Baltics and Central/Eastern Europe, particularly after their accession to the EU.
The Road Ahead
Russia is at such a juncture that positive and correct changes in the country could lead to economic development so as to match some of the fast growing economies of Europe. It can make progress like the 'poor' European countries did to match up to the 'rich' European countries. Only legal and policy framework modification will not help to achieve the desired level of development and investments. A rules-based FDI policy regime and its enforceability is key. A level playing field and a rule of law require an honest, even-handed and efficient bureaucracy and judicial system, implementing reasonable rules in a consistent and predictable manner. Evolution of new business culture in Russia is also a immediate requirement.
Country Investment Recommendations
There are several reasons for businesses and countries to invest in Russia. The country has abundant natural resources and educated population. Although the labour is expensive compared to the developing countries such as India and China it is still less expensive when compared to the U.S and other developed European countries. There is availability of technically skilled labour in the areas of biology, chemistry, physics, information technology, shipbuilding, aerospace, optics and natural resources. The middle class of Russia is growing at a good rate which makes it a market with immense potential relative to already saturated European markets. Good management skills are not at par with the best of the countries but investing companies can always opt for a mix of managers from the host and home country, provided they are given adequate training.
Agriculture
One of the potentially attractive investment sectors in Russia is agriculture. Agricultural industry of Russia is based on two major sectors: animal breeding (60% of all agricultural production) and crops (40% of all agricultural production). The major products of agriculture are grain, sugar beets, sunflower seed, vegetables, fruits, beef, milk.
The financial position of the agricultural sector in Russia has changed dramatically since the break-up of the Soviet Union. Formerly Russia relied heavily on the satellite republics of the Soviet Union for food commodity supplies. Following the break-up of the Soviet system, these along with subsidised prices have almost disappeared. The level of agricultural support fell significantly. The agricultural system experienced falling incomes, reduced investment in inputs resulting in falling yields and low returns. In 2001 and 2002 this cycle was broken with output increasing and cereal exports exceeding imports for the first time in many years, assisted by better growing conditions and the devaluation of the currency making exports attractive. However as a result of crop damage due to a harsh winter, cereal output declined in 2003 and the excess available for export was significantly reduced, although this situation was recovered in 2004 and 2005. In 2006 and 2007, the market benefited from a more benign winter, however 2007 saw a major summer drought that reduced output.
In 2007, the area of maize, cereals, sugarbeet, and rice increased by 55.2%, 6.7%, 5.4% and 4.5% respectively, whilst the potato area fell by 3.4% and soybeans by 12.5%. Although production of maize (+7.8%), cereals (+4.6%), and rice (+3.2%) all increased in 2007, these rates are well behind the area growth, whilst output of potatoes (-4.6%), sugarbeet (-6.0%) and soybean (-19.2%) fell, all affected by the summer drought. In comparison with 2002 the cereal and potato planted areas have declined, however maize, rice, cereal and sugarbeet have all increased. Generally yields of all crops have increased over the last five years .
Although the Russian government has pursued a policy of privatisation in the domestic agricultural sector, large farming collectives still dominate in the country, and in 2001 were reported to account for over 90% of farm land. These collective units, which are now owned on a shared basis, have survived mainly because of the resistance to change amongst the rural population.
The Russian agricultural system had experienced falling investment, decreasing output and income decline for some time, however this appears to now have bottomed out and further expansion is now anticipated. There is clearly enormous potential for improvements in crop production industry. The move to private land ownership is resulting in some increase of investment. The major development in agricultural markets has been the production of an exportable excess of grain that has led to increasing investment in production. Russia remains a net importer of arable produce, however the deficit had been decreasing, a trend that resumed in 2007 as arable imports increased by 27.5%, but exports more than doubled.
Cereal exports rose by 163%, whilst cereal imports however rose by 79.8%. As cereal production has remained static from 2003 to 2005, but improved in 2007, this indicates the significant impact the weather can have on Russian trade, the agricultural economy and the potential for the crop protection market. It also shows the impact of increasing domestic demand as the general economy continues to improve. It is evident that cereals from both Russia and the Ukraine can undercut prices in the EU, hence a ready export
market exists if an excess available for export can be produced.
The revision of the EU sugar price support mechanism, and expected significant downturn in sugar production in the EU, presents a further significant trading opportunity for Russian products.
At present, the agricultural industry in Russia has enormous potential to grow and is a particularly attractive investment opportunity.
Space technology & space exploration
Various excellent investment opportunities regarding high-tech cooperation also exist in the fields of space technology and space exploration as well as those in nanotechnology and nuclear energy (introduction in Chapter 1.e). Russia is currently speeding up and developing high technology devices and therefore searches for potential partnerships with foreign investors. The ongoing projects are promising. Russia has long been a pioneer in the sector of space technology and historically achieved outstanding results. This global space competition started with the Russian launch of Sputnik in 1957. Since the 1990s, Russia is strongly involved in international space activities, actively participating at the International Space Station, which is described as the mankind's biggest scientific project. Lately Russia's biggest space project since the cold war started, including plans from the Russian space agency to replace all its outdated launch facilities and rocket designs. President Medwedew decided in 2009 to heavily invest in this field despite the financial crisis (see 1.e). Russia already collaborates with the Finnish Meteorological Institute (FMI), the leading institute for R&D in space technology in Finland. At present, the Russian Lavoschkin Association (LA), the Russian Space Research Institute (IKI) and FMI are cooperating to succeed in an Earth observation Mission (Arktika) to study the terrestrial atmosphere and in a Martian exploration mission. With expertise and long cooperation traditions in space-based systems and techniques even major problems like the climate change can be solved. And after all, collaboration reduces costs. And missions like the MetNet Mars Mission, which is planned for 2018, is likely to be implemented in corporation with FMI, LA, IKI and other major space agencies. New partners are welcomed, in order to decrease the overall mission costs and improve the results. The planetary science and especially the Martian atmospheric science is in particular need for further exploration and high promising joint cooperation. Altogether the MetNet Mars Mission would provide essential information for the understanding of the dynamics and behavior of the Martian atmosphere, to ensure safe landings for all forthcoming Martian landing missions.
Nanotechnologies
Russia announced to heavily invest in its nanotechnological sector, using its huge revenues from the oil and gas exports, in order to become a global player in this field of technology. Through its current success in the production of nanomembranes and nanopowders and after completing the necessary infrastructure, this would give wide opportunities for foreign investors (see chapter 1.e), for nanotechnology represents a technology still in its early stages and whose importance is globally recognized. Cooperation in this sector are challenging and promising at the same time.
Nuclear energy
Russia directly offers cooperation with potential partners for peaceful nuclear energy usage (see 1.e). Its technique in this sector is highly advanced and predicts high revenues. There're many advanced projects to work on, which makes Russia an interesting investment partner. So Russia is currently the only country in the world producing mobile nuclear power plants, which were already successfully used in distant parts of Russia. This mobile nuclear power plant was developed to meet the energy demand in remote regions.
In these years the project of mass-built floating nuclear power plants (FNPP) will be completed, too, which are specially designed for coastal waters near industrial sectors. They can be transported with the help of a tug boat and without nuclear fuel, they will be a non-threatening hardware. A strong security system was developed, to enhance safety. A floating nuclear power plant can solve energy demands in Russia's Far East and extreme North. Here a new market is growing and this system is ready to be adopted in distanced areas worldwide. An investment agreement has already been signed with the Republic of Sakha (Yakutia). Therefore potential foreign investors are able to see the FNPP operating. Experts say demand will exceed supply.
Further Recommendations
Despite these advantages, policies adopted by the Russian government are not very inductive to bringing in foreign direct investment in the country. Issues such as corporate and other taxes, customs, certification, licensing still make the companies speculative about making big investments in the country. Also the fact the skilled labour is not growing at the desired rate might be a deterrent. Some of the other roadblocks to investing companies are the difficulties in obtainment of long term financing and the scarcity of reliable information.
It is advocated that Russia should phase out high tariffs and nontariff protection for the domestic market, most tax preferences for foreign investors (which don't increase foreign direct investment but do reduce fiscal revenues), and many restrictions on foreign direct investment. A World Bank Policy Research Paper recommends that Russia switch to a more modern approach to foreign direct investment by:
One of the factors currently preventing foreign investors from developing long term operating centres in the country is the weak property rights in the country. Strengthening the enforcement of these rights will help in giving a positive signal to the investors to develop the centres in the country for long term purposes.
Also the registration procedure for new investors coming to Russia and operating is massively complex and bureaucratic. One of our recommendations is to simplify registration procedures for foreign investors, to make them transparent and objective.
Many of the investors coming to Russia are not very sure of the success of the project as risks are too many. The government should extend guarantee schemes covering basic non commercial risks. This will satisfy investor as some of the risk will be covered by the government, only the commercial risk will be borne by the investor.
Efforts should also be made to reduce crime and oligarchy in the country. This is also one of the factors why the investors hesitate to come to the country. If these issues were in check, it would highly be in favour of the country as it would provide a positive outlook to the investors that protection is available in the country.
All in all, Russia is emerging as an attractive and preferred investment location, alongside other BRIC countries, for Multinational companies. The following could be some of the recommendations that could be made to the businesses that would be willing to invest in the country:
