Overview of the Russian economy
Russia is currently ranked 31 among 190 economies in the Ease of doing business ranking, scoring better than China (ranked 46). For example, Russia strengthened the protection of minority investors in 2017 by increasing shareholder rights and role in major corporate decisions.
Russia’s growth seems unsustainable for the coming years. The surprising +2.3% growth in 2018 is due to the revision of the construction sector which increased by 5.7% instead of the 0.5% estimates, but there is no sustainable driver for growth such as increasing investments, or an increasing household real revenue to support the economy and the industry is not running at full utilization capacity. In addition, Russia still faces a demographic issue and FDI drastically decreased in 2018 as the risk of tougher sanctions from the US creates incertainty about the Russian market performance in 2019.
Companies exporting to Russia or willing to might have to localize part of their production there, or risk being forced out by competitors who did. As foreign companies localize their production in Russia and domestic companies grow and modernize their assets, demand rises for production equipment, high-tech components and goods and services from developped economies and though Russia claims it will produce everything on its own, there are still multiple opportunities for niche products.
The priorities defined by President Putin for his 2018-2024 mandate are aimed at stimulating the internal demand and 56% of the program concern infrastructure, education, health care and ecology, whereas in 2012 it concerned mostly governance, military & defense and social policies. However, 2019 brings a new strategy oriented toward infrastructure development by investing 100 billion USD in infrastructure projects for roads, ports and hospitals development, while increasing salaries in the public sector.
Pharmaceutical industry in Russia
In the pharmaceutical industry, the target is to localize 90% of the production of strategic drugs by 2020. Pharmaceutical corporations which risk being excluded from governmental procurements started evaluating production localization in Russia.
There is a growing demand in the Aerospace market for aircrafts, engines and launch services. The modernization of the industry is supported by governmental financial solutions, including preferential loan and credit policies, along with Special Economic Zones with preferential tax regimes and advantageous conditions.
There are competent clusters across Russia, while the supply chain system is being transformed following the economic sanctions stimulating domestic hardware base manufacturing. The sector remains dominated by state companies despite efforts to foster startups and the emergence of private players.
The automotive Russian market, with a 3.6% growth in 2018, showed slow but sustainable dynamics towards further development in all the segments of the automotive manufacturing industry. Car production and sales in 2018 showed high and positive dynamics.
The agricultural sector grew by 2.3% in 2018 despite negative prediction and weather conditions. Counter sanctions on food products gives domestic companies time to develop themselves and become competitive. As sanctions are likely to last for 5 years at least, the Russian agricultural sector will keep developing itself steadily.
Energy sector in Russia
In 2009, Russia adopted a program aimed at attracting investors in the energy sector, including renewable energy, with a mechanism that allows investors to get returns on investments faster by increasing their prices by maximum 10% over 15 years, at the expenses of the government.
Russia’s waste market lacks recycling companies and companies that produce tradable goods from waste. The only material that are recycled are polyethylene (PET) materials and cardboard. The Committee of Opora Russia that deals with waste treatment communicated about the government’s will to create a federal network to recycle a wide range of wastes, but nothing has been done yet. This association is lobbying to defend the status and the role of SMEs in dealing with domestic waste.
Sanctions against Russia
Sanctions have a limited impact on Swiss SMEs willing to develop activities in Russia, as sanctions only restrict defined Russian banks, individuals and companies to raise funds with a maturity period over 30 days on capital markets. It does not concern Swiss individuals nor companies and does not prevent them to develop economic activities that are not under sanctions. Nevertheless, the embargo on dual-use equipment has a broad scope, concerning a ban on any equipment or service provided to the Russian military and plants of some sectors such as space or energy have both civil and military activities.
Russia Quarterly Briefing
February 2019 – 14 pages