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Tyutchev on Russia

Department of International Business A witty and deep description of Russia was coined by the famous Russian poet and diplomat in Germany, Munich (München), Fyodor Ivanovich Tyutchev (1803–1873)

Умом Россию не понять, You will not grasp her with your mind Аршином общим не измерить: Or cover with a common label, У ней особенная стать — For Russia is one of a kind – В Россию можно только верить. Believe in her, if you are able.

Original version, 1866 English translation byAnatoly Liberman, Ilya Bolotov, Ph.D., MBA 2000s, Tyutchev working group 25.02.2014

Historical figures (left to right):

Ryurik (founder of Russia/Rus), Ivan IV (the Terrible), Peter I, Catherine II, Nicholas II

Historical figures (left to right): Lenin, Stalin, Khrushchev, Brezhnev, Michael Gorbachev, Boris Yeltsin, Vladimir Putin and Dmitriy Medvedev

Map of the Russian Federation BBC Country Fact Sheet (updated)

Full name: Russian Federation, Russia (two official names) Area: ca. 17.1 million sq. km (6.6 million sq. miles) Population: 146.5 million (Rosstat, 2016), 143.7 million without disputed Crimea Capital: Moscow Major cities: Moscow, St. Petersburg, Novosibirsk, Yekaterinburg, Nizhniy Novgorod Major language: Russian (official in all regions), Tatar, Chechen, Ukrainian, Chuvash Major religions: Christianity (Orthodox), Islam, Buddhism, Judaism, Atheism, Shamanism Life expectancy: 65.1 years (men), 76.3 years (women) (UN, CIA, Rosstat), growing Monetary unit: 1 rouble = 100 kopecks (e.g. US $1 ≈ ₽64, €1 ≈ ₽72, 1元 ≈ ₽10) Main exports: Oil and oil products, natural gas, wood and wood products, metals, chemicals, weapons and military equipment, services GNI per capita (PPP): US $ 23,790 (World Bank, 2016), high income [ERDI > 2] Internet domain: .ru, .su, in local language: .рф International dialling code: +7, mobile phones +7 9XX (e.g. +7 920 – Megaphone J) Postal code: 6 digits, first two – regional code (e.g. 101000 – Moscow Post Office) Source: BBC. Russia Country Profile. [online] [cit. 08.02.2013]. Available at WWW . 25.02.2014 Source: http://www.lonelyplanet.com/maps/europe/russia/

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Outline What is so important in the BRICS?

• The BRICS, a „trend“ in the world economy • Specifics of the Russian economy – Successes and difficulties The share of the BRICS in world trade grows. – Competitiveness In 1990 the BRICS formed 3 % of world trade, – Business friendliness in 2011 the share was already 19 % • Russian foreign trade – Trade profile on exports and 16 % – Eurasian Economic Union on imports of goods and services. – Inter-BRIC trade • Russia as FDI destination – Investment promotion • Sanctions of the US, EU and Canada

Source: http://www.financialmirror.com Introduction to the BRICS Terence James "Jim" O'Neill (*1957)

Paper“Building Better Global Economic BRICs” (2001)

BRIC = 4 developing economies with great potential

“Over the next 10 years, the weight of the BRICs and especially China in world GDP will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.”

Source: Goldman Sachs. Dreaming with BRICs (2003) Source: Goldman Sachs. Dreaming with BRICs (2003)

BRIC will have greater US$ GDP than G6 • “Over the next 50 years, Brazil, Russia, India and China—the GDP BRICs economies—could become a much larger force in the (2003 US$ billion) by 2050 world economy. We map out GDP growth, income per capita 100,000 and currency movements in the BRICs economies until 2050.” BRIC 90,000 G6 By 2040 • “ 80,000 The results are startling. If things go right, in less than 40 > GDP G6 70,000 years, the BRICs economies together could be larger than the By 2025 G6 in US dollar terms. By 2025 they could account for over 60,000 ½ GDP G6 half the size of the G6*. Of the current G6, only the US and 50,000 Japan may be among the six largest economies in US dollar 40,000 terms in 2050.” 30,000 • “The list of the world’s ten largest economies may look quite 20,000 different in 2050. The largest economies in the world (by 10,000 GDP) may no longer be the richest (by income per capita), 0 making strategic choices for firms more complex.” 2000 2010 2020 2030 2040 2050

* G6 = France, Germany, Italy, Japan, the UK and the USA.

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Source: Goldman Sachs. Dreaming with BRICs (2003) Source: Goldman Sachs. Dreaming with BRICs (2003)

GDP (2003 US$ billion) Biggest economies by 2050 GDP per capita GDP per capita estimate (2003US$ prices) 50000 60,000 45000 India 40000 50,000 Brazil 35000 40,000 China 30000 South Africa 30,000 25000 Russia 20000 20,000 15000 10,000 10000 5000 0 0 2000 2010 2020 2030 2040 2050 China USA India Japan Brazil Russia UK Germany France Italy

BRICS today Outline

• Global crisis of 2008–2009 -> slowing down: • The BRICS, a „trend“ in the world economy – China‘s growth is decelerating, India is the leader, • Specifics of the Russian economy – Russia and Brazil were hit by crisis, Russia by sanctions, – Successes and difficulties – Growth of both the Russian and Brazilian economies are – Competitiveness under the long-term 5% forecasts. – Business friendliness • Russian foreign trade – Trade profile • Criticism of the BRICS concept by experts: rapid growth – Eurasian Economic Union is only a phase of development (Ruchir Sharmy, Morgan Stanley). – Inter-BRIC trade • Goldman Sachs stopped publishing research on the BRIC, • Russia as FDI destination Jim O’Neill retired. – Investment promotion • Sanctions of the US, EU and Canada

Before Foreign investment 1920s during the Russian Centrally-Planned Economy and Privatization (1) Empire • RSFSR as a centrally planned economy: Industrialization – Public property of productive capacities, during the Soviet – Isolation / autarky => price deteriorations, 1930s- period – State monopoly over foreign trade, 1980s – Extensive (not-innovative) development x West since 1970s , Stagnation of – Stagnation in 70s–80s (in Russian the “Zastoy” period). 1970s-1980s • Privatization in the RSFSR and RF: – Was and still is aimed at improving the efficiency of the Russian economy (private property increases motivation), 1985- Privatization nowadays – Not well-organized (many phases, still unfinished), – Had and has contradictory effects on the Russian economy and society Specifics of the Long-lasting and is not well-perceived by the majority of Russians. Russian economy problems

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Centrally-Planned Economy and Privatization (2) Economic success in 2000s Phases of the Privatization • Transition from upper middle income to a high income country in 2000s – Spontaneous (1988-1991) (WB data). • Gorbachov’s decrees, several 1000s of companies, not significant. • Big market (over 140 million people) with still unsatisfied demand. – Voucher privatization (1992-1994) [PS Rouble was RUR till 1998] • Russia is among Top 10 exporters in the world and among Top 3 in • Big companies –> joint-stock companies with big amount of shares. – Oil production and exports, • Each voucher had a value of 10 000 RUR (= total national wealth per inhabitant), – Gas exports, however, the amount of shares a person could buy varied across the country. – Coal exports, – Auctions (simultaneously) – Nuclear power plants (37% of the world market in 2013, CNBC). • For SMEs, their importance was understated in most regions during • rd th the privatization, except Moscow. In 2013 3 biggest foreign direct investment destination, 4 biggest investor in the world. – Loans for shares (1995–1996) • Especially competitive in: • Shares constituted collaterals for loans taken by the government (YUKOS, – Certain branches of space technology (rocket engines), Norilsk Nickel, Sibneft’ and some other big companies), which were not paid back afterwards. YuKOS was re-nationalized in 2000s (Khodorkovskiy’s case) – Arms and military equipment (machine guns, helicopters, defense systems – Exceptions: Moscow (since 1992) etc.), – Some cheap low-value added products (glasses sold through IKEA) or tablets / • (its own, more efficient program: with higher participation of the city smartphones / game consoles. administration and a higher share of auctions, which generated the biggest returns from privatization in comparison with all other regions).

Source: The Economist (2010), OECD (2014) household activities agriculture, hunting 0% and forestry health and social work 4% other community, Macroeconomic Overview of the Russian 4% social and personal Structure public administration service activities Economy in 2000–2009 fishing of and defence; education 2% 0% Gross domestic product and structure of the economy compulsory social 3% the Russian security GDP (In 2015 80 412.5 RUB) 41 668 bil. RUB GDP per cap. 11 830 USD per cap. 7% economy 1 679 bil. USD GDP per cap., 34.4 mining and Average GDP growth rate 7% PPP (USA=100) => price competitiveness quarrying in 2003–2008 => high 11% 2013–2014 Sources of GDP Agriculture (A) 5% Use of GDP Private consumption 48% r th Industry (I) 37% Public consumption 17% 3 4 nd 26% 2 - manufacturing 18% Investment real estate, renting d manufacturing Services (S) 58% Export 31% and business activities -22% => structure SIA Import 12% 15% Employment and its structure Unemployment rate, 2008 6.2 % of labour force Employment structure Agriculture 10% financial Industry 28% intermediation Average, 1995–2008 9.1 % of labour force Services 62% 5% electricity, gas and Inflation and monetary statistics construction water supply 33.5% 3% Inflation (CPI), 2009 11.7 % Average M2 growth rates, st 7% Average, 2004–2009 11.4 % 2003–2008 transport, storage and 1 wholesale and retail communications trade; repair of motor Note: If not stated otherwise, the statistics are from the years 2008–2010. Higher share of employment 8% vehicles, motorcycles in agriculture compared with its share in creation of GDP points to existing inefficiencies in this sector. hotels and restaurants and personal and household goods Source: The Economist (2010, str. 204–205). 1% 22 18%

90 160 Specifics of the Russian Economy (1) 80 140 70 120 • Still lower competitiveness of manufactured products, 60 100 50 80 40 especially on foreign markets: 60 30 40 – lower labour productivity (see graphs on next slides), 20 20 – lack of innovations, 10 0 0 – wear of production capacities (ca. 46.8% with yearly Italy Chile Spain Korea

reproduction of 6.6% in 2007) –> long-term issue, Poland Ireland Mexico Finland Belgium Hungary Australia Denmark Germany – Inefficient government support of domestic producers: Euro area OECD Total Switzerland

• in terms of monetary policy (access to credit, exchange rates). New Zealand Slovak Republic • in terms of export promotion (not as sophisticated as in the Central United Kingdom

and Eastern Europe, e.g. in the Czech Republic). Russian Federation • export and investment support is, however, now improving. GDP per worked hour, USD GDP per worked hour, USA = 100 – Government attempts to solve the problems by modernization/import substitution programs. Source: OECD (2012)

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IKEA Consumer low value-added Electronics

RD NOT BAD IT / Software Made in Russia

Helicopters, jets, space ships

R&D not bad!

Source: WB

5,500.0

Specifics of the Russian Economy (2) bn. 5,000.0

• Still strong dependence on natural resources, mainly oil, 2003, 4,500.0 of

natural gas, metals and wood: 4,000.0

2

prices y = -0.2529x + 53.222x + 1984 – In average, these groups had a ca. 83.1% share in total Russian exports RUB 3,500.0 in the years 2002–2011 (before the slowdown of economic growth). R² = 0.82842 – The main export partner of the RF is the EU (its share for these groups GDP, 3,000.0

is ca. 70% of total Russian exports). Real 2,500.0 y: • Russian extraction / mining industries, however, still face a lack 2,000.0 10 20 30 40 50 60 70 80 90 100 110 120 of geological research (prior to 2008–2009 it was performed by x:Average crude oil export price, Urals (Russian brand), USD/bbl. international firms with the share of ca. 70%) –> changing, • Insufficient reproduction investment (ca. 6.7% yearly in 2007, Real GDP is directly and significantly related to crude oil prices 2 wear – 53.3%) and declining growth rates of oil extraction (R is ca. 82.84%). since 2000 (from 7.7% – 10.8% to ca. 2.1% in 2006 and 2007 However, GDP cannot be boosted by oil prices infinitely. and 1.2 % in 2009) –> long-term issue, changing. Source: Bolotov (2012)

Russia and the “Dutch Disease”: • IMF (2007) attempted to compare the Russian economic Specifics of the Russian Economy (3) development between January 1995 and December 2005 with the symptoms of the “Dutch Disease”: • Dependence on imports of manufactured goods (in average, – appreciation of the real exchange rate (exchange rate reflecting PPP), imports of chemicals, machinery and transport equipment – slowdown in growth of industrial production, and miscellaneous manufactured articles had the share of – increase in growth of the tertiary sector (services), ca. 64.1% in total imports in 2002–2011, before the slowdown). – increase in salaries / wages. – The main import partner was also the EU with the share of ca. 50%. • Their results showed that Russia has some symptoms of the • Substitution of domestic products by more competitive “Dutch Disease”, however: imports (better and cheaper foreign goods tend to suppress – The real exchange rate is still not overvalued. – A decrease in industrial production and an increase in services may be domestic production), which is amplified: attributable to transition processes (centrally planned economies had a – by a relatively high inflation (in average ca. 11.4% in 2004–2009, 2014–). lower share of services in GDP/national income than market economies). – By an appreciating exchange rate of RUB/USD and RUB/EUR – Increase in wages can be explained by the reduction of a part of the grey (e. g. from 31.35 RUB/USD in 2002 to 24.85 RUB/USD in 2008). economy caused by productivity growth and the recovery after the • Russian financial crisis of 1998 and by the good results of the 2000s. Rouble depreciation of 2014/2015 changes the trend.

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Specifics of the Russian Economy (4) Specifics of the Russian Economy (5) • Relatively high tariff protection (average MFN tariff level • Long-term dependence on foreign capital inflows, which are, is ca. 9.43% (2009, WTO), which is above the BRIC average at present, the main source of the modernization of (7.4%) and significantly exceeds the level of developing economy (see the previous presentation): countries (EU – 5.27%, USA – 3.49% and Japan – 5.29%). – Problem: lack of domestic capital (common to transitional economies). – Accession to the WTO will reduce several tariffs up to 0%, in total – The EU is the main investor in Russia (ca. 75% of total stock of FDI). by 30 % by 2020. The new MFN maximum should be 7.6% (officially - • FDI stock in the Russian economy in relative terms (% of GDP) 8.2%, but the RF agreed with the WTO on further reductions). is above the BRIC average, however, is still below the one of the – Tariffs protect industries with low competitiveness, e.g. automobile Central and Eastern European States: industry, as well as natural resources (export tariffs, mainly oil) • The protection will remain for several years after the WTO accession. In 2002–2011, before the slowdown, in average, 24.8% GDP – Russia has ca. 80,000 customs workers, the second biggest customs compared to ca. 21.0% of the BRIC and ca. 52.6% service in the world (according to the statistics of 2009, biggest – China?). of the Visegrád group (the Czech Republic, Slovakia, Hungary – Tariffs are an important contribution to the consolidated budget of and Poland). the RF (ca. 25%) and form up to 10% of GDP.

Specifics of the Russian Economy (6) Specifics of the Russian Economy (7) • Relatively big share of state interventions into the economy • Relatively high share of imperfect competition (so-called “quasi-state economy”, government expenditures form up to 40% of GDP), an important role of Ministries and (monopolies and oligopolies), especially in the natural state enterprises, support of non-efficient firms and high resources extraction/mining and communal sectors transaction costs of the state administration: and at the local level: – Overlapping competences (as defined by laws). – Existence of so-called oligarchs (very rich people controlling – Courts are not fully independent (Russian state enterprises big companies, which were usually acquired during the privatization e.g. through the “loans for shares” scheme). are favoured in disputes). – Systemic (overall present) corruption. – See examples on the next slides. • According to the Transparency International, 2011, Russia was – The efficiency of the Russian Federal Anti-Monopoly Service (FAS) has certain gaps. placed 143 out of 182 in terms of corruption (Corruption Perception Index was 2.4 out of 10) – worst result. – Often non-transparent public procurement. Corruption practices (a common Eastern European problem).

• Examples of monopolies in 2007 (most are quoted at the The most important Russian companies: Moscow stock exchange): – RUSAL (100% in aluminum production), – Rosneft, LUKOIL, TNK-BP and Surgutneftegaz (73% in oil extraction), – SUEK and Evraz Group (ca. 63% in coal extraction), – NLMK, MMK, Severstal and Evraz Group (more than 50% share in iron ore extraction), – GAZPROM (85% in extraction, almost 100% in transport and 100% in export of natural gas), – Evrocement Group (39% in cement/concrete production) etc. • Effects: – So-called “Gasoline crisis” in 2011 (increase in price and shortage of gasoline in some of the Russian regions) due to simultaneous service checks and repairs of major (automotives) refineries. Source: Forbes, EconomyWatch – Small impact of the oil price decline on the fuels market.

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Specifics of the Russian Economy (8) Reasons for higher inflation in the Russian Federation: • Policy of the Russian government and Central Bank (CBR) in the • Relatively high inflation rate (yearly CPI growth in 2002–2011, 1990s (unwillingness to address the issue due to the difficult economic and social situation). before the slowdown, was ca. 10.76%, in 2014–2015 ca. 17%, – Russian monetary policy is equally aimed at regulation of inflation and stability 2016 – 6%?). of the RUB. Since 2014 the CBR applies managed floating regime. • The CPI basket may not accurately reflect the growth of all • Exchange rate policy (fixed ER) and interventions of the CBR against prices (the basket is narrowly defined, consumption is usually the rouble in order to improve the price competiveness (in 2000s). • Imperfect competition in certain industries (see above). vaster, not taking into account other influences): • Increase in public expenditure, especially on social projects, – E.g. the average growth of wages was higher (ca. 38.32% in 2005– 2011, before the slowdown), in fact higher than the GDP. in case of higher oil returns (mostly before the crisis). • High GDP growth in 2000s accompanied by a rapid credit expansion. • Acceleration in inflation in 2014–2015 due to rouble • Increase in FDI and other foreign capital inflows before the crisis. depreciation (up to 17%). • Expensive banking credits due to high interest rates. => rouble depreciation restored price competitiveness. • Anti-crisis measures in 2009–2010. • Rouble depreciation, fall in oil price, sanctions.

Specifics of the Russian Economy (10) Specifics of the Russian Economy (9) • Important size of the so-called grey economy, ca. 48.6% of the • Relatively weak banking sector: the share of bank credits in GDP in 2002– official GDP in 1999–2007 (130th rank of 151, 2007 – last major survey). 2011, before the slowdown, was, in average, 28.6% against 97.0% Possible explanations: in the BRIC, 54.7% in the Visegrád group (Czech Republic, Slovakia, – Lack of more lucrative alternatives in the legal sector. Hungary and Poland), 139.4% in the EU, 226.3% in the USA and 313.7% – Moral and legal gaps since the break up of the USSR. in Japan. E.g. Brazil, comparable to Russia in terms of HDI, had the share – Relatively low GDP per capita, economic problems in the 1990s. of 86.1% GDP. – Incorporation of new, foreign, institutions in the Russian society. – A problem for small and medium-sized enterprises, SME, as well as – for big firms. Systemic corruption etc. – According to several Russian economists, Russian non-financial companies finance ca. 20–30% of their investment from domestic • Example: double-wage in SMEs (part is legal and taxed, part is paid banks and use own capital and foreign banks for the rest. “in envelopes” through different tax avoiding schemes). – Big companies create their own banks for self-financing, e.g. Gazprombank (GAZPROM), Petrokommerc (LUKOIL), • Benefits: grey economy reduces inflation (prices are lower due to Surgutneftegazbank (Surgutneftegaz), Zenit (Tatneft) etc. the “deduction” of taxes through non-declaring part of income).

Competitiveness

China

S. Africa Brazil India Russia

China Russia S. Africa

Source: ibid. Brazil Zdroj: WEF India3 28 NB: Grey economy is slowly “disappearing” in the RF

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Business friendliness

Doing business in Russia in 60 sec. – Progress in 2013 © Sylvie K. Bossoutrot https://vimeo.com/82144860

PS World Bank’s “Doing Business” report focuses on Moscow and St. Petersburg More at http://www.doingbusiness.org 5152

Countries by tariff protection, averages Outline

• The BRICS, a „trend“ in the world economy • Specifics of the Russian economy – Successes and difficulties – Competitiveness – Business friendliness • Russian foreign trade – Trade profile – Eurasian Economic Union – Inter-BRIC trade • Russia as FDI destination – Investment promotion • Sanctions of the US, EU and Canada Source: WTO

Merchandise exports and imports in current US dollars Exports and imports of commercial services in current US by region, 2012 dollars by region, 2012

Source: WTO Source: WTO

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WTO. Merchandise trade: leading exporters and importers, WTO. Service trade: leading exporters and importers, 2012 2012

bn. USD bn. USD bn. USD bn. USD

EXPORTS 2010–2014 (1)

TRADE BALANCE 1995–2014

In 2014 Russia exported $449B, making it the 10th largest exporter in the world. During the last five years the exports of Russia have increased at an annualized rate As of 2014 Russia had a positive trade balance of $154B in net exports. As of 9%, from $292B in 2009 to $449B in 2014. The most recent exports are led by compared to their trade balance in 1995 when they still had a positive trade balance Crude Petroleum which represent 34.7% of the total exports of Russia, followed by of $11B in net exports. Refined Petroleum, which account for 19.6%. Source: MIT Source: MIT

EXPORTS 2010–2014 (2) EXPORTS 2010–2014 (3)

5-year annual growth rate The top export destinations of Russia are China ($39.3B), the Netherlands ($39B), Germany ($29.8B), Italy ($22.9B) and Japan ($21.5B).

Source: MIT Source: MIT

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IMPORTS 2010–2014 (1) IMPORTS 2010–2014 (2)

In 2014 Russia imported $295B, making it the 17th largest importer in the world. 5-year annual growth rate During the last five years the imports of Russia have increased at an annualized rate of 11.6%, from $170B in 2009 to $295B in 2014. The most recent imports are led by Cars which represent 5.32% of the total imports of Russia, followed by Packaged Medicaments, which account for 3.44%. Source: MIT Source: MIT

IMPORTS 2010–2014 (3) SUMMARY, 2010–2014 Top 5 Products exported by Russia Crude Petroleum (39%), Refined Petroleum (15%), Petroleum Gas (9.1%), Coal Briquettes (3.0%), and Semi-Finished Iron (1.5%) Top 5 Products imported by Russia Cars (7.3%), Packaged Medicaments (3.4%), Vehicle Parts (3.2%), Computers (2.2%), and Delivery Trucks (1.4%) Top 5 Export destinations of Russia Netherlands (9.2%), China (8.1%), Germany (6.5%), Ukraine (5.7%), and Belarus (5.4%) Top 5 Import origins of Russia China (15%), Germany (14%), Ukraine (5.5%), Belarus (4.6%), and Japan (4.4%)

Russia is the top exporter of Raw Aluminium, Semi-Finished Iron, Nitrogenous The top import origins of Russia are China ($50B), Germany ($37.3B), the United Fertilizers, Sawn Wood, Mixed Mineral or Chemical Fertilizers, Copper Wire, States ($16.5B), Belarus ($14.9B) and Italy ($12.4B). Raw Nickel, Rough Wood, Precious Metal Compounds, and Pig Iron. + grain in 2016

Source: MIT Source: Rosstat, MIT

Russia – Eurasian Economic Union (1) Russia – Eurasian Economic Union (2)

EAEU Armenia Belarus Kazakhst Kyrgyzstaan n Russia

Share of 3rd countries in total trade Share of mutual trade in total trade

Sources: Eurasian Commission

Source: Eurasian Commission

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Russia – Eurasian Economic Union (3). Russia – Eurasian Economic Union (4)

Structure of mutual trade January – September 2014 January – September 2015 between the members of the EAEU Export Import Russia Belarus Armenia Kyrgyzstan Kazakhstan Mineral products Machines, equipment and transport Agricultural goods equipmentMetals and metal products Chemical goods Other goods Sources: Eurasian Commission Sources: Eurasian Commission

Intra-trade inside BRICS (1) Intra-trade inside BRICS (2)

(c) Trade between India and rest of the BRICS (d) Trade between China and rest of the BRICS (a) Trade between Brazil and rest of the BRICS (b) Trade between Russia and rest of the BRICS

Source: IIFT Source: IIFT 9

Intra-trade inside BRICS (3) Trade balances – BRICS

500 (e)Trade between South Africa and rest of the BRICS 400 BILLION USD

300

200

100

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-100

-200 BrazílieBRAZIL RuskoRUSSIA IndieINDIA ČínaCHINA Jižní AfrikaS. AFRICA Source: Based on UN COMTRADE and http://wits.worldbank.org/wits/ (as accessed on 28/01/2013)

Source: World Bank Source: IIFT

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Outline FDI in the Russian Federation (1) FDI in Russia, million of USD • The BRICS, a „trend“ in the world economy 30 000 Since 2013 In 2014, Russian FDI stock was • Russia experiences Specifics of the Russian economy US$ 378,5 billion net outflow of capital – Successes and difficulties 22 500 – Competitiveness – Business friendliness 15 000 • Russian foreign trade 7 500 – Trade profile – Eurasian Economic Union 0 – Inter-BRIC trade 19952000200120022003200420052006200720082009201020112012 • Russia as FDI destination – Investment promotion FDI in equity • Sanctions of the US, EU and Canada Credits from foreign owners Other FDI Source: Rosstat

FDI in the Russian Federation (2) • Main investors (countries) In the years 2004–2010: – The Netherlands (30.3 %), Cyprus (23.2 %), Germany (9.3 %), British virgin islands (4.3 %), France (3.5 %), UK (3.5 %), Austria (2.4 %), Finland (2.3 %), USA (1.9 %). – Growing share of tax havens, 50–60 % of total FDI inflows compared with the 1990s. Repatriation of “foreignized” Russian capital. – Most recent data: http://www.gks.ru/bgd/regl/b12_12/IssWWW.exe/stg/d02/24-11.htm • Industries in the years 2004–2010: – Extraction / mining (27.1 %), manufacturing industry (25.1 %), real estate, lease and services (15.5 %), retail and wholesale trade, repairs (12.6 %) and financial services (5.5 %). – Investment flowed into the most productive sectors of the economy – Most recent data: http://www.gks.ru/bgd/regl/b12_12/IssWWW.exe/stg/d02/24-09.htm Source: CIA. Factbook.

FDI inflows in 2010–2013, thousand US$

2010 2011 FDI in the Russian Federation (3) Total 13 810 042,45 Total 18 414 837,68 Cyprus 3 450 978,03 Cyprus 4 705 854,37 Germany 2 581 845,43 Netherlands 3 307 629,91 • Major foreign companies present in Russia: Netherlands 1 515 882,11 Germany 1 731 795,47 – E.ON, Boeing, Alcoa, TNK-BP, Coca-Cola, Deutsche Bank, France 960 231,48 Virgin Islands (UK) 1 442 304,07 UK 584 170,31 Austria 853 326,56 ExxonMobil, Hewlett Packard, Mitsubishi Corporation, PepsiCo, Rep. of Korea 519 692,03 France 775 615,97 India 512 429,42 India 612 449,66 Renault and others. Finland 389 058,63 Finland 605 759,02 Austria 371 414,03 China 591 104,11 • In total, FDI inflows were not important in the RF until Virgin Islands (UK) 307 318,44 UK 310 748,62 2012 2013 2006 (2005 – Special Economic Zones project): Total 18 666 044,04 Total 26 117 715,62 Cyprus 5 844 104,36 Non-listed 20 912 759,61 – E.g. net FDI inflows per capita were below the CIS average. Germany 1 768 468,62 Cyprus 9 762 724,98 Netherlands 1 550 556,83 Germany 3 973 611,2 th th France 1 241 464,35 Netherlands 3 101 610,5 • Nowadays Russia is the 5 –7 most perspective market Virgin Islands (UK) 970 607,76 Japan 1 027 326,2 Austria 952 326,68 Austria 886 123,6 for MNCs and TNCs according to the UNCTAD WIPS UK 754 585,56 Switzerland 813 514,77 (surveys): Finland 505 502,7 France 758 166,13 India 487 721,33 Finland 719 851,04 – The amount of FDI is still on the border of needs of the country Luxembourg 437 367,96 UK 643 355,36 => NEED FOR FURTHER INVESTMENT PROMOTION Source: Rosstat

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Special Economic Zones (1) Special Economic Zones (2) • “Special economic zones (SEZs) are areas eligible for special • SEZs offer: business regulations and were created in 2005 with the aim of – a simplified procedure of land assignment, attracting investment into the regions of Russia” (source: – special free customs regime, invest.gov.ru). – a number of tax preferences for SEZ residents. – Similar zones exist in other countries, e.g. Belarus, China, USA or South In practice: Korea. – reduced rate of income tax, relief on property and land tax for 5–10 years, • Russian legislation outlines four types of special economic reduced road tax, accelerated depreciation, reduced contributions to social zones: and health insurance, a special customs procedure (removal of tariffs and restrictions on imports of equipment), administrative unification procedures – Industrial and development zones, (including electronic document circulation), reduced land rent. – Technological implementation zones, – SEZs are equipped with transport, social, communal, customs and other – Tourist and recreational zones, infrastructure from the state and local budgets and are located near major – Port zones. universities. Investors are also informed on average height of wages. The Russian regions

their share in the investment potential of all regions taken together. To derive a ranking of the best regions in which to invest, we first looked at the investment climate ratings from 1995 to 2007.31 As there is considerable variation in both the investment potential and investment risk ratings from year to year, we created a proxy for long-term investment climate by selecting regions with above- average investment potential and at the same time below-average investment risk over the period 1995-2007. We were thus left with 11 regions satisfying this criterion.32 In addition, we took the latest (2008) investment potential and risk ratings for our selected regions into account. Compared with the period 1995-2007, eight regions maintained or improved their investment climate rating in 2008, and therefore were selected for the ―top regions‖ ranking. The three remaining regions, namely Moscow, Belgorod Region and Saratov Region, had a worse investment climate rating in 2008 than in 1995–2007. Still, we decided to include one of them, Moscow, in our list, since it had a The Russian regions Where to invest ? fairly good rating (1B) in 2008. Table 5 shows our final rating.

(3.3 m inhabitants) with a per capita GRP of USD 34,000 in 2007.39 GRP growth rates TheWithin top the 9 regionstop 9 regions, with GRP above-average per capita ranged investment from USD 26,225 in Average annual GRP growth rate, potentialMoscow to and USD below-average 4,300 in Rostov investmentRegion (see chart risk 10). 2000-2007 1995-2007 (2008) While GDP or GRP per capita often serve as a first approximation Rostov R. for economic well-being in aInv country, es tment theyInv esare tment a ratherInv escrude tment Moscow measure. A broader measure potentialis, for example,risk the Humanclimate Mos c ow 16.1 (17.6) 0.77 (1.02) 40 1A (1B) St. Petersburg Development Index (HDI) of the United Nations. Russia is St. Petersburg 5.5 (6.5) 0.82 (0.93) 1B (1B) 41 Moscow R. considered a country with a high level of human development. An Mosindex c ow R.comparable to the HDI for4.1 (4.8)Russia’s0.87 regions (0.91) is provided1B (1B) by the Russia SamaraIndependent R. Institute for Social2.2 Policy(2.0) in0.98 Moscow (1.07) as part2B (2B)of the Rep. of Tatarstan Krasnodar―Social Atlas‖T. on economic and2.1 social (2.6) issues.0.90 (0.73)42 This index2B (2A) is also Nizhni Novgorod R. Nizhnibased Novgorod on income, R. education and2.1 (2.0) longevity.0.87 43(0.87) 2B (2B) Rep. of Tatarstan 2.0 (2.1) 0.82 (0.82) 2B (2B) Rep. of Bashkortostan The highest HDI score among Russia’s regions has traditionally Rostov R. 1.9 (2.0) 0.93 (0.79) 2B (2A) Krasnodar T. been recorded in Moscow, and the lowest score in Tyva Republic. Rep. of Bashkortostan 1.9 (1.8) 0.91 (0.91) 2B (2B) Samara R. Note:Despite The investment the potential fact that score reflectsthis indicatora region's share is in thea overallmore investment comprehensive potential of Russia andmeasure ranges from 0% of to well100%. The-being, investment the risk scorevariation reflects a regions'samong relative the position regions in relation is todriven to a Population and area0 4 8 12 an average Russian risk level of 1. Figures in brackets refer to the latest rating from autumn 2008. large extent by differences in income per capita (see chart 11) as Area (sq Sources: Rosstat, DB Research 9 differences with regard to life expectancySources: and Expert education RA, DB Research are 5small. Population km in GRP is hence a good proxy for well-being in Russia’s regions.44 (m) 1000) RusGRP s ian per capita Regions’ population and area FederationUSD, '000, 2007 142.2 17,098 Human development index strongly correlated with Mos c ow 10.4 1 The Russianregions' Federation per capita has a populationincome of 142 million. More than Source: EY Moscow Mos c ow R. 6.6 46 80% ofAs its of inhabitants 2006 live in the European part of Russia (Central, St. Petersburg Krasnodar T. 5.1 76 North-West, South, PrivolzhskyGRP (Volga) pe r and UralsLife federal districts)HDI value Rep. of Tatarstan St. Petersburg 4.6 1 and 73% are urban dwellers.33 Twocapita regions, expectancy Moscow andLiteracy St. (rank out Russia Ros tov R. 4.3 101 Petersburg, together account for (USD)10% of the Russian(years) populationrate (%) of 83) Rep. of Moscow R. (see chartRus s6) ia and have a share of9,922 22% of Russia’s65.3 investment99.0 0.781 Samara R. Bashkortostan 4.1 143 Mos c ow 17,091 70.8 99.8 0.873 (1) Rep. of Bashkortostan 31 See theSt. specialPetersburg analysis included in the10,133 2007 edition of the67.3 investment99.8 climate 0.817 (3) Rep. Nizhniof Tatars Novgorod tan R. 3.8 67 ratingRep. at of Tatarstan 12,325 67.7 99.0 0.812 (4) Niz hni NovKrasnodar gorod T. http://www.expert.ru/printissues/expert/2007/47/pereraspredelenie_riskov/. R. 3.4 77 32 Samara R. 9,795 65.7 99.2 0.787 (10) Rostov R. Neither the regions accounting for a large fraction of current oil and gas extraction Samara R. 3.2 54 nor theRep. regions of Bashkortostan with large future potential9,664 in this regard satisfy66.3 this criterion.98.8 While0.786 (11) their investment potential is among the top 20 regions, investment risk (e.g. Share Top 9 0 31%10 203% 30 Krasnodar T. 6,469 67.5 99.0 0.763 (27) administrative risk, ecological risk and economic risk) is considered as high by Nizhni Novgorod R. 7,664 63.8 98.9 0.757 (24) Sources: Rosstat, DB Research Expert RA (see e.g. Expert 2008 rating - link shown in Footnote 29). Sources: Rosstat, DB Research 10 33 6 See RosstatRostov (2008a).R. 5,505 66.7 99.1 0.754 (38) Mos c ow R. 7,670 65.6 99.6 0.754 (39) September 18, 2009 7 Sources: Independent Institute for Social Policy, DB Research 11

In the top 9 regions, seven economic sectors accounted for about 83 percent of gross value added in 2007 (see chart 12). Manufacturing was of particular importance in the Republic of Bashkortostan and Samara Region, wholesale and retail trade in

39 Note that Tyumen region’s GRP per capita includes GRP and population of the auonomous areas Khanty-Mansiyky and Yamalo-Nenetsky. 40 The HDI, which has been published since 1990 for a large number of countries, is a composite index comprising income, education and longevity. In the latest report, the HDI ranges from 0.329 in Sierra Leone (rank 179) to 0.968 in Iceland (rank 1). 41 The sub-indices reveal that Russia scores better than its overall 73rd rank on adult literacy (rank 11) and GDP per capita (rank 55) but far worse on life expectancy at birth (rank 121). 42 See Independent Institute for Social Policy (2008) and Stiglbrunner (2008, p. 12). Another indicator of well-being is ―The Quality of Life Index‖ which is also provided as part of the Social Atlas. 43 Income is GRP at purchasing power parity, education is measured via literacy rate (2/3) and the share of students among 7-24 year olds (1/3). Longevity is defined via life expectancy. InvestinTatarstan Video, © TIDA 44 Moscow Region is an exception here as it has the 5th largest GRP per capita but https://www.youtube.com/watch?v=cKEuDSod8Ss Krasnodar the lowest Region, regional HDI among Russia the top 9. September 18, 2009 © Unravel Travel TV 9

https://youtu.be/GWbK0eJS9iQ 51

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Outline Sanctions (1)

• The BRICS, a „trend“ in the world economy European Union: • Specifics of the Russian economy • As tensions rose in the Ukraine and Crimea, and in the absence of – Successes and difficulties de-escalatory steps by the Russian Federation, the EU began imposing sanctions in March 2014. As with the sanctions imposed – Competitiveness by the United States, these have expanded in scope to include: – Business friendliness • Sanctions targeting individuals and entities through travel bans and • Russian foreign trade asset freezes. • Measures dealing with access to the capital markets for specified – Trade profile financial and defense institutions. – Eurasian Economic Union • Restrictions on the export of dual-use goods and technologies. – Inter-BRIC trade • Restrictions on dealing with technologies listed on the Common Military List. • Russia as FDI destination • Restrictions on dealing with goods and services related to the oil – Investment promotion industry. • Sanctions of the US, EU and Canada Source: Mondaq

Source: OECD

Sanctions (2) United States (and Canada): • The U.S. sanctions on Russia are focused on the financial services, energy, and defense industries. The sanctions contain a variety of targeted prohibitions that have increasingly expanded the scope of the sanctions program, to include: • Designating or blocking certain Russian individuals and entities, and an important change in the Office of Foreign Assets Control ("OFAC") policy on entities owned by blocked persons. • Limiting the availability of debt financing for certain Russian financial institutions. • Prohibiting the provision of goods, services, and technology in support of certain activities relating to the exploration or production of oil or gas in Russia, its claimed maritime area, or "extending from its territory”. • Restrictions on the supply of certain items (a) to the Russian military or other military end- users in Russia; and (b) for use in oil or gas exploration or production in Russia, including Arctic offshore locations or shale formations. • Restrictive licensing policies for export activities involving Russian-made defense articles (including spacecraft) and defense articles intended for end-use in Russia. • The sanctions include both economic measures administered by OFAC and export controls administered by the U.S. Department of Commerce, Bureau of Industry and Security ("BIS"), and the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"). Source: Mondaq

Future?

Thank you for your attention! J

Source: IMF

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A Photo of Russia, Peter and Pau Fortress A Photo of Russia, Moscow Kremlin

25.02.2014 Source: the Internet 25.02.2014 Source: the Internet

SOURCES (1) SOURCES (2) Mentioned on slides: Mentioned on slides: • RUSSEZ • The Great Soviet Encyclopedia, English 2010 edition. • KPMG Reports. • EU-Russia center • EBRD • Deloitte Reports. • KPMG Reports. • White & Case. • Deloitte Reports. • Civil code of the Russian Federation, CC, of 30.11.1994 N 51–FZ. • White & Case. • Labour Code of the Russian Federation, LC, of 30.12.2001 N 197–FZ • Civil code of the Russian Federation, CC, of 30.11.1994 N 51-FZ. • Federal Tax Service, http://www.nalog.ru • Semetkovský, L. & Ďuricová, I. (2013). BUSINESS IN RUSSIA. • Semetkovský, L. & Ďuricová, I. (2013). BUSINESS IN RUSSIA. Self-published book. Self-published book. • TIM. Establishing Business in Russia. 2012.

SOURCES (3) • Guriev and Rachinsky (2004). The Role of Oligarchs in Russian Capitalism , Journal of Economic Perspectives, 2005, Vol. 19, No. 1, pp. 131–150. • The Economist Factbook 2010. • Bolotov (2012). Světová finanční krize a její dopady na ekonomiku Ruské federace. Ph.D. thesis. Univesrity of Economics, Prague, 2012. • World Bank. • OECD. • Moscow Stock Exchange MICEX. • Federal State Statistics Service. • Central Bank of Russia. • World Economic Forum. • Transparency International. • Banksdaily.com, http://www.banksdaily.com, access 05.03.2013. • RA-Expert, RBC, access 05.03.2013. • Expert.ru, access 05.03.2013. • Centre for WTO studies. Trade Policies, Institutions and Areas for Deepening 67 Cooperation. Indian InsNtute of Foreign Trade, 2013 [online] [cit. 17.05.2013]

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