Recently, I  have been doing some research on the state of Russian economy. Hence, in this blog post, I decided to briefly throw light upon  the impact of economic and political factors on investment climate in Russia. I think some of you might find it useful.

Impact of economic and political factors on investment climate in Russia

Recent political factors

Russia’s incursion into Ukraine’s Crimean peninsula and its subsequent incorporation into Russia have caused growing apprehension on the market that could  lead to a decrease in foreign investment, a rise in capital outflows and deteriorate Russia’s overall economic situation[1]. Currently, the US and the EU have already imposed their initial sanctions (concerning financial assets, property freeze and visa restrictions) to a list of key individuals from Russia, Ukraine and Crimea who were either directly or indirectly involved in the current political crisis over Crimea[2]. It has to be stressed that the direct impact of these imposed sanctions haven’t been significant yet. However, due to heightened geopolitical and strategic risks in the region and likelihood of further EU and EU sanctions, one could expect more significant impact of sanctions on investment and business climate in Russia[3]. Recently, S&P, Moody, Fitch ratings have reduced Russia’s credit rating outlook to negative due to the above-mentioned reasons.[4][5][6]

 Economic factors

Since the collapse of the USSR, the investment and business climate in Russia has significantly improved[7]. According to EY, “Russia’s large consumer market, rising disposable income, expanding middle class and cheap, yet highly skilled, workforce continue to attract investors from all corners of the world. Vast resource reserves are also drawing global interest.”[8]

EY - Russia in numbers

Figure 1. EY. Russia in numbers[9]

In spite of this, investment and business climate faces serious political, legislative and administrative challenges. High levels of corruption, deficiencies in the legislative environment and inter-regional disparities in Russia prevent foreign investors from entering the Russian market. Indicators presented in the table below demonstrate the fragile economic position of Russia in terms of overall economic freedoms, taxes, protection of investors etc.

Measure[10] Year Index/Ranking
Transparency International Corruption Index[11] 2013 28 – 127 of 177 countries
Heritage Economic Freedom[12] 2014 51.9 – 140 of 184 countries
World Bank Doing Business[13] 2014 92 of 189 economies
Trade Policy(Heritage Economic Freedom)[14] 2014 74.6(moderately free)
Business Start Up(World Bank Doing Business)[15][16] 2013 92 of 189 economies
Protecting investors and paying taxes(World Bank Doing Business)Freedom Rating[17][18](Freedom House) 20132014 Protecting investors: 115 of 189 economiesPaying taxes: 56 of 189 economies6 out of 7 (scale of 1-7, 1 being the best)Status: Not Free

Political Rights: 6

Civil Liberties: 5

[1] ‘US, EU, Russia ramp up sanctions over Crimea action’ (The Business Line News, 21 March 2014) <http://www.thehindubusinessline.com/news/international/us-eu-russia-ramp-up-sanctions-over-crimea-action/article5813448.ece > accessed 14 March 2014

[2] ‘Sanctions over Crimea push Russia toward recession’ (CBC News, 24 March 2014)

<http://www.cbc.ca/news/business/sanctions-over-crimea-push-russia-toward-recession-1.2583988> accessed 24 March 2014

[3]‘Sanctions over Crimea push Russia toward recession’ (CBC News, 24 March 2014)

<http://www.cbc.ca/news/business/sanctions-over-crimea-push-russia-toward-recession-1.2583988> accessed 24 March 2014

‘S&P Reduces Russian Federation Outlook to Negative from Stable’ (Street Insider News, 20 March 2014) <http://www.streetinsider.com/Credit+Ratings/UPDATE%3A+S%26P+Reduces+Russian+Federation+Outlook+to+Negative+from+Stable/9302300.html> accessed 21 March 2014

[4] S&P reduces Russia’s credit rating outlook to negative (Press Herald, 20 March 2014) <http://www.pressherald.com/news/S_P_reduces_Russia_s_credit_rating_outlook_to_negative_.html> accessed 21 March 2014

[5] ‘Fitch Revises Russia’s Outlook to Negative; Affirms at ‘BBB” (Reuters News, 21 March 2014 ) <http://in.reuters.com/article/2014/03/21/fitch-revises-russias-outlook-to-negativ-idINFit69422420140321> accessed 21 March 2014

[6] ‘Russia’s Credit Outlook Cut as U.S., EU Widen Sanction Lists'(Bloomberg News ) <http://www.bloomberg.com/news/2014-03-20/russia-outlook-cut-to-negative-by-s-p-as-obama-widens-sanctions.html>  accessed 21 March 2014

[7] ‘Investment Map of Russia’ <http://invest.gov.ru/map/ > accessed 14 March 2014

[8] ‘Russia attractiveness survey 2013:Shaping Russia’s future'(EY website, 15 March 2013) <http://www.ey.com/RU/en/Issues/Business-environment/Russia-attractiveness-survey-2013> accessed 20 March 2014

[9] ibid

[10] ‘ 2013 Investment Climate Statement – Russia’ (US State Department, 2013) <http://www.state.gov/e/eb/rls/othr/ics/2013/204720.htm > accessed 14 March 2014

[11] ‘Corruption by country: Russia’ (Transparency International 2013)<http://www.transparency.org/country#RUS> accessed 17 March 2014

[12] ‘2013 Index of Economic Freedom:Ukraine ‘ (Heritage Foundation 2014) <http://www.heritage.org/index/country/russia> accessed 20 March 2014

[13] ‘Ease of doing business in Russian Federation’ (IFC 2014) <http://www.doingbusiness.org/data/exploreeconomies/russia/ > accessed 15 March 2014

[14] ‘2013 Index of Economic Freedom: Ukraine ‘ (n 12)

[15]‘Starting a business in Russian Federation’ (IFC 2014)  <http://www.doingbusiness.org/data/exploreeconomies/russia/starting-a-business/ > accessed 15 March 2014

[16] ‘Economy rankings’ (IFC 2014) <http://www.doingbusiness.org/rankings> accessed 15 March 2014

[17] ‘Freedom House: Russia’ (Freedom House 2014)<http://www.freedomhouse.org/country/russia#.Uy-saqhdUrU> accessed 15 March 2014

[18] ‘Freedom in the world 2014’ (Freedom House 2014)<http://freedomhouse.org/sites/default/files/FIW%202014%20Scores%20-%20Countries%20and%20Territories.pdf > accessed 16 March 2014

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