Russia, the largest country in the world by territory, has a unique geographic location that allows it to serve as a bridge between Europe and Asia. Emerging from a decade of post-Soviet economic turbulence, the country has moved from economic isolation to become a country that is well-integrated in the global markets. The ‘90s saw privatisation of most sectors in the economy, with the exception of defence and energy.
Recent challenges
After a decade marked by economic growth and relative prosperity, Russia is entering a challenging period for companies looking to do business in the region. The ongoing political crisis in Ukraine has impacted the Russian business world, with Western sanctions limiting access to international capital markets and hindering growth opportunities for many national and international businesses.
Two of the most badly affected sectors are energy and retail. While energy companies have been struggling under low crude oil prices and sanctions-related equipment shortages, retail businesses have been facing declining consumer purchasing power and increasing regulation.
According to Maksim Arefiev, former legal director at international retailer Groupe Auchan (he’s now at X5 Retail Group), the situation resembles a ‘calm before the storm’, with companies looking to ‘optimise their internal operations, preserving those areas that bring maximum results and reorganising areas that do not give strong results.’ Arefiev feels that this situation offers an opportunity for certain retail businesses that have ‘clear financial arrangements, financial security and safety nets to stand out from competitors and strengthen their role in the market, while expanding their networks.’
Financial sector and changing legislation
It has not been easy for companies in the Russian financial sector either. The decline in financial markets has had a negative impact on both short- and long-term investors, while high interest rates and sanctions over the conflict with Ukraine are squeezing the country’s lenders.
But it is not all doom and gloom. The introduction of new financial laws similar to those in place in many Western countries is making Russian financial markets more attractive. While they have not had an immediate impact on the financial world, they will undoubtedly help attract investors to the Russian financial markets when the situation cools down. Alexander Smirnov, legal director at the Moscow Exchange, feels that there are positive signs: ‘There have been a number of unique breakthroughs in the Russian Civil Code. While they do not have a significant impact now, they are great steps for the future. When foreign investors do come to Russia they will be attracted by the more favourable and familiar legislative environment.’
Changes in legislation are not confined to the financial sector, but have been introduced across the entire Russian business world. The way in which the Russian government views and regulates businesses is in a period of overhaul. Maria Savelova, head of the legal service for strategic planning at oil and gas company Tatneft, sees these changes in legislation as positive: ‘There used to be a lot of gaps in Russian law, but legislators are now widening their perspectives. Decision-makers look at norms and attitudes in other countries and are applying their best practices in a Russian environment.’
Innovation and drivers for growth
Government figures have been making significant efforts to stimulate economic development and innovation. There have been clear indications that Russia’s aim is to gradually move away from being an economy based on oil and gas, towards recognition for its innovation and technology. The Russian government has sought to boost R&D and increase the competitiveness of the country’s innovative products on the global stage.
According to Smirnov, while Russia is facing a difficult period, the country has big potential as its ‘large consumer market, strategic location and well-educated and creative workforce certainly serve as key drivers for future growth.’