Russia – Time to Reassess Foreign Investment Potential

Foreign investment from the West has significantly dropped off since the imposition of sanctions on Russia. However, with the immediate Kremlin response to “Go East”, as well as to become more self-sufficient, opportunities are now presenting themselves in the wake of many European businesses exiting the Russia market.

We can see where Russia sits today in terms of its FDI inflows. FDI in Russia averaged US$5,885.18 million from 1994 until 2018, reaching an all-time high of US$40,140 million in the first quarter of 2013 and a record low of US$-4,245 million in the third quarter of 2018. However, what is interesting is that most of the Net Inward FDI in Russia came from just ten jurisdictions and countries: the Bahamas, Bermuda, British Virgin Islands, Jersey, France, China, Germany, Ireland, Korea, and the UK. That’s an unusual mix – and with four of those being offshore financial centers suggests the Russian economy is being invested in by funds held in safe havens, and out of reach of US sanctions imposition. Of the others, France, Germany, and Ireland are EU nations with traditionally large investments into Russia, and the UK, which is also a traditional large Russian investor, but is wanting to rekindle its trade relationships in the event of Brexit.

The resulting loss of FDI into Russia has certainly had an effect. But there are positives to be taken from this too, like the emergence of a new Russian outbound investment program of its own; an engagement with Asia and other emerging markets. There are several ways in which we can look at Russia now as a potential market for FDI.


Russia’s Domestic Market

The Ruble has tanked the past couple of years, meaning imported goods are expensive. However, domestically made products are relatively inexpensive, and Russian production costs competitive, in many cases similar to those in Southeast Asia. The Russian market also has pent up demand – money is there but needs to find an outlet. With a consumer base of 147 million, with most having a disposable income three times higher than that of the Chinese, the country is also showing signs of growth – at a rate expected to be higher than that of the EU. While the country is huge, its two main wealth areas remain Moscow and St. Petersburg and are easily accessible from Europe. That means a concentrated effort on just one or two cities can bring rewards, or at the very least provide a platform from which other domestic markets in Russia can then be targeted. With an absence of competition, there is a lot of Russian demand to inherit. That can be fast tracked by forming a Russian Wholly Owned Enterprise or Joint Venture.

Russia’s Export Market

Russian exports are expected to reach US$250 billion by 2024. Russia is a founding member of the Eurasian Economic Union (EAEU) – a vast Free Trade Area that essentially sits between China and the European Union with a GDP of US$5 Trillion. EAEU trade grew by 38 percent last year, and Moscow has provided incentives for Russian based companies to grow and develop, so basing a foreign owned company in Russia essentially qualifies it to take advantage of Moscow backed policies.

Aside from the EAEU, Russian trade with Asia is also experiencing strong growth. Trade with China hit US$100 billion in 2018, with that set to double in the next five years. There are inroads being made in Southeast Asia too: Vietnam has a Free Trade Agreement with the EAEU and Russian companies have been setting up production facilities in Indonesia and exploring investments in other ASEAN nations, and India. Delhi has recently proposed establishing Free Trade Zones especially for Russian businesses.


Tax Benefits

Russia has a relatively low tax regime with Corporate Income Tax based at a high of 20%. This can be reduced further using withholding taxes in certain cases. Profits tax applies upon repatriation; however, there have been calls for this to be scrapped, and there is a plethora of incentives, differing from industry to industry and region. Individual Income Tax for foreigners in Russia is generally calculated at 13 percent. Russia has a number of Double Tax Treaties in place that can also reduce the tax burden if used correctly.

Using Russia as a foreign investment base to break into the domestic market makes a lot of sense. Yet, what is not often added to that is the current sense of outward expansion from Russia overseas that is currently taking place. This has the huge additional potential of assisting foreign investors in Russia break into the markets of the Eurasian Economic Union, as well as Asia.

This article was first published by Russia Briefing, which is produced by Dezan Shira & Associates.

The firm assists foreign investors with corporate establishment, business & tax advisory, compliance, accounting, payroll, due diligence and financial review services throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India and Russia. We also maintain a Russian speaking advisory desk.

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Date Published:

25 March 2019



Chris Devonshire-Ellis, Russia Briefing, Dezan Shira & Associates