Russia Overview. Economic outlook: at a closer look, there is plenty to cheer

14.04.2014

Chambers Global, 2014

As the world continues to stutter in the wake of the 2008 crisis and the 2011 debt crisis, Russia has not been immune. Annual forecast growth for the rest of the decade may have been revised down to 2.5%, but that is a number many of Russia’s neighbours and trading partners would jump at. That forecast does not take into account the raft of proposed structural reforms, implementation of which appears to be gathering steam in the background. Rate cuts and direct stimulus look to be on the near horizon and will give growth a boost in the economy that, in 2013, has displaced Germany as the fifth biggest economy in terms of purchasing power parity.

Several other things are also worth bearing in mind. Russia is hosting the Winter Olympics in Sochi in February 2014, and the World Cup across 11 cities in 2018. Whilst much of the Sochi infrastructure is now in place, considerable development and redevelopment is planned over the coming years in preparation for the World Cup. Also planned are capacity increases at Sheremetyevo and Domodedovo airports, and development of the Moscow-St Petersburg toll road, which are expected to capitalise on an increase in tourism.

It is also important to remember that, of the BRICs, Russia is arguably the only country with an established and growing middle class. In comparison with the EU, Russia is in an enviable position, with consumption running at considerably higher levels. Over the next few years it is expected that the continued urbanisation of Russia and growth of the middle class will drive improvements in local business operations and increase international investment. There remains great potential for growth outside the developed northwest and central districts. Russian unemployment remains at historical lows of below 6%, comparing very favourably with the Eurozone and the USA.

Current business trends

Some of the challenges that businesses in Russia face remain the same. Corruption, perceived and real, remains a challenge in business. Bureaucratic and administrative burdens also impact on the efficiency of day-to-day activities. Yet there is a clear move towards making Russia an easier place to do business, with recent positive changes in ratings and indices for corruption, doing business and competitiveness; Russia is doing particularly well in the rankings compared with the other BRICs.

The 2013 Cypriot banking crisis meant the island has become less attractive to many Russian businesses when planning their transactions. Previously less popular but still widely utilised jurisdictions, such as Luxembourg, the Netherlands Antilles and other Caribbean nations, have filled the gap, and offshore components to many transactions will remain the norm.

Big Russian companies are increasingly active abroad, particularly in Central and Southern Europe and South East Asia. Domestically, fewer deals are being done in the energy sector and there has been a trend towards consolidation in the consumer goods and retail sectors. With government policy encouraging healthier lifestyles in Russia, the healthcare and pharmaceutical industries could ride the next wave of investment and consolidation.

State-controlled corporations and other government-backed enterprises set up to drive regional development (e.g. the North Caucasus Regional Development Corporation, the Corporation for Development with the main mission of facilitating development and implementation of the "Urals Industrial - Urals Polar" Project, and many others) are seeking foreign partners for their large-scale infrastructure development programmes aimed at driving growth. The effect of Russia’s recent accession to the WTO is still to be felt fully and many benefits are still to come. Some of the previously affected industries in Russia’s developed neighbours are already reporting increases in demand for their products, and better access to the Russian market. Government support for utilising, and adhering to, the WTO’s rulebook and mechanisms appears undiminished after the long slog to gain membership.

Outlook for the legal market

The evolution of the legal services market continues in the wake of the 2008 crisis. International firms have downsized their local presence and, where they have invested, it has been in Russian law capability. These moves are focused on building strength in depth in areas outside the boom-time drivers of M&A and Finance. The trend of Russian corporates growing their in-house legal teams appears to have reached an equilibrium and has cooled for the time being.

Major legislative reform on the horizon

Russia’s judicial system, historically based on the Supreme Court and the Supreme Arbitration Court, may be coming to an end. A bill currently before the Duma will collapse the Supreme Arbitration Court into the Supreme Court, theoretically leading to a more efficient, streamlined system. Creating a system that combines the best features of the two systems could reinvigorate the Russian judicial system and reduce, if not remove, one of the main objections to doing business in Russia. Many of the details of the new system still need to be ironed out, and uncertainty is likely to exist for some time. Particular care is needed to ensure that the best characteristics of the Arbitration Courts survive and flourish in the new system. How the new system appoints its judges will also be closely watched, to see if the independence of the judiciary is compromised in any way.

Reforms to the Civil Code are under way, the aim being to incorporate the best practices of international contractual law. This should drive improvements in business and M&A transactions and lead to greater legal certainty in legally regulated relationships.

Conclusion

Improving Russia’s business climate through administrative and legislative reform remains a priority. International investors' perception of the Russian market as attractive, particularly in comparison with other investment markets, is likely to grow as these changes are implemented.

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