Foreign Investors Return to Russia

PHOTO by depositedhar / Depositphotos
Major foreign companies, it would seem, have regained at least some of their former confidence in the Russian economy and are now busy expanding their presence in the country

Companies such as IKEA, Leroy Merlin, Mars and Pfizer among others, have resumed their investments. Donald Trump's victory in the US presidential elections has also played its part in restoring the investors' hopes, since the new president-elect was very vocal throughout his campaign in expressing his support for restoring the ties between Russia and the US.

Bloomberg reports that major foreign retailers, such as Sweden's IKEA Group and France's Leroy Merlin, renewed their investments in Russia several months ago, with the aim of opening new stores and improving manufacturing in Russia.

IKEA, for example, is planning to spend $1.6 billion over the next five years on opening new stores in Russia, with Leroy Merlin announcing plans in September to allocate €2bn towards doubling the number of its outlets across the country. Mars and Pfizer have also announced plans to expand their presence in Russia.

Retailers are counting on the fact that the Russian economy will soon come out of recession, which will lead to a growth in consumer's purchasing power. "Now is the time for investment. I firmly believe in the long-term potential of the Russian market," said Walter Kadnar, the General Director of IKEA Russia for Retail. The last time the company opened a new store in Russia was five years ago. In autumn this year, the Swedish retailer launched a furniture factory worth $60 million in Novgorod, and bought the land to build a third Mega Shopping Mall near St. Petersburg.

Ikea
IKEA store in Samara, Russia

The Winds of Change

A sharp fall in oil prices and the economic sanctions imposed by Western countries led to a recession in the Russian economy and caused capital to flood out of the country. According to Bloomberg, the time has now come to invest in Russia once again, since the rouble devaluation has driven production costs in Russia down sharply. In some cases they are now lower than those in China.

"The last 2-3 years have been a disaster," said Frank Schauff, Director General of the Association of European Businesses in Moscow. "Now, the situation is changing as the rouble exchange rate has stabilised and the Russian economy is forecast to return to growth soon."

The Sochi-2016 International Investment Forum saw a record number of attendants from the senior management of large foreign companies in a decade, and foreign direct investment surged to $8.3 billion in the first nine months of this year, constituting a more than 40% increase compared with the same period last year. The Russian government is expecting the country's economy to grow by a further 0.8% over the course of the following year.

“We are seeing signs of improvement,” PepsiCo Inc. Chief Executive Officer Indra Nooyi said earlier this year. Even after the plunge in the rouble, which has fallen by almost 50% since 2014, Russia continues to remain the company’s third-biggest market after the US and Mexico.

PepsiCo Inc. were able to expand their cheese production in Russia following the introduction of a Moscow-imposed food embargo in retaliation against the Western sanctions. Earlier this November, the company announced plans for a new $40 million baby-food plant to be built in the Krasnodar region of southern Russia.

Russia calling

Competitive Wages

In the middle of November, Bloomberg published an article in which it stated, with reference to analytical data provided by experts at Renaissance Capital, that salaries in Russia have become “broadly competitive” with China’s for the first time since the tsarist era ended a century ago.

The Moscow-based Higher School of Economics (HSE) estimates that, in dollar terms, Russian wages in 2015 were lower than salaries in Brazil, and fell to almost half the level seen in former members of the Eastern bloc such as the Czech Republic.

According to their research, at $558 last year, the average salary in Russia has dropped by almost 30 percent since 2011, taking it close to salaries offered in other former Soviet republics, such as Kazakhstan. The reversal in fortunes for labour costs has largely hinged on the rouble, which is down almost 50 percent against the dollar in the past two years.

Geopolitical Optimism

Tension in Russian-Western relations are a major deterrent for foreign investors in Russia. However, the situation may change following Donald Trump’s election in the USA, since the Republican candidate has repeatedly stated his intention to mend the US relationship with Russia and its President Vladimir Putin.

"Trump has a more open mind regarding the U.S.-Russia relationship, It’s clear there is room for improvement and that in itself is cause for hope,” said Alexis Rodzianko, president of the American Chamber of Commerce in Russia.