European companies announced new opportunities in Russia

A survey by the Association of European Businesses showed that foreign companies expect a decline in investment in Russia in the coming years.But they also see opportunities for growth in increasing market share and reducing competition.

Most European companies that are members of the Association of European Businesses (AEB), despite sanctions restrictions and economic uncertainty, see some prospects for development in Russia. This is evidenced by the results of the annual survey conducted by the organization. Although the majority of respondents expect the Russian economy to grow in the medium term, foreign investment in Russia in the next couple of years, according to respondents, will decline .

AEB is an independent non-profit organization that unites more than 500 companies (both large international corporations and small and medium-sized businesses) operating in Russia. These are companies from the countries of the European Union, the European Free Trade Association, as well as Russian, American, Japanese, Korean and Turkish companies.

Many Russian companies - members of the AEB have a share of European capital or are established by citizens of European countries, the association notes.

The survey, conducted in April-May 2023 in the form of online interviews with top managers, involved 93 companies operating in Russia. A year earlier, there were 107 survey participants. In the national context, the survey is dominated by companies from Germany (26%), Russia (23%), France (11%). There are also firms from Sweden, Switzerland, Great Britain , Finland, Italy, the Netherlands.

Profit and Investment Forecasts

Turnover in 2022 decreased in 39% of the surveyed companies, which is more than in the pandemic 2020 (when the turnover fell by 31%). 43% of respondents said that their turnover has increased, and 17% - that they have not changed.

The share of companies expecting growth in turnover and profit in the next three years has grown compared to last year's survey. 48% predict an increase in turnover (against 24% a year earlier), 29% believe that the indicators will decrease, 18% - that they will remain unchanged. Profit growth is expected by 42% (versus 19% in 2022), reduction - 28% (59% in 2022).

The pessimistic forecasts for investments by foreign companies in Russia in the next two or three years have slightly improved, but remained at a high level. Thus, 67% of companies believe that foreign investment will decrease both in their industry and in Russia as a whole. In 2022, 84% and 88%, respectively, held this opinion.

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Foreign companies assess the medium-term prospects for the Russian economy better than in 2022, but worse than in the “pre-sanctions” 2021. Economic growth in the next three to five years is expected by 55%, contraction - 22%, stagnation - 20%. A year earlier, 38% of respondents expected GDP growth, and in 2021, in the year of post-COVID recovery and before the military operation and related sanctions, 73% of respondents.

Barriers to work in Russia

Among the most significant obstacles to operating in Russia, companies most often (multiple answers were possible) name:

restrictions due to US , EU and other countries sanctions against Russia - 70%; refusal of foreign partner companies from doing business in Russia - 56%; the economic crisis and the uncertainty of the development of the situation in Russia - 51%; restrictions due to Russian retaliatory measures - 45%; difficulties with making payments and mutual settlements - 45%; reputational risks for businesses from working in Russia — 41%; difficulties with logistics, supplies, including a shortage of raw materials and components - 37%; the threat of economic isolation of Russia - 36%; the volatility of the ruble exchange rate is 30%.

Respondents were also asked to name the most significant barriers to funding. Most often they talked about sanctions against Russia (69%), Russian countermeasures (41%), high interest rates (17%), lack of cash flow and financial capacity (15%).

Half of the companies indicated that they were severely affected as a result of sanctions and Russian response, another 33% said that their business was affected, but not much. Only 5% reported no problems. The most common difficulties were: disruption of supply chains and problems with logistics, difficulties with making payments, falling sales, administrative barriers.

Almost 60% of the surveyed companies did not change the company management structure under the influence of the conflict in Ukraine and sanctions, 18% changed the structure. Of the 20 AEB members that changed their structure, 35% were either sold to management (including for borrowed money ), or to a Russian strategic or financial investor.

New opportunities

“Despite the difficulties of doing business in the current situation, most companies are not considering the option of closing their business in Russia,” states the AEB. The risk of closure in the next year is assessed by 13% as high, 15% as medium and 58% as low, another 14% find it difficult to answer this question.

Moreover, the majority of AEB members surveyed still see new opportunities for developing their business in Russia. First of all, hopes are associated with an increase in market share (34%), a decrease in competition (30%), an opportunity to occupy new product niches (27%) and enter new consumer segments (22%).

However, 24% of respondents said they do not see any new opportunities in the Russian market.

According to the AEB, the perception of interaction with buyers, contractors and partners in the supply chain has worsened among foreign companies in Russia. However, despite this, members of the association "continue to assess interaction with them as a whole positively." The interaction with the legislative bodies and the justice system is assessed as neutral-negative, while an increase in negative assessments was recorded, the AEB points out.

In March, The Financial Times reported that out of 1,400 foreign companies that have legal entities in Russia, only 206 sold their business in the country. The Bank of Russia reported that from March 2022 to March 2023, foreign investors made about 200 transactions to sell their Russian assets.

The approval of the government commission is necessary for the sale of Russian assets by residents of unfriendly countries. At the same time, in order to leave the Russian market, companies must pay to the budget at least 5% of the value of assets, if the discount from the market value is less than 90%, or at least 10% of the market value of assets, if they are sold at a discount of more than 90% from business value.