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European companies in Russia: confidence drop is slowing

by Amanda Martin , 12.08.2015

Confidence of European businesses operating in Russia has dropped by 9 points compared to last year, to stand at 106 points out of a possible 200. This moves it out of the positive expectations band and into the neutral band.

The good news is that the decline in business confidence has slowed (in 2014 the AEB-GfK Index plummeted down to 115 points, from 144 points in 2013), so it seems that European businesses operating in Russia are over the first shock and accommodating themselves to the new and more difficult economic climate in Russia.

These are the findings of the “Strategies and Prospects of the European Companies in Russia” survey, conducted annually on behalf of the Association of European Businesses (AEB) in Russia. The AEB-GfK Index monitors the current perception of the economic situation and investment climate in Russia from the point of view of European companies doing business in the country. It reflects the problems they are facing and their intentions regarding business strategies for the coming 2–3 years.

Low expectations on growth and investment

Only just over half (55 percent) of representatives of European business expect to see turnover growth this year, compared to 72 percent in 2014 and 89 percent in 2013. And we see the same falling trend in expectations for revenue growth.

Added to this, the survey reveals general pessimism on the prospects of foreign investment in Russia over the next 2-3 years. Only 23 percent of respondents plan to increase investment in their businesses in 2015, compared to 30 percent last year and 66 percent in 2013. And only one in five expect to see any increased investment in their industry within the next 2-3 years (19 percent) or in the Russian economy as a whole (20 percent). Compare this with the 2014 survey results when the numbers were 22 percent and 31 percent respectively, and 47 percent and 59 percent in 2013.

As a result of this, the short-term (1-2 year) outlook for Russia is very pessimistic, according to the survey findings, but get better in the middle-term (4-5 years). Encouraging, however, the long-term prospects for the Russian economy are thought to be good.

Reasons for pessimism in immediate future

AEB members believe the economic conditions for doing business in Russia have deteriorated, thanks to high interest rates and the limited availability of bank credit. Red tape also remains a major problem in for EU businesses operating in Russia - but the good news is that the perception of this problem has not increased compared with last year and the survey revealed positive expectations for improvement in the tax regime.  Pessimism continues over seeing improvement in areas such as infrastructure and customs practices and regulations.

Regulatory limitations and lack of qualified personnel are also listed among the main obstacles for business growth in Russia, although, once again, the situation is better than a year ago. There is one indicator which has deteriorated noticeably compared with 2014 and that is the reliability of the supply chain.

Ukrainian geopolitical crisis and sanctions

The main pain point for EU businesses operating in Russia is still the Ukrainian geopolitical crisis. Its negative impact has intensified considerably this year, with almost three quarters (74 percent) of respondents saying the Ukraine situation had impacted their business – compared to under half (45 percent) last year.

Only five percent of the companies surveyed report that their activities fall directly under the EU and the US sanctions against Russia, but 70 percent state that these sanctions had a negative impact on their business. This is much higher than those impacted by the counter-sanctions imposed by Russia, where seven percent say their business activities were hit directly and 38 percent say they were partially impacted.

Stronger outlook for long term

This year, a quarter (24 percent) of respondents say that the state of the local economy is worse than expected, while in 2014, that figure was over a half (52 percent). In addition, 22 percent say that economic conditions have actually improved this year, compared to only 6 percent making that statement this time last year. Added to that, 16 percent of the top managers of the AEB companies claim that the situation for their own business has improved (up from 10 percent last year) – balanced against a third (33 percent) who say it is worse than last year (down from 36 percent in 2014).

Overall, pessimism within European companies in Russia has slowed its growth compared with 2014. Business confidence, although down, is still in the neutral area of expectations, rather than the negative area - and long-term prospects for the Russian economy are up, with Q1 performance this year turning out better than expected.

For more information please contact Amanda Martin at amanda.martin@gfk.com.