Analysis

An overview of business in Russia

After ten years of profound institutional reforms, Russia has turned into a country with a normal market economy. Immense natural, intellectual and manpower resources, a stable rate of economic growth, an unlimited demand for capital, a well-disposed attitude of authorities and the lowest income tax in Europe open far-reaching prospects and provide a high profitability of investment activity in Russia. Many foreign investors have already occupied their place in the Russian market by setting up affiliated and joint ventures, by obtaining securities and so on.

General business situation in Russia

Today the general situation for developing business in Russia is better than at any time since the break-up of the Soviet Union. It is very well seen through comparison. Russian private business passed two stages and has entered a third stage in its development.

1. The first stage 1991-1998. Liberalization of the economy began with liberalization of prices which increased thousands of times. People lost all their savings at once. Uncontrolled import of foodstuffs and goods damaged both agrarian and industrial sectors. Many economic links were destroyed as a result of the USSR's disintegration - whole sectors of the economy stopped working. That led to the reduction in the level of production (over 50%), unemployment and a profound economic and political crisis.
Privatization carried out without a clear-cut state program and a legal foundation turned into uncontrolled looting of the nation's wealth. The most important result of this period was forming big financial and industrial groups - a small number of very rich families (oligarchs) linked with political authorities and criminal circles. Corruption grew incredibly, affecting all branches of political staff, including law-enforcement agencies.
In the mid-1990s the situation began slightly changing for the better. Industry showed some positive tendencies. Small and middle level businesses first started developing in the area of wholesale and retail trade, in services, construction and then in industry. "Middle class" came to the surface. Business activity kept growing. There should be mentioned another important feature of this stage - the growth of the "shadow" economy.

2. The second stage 1998-1999. Ruble devaluation and the default in August, 1998, hit purchasing power and struck small and middle businesses hard. But the positive effect of the default was that it made it possible for national export industries (such as mining, oil and gas industries, metallurgy, production of fertilizer, cellulose, etc) to grow. The "shadow" economy reached its maximum. Capital was being withdrawn from Russia at a high rate ($20-25 billion per annum). The menace of the disintegration of the Federation itself became quite real.

3. The third stage started with President Putin's coming to power. It is a period of improvement in the social, political and economic situation in the country. Political power is being enforced and the power of the bureaucracy, both at the federal and regional levels, is being limited. The legislation of the Regions is being brought into agreement with the Federal Constitution.
In fact, starting with the beginning of 2000, the legal basis of the market economy has been systematically established. Several key laws have been passed. One of them is the Land Law that gives investors the right to purchase land under buildings and to buy land to build on (before then, land was state property and it could only be rented, which was a great obstacle for investment).
Production decline has stopped. In spite of the recent worldwide recession, during the last two years the level of gross national product in Russia has shown stable growth (+4-5%).
The standard of living is increasing. Average income in August, 2001 was 34% higher than in August, 1998. Export, gold and foreign currency assets are growing.
The law and order situation, the moral and psychological climate in the Russian business community is changing for the better.
The Russian stock exchange has provided the fastest growth over the last few months compared to any other.

The international rating of Russia is going up. There are indications that large investments from Germany, Italy, France, USA, India and other countries are coming to Russia. No doubt that these changes fill investors with optimism.

Experts believe that positive tendencies in Russia’s economic and
socio-political life will continue in 2002. According to forecasts,
the gross national product will increase 4-5 % this year and the ruble exchange rate won't exceed 33,0 - 33,5 per dollar by the end of the year.

Moscow, March 2002