By Veronika Sherova
Your commercial awareness dose
Russia is an enormously huge country stretching across Eurasia and possessing an undoubtful geographical advantage. Russia is very much wealthy in terms of natural resources, technology, and a large workforce with great potential. The interest from foreign investors in the Russian economy experienced several turnarounds including the decline after the 1990s, the financial crises, and the European sanctions and counter-sanctions. Nevertheless, Russia still positions itself as a great opportunity for investors, domestic and foreign alike. With attractive tax rates and a set of investment incentives, foreign direct investments in Russia are likely to expand.
The Individual Income and Corporate Profit Tax rates are competitive and stand for 15% for above 5 million rubles of personal income (approx. $68000) and 20% for standard corporate income tax, though with correctly implemented incentives can be reduced to 15,5%. VAT ranks between 10-20% depending upon the product. Russia also has an extensive network of Double Tax Treaties, which are highly useful for foreign investors and provide a reduction in income tax, VAT, and others to avoid double taxation.
Notwithstanding the importance of taxes, it is crucial to consider the risks when planning to invest in a country of your interest. World Bank’s Worldwide Governance Indicators 2019 survey suggests that regulatory quality (rank 143 out of 206 economies) and rule of law (rank 166) remain zones of serious concern in Russia. The perceptions of corruption (rank 165) are also significant, thus fair competition is not guaranteed. Business confidence in the country’s legal system remains weak, inasmuch because accounting rules and legislation are complicated and sometimes contradictory.
Among other issues in Russia are geopolitical risks: conflict with Ukraine and the followed tensions with Europe and the US over the issue. The consequent sanctions and counter-sanctions complicate the pursuit of business and increase its costs, by doing so the sanctions detain Russian growth prospects.
In terms of the protection of foreign investments, Russia implemented 64 bilateral investment treaties as of the 13th of Jan with countries all over the world. Russia is a signatory to the Multilateral Investment Guarantee Agency Convention, and in case of disagreements, the following organizations offer their assistance to settle the emerged disputes: International Court of Arbitration, International Chamber of Commerce, and the Arbitration Institute of Stockholm Chamber of Commerce.
With the UK exiting the European Union, the country will be looking for new markets and opportunities. In the times prior to European sanctions, the UK was sending over £8 billion worth of goods to the Russian market. Now that the UK is not bound with the sanctions, the British export can stand up from the current mark of £5,8 billion, the biggest part of which is the export of financial services that ranks for over £1,3mln.
Nevertheless, Moscow doesn’t hold any illusions about the Brexit, but the progress of Russian – British economic cooperation after the Brexit deal is possible and even expected in the long term.
In recent years Russia has started investing in the development of high-tech infrastructure and set up special economic zones to attract foreign investors. Those who want to open a business in these specific areas will benefit from a reduced profit tax of 2% and land and property tax exemptions. These special economic zones include traditional industries and innovative ones such as titanium production, aviation, and engineering. Innopolis, one of these zones, is set up to become the most important IT centre in the country. Another zone, Moscow Technopolis, attracts investments in sectors like biotech, robotics, micro-electronic, and renewable energy.
Russia has invested $26 billion in National Digital Economic Development in 2020. However, the Hi-Tech represents only one potential path for direct foreign investments. Russia has wild economic and market growth opportunities for investors, such as trade with China and inside the Eurasian Economic Union. Other ideas for foreign investments could be found in the Russian Arctic, which recently has been declared a Free Trade Zone, with tax incentives and reductions. Stable GDP growth and tax incentives and reductions will continue to attract investors to Russia. But to be successful in the global economy and to attract direct foreign investments Russia needs to improve its regulatory mechanisms, strengthen the rule of law and make its political position, both domestic and international, more stable.
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