Decrease in foreign business activity in Russia


Evgeny Voronov, lawyer

In 2020, businesses around the world faced significant restrictions of various kinds due to the pandemic. This also affected those companies that come to the Russian market in search of new clients. The downward trend in foreign investment can be traced both through a decrease in the number of Russian companies established by foreign citizens and organizations, and a decrease in the number of branches and representative offices opened by foreign companies.

In 2018, foreign legal entities and individuals established 2,931 companies in Russia, in 2019 - 2,247 companies, in 2020 - 1,443 companies. Accordingly, the decrease in the number of open companies with foreign participation in relation to the previous year was 23% in 2019 and 36% in 2020. The statistics are not exhaustive, since the Unified State Register of Legal Entities may not indicate the citizenship of a foreign founder - an individual. In accordance with statistics obtained on the basis of open data of the electronic state register of accredited branches, representative offices of foreign legal entities, 452 successful accreditations of branches and representative offices were carried out in 2016, in 2017 - 411 accreditation, in 2018 - 403 accreditations, in 2019 - 372 accreditations, in 2020 - 223 accreditations. Thus, over the past 5 years, the number of accreditations has been reduced by about half. It should also be taken into account that some of these accreditations are branches and representative offices of foreign companies with Russian owners, for which opening a branch is the first step in returning capital to the Russian Federation after Russia has entered into new agreements to avoid double taxation with some countries. Some of these companies are planning to transfer their assets to Russia in the future within the framework of the “capital amnesty” announced by the President of the Russian Federation. In this regard, it is more appropriate to talk about the so-called "repatriated capital" or "circular investment", not foreign investment. Therefore, the actual number of foreign companies coming to Russia with their projects and investments is even less than what we can see from the above statistics. Currently, the growth in the number of companies with foreign participation and branches of foreign companies is largely constrained by closed borders: employees of the parent company cannot come from abroad to establish contacts with future counterparties in Russia, discuss and implement investment projects, take part in registration procedures. In addition, in many countries, government agencies operate on a limited basis due to the ongoing pandemic, and it has become difficult to obtain documents from these agencies. Taken together, these circumstances force foreign investors to postpone the preparation of documents for opening a branch or subsidiary and plans to expand the business for the future.

As for the statistics on foreign direct investment, everything looks even more modest here. According to the January report of the Bank of Russia, the total volume of new foreign direct investment in Russian non-financial companies at the end of 2020 amounted to $ 1.4 billion. The same indicator for 2019 exceeds this amount by more than 20 times ($ 28.9 billion). This catastrophic decline in total foreign investment in 2020 is due to some extent to the pandemic, but an analysis of a wider timespan suggests that the reason for such a significant decline in foreign investment lies in the systematic circumstances that together determine the investment climate. This should include administrative barriers, a high level of corruption, tax innovations (since the beginning of 2021, non-residents are taxed on dividends, the tax rate is 15%). One cannot but take into account the political factor, the negative significance of which has only been increasing since 2014. Now foreign sanctions are in force against enterprises of the fuel and energy complex. The energy sector has always been a priority for foreign business in Russia, and the effect of trade restrictions has a negative impact on all market participants.

Against this background, it is also interesting to get acquainted with the statistics on registrations of foreign business in other countries. As an example, we can take the UK, since its economy is also affected by the general instability in the world and political factors (the so-called Brexit, which entailed restrictions on access to the single European trade space, could not but affect the presence of foreign business in the country). The statistics on the opening of branches of foreign companies looks somewhat unusual: the number of new registrations for the period 2016-2017 was 766, for 2017-2018 - 807, for 2018-2019 - 738, for 2019-2020 - 903. The temporary decline in the number of registrations for the period 2018-2019 could be partly explained by the uncertainty that was due to the development of economic conditions for the UK's exit from the EU and their consequences for business. The growth that followed was largely due to companies from the countries with the strongest economic ties with the United Kingdom (Republic of Ireland, USA, India).

As a result, it should be noted that a change in the long-established trend towards a decrease in foreign investment in Russia is unlikely, given the systemic nature of the underlying circumstances and may be associated in the short term only with the opening of borders for foreign citizens. It remains to be hoped that foreign business will be able to maintain its activities in Russia. This determines not only the amount of funds that the state receives in the form of taxes, but also the number of jobs that foreign business creates for Russian citizens, as well as the main result of foreign investment - the creation of new enterprises, due to which the national economy is formed.