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A VDMA survey showed that every second mechanical engineering company expects an increase in sales in Russia for 2017. In the medium term, the interest in investments is growing.

By Monika Hollacher

After three difficult years, the Russian economy is looking more positive. Whether growth will increase by 0.8 or 2.0 percent is uncertain, but there is no doubt that Russia is now out of the recession.

The current trend in bilateral trade supports the political and economic forecasts. According to the Federal Statistical Office, the movement of goods between Germany and Russia increased by 37 percent during the first two months in 2017 when compared to the same period of the previous year. Exports to Russia recovered by 35 percent. This positive development is also noticeable in the mechanical and plant engineering sector. During the first two months, trade with Russia grew in nearly all important sectors by a total of 15.5 percent. This is due to a low base value from the previous year and the recovery of the price of oil following an increase in oil exports.

Increase in sales for 2017 expected

How sustainable this trend is will mainly depend on the development of the price of oil and the stability of the ruble. If there are no large disturbances in this area in 2017, machine exports will grow by double figures, since the Russian industry needs technology in order to achieve the desired diversification. It would not be able to do so by itself.

So it comes as no surprise that the mood among the mechanical and plant engineers is brightening. Half of the 227 participants of a VDMA survey from March 2017 stated that they expect an increase in sales in Russia for 2017. Only 9 percent expect sales to continue to decline. 50 percent however assessed the business situation in 2016 as being poor.

Crucial for investments: a reliable legal framework

Since 2014, the Russian government has been pursuing its goal of reducing the country's dependency on foreign imports. A combination of investment promotion and protectionist measures is to compel foreign companies to establish production facilities in Russia and bring technologies into the country. Mechanical engineering is strongly affected by this. Against this backdrop, a VDMA survey inquired about the factors that would be relevant for VDMA members when considering a location for a production site, and in how far the Russian market already complies with these requirements.

For the primarily medium-sized German mechanical engineering industry, a reliable legal framework is crucial when it comes to making investments (82 percent). However, 72 percent of the participants in the survey regard Russia as being wholly unreliable or only partially reliable in this respect. Here, it is up to the Russian government to take action if it wants to increase the country's investment appeal. The same applies for reducing the level of bureaucracy, which is considered as being extremely high. Investment promotion and programs, on the other hand, play a minor role in the considerations around establishing a production site in Russia.

Crucial for establishing production sites: supplier structures

The supplier structures are crucial when it comes to establishing a production site. For 60 percent of the survey participants, the suppliers' quality was of particular importance. Only 4 percent are fully satisfied with the suppliers' current quality, 33 percent are partially satisfied. The companies also feel that the number of suppliers is too low. In view of the strict requirements that the Russian government has for the necessary vertical range of local products, the investors need to explore this topic in more depth, particularly if the localization is linked to hopes of participation in state contracts or subsidy programs.

Russia gains points for the size of its sales market, which is relevant for two-thirds of the companies when making their decision. 34 percent consider the sales market to be adequate, a further 36 percent consider it to be partially adequate. An expansion of the export promotion and trade within the Eurasian economic union can considerably improve Russia’s perspectives as an investment location.

Russia will remain of interest as an export market

Whether the Russian government will moderate its strict course on import substitution in light of the improved economic situation remains to be seen. The oil price shock ultimately showed that a diversification of the economy must be taken seriously. This is something German exporters as well as local producers will benefit from. Russia will remain of interest as an export market and will develop into a production site.

Further Information

VDMA Foreign Trade

Monika Hollacher, VDMA Foreign Trade

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