In the latest sanctions unveiled on Monday, February 26, 2024, the U.S. and UK have targeted Russia’s Arctic LNG 2 project, affecting ship construction efforts in Russia and South Korea, along with Novatek’s Belokamenka assembly yard. These sanctions, marking the third round in six months, underscore the ongoing international response to Russia’s energy projects amidst geopolitical tensions.

As the second anniversary of the Kremlin’s invasion of Ukraine approaches, Russia’s economy, including its asset finance and equipment leasing sectors, is expected to face significant challenges in 2024. Despite a rebound in GDP driven by substantial military spending, the economy is hindered by factors such as population outflow and technology shortages, which are likely to impede economic growth and affect business financing and asset finance leasing.

In 2023, the Russian economy grew by 3.6% following a contraction in 2022, but the International Monetary Fund (IMF) has raised concerns about the poor quality of this growth, particularly emphasizing that increased military production may not necessarily benefit the population. Factors such as sanctions, population outflow, and reduced access to technology further compound the challenges facing Russia’s economic prospects.

As of August 2022, Russia was earning more than $1 billion per month from trading with the United States, despite sanctions imposed on Russia due to its military engagement in Ukraine. The Associated Press reports that more than 3,600 shipments of wood, metals, rubber, and other goods have been imported from Russia to the U.S. since the end of February. Although this is almost half of the amount during the same period in 2021, it still totals more than $1 billion per month. Wood is the largest commodity item imported from Russia (1294 shipments), followed by metals (909 shipments), food (341 shipments), oil and gas (209 shipments), rubber (179 shipments), fertilizers (102 shipments), spare parts (67 shipments), radioactive materials, and ammunition (47 each).

The U.S. Department of Commerce has added a ban on the export of smartphones over $300 to its list of American goods that are prohibited from being shipped to Russia. As a result, all modern Apple iPhone models are affected, including the latest iPhone 14, which starts at $799. However, experts say that this does not mean that there will no longer be an Apple iPhone in Russia, as phones are not directly exported from the U.S. to Russia.

New Apple iPhones are manufactured in Asia and their distribution chains are diverse and complex, with enough countries and companies ready to sell devices to Russia in large and small batches. The ban on expensive goods and luxury goods to Russia, including cars, clothes, and jewelry, has been in place since March 2022, but these goods have been replaced by parallel import.

The French magazine Challenges has acknowledged the remarkable resilience of the Russian economy under sanctions. Analysts who predicted an 8% decline in the Russian economy have been proven wrong, despite multiple Western sanctions.

The magazine highlights the Russian economy’s successes in the military equipment and agriculture sectors, which have helped maintain economic stability. The magazine attributes this stability to state support measures and the Central Bank’s efforts to stabilize the ruble.

The sanctions pressure has intensified after the start of the military conflict in Ukraine, and the U.S. has announced new restrictions that would affect Chinese companies and Russian banks.

Trade summary for the commercial relationship of Russia and the United States.

On August 22, 2012, Russia became the 156th Member of the World Trade Organization (WTO). On December 14, 2012, the U.S. President signed legislation terminating the application of the Jackson-Vanik amendment and extending permanent normal trade relations to Russia and Moldova. On December 21, 2012, the United States and Russia both filed letters with the World Trade Organization (WTO) withdrawing their notices of non-application and agreeing to have the WTO agreement apply between them. On December 20, 2012, the United States and Russia agreed to an Intellectual Property Rights (IPR) Action Plan to improve IPR protection and enforcement.

How to set pricing formula and other fees, value-added tax (VAT), etc.

Russian consumers are attracted to bargains but are increasingly able and willing to pay a premium for quality merchandise. U.S. companies exporting to Russia should be prepared to offer competitive prices for their goods, since there are inexpensive Russian products on the market, and strong competition from Asian and European companies. With a few exceptions, goods and services sold in Russia are subject to the value-added tax (VAT) of 20 percent, which is assessed on the cost, insurance, and freight (CIF) value of an imported shipment, plus the applicable duty. In addition, with strong local and third-country competition in many industry sectors, it is advisable to invest in advertising and brand promotion.

Legal requirements and options for joint ventures and licensing in the Russian market.

Joint ventures

U.S. companies or individuals may become strategic partners with Russian firms by taking equity positions in Russian joint stock companies or establishing joint ventures (JV). The launching of a JV in Russia demands meticulous planning and sustained commitment. In most cases, it is advisable for the U.S. partner to retain managerial and voting control. JVs in which foreign partners hold minority stakes are highly dependent on the good intentions of their Russian majority owners, and foreign minority shareholders could face difficulty protecting their interests in the Russian courts.

Common practices to be aware of when selling in the Russian market.

Adapting sales and marketing strategies to Russia’s business climate is a key factor that determines whether a product or service offering is well-received. Market research is required to identify opportunities and potential Russian business partners. The choice of a partner is key and should be done only after conducting sufficient due diligence to determine its reputation and reliability. The U.S. Commercial Service can provide customized services, which may include market research, promotional events, partner and buyer identification, and due diligence services.

U.S. firms should be aware of the average tariff rates and types when exporting to the Russian market.

In August 2012, Russia became a member of the World Trade Organization (WTO), lowering the average bound tariff rate on industrial and consumer goods from almost 10 percent in 2011 to 7.8 percent by 2017.

Opportunities for U.S. franchisers and legal requirements in the market.

Russia presents both significant challenges and opportunities for experienced American exporters. Russia’s 2014-2016 economic downturn, driven by low oil prices, Western sanctions, and compounded by a lack of structural economic reform, squeezed both Russian corporations and the average consumer. While targeted American and European economic sanctions remain in place and have gradually expanded, there is no overall trade embargo on Russia. On the back of a tight fiscal and monetary policy, coupled with higher oil prices, Russia returned to GDP growth of 1.7 percent in 2017, and the economy expanded at a comparable or slightly slower pace in 2018. Over 1,000 American firms of all sizes continued to do business in Russia, given its 142 million consumers, $27k+ GDP per capita (as measured in purchasing power parity), a growing middle class, and a highly educated and trained workforce.

Russia has a unique system of standards, which uses a combination of various international standards, but relies mostly on product testing as a key element of the product approval process. Russia does not have an association agreement with the E.U. or the United States and does not recognize internationally-recognized certificates, such as CE mark or FDA certificates. These certificates will often be a part of an application file submitted to the relevant approval government agencies, but tests would have to be carried out in Russia.

The Russian government spending sector had total revenues of USD1,091.2 billion (bln) in 2017, representing a compound annual growth rate (CAGR) of 6.3 percent between 2013 and 2017. In comparison, the Czech and the Polish sectors grew with CAGRs of 2.8 percent and 2.8 percent respectively, over the same period, to reach respective values of USD106.4 bln and USD243.2 bln in 2017.

Russian government budgets are generally reliant on oil and gas revenues, but successive Russian finance ministers have sought some caution. A decline in oil prices has impacted government revenues, with a 17-percent drop between 2015 and 2016. However, non-oil revenues were increased by 11 percent, and the government is content to run a moderate deficit and store any excess oil revenues.

On June 7, 2018, the Bank of Russia expert team prepared a report addressing major changes in the Russian banking sector throughout the 2008-2017 decade, as well as the impact of these changes on the stability and the competition environment among the country’s banks.

Banking sector assets grew at fairly high rates both in absolute and in relative terms. This trend occurred in parallel with the overall improvement in the quality of governance, a development that helped boost operational efficiency in the banking business. The Russian banking sector is working to restore its crisis-hit stability at a time when fair competition between banks was strengthening alongside improvements in the quality of banking services. Based on the analysis of key figures on the balance sheets of banks that had their licenses revoked, supervisory assessments have become more conservative with a faster supervisory response to the banks’ operating drawbacks.

The draft guidelines for the development of the Russian financial market in the years 2019 to 2021, released by the Bank of Russia on June 6, 2018, set forth long-term strategic targets that include creating a confidence-based environment, advancing competition in the financial market, and maintaining financial stability and fiscal inclusion.

The draft document is offered for public discussion. It describes the objectives and the principles that the Bank of Russia espouses regarding financial market development, as well as the methods of achieving the targets set. Priority development goals remain unchanged. These goals include raising the level and improving the quality of living standards of Russian citizens using financial market instruments, fostering economic growth via competitive access to funding, and creating conditions conducive to the development of the financial industry.

In line with the draft amendments to the Bank of Russia’s Instruction on Required Ratios released on May 23, 2018, the Bank of Russia intends to take additional measures to limit forex lending risks in order to bring down systemic risks of FX debt.

The draft document provides for an increase from 100 percent to 110 percent in risk ratios on FX credit claims (and investments in debt securities) on resident exporting legal entities. In order to further reduce lending in the riskiest segment, risk ratios on mortgage loan exposure have been revised upwards from 130 percent to 150 percent. The weighted risk ratio on other FX claims on legal entities will stand at 130 percent (the current ratio is 110 percent). There remains an exception that abrogates the application of the new risk ratios to credit claims guaranteed, directly or indirectly, by the Russian government (in particular, FX credit claims backed by an EXIAR insurance policy).

The Russian Central Bank said that modest GDP gains are attributed to low investment growth and weak October performance figures.

Russia’s GDP growth rate in 2017 will be closer to the lower limit of the forecast interval of 1.7 to 2.2 percent, according to the Bank of Russia materials made public on December 1, 2017.

The regulator noted that the low growth rate is associated with a lower-than-expected investment demand and weak October statistics. The updated macroeconomic forecast put out by the Bank of Russia will be published in the December issue of the Monetary Policy Report.

In the third quarter of 2017, the annual GDP growth rate of slowed down to 1.8 percent from 2.5 percent in the second quarter. According to the Central Bank’s estimates, the reduction in economic growth was due to the slowdown in investment demand and a current assets contraction.

According to estimates from the Ministry of Finance, a quarter to a third of wages are in the gray zone in Russia today.

The share of the shadow economy in Russia in recent years hovers at around eight to 15 percent, the head of the Federal State Statistics Service, Alexander Surinov at a press conference on December 22, 2017.

“When we talk about the so-called non-observed economy, we estimate it as the difference between the GDP calculated with the production method and the GDP calculated with the expenditure method. This is the method of mirror statistics that takes into account the difference between income and expenditures. Within the past few years, that figures varies from eight to 15 percent,” the official said.

Surinov stressed that it is necessary to distinguish between the “non-observed economy” concept in general and “informal employment”.

Since 2000, GDP rose by 75 percent, President Putin said during his annual press conference.

Real wages in Russia increased some 3.5 times since the year 2000, while pensions rose 3.6 times, the country’s President Vladimir Putin said at the annual press conference on December 14, 2017.

“Real wages decreased recently as a result of the crisis that happened during the recent years, but since the beginning of the 2000s, the wages actually went up 3.5 times, while real pensions increased 3.6 times,” the Russian head of state said.

Foreign direct investment in the Russian economy in 2017 more than doubled to USD23 billion.

“This year thus far foreign direct investment reached USD23 billion, which is two-fold more than last year and the best indicator of the last four years,” the Russian leader said.

Spending from the fund for the year will stand at 1.5 trillion rubles, the minister said Finance Minister Anton Siluanov.

The reserve fund will be fully exhausted in 2017, the Russian Finance Minister Anton Siluanov told reporters on December 26, 2017. Spending from the Reserve Fund will stand at 1.5 trillion rubles, while expenditures from the National Welfare Fund will total about 660 billion rubles.

Siluanov said that according to the Ministry’s estimates, as of January 1, 2018 the National Welfare Fund volume will be 3.7 trillion rubles, or just over four percent of the GDP. The liquid assets held in the National Welfare Fund will be 2.3 trillion rubles. Starting next year, Russian law provides for the merger of the National Welfare Fund and the Reserve Fund.

In the second quarter of 2017, the Russian economy increased in size by 2.5 percent in annual terms, according to the Russian Central Bank.

“On the basis of the information at its disposal, Rosstat has carried out a preliminary estimate as to the dynamics of the gross domestic product in the second quarter of 2017. This year’s second quarter gross domestic product constitutes 102.5 percent of the figure reported in the corresponding period of 2016,” the agency stated on August 2, 2017. As such, Russia’s GDP growth accelerated after increasing at a rate of 0.5 percent in the first quarter of the current year.

Earlier, Russia’s Ministry of Econo-mic Development predicted economic growth from April to June 2017 at 2.7 percent. Central Bank analysts expected that third quarter 2017 growth could reach 1.5 to 1.8 percent as “the increase in investment and consumer demand promotes accelerated GDP growth.”

On September 15, 2017, S&P Global Ratings affirmed its “BB+/B” long-term and short-term foreign currency and “BBB-/A-3” long-term and short-term local currency sovereign credit ratings for Russia.

The outlooks on the long-term ratings remain positive. At the same time, the rating agency revised its transfer and convertibility (T&C) assessment on Russia to “BBB-” from “BB+”, reflecting, among other things, Russia’s track record of not restricting access to foreign exchanges during previous economic crises. While Standard & Poor’s confirmed Russia’s lackluster credit rating, foreign investors remain interested in Russia, according to the country’s Finance Minister.

On September 22, 2017, Fitch revised its outlook on Russia’s long-term foreign- and local-currency issuer default ratings to positive from stable. The recent elevation of Russia’s credit rating by Fitch prompted doubts as to the impartiality of earlier rating demotions. Moody’s, Standard & Poor’s, and Fitch Ratings were repeatedly blamed by Russian officials for deliberately undervaluing the nation’s financial system. Jim Rogers, a venture capitalist and a leading authority on Russia’s economic opportunities stated that the U.S.-based agencies lack competence and are prone to make errors. The American businessman said that the agencies have made a number of mistakes in the past.

Cooperation between regions and the private companies from Russia and the U.S. will promote warmer Russian-American relations, the president of the Russian-American Pacific Partnership (RAPP) Derek Norberg said on September 7, 2017 in Vladivostok.

The relationship between Russia and the West worsened because of the situation in Ukraine. Western countries imposed a number of sanctions against Russia, as officials in Moscow took countermeasures to protect Russian agricultural producers. At the same time, Moscow repeatedly rejected the Western countries’ accusations of its intervention in Ukraine, stating that Russia is not a party that needs to be involved in intra-Ukrainian conflict in the Donbass region. Russian representatives have also stated that using the language of sanctions is counterproductive.

During the previous year, Russia rose by five points in the rating of global competitiveness of the World Economic Forum (WEF). Russia now takes the 38th place out of 137 countries. From 2012, Russia’s position within the rating has improved by 29 points. The leading BRICS-member on the global competitiveness list is still China, which takes the 27th place on the list.

Russia’s competitiveness is highly valued in such categories as “market size” (the sixth place in the world). However, other criteria still make it problematic for Russia to rise to the top position. For example, in terms of higher education and vocational training, Russia has taken the 32nd place. Infrastructure development placed the country at the 35th place. The country took the 49th place in terms of innovative potential and the 57th place in technology. Russia was in the 60th position in terms of labor market efficiency.

Speaking at a meeting on the development of transportation infrastructure in Russia’s Northwest, the country’s Economic Development Minister Maxim Oreshkin said that Russia is going through a significant trend toward de-dollarizing its economy.

“We recently had a detailed discussion on this issue at the Central Bank. There is a big trend for the de-dollarization of the Russian economy. The Central Bank has taken some important steps such that fewer dollar-denominated loans are now issued,” the Minister said on August 16, 2017.

According to the Russian official, the government is backing the ruble through such measures as introducing restrictions on loans in foreign currency. Central Bank statistics reflect that only 60 percent of Russia’s foreign debt was in U.S. currency in August. This is the lowest share of dollar-denominated debt since 2014.