After economic growth hit 4.5% in the fourth quarter of 2010 it slowed to 4.1% in the first quarter of 2011 and 3.4% in the second quarter. Inflation also rose during the first half of 2011 – the Consumer Price Index hit 8.7% in December 2010, peaked around 9.5% in May before settling at 6.1% by the end of 2011. But this is a big change from the days when Russian inflation was measured in hundreds or even thousands of per cent.

The structure of the Russian economy during the last five years has been remarkably stable. On average, the largest contributors to GDP have been wholesale trade which has made up around 9%, oil and natural gas production 7%, retail trade 6%, and public administration and defence 5%.

Russia’s dependence on raw materials remains high. Raw materials not only contribute a significant share of GDP but also make up a 30% share of the export charge in the federal budget income.

The role of the State

The State controls much of the market in Russia. Of 4.8m registered businesses the State owns almost 120,000 and a further 240,000 are owned by municipalities.

Further, there exist many vertically integrated structures where the State owns the parent company, which holds shares in companies lower down the structure. Examples include Rosatom, Rostekhnologii and Gazprom.

Businesses controlled by the State tend to operate in strategic sectors such as nuclear, military, and energy. This leaves openings for businesses in non-strategic industries where the private sector continues to dominate.

Recent forecasts of social and economic development during 2012-14 estimate the State will be responsible for 25.4-25.6% of GDP. This illustrates the important role the State plays in the Russian economy.

Direct foreign investments

More than 55% of existing foreign investments exist as share capital in incorporated Russian companies. A further 33% is in the form of foreign loans to Russian businesses.

During 2009-10 direct foreign investment decreased significantly due to the state of the global economy and the resultant shortage of capital. The continued crisis in the euro zone points to little short-term change. However, once Europe recovers the opportunities that investment in Russia presents should prove attractive.

Doing business in Russia

One of the attractions of running a business in Russia is its low taxation – corporate income tax at 20% and value-added tax at 18% are both lower than the European average. And social insurance contributions are also lower than elsewhere in Europe.

On the downside, business in Russia is severely hampered by State regulation of economic activity. For example, in 2011 alone there were changes to social insurance rates, new laws governing licensing and digital signatures, and more than 20 pieces of legislation updating the taxation regime.

However, there were some encouraging words from Russian Prime Minister Vladimir Putin who, in December 2011, outlined his aim to stamp out corruption and make Russia more business friendly.

“We are setting the goal of accelerating economic growth to 6%, better to 6-7%, and join the list of the world’s top five economies in five years but not only because advanced economies will be falling but also because we’ll be growing.

“We need to outline a quite clear goal - to become one of the world’s leading countries with the best conditions for entrepreneurial activity within ten years,” said Mr Putin.

If Prime Minister Putin’s vision becomes reality there will be real opportunity in Russia for businesses in the coming years.

Be sure to get advice

The Russian regulatory landscape makes using external consultants in business a regular occurrence rather than an extraordinary one. The main consultants used are legal advisers for drafting contracts or defending business interests in court, or financial consultants such as accountants and auditors.

By law, certain companies are subject to compulsory audit. These include open joint-stock companies, banks and issuers of listed securities. Further, any company where turnover exceeds 400m roubles (10m euros) or assets exceed 60m roubles (1.5m euros) must also be audited.

However, many companies that do not fall into these categories may also employ external auditors. Often this will be when they require an audit of financial statements that are prepared in line with international standards such as International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and US Generally Accepted Accounting Principles (US GAAP). Companies will also use external auditors for other complex issues where specialist expertise is a must.

Although there is much practice of outsourcing to auditors, use of external services from accountants is low. This is largely explained by the level of qualifications among accountants and bookkeepers, which is often inadequate for the continually evolving needs of business. Therefore, most companies keep this in-house.

Data published by the independent ratings agency Expert supports these findings. In 2010 the top 15 largest consulting groups derived revenue of 20.2bn roubles (500m euros) from audit services. Contrast this with the revenue earned by the leading 15 accounting and tax services providers of just 850m roubles (20m euros).

This evidence supports the need to use high-quality and professional consulting firms when outsourcing services.