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Analysis & Opinion
12.01.12 Business Mood Swings
By Tai Adelaja

Russian business people have been gazing into the future, and what they see is a long dark tunnel without a glimmer of light, a new report has found. Among Russian top business executives and entrepreneurs polled for a quarterly report conducted by Grant Thornton late last year, optimism for any kind of business undertaking in Russia has all but evaporated. The uncertainty about the Kremlin’s economic policy outlook, which has triggered unprecedented capital flight in recent months, has also led to the sharpest decline in business optimism in the country, according to the recently-published Grant Thornton’s International Business Report (IBR).

Business optimism in Russia dropped from 15 percent in the first quarter of 2011 to minus four percent in the fourth quarter, the sharpest decline among the four BRIC (Brazil, Russia, India and China) member countries, the IBR report said. Among these four largest emerging economies, business people from Brazil are the most optimistic, with 74 percent looking to the future with confidence and optimism. India came second with 58 percent of its business executives expressing optimism, while China came third with 22 percent. Russia trailed far behind with a minus four percent rating, suggesting a high sense of trepidation and foreboding among Russian businessmen that the future will bring only negative changes.

The results show that Russia is the only BRIC country where there are more pessimists than optimists, Grant Thornton’s researchers said. "In the real business world where I work, there is no reason to think that the New Year will bring positive changes," said Dmitry Orlov, the core shareholder and CEO of a mid-sized bank Vozrozhdeniye. "Right now, small and medium-sized businesses are extremely cautious and unwilling to take chances. They see no prospects and no clarity as to what the future holds." One reason for Russia’s lag is that unlike China, Russia has made no efforts to stimulate domestic demand, which should keep the economy humming even when external demand contracts, said Igor Nikolayev, the director of strategic analysis at the consulting firm FBK. "Russian businesses are also expecting an increase in their tax burden this year as a result of the state’s excessive social obligations, which are sure to further dampen entrepreneurial spirit," Nikolayev said.

The IBR survey was conducted by interviewing more than 2,700 business leaders across the globe between November and December 2011. In Russia, Grant Thornton’s International (GTI) researchers interviewed the owners and directors of more than 100 small and medium-sized businesses, employing between 100 and 499 people in Moscow, St. Petersburg, Yekaterinburg, Nizhny Novgorod and Novosibirsk. The results, the researchers said, point to a progressive decline in positive sentiment among top Russian companies throughout 2011. While the first quarter brought some optimism, with economic sentiment indicator at around 15 percent, it slid four notches to 11 percent in the second quarter and to nine percent in the third. The last quarter saw a dramatic drop in the index by 13 points to a negative level.

In Moscow, home to recent wave of middle-class mass protests, businessmen are less inclined to believe in the imminent economic recovery than their counterparts in the Russian regions, according to the survey. Among businessmen in Yekaterinburg, 42.5 percent said they are optimistic about the future while 35.4 percent expressed the same sentiment in Novosibirsk. In Moscow and St. Petersburg 28.2 percent were optimists, while just 26.3 percent of entrepreneurs in Nizhny Novgorod said they are. However, 46.3 of respondents in Yekaterinburg said they were neither optimistic nor pessimistic, compared to 33.8 percent in Moscow.

At least some of the gloomy mood is attributable to a global trend. Russia, along with Singapore, Malaysia and Switzerland, ranked 27th out of the 40 countries that participated in the business optimism survey. But amid a global economic outlook clouded by the euro zone crisis and fears that the global economy may be headed for a quicker-than-expected slowdown, the global business optimism in the fourth quarter of 2011 has stagnated at a net zero percent. This represents a further deterioration from three percent in the third quarter and 31 percent in the second quarter of 2011, according to GTI researchers. Globally, business expectations for increasing revenues and profits fell by two percentage points over the last quarter. In the euro zone, economic optimism fell from two percent to negative 16 percent.

As well as the deteriorating economic conditions in Europe, the volatile domestic political scene in Russia ahead of the March presidential elections may have dampened the economic mood, analysts say. "The sharp drop in economic optimism in the fourth quarter after Vladimir Putin's decision to reclaim the presidency next year is positive proof that the political situation plays a role," said Elsa Bikchurina, a senior analyst at the Solid Investments financial company. “It is also telling that the economic optimism index has been falling amid rising oil prices, which have traditionally propped up Russia's economic growth and boosted optimism by creating opportunities for businesses.”
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