European attractiveness survey 2016 Russia findings

European attractiveness survey 2016 Russia findings

European context: Western Europe continues to be the most appealing FDI destination in Europe Despite a number of geopolitical risks, investors continue to see Europe as an attractive destination. Europe achieved a record level of 5,083 projects (up 14%) and 217,666 jobs (up 17%) created by foreign direct investment (FDI). Western European destinations maintain the lead, but there was strong growth in Central and Eastern Europe. Western Europe continues to dominate FDI projects with a 77% share (81% in 2014). The top three countries in terms of FDI project numbers the UK, Germany and France together account for 51% of all FDI projects and a third of all jobs created. Other key FDI destinations, such as Spain, the Netherlands, Belgium and Ireland, all posted positive growth in 2015 but countries in Central and Eastern Europe grew almost 4 times as fast as their counterparts in Western Europe. As far as jobs are concerned, Central and Eastern Europe saw the creation of 50% of all FDI jobs in Europe, thanks to the strength of the region in manufacturing, which accounted for 69% of the FDI projects in the region. The USA is increasingly active in investing in the region In 2015, intra-european projects continued to dominate FDI activity (54% of all projects). The second largest foreign investor turned out to be the US, with finance and business services making up the bulk of its FDI activity. The retail and hospitality sector saw a big jump in FDI from the US (54 projects, up 80%). Asia is also increasing its FDI flows: China invested in 238 projects (up 2% on 2015) primarily in the UK and Germany, and created 8,917 jobs (down 25%). India s FDI was also noteworthy. Investors prefer manufacturing Favorable exchange rates and cheaper oil added to Europe s industrial competitiveness. However, Germany, the UK and France saw little change in industrial activity, with growth focused in the CEE region. Hungary (69 projects, up 103%), Poland (117 projects, up 34%), Turkey (105 projects, up 52%), Serbia (51 projects, up 76%) and Romania (51 projects, up 21%) drove FDI in manufacturing facilities. The automotive sector drove manufacturing growth in Hungary and Poland, while machinery and equipment dominated in Turkey, Serbia and Romania. TOP 10 COUNTRIES BY FDI JOBS Country 2015 2014 Percentage change, % UK 1,065 887 20% Germany 946 870 9% France 598 608-2% Spain 248 232 7% Netherlands 219 149 47% Belgium 211 198 7% Poland 211 132 60% Russia 201 125 61% Turkey 134 109 23% Ireland 127 106 20% Others 1,123 1,032 9% Total 5,083 4,448 14% Source: EY Global Investment Monitor, 2016 TOP 10 COUNTRIES BY FDI JOB CREATION Country 2015 2014 Percentage change, % UK 42,336 31,344 35% Poland 19,651 15,485 27% Germany 17,126 11,890 44% Russia 13,672 18,248-25% France 13,639 12,579 8% Romania 12,746 10,892 17% Hungary 11,741 4,868 141% Ireland 10,772 7,306 47% Serbia 10,631 5,104 108% Slovakia 9,564 8,012 19% Others 55,788 60,620-8% Total 217,666 186,348 17% Source: EY Global Investment Monitor, 2016 European attractiveness survey 2016 1

FDI projects FDI jobs Top sectors within industries Top destinations for industries Top industries 2015 2014 Percentage change, % 2015 2014 Percentage change, % Sectors Projects Percentage change, % Countries Projects Percentage change, % Manufacturing Machinery and equipment 360 15% Germany 459-1% Automotive 322 12% UK 355 7% 2,495 2,259 10% 135,202 125,210 8% Food 224-2% France 333-6% Finance and business services Transport and communications Retail and hospitality 1,650 1,487 11% 48,616 37,550 29% 447 344 30% 12,636 10,516 20% 163 134 22% 12,418 7,987 55% Chemicals 218 12% Russia 171 80% Pharmaceuticals 160-5% Belgium 130 2% Software 694 6% UK 496 22% Business services 476 27% Germany 322 18% Financial intermediation 198-8% France 161-9% Scientific research 137 20% Netherlands 83 65% Insurance and pension 79 0% Ireland 73 38% Land transport 127 95% UK 61 2% Telecommunications and post 80-2% France 57 36% Air transport 56 81% Netherlands 40 135% Water transport 46 92% Spain 39 11% Other transport services 138-3% Germany 81 72% Retail 95 25% UK 43 26% Wholesale 56 44% Germany 30-19% Hotels and restaurants 6-14% France 15 88% Sale and repair of motor vehicles 6-50% Finland 12 500% Spain 12 33% Others 328 224 46% 8,794 5,085 73% Total 5,083 4,448 14% 217,666 183,348 17% Source: EY Global Investment Monitor, 2016 2 European attractiveness survey 2016

The UK extended its dominance in the finance and business services sector (496 projects, up 22%). But Germany overtook the UK as the most attractive destination for transportation and communications projects, while the UK supplanted Germany as the number one destination for retail and hospitality projects. In terms of investor sentiment, London is once again the most attractive European city, followed by Paris. According to investors, the top 10 cities for FDI investment ranking includes three cities in Germany Berlin, Frankfurt and Munich as well as two cities in Spain Barcelona and Madrid. Despite a positive 2015 for FDI investment in Europe, geopolitical and macroeconomic challenges are denting investor sentiment. Only 36% respondents expect investment prospects to improve over the next three years. Europe s strengths are its digital and logistics infrastructure, skilled labor force and stable political, legal and regulatory environments. Most of respondents (35%) see digital industries as the preferred sector for Europe s growth in the coming years. The European Commission will be investing close to 50b over the next five years towards creating a digital single market. Nonetheless, less than 1% of our survey respondents feel that Digital will drive their business growth in the coming years. How attractive are the following features of Europe? STRENGTHS Telecommunications infrastructure Local labor skills level Transport and logistics infrastructure 82% 79% 77% Political, legal and regulatory infrastructure* 68% AREAS FOR IMPROVEMENT Flexibility of labor legislation Labor costs Corporate taxation 48% 44% 43% Source: EY 2016 European attractiveness survey (total respondents: 1,469) *Stability and transparency of political, legal and regulatory environment. European attractiveness survey 2016 3

Russian context The number of FDI projects in Russia grew by 61% In 2015, foreign investors funded 201 projects in Russia. This is one of the best results for Russia since 2005. The number of FDI projects in Russia grew steadily between 2006 and 2010, from 87 to 201. Subsequently, it averaged 120 projects per year, right until last year, when Russia recorded a fresh spurt and equalled the previous high of 201 projects. Although Russia retained the eighth position among European countries the number of FDI projects, the figures improved significantly: the number of projects grew by 61%. This means that Russia has the highest FDI growth rate among the top 10 European countries by number of FDI projects. Poland follows closely with 60% and the Netherlands comes third with 47%. In terms of jobs created by FDI, Russia takes the fourth position in Europe, securing 13,672 new jobs. Investors from Western Europe dominate FDI activity in Russia Western Europe remains Russia s largest foreign investor. Despite the imposition of restrictions and the challenging macroeconomic environment in Russia, we are seeing an increasing number of FDI projects financed by investors from these countries. Last year, West European investors put capital into 106 projects the highest number since 2005 and a growth rate of 77% year on year. The milestone of 100 FDI projects from Western Europe was exceeded only once in 2010. The top three European countries in terms of FDI projects in Russia are Germany (36 projects and 2,076 jobs created), France (20 projects и 819 jobs created) and Italy (12 projects and 777 jobs created). US investors come after Europe by level of FDI in Russia with 29 projects (2,868 jobs created) in 2015 twice as many as in the previous year. Investors from Asia are still bracing themselves for greater involvement but the trend has shown an uptick. Chinese investors ventured to set up 12 FDI projects (1,350 jobs created) in Russia in 2015 the largest number since 2005. Putting this into perspective, there was only one Chinese FDI project in 2007 and in 2014 their number increased to seven. FDI inflows from other Asia-Pacific countries grew as well, pushing the number of projects up almost fourfold to 11. 4 European attractiveness survey 2016

Russia 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Number of FDI projects 111 87 139 143 170 201 128 128 114 125 201 Jobs created 6,632 8,060 14,934 12,900 11,834 8,058 8,362 13,356 13,621 18,248 13,672 Average jobs per project 60 93 107 90 70 40 65 104 119 146 68 Source: EY Global Investment Monitor, 2016. Last year, foreigners invested mainly in new projects in Russia. These amounted to 162, far greater than investments in expanding existing businesses (32 projects). Investors and the number of FDI projects in Russia 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Western Europe 58 37 73 82 93 103 64 68 46 60 106 Rest of Europe 8 8 9 9 9 14 8 6 6 7 15 US 16 19 19 26 29 24 24 29 24 14 29 Latin America & the Caribbean 1 1 2 1 1 Rest of America 3 1 1 2 2 4 2 2 3 2 Asia-Pacific 3 2 4 4 5 6 2 2 2 3 11 China 1 2 1 2 4 3 3 4 7 12 India 1 1 1 1 9 1 1 1 2 Japan 12 8 7 5 6 11 6 9 14 8 10 Middle East 1 2 1 2 1 2 2 2 Africa 1 Origin not detected 7 10 24 14 19 27 15 10 11 18 11 European attractiveness survey 2016 5

Manufacturing is the most attractive investment sphere Manufacturing has historically attracted the most FDI in the Russian economy and 2015 was no exception. The number of FDI projects in manufacturing increased by 80%: to 171 in 2015, up from 95 in 2014, bringing Russia up to the fourth position in Europe after Germany, the UK and France. With the macroeconomic environment still turbulent, foreign investors are wary of putting their capital into other sectors of the economy. FDI is slowing in the transport, communications, retail and hospitality sectors. The number of FDI projects in the financial and business services is still only half of what it was in the late 2000s. Manufacturing also secured the majority of new jobs created by foreign investors 13,144. Most of the FDI projects in manufacturing (153) focused on production facilities. There were 20 projects in sales and marketing, while logistics and R&D each secured 10 projects. FDI projects by industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agriculture 2 1 3 2 Construction 1 2 2 1 3 3 1 4 Energy 1 2 1 2 1 1 1 Finance & Business Services 22 16 28 28 33 26 23 27 12 15 15 Manufacturing 78 69 94 94 113 152 90 81 84 95 171 Recreation 1 2 2 Retail & Hospitality 4 1 2 1 5 5 4 1 Transport & Communications 10 1 9 18 16 19 7 12 10 9 8 FDI job creation by industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agriculture 14 Construction 165 500 1,800 500 Energy 700 15 200 7 Finance & Business Services 131 35 506 150 1,169 42 116 85 3 199 8 Manufacturing 6,498 8,025 13,560 12,468 10,120 7,981 7,991 11,445 12,210 18,032 13,144 Recreation 7 Retail & Hospitality 3 2 705 10 Transport & Communications 3 275 30 35 53 12 703 20 Types of FDI projects 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Contact Centre 1 1 Education & Training 1 1 1 2 2 2 1 2 4 2 1 Headquarters 2 3 9 2 1 1 IDC 2 1 1 1 3 Logistics 10 6 6 11 15 9 5 6 9 13 10 Manufacturing 52 47 67 78 85 110 62 60 55 69 153 Research & Development 5 1 8 3 6 5 3 4 4 4 10 Sales & Marketing 37 27 44 42 55 67 51 49 40 34 20 Shared Services Centre 1 2 2 1 Testing & Servicing 4 1 2 5 5 4 4 6 1 2 3 6 European attractiveness survey 2016

European attractiveness survey methodology Our evaluation of the reality of FDI in Europe is based on EY Global Investment Monitor (GIM). This database tracks those FDI projects that have resulted in the creation of new facilities and new jobs. By excluding portfolio investments and M&A, it shows the reality of investment in manufacturing and services by foreign companies across the continent. Data is widely available on FDI. An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the company s equity and takes a role in its management. FDI includes equity capital, reinvested earnings and intracompany loans. But our figures also include investments in physical assets, such as plant and equipment. And this data provides valuable insights into: How FDI projects are being undertaken What activities are being invested in Where projects are located Who is carrying out these projects The following categories of investment projects are excluded from GIM: M&A and joint ventures (unless these result in new facilities or new jobs being created) License agreements Retail and leisure facilities, hotels and real estate* Utilities (including telecommunications networks, airports, ports and other fixed infrastructure)* Extraction activities (ores, minerals and fuels)* Portfolio investments (pensions, insurance and financial funds) Factory and other production replacement investments (e.g., replacing old machinery without creating new employment) Not-for-profit organizations (charitable foundations, trade associations and government bodies) The GIM is frequently used by government bodies, private sector organizations and corporations looking to identify significant trends in employment, industry, business and investment. The GIM database focuses on investment announcements, the number of new jobs created and, where identifiable, the associated capital investment. Projects are identified through the daily monitoring of more than 10,000 news sources. To confirm the accuracy of the data collected, the research team aims to directly contact more than 70% of the companies undertaking these investments. * Investment projects by companies in these categories are included in certain instances e.g. details of a specific new hotel investment or retail outlet would not be recorded, but if the hotel or retail company were to establish a headquarters facility or a distribution centre, this project would qualify for inclusion in the database. European attractiveness survey 2016 7

We define the attractiveness of a country or area as the combination of its image, investors level of confidence in it as an investment destination and the perception of its ability to provide the most competitive benefits for FDI. The research was conducted by the CSA Institute from February to April 2016, via telephone interviews with a representative group of 1,469 international decision-makers. OUR SAMPLE GROUP INCLUDED REPRESENTATIVES FROM European businesses 48% North American businesses 33% Asian businesses 15% South American businesses 1% Middle Eastern businesses 1% Businesses from other regions 2% Overall, 65% of the 1,469 companies surveyed have a presence in Europe. And of the non-european companies, 30% have established operations in Europe. Disclaimer: FDI jobs data is available for 2,600 projects out of 5,083 projects (or 51%) in 2015 8 European attractiveness survey 2016

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY works together with companies across the CIS and assists them in realizing their business goals. 4,500 professionals work at 20 CIS offices (in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Rostov-on-Don, Togliatti, Vladivostok, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Bishkek, Baku, Kyiv, Tashkent, Tbilisi, Yerevan and Minsk). EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2016 Ernst & Young Valuation and Advisory Services LLC. All Rights Reserved. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.