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29/05/2019

Russia vs Europe: comparison of doing business

29/05/2019
Russia vs Europe: comparison of doing business
The chemical industry in Russia is attractive for foreign investments. Many western companies are very interested in co-projects in Russia. We collected data on the conditions of doing business in Russia in comparison with European countries (these comprise labour costs, utility costs; land costs, etc.) so that you can assess the economic potential of such projects.
In terms of capital and operating costs, it is more profitable to do business in Russia than in Europe. In Russia, the utility costs and taxes for business are significantly lower. The availability of vacant and cheap lands and ready-made production sites, a scientific base and qualified specialists make Russia attractive to start up new chemical plants with the participation of foreign capital.

ECTC helps to make the transfer of chemical technologies simple and effective.

Research methodology

The study was conducted in order to compare the business environment in the Russian Federation (including Ukraine and Kazakhstan) and EU countries. All Information is provided by public and commercial sources.
The list of parameters for the analysis:
The cost of electricity for businesses and individuals.
The cost of gas for businesses and individuals.
The cost of water for businesses and individuals.
The cost of land.
The cost of office and plant lease.
Taxes.
Credit and financial costs.
The average salary of employees in different countries.
All these criteria, taken together, will help to estimate the cost of doing business in European countries and Russia.

Cost of electricity

Today the main sources of electricity are thermal, hydraulic, nuclear, and alternative (wind, sun, etc.). Each of them has its advantages and disadvantages in terms of utilization efficiency, environmental impact and potential hazard.

In Russia the share of alternative energy sources is quite small, which makes it possible to keep electricity prices at a record low.

Russia is mainly a northern country where the sun is not shining all year-round; that is why the possibilities for introducing alternative energy sources are limited. Individuals or small plants use renewable energy sources, but large-scale productions traditionally prefer captive power plants. In Europe, the average electricity tariff is well above than in Russia. The cause lies in the considerable share of taxes in the electricity price to support the development of "green" energy.

In Russia the presence of a significant amount of quite cheap generating capacity, including nuclear and hydroelectric power plants, maintain low cost of electricity. The industrial consumers pay the largest share of the electricity generated in the country.

Electricity prices for household consumers in 2019

Electricity tariffs are divided by consumers: non-household consumers (industrial companies) and household consumers (individuals). For households the cheapest electricity is in Ukraine, the tariff — 0.030 EUR/kWh; the most expensive is in Germany — 0.31 EUR/kWh.

Russia ranks among the top three in the low-price electricity rating with an average tariff of 0.044 EUR/kWh. Kazakhstan is the second — 0.032 EUR/kWh.

Electricity tariffs vary in time of day, type of settlement, geographic location and type of activity. Such diversity is not seen across the board, however. For example, in Finland, the state does not allow any discounts, and the cost per 1 kWh does not change.
Electricity prices for household consumers in Europe
If we compare 2016 and 2018, the cost of electricity for the population in Europe has increased by an average of 0.014 EUR/kWh (6.8%). From 2016, the tariff in Russia has increased by 11% and reached a price of 0.044 EUR/kWh. Now the difference is an average of 0.177 EUR/kWh in favor of Russia.

Electricity prices for non-household consumers

The electricity pricing policy for non-households differs in Russia and Europe.
There are two types of dispatch zones in Russia:
The pricing zone. Tariffs are formed based on the value existing on the wholesale market, they are not under regulation, and are readjusted every month. The price depends on wholesale price on the market, transmission tariffs, supplier premiums, infrastructure costs.
Non-pricing zone. This zone is regulated by the government. The price is based on electricity transmission, services of infrastructure enterprises, and premiums of guaranteed suppliers.
For the end user discrimination of tariffs depends on the price category, which had been chosen by a particular enterprise, on power output and voltage limit. In Russia, there are 6 "price categories" that depend on factors of consumption. The tariff for business consuming up to 10 MW per month is 0.062 EUR, less than 150 kW — 0.064 EUR.

If we are talking about round-the-clock production, the calculation is made for each time of day: at night and shoulder, the maximum tariff is 0.051 EUR/kWh. Companies that include in price transportation of electricity up to 10 MW, have the maximum tariff of 0.055 EUR/kWh. If legal entities pay electricity at wholesale and the transmitted power, the maximum tariff is 0.022 EUR/kWh.

For European countries, the tariff for business is defined as the average for consumers from 500 to 2,000 MWh. The average tariff for 35 countries is 0.11 EUR/MWh (in EU, business pays less taxes than household does).
Electricity prices for non-household consumers in Europe
*Data for Russia 2019
The table shows the electricity tariffs in European countries. The average tariff for business in 10 represented countries was calculated in euros and rubles at the rate of 73.05 rubles/EUR. The average tariff for legal entities in Europe in 2018 was 0.0987 EUR/kWh, in Russia it is 0.062 EUR/kWh

Gas prices

In most European countries, gas prices remains a hot-button issue despite the brisk growth of renewable energy sources. A run on natural gas in Europe is driven by the desire of energy companies to stop using coal, since CO2 quotas are at its maximum. In addition, the chemical, metals and automobile industries cannot operate on "bare" electricity, however much environmental activists would like it to be.

More than half of the world's natural gas reserves (58%) are located in four states: Turkmenistan — 9.3%, Qatar — 13.1%, Russia — 17.4%, Iran — 18.2%. According to 2017 data, Russia is a leading gas importer to Europe (40.3%), Norway is the second one (27.3%).
There are several ways to purchase natural gas on the European market:
The spot market, where the actual price is "here and now", its prices do not exceed ones under long-term contracts.
Long-term contracts when gas prices depend on oil prices.
NYSE American and London Stock Exchange.
Gas hubs — distribution centers that sell and distribute gas through pipelines to the ultimate customer.
Europe's main gas hubs are:
• NBP — United Kingdom;
• CEGH — Austria;
• TTF — the Netherlands;
• GASPOOL, NCG — Germany;
• ZEE — France;
• PSV — Italy.
From 2016 and by this day, the Dutch TTF is Europe's largest gas hub, followed by the British NBP. Of note, in early 2019 Gazprom made sales through the TTF gas hub.

According to the 2018 data, natural gas output in Europe is decreasing. In the Netherlands, at the Groningen gas field, it was reduced to 19.4 billion m3. Norway and Algeria are not able to increase production and to meet the demand of European consumers in full. The largest exporter of gas to the European market is Gazprom, which pursues to be a leader.

Europeans buy gas according to the "take or pay" principle. It implies long-term contracts for a period of 25 years with fixed annual volumes of gas. If the buyer does not purchase this volume, he will pay a penalty.

In February 2019 the import price of natural gas to the EU was 191.96 EUR/thous. m3.

In Europe the most expensive gas is in Sweden, 1.16 EUR/m3, considering that almost half of the electricity produced comes from renewable sources. Denmark, Italy and Spain take the second place with the price 0.90 EUR/m3.

The cheapest gas for household consumers is in Kazakhstan — 0.048 EUR/m3. Russia comes second with the average price 0.082 EUR/m3.

Gas prices for household consumers in Europe

The price of gas for Europeans is influenced by political, social factors, fiscal policy, which is focused on consumption of expensive green energy. The average cost of natural gas for 34 European countries is 0.52 EUR/м3.
Gas prices for household consumers in Europe
*Data for Russia 2019
Sweden is a leader with the highest tariff for gas households — 1,045.21 EUR/thous. m, while Hungary has the lowest one of 331.21 EUR/thous. m3. If you have a look at tariffs by year, you can see an increase by 40% for the past 17 years. Russia is last with 75 EUR/thous. m3.

Gаs prices for non-household consumers in Europe

Gas prices for non-household consumers in Europe
* Data for Russia 2017
The most expensive gas tariff for business is in Sweden (773.92 EUR/thous. m³). In Russia, it costs much less (55.21 EUR/thous. m³). In European countries gas rate has increased from 2001 to 2018 by 30%.

The tariff for business is 38% lower than for individuals.

Forecasted gas prices in Europe:

• 2019 г. – 239,72 EUR/thous. m³;
• 2020 г. – 223,74 EUR/thous. m³;
• 2021 г. – 226,94 EUR/thous. m³;
• 2025 г. – 239,72 EUR/thous. m³;
• 2030 г. – 255,70 EUR/thous. m³.

According to the forecast data, the maximum price is expected to be 255.70 EUR/thous. m³ in 2030.

Gas prices for household consumers in Russia

In Russia the average cost of gas for the population is 0.075 EUR/m3. Gas tariffs are regulated by regional authorities and approved by federal government.
The following factors affect the tariff:
climate pattern of the region;
infrastructure;
total energy consumption;
seasonal fluctuation;
welfare beneficiaries.
In addition to these factors the purpose of using also affects gas prices.
Current gas prices for households in the Russian regions

Gas prices for non-household consumers in Russia

The first thing to be of interest of any entrepreneur before starting the development of investment project is the location of new production and the cost of energy resources in the region.

The cost of gas may have a significant impact on the effectiveness of the project as a whole, especially in the short term.

According to the 2017 data, Russia is among the six countries with the lowest gas prices for business.

There are various industrial sites equipped with all the necessary communications today in Russia. Specialists calculate the gas tariff for business individually depending on the specifics of production and its capacity.
All the calculations are based on gas tariff structure for each region and take into account the following aspects:
Regulated wholesale gas prices for business.
Prices for gas transmission and distribution pipeline for business and surcharges to these rates.
Payment for logistics and distribution services.
Top 10 regions with the lowest natural gas tariffs for non-householders in Russia, valid from July 1st, 2017
Top 10 regions with the highest natural gas tariffs for non-householders in Russia, valid from July 1st, 2017

Water price

In Europe both the state and market regulate utility tariffs, there's no monopolization. The population can choose water suppliers; therefore, they try to drive extra customers by promotions and sales. The average water price in Europe is 3.52 EUR/m³.

In Russia Housing and Utilities Sector is under the authority of federal, subfederal and local government, water price doesn't exceed 0.88 EUR/m³.

Water prices for household consumers

Water prices in European countries
The highest water prices are in Germany - 2.3 EUR/m³, the lowest one is in Greece - 0.16 EUR/m³. In the table, you can see the average price 1.03 EUR/m³ for the European countries. In Russia, the water price is 0.25 EUR/m³.
The amount the Europeans charge for their water and sewerage services depends not only on whether they have a water meter or not but also on:
self-contained water heater;
economic climate in the country;
social standard of living.
There is no big worry with water resources in Russia: water tariffs are 10 times less than Europeans are. For example, in Moscow the population pays for water 0.38 EUR/m³, while in Paris — 1.95-3.58 EUR/m³.

Water price depends on whether you have a water meter or not. A new government decree as of January 2019 introduced water payment at a higher rate 1.5 times for those people who have no water meter.

Water prices for non-household consumers

In Russia there are two ways to calculate water tariff. The first and most profitable one is to install a meter. If the enterprise doesn't have it, the payment will be based either on the service conditions of the provider, or on the Regulation of the Government of the Russian Federation No.167 (February 12, 99).

Water price for business is calculated based on consumption in cubic meter. According to the data of 2017, the tariff for hot water was 2.47 EUR/m3, for cold water — 0.48 EUR/m3, for water disposal — 0.34 EUR/m3.

There are also tariffs for process water. For example, this tariff for the Angarsk urban district in the first half of 2018 was 0.08 EUR/m3 (excluding VAT), in the second half - 0.09 EUR/m3 (excluding VAT).

There is no available detailed information on water tariffs for business in European countries. In general the cost of water in Europe for industrial consumers depends on the country and volumes of consumption; and it is comparable to the cost for individuals (higher than in Russia).

Cost of land for non-households

Some aspects affect prices of land property in Russia:
location;
proximity to highways and railways;
communications;
quality of access roads.
Let's compare Russia and one of the leading EU country — Germany. In Russia the majority (92%) of the land belongs to the state, while in Germany the state owns only 13% of the land, as of 2017. There is no land scarcity in Russia.

As an illustration, you can see land prices in Germany represented in the site of German company "Stimul Consulting". It has a partner network in Russia and focuses on partnership in real estate and international business.
Cost of land in Germany
Average price per one ha is approximately 13 850 EUR.

The price of land varies depending on the assignment of the land parcel and its location. For example, the cost of residential land ranges from 90 000 EUR per 1.6 ha to 780 000 EUR per 2.6 ha. Agricultural land — from 139 500 EUR per 1.5 ha to 187 500 EUR per 8.3 ha. Offers for sale of industrial land are very rare. Only one variant with buildings ready for production was found at a cost of 515 000 EUR per 1 ha.

In Russia, as of 2018, the weighted average price of 1 ha of industrial land was 178 270 EUR (excluding utility hook-up costs). For comparison, in the Novosibirsk region the average cost of land — 24 683 EUR per 1 ha.
Cost of land in the RF regions
In Russia the average cost of land in industrial cities is 2 062 EUR per 100 m2 (206 200 EUR per 1 ha). Thus the average price per 1 ha in Germany and Russia first of all depends on the category of land and its location.

Office and industrial premises to rent

The rental cost of office and industrial premises most significantly depends on location and ownership (private or federal).
Other principles of rental cost formation of offices are:
infrastructure;
proximity to places with high consumer flow;
availability of public transport;
district prestige.
In Russia and Germany there are no significant differences in the rental price of industrial premises. Following are rental prices in Germany: all data is available on web site "Arcadia".
Rental of industrial premises in Germany
The average monthly rental cost for industrial premises in Germany is 5 EUR/m2 while in Russia it is 3.5-4 EUR/m2. To compare the rental cost of office up to 200 m2 let's consider the following example of Novosibirsk and Germany.

The average cost of 1 m2 of office space in Germany is 11 EUR, in Novosibirsk — 11.76 EUR.

Business tax rates in Russia and Europe

Every country has its own tax system, with its own tax rates. The main tax for individuals in Europe is income tax and social insurance. In many European countries there is a progressive scale that means the rich pay more.

Minimum income tax rates vary by country. In the UK it starts at 10%, and in Belgium, at 25%. The difference between the maximum and minimum is quite large. Income tax rates data in different countries is provided below.
Income tax in different countries
The variation of interest rates on social contributions is quite wide and depends on the state legislation. For example, in Slovenia an employee pays social tax of 16.1% of income, and a company — 22.1%.

In the corporate sector there is also a large spread of tax rates. In general all companies are required to pay VAT and income tax. The minimum value-added tax (17%) was found in Luxembourg, the maximum of 27% in Hungary. In most European countries, VAT is 20-24%.

Income taxes in Europe also vary widely, and you often can get incentives for attracting investors. The average rate for the EU is just over 21%. The best rate is in Slovenia, in the form of incorporation LLC business pays 17%; in Austria — 25%; in Italy — 31.4%.

In Russia there are different tax systems such as Simplified Tax System, Patent Taxation System, Unified Tax on Imputed Income, Single Agricultural Tax) and Common System of Taxation. Organizations and entrepreneurs use CST, as in this case there are no restrictions on the types of activities, revenue, and number of staff.
The main taxes that business pay under the CST:
income tax (paid by the organizations) — 20%;
VAT (paid by organizations and individual entrepreneurs) — 20%;
corporate property tax (paid by organizations) — 2.2%;
UST — uniform social tax (paid by organizations and individual entrepreneurs),
Pension Fund of the RF — 22%,
Social Insurance Fund — 2.9%,
Federal Compulsory Medical Insurance Fund — 5.1%.
In addition, companies and entrepreneurs pay land tax and personal income tax on business income — 13%.
To illustrate the difference in tax rates we provide you with a comparative analysis of Russia and Germany ones:
The Russian personal income tax rate is 13%, which is 3.5 times less than in Germany (45.5%), while there is no tax progressivity in Russia.
In Germany, there is a church tax, a solidarity contribution, a municipal business tax on commercial income and a capital yield tax of 25%, which includes dividends and income from the sale of investment assets. There are no such taxes in Russia.
Corporate tax in Germany ranges from 36% to 50%, in Russia it is 20%.
In Germany, there is a trade tax for certain types of activities, where subjects to tax are profit (rate of 5%) and the fixed assets value (0.2%). In Russia, there is no such tax.
A significant difference is for social insurance tax, in Germany it is 43-46%, in Russia — 30%.
To sum up, Russia has a quite small tax burden compared with the EU countries (even without taking into account such traditionally socialist-oriented countries as France or Sweden). Due to the low tax rates, Russia is investment-attractive for foreign investors.

Business loans and subsidies

Today virtually no business can do without borrowed funds.

The state is interested in a stable economy, therefore it tries to support subsidy programs and minimize credit rates for business.

The development of small and medium-sized businesses in the EU countries is well on the way, making up about 70-80% of the total number of enterprises.

For a comparative analysis, let's take Germany and Russia. In Germany, banks lend out money at 3-4% per annum for 10-20 years, while the borrowers pay only interest in the first few years. There are certain conditions for taking out a loan. For example, the company must exist for at least 3 years to take a subloan of 100 000 EUR. Then you can take out a loan for a period of 5 years with an effective interest rate of 2.63% or for a period of 10 years with a rate of 2.89%.

In Russia the average loan rate for business ranges from 9.25% to 19%. Today, there is a soft-window facility: the rate is 6.5%, valid from 2018 to 2024. Essentially, the interest rate ranges from 7.75% to 8.5%, but a part of 1.5-2.5%.is propped up by the government. So far, only 70 enterprises have been chosen to participate in this program.

In addition to concessional lending, there are also programs of state aid. In Germany, you can find more than 700 subsidy programs for small and medium-sized enterprises. The size of the non-repayable subsidies ranges from 25% to 80% of the costs of project implementation. The size of the subsidy depends on other factors such as the purpose of the project, the size of the company, the number of employees, turnover, and place of registration.
In addition, there are other forms of state aid to SMEs.:
non-repayable subsidies;
loans with very low interest rates;
reimbursement of part of the loan, refinancing;
guarantee.
To obtain state aid it is necessary to be involved in:
production;
support of innovations and engineering solution;
social sphere;
education;
health care;
physical culture and sports;
informational support and consulting;
support in personal training, retraining and personnel development;
job creation.
In Russia, there are also government subsidy programs, their forms are:
grants;
guarantee funds;
VC funds;
multifunctional centres.
In 2019 programs to support small businesses focuses primarily on companies with a certain number of employees and size of the annual turnover. Enterprises with a staff of no more than 100 people and with a maximum turnover of up to ~ 10 million EUR belong to small business.
In Russia, as in foreign countries, there are priority areas for business organization:
food and Industrial production;
production of vital goods;
health care system;
eco tourism;
utilities, household and other services;
social entrepreneurship;
innovative technologies.
Subsidies at the regional level are carried out on a competitive basis among future businessmen interested in recovery of expenses of basic equipment.

By the way, in Europe, there are better interest rates on loans for business and many options for taking out state aid.

Labor costs

Average salaries in European countries are much different from Russian ones. However, there are nuances both within the EU and in RF regions.

The average salary is calculated for all countries by the same way — by taking into account incomes of every segment of population.
An example of the minimum wage in some European countries in 2018:
Netherlands — 1 578 EUR.
Belgium — 1 563 EUR.
France — 1 498 EUR.
Germany — 1 498 EUR.
United Kingdom — 1 401 EUR.
As following offers the average salary rating for some European countries according to 2018-2019 data:
1
Switzerland — 5 803 EUR.
2
Belgium — 3 261 EUR.
3
France — 2 874 EUR.
4
Germany — 3 703 EUR.
5
Norway — 4 635 EUR.
6
Netherlands — 3 073 EUR.
7
Spain — 2 188 EUR.
8
Austria — 2 555 EUR.
9
Italy — 2 560 EUR.
10
Portugal — 1 158 EUR.
According to 2018 data, the average salary in the EU, taking into account 28 countries, is 1 748 EUR.

The average salary in Russia is significantly lower than in Europe; as of 2019 data, it is 584 EUR. Below you can see statistics according to Rosstat (Federal State Statistics Service).
The average salary in the RF regions
Such a wide difference in salary across Russia is due to different economic development of each territory.

Conclusion

Doing business in Russia, including those involving the export of chemical products to other countries, has several advantages. In financial terms, capital costs for starting production in Russia are lower than in EU countries. More than that, land is cheaper.

The transaction costs of business in Russia are much less than in Europe. The cost of electricity, gas, and water for enterprises is far lower. Russian business pays fewer taxes than European one.

On the other hand, the obvious advantage of doing business in Europe is low-interest lending and a large number of subsidy programs.

Labor costs are another important factor. There is no shortage of labour in Russia, including qualified specialists. According to the International Labor Organization, Russia ranked 67th in level of wages in the world in 2018, with an indicator of 637.7 dollars. For comparison China is in the 48th line.

Trade unions weakness and immaturity of labor and ecological safety legislation also could be included to benefits of doing business in Russia.

Today is a good time to invest in Russian Chemicals industry (http://ect-center.com/blog-en/hit-the-jackpot).

The Engineering Chemical Technological Center is ready to help foreign partners and investors to start the chemical business in Russia, adapt the existing technologies for specific production tasks, carry out an appropriate marketing analysis of the project, and make necessary technical and economic estimate.

ECTC is a trusted partner you can rely on in investment in Russian chemical industry.
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