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Russian Federation
Written by:
Michael Kryukov
[email protected]
For International Business 8180
Georgia State University
April 15, 1999
I.
STATISTICAL OVERVIEW
A. Geography
Land area
Major cities
Climate
B. Demography1
Population
Population growth rate
Fertility rate
Infant Mortality rate
Life Expectancy
C. Political
Type of government
Party or person in power
D. Economic
Currency
Exchange rate (per US$)
Fixed/Floating exchange
rate
GDP PPP (US$)
GDP per capita (US$)
GDP growth rate
Inflation rate
Unemployment rate
Major imports
Major trading partners:
imports
Major exports
Major trading partners:
exports
E. Socio-Cultural
Major religions
Literacy rate
Languages spoken
Ethnic groups
1
17,075,200 sq km, slightly less than 1.8 times the size of the US
Moscow, St. Petersburg, Novosibirsk, Irkutsk, Vladivostok
Winters vary from cool along Black Sea coast to frigid in Siberia;
summers vary from warm in the steppes to cool along Arctic coast
146,861,022 (July 1998 est.)
-0.31% (1998 est.)
1.34 children born/woman (1998 est.)
23.26 deaths/1,000 live births (1998 est.)
Male: 58.61 years
female: 71.64 years (1998 est.)
Federation
President Boris Yeltsin
Russian Rouble
1US dollar = 25 roubles 25 kopeek (2.25 RR)
Managed Floating
$692 billion (1997 est)
$4,700 (1997 est.)
0.4% (1997 est.)
11% (1997 est.)
9% (1997 est.) with considerable additional underemployment
Machinery and equipment, consumer goods, medicines, meat,
grain, sugar, semifinished metal products
Europe, North America, Japan, Third World countries
Petroleum and petroleum products, natural gas, wood and wood
products, metals, chemicals, and a wide variety of civilian and
military manufactures
Europe, North America, Japan, Third World countries
Russian Orthodox, Muslim
Male: 100% female: 97% (1989 est.)
Russian
Russian 81.5%, Tatar 3.8%, Ukrainian 3%,
The Central Intelligence Agency, "The World Factbook", http: //www.odci.gov/cia/publications/nsolo/factobook.
II.
INTRODUCTION
Since break up of the Soviet Union in June of 1991 the Russian Federation has been going
through the rough times: country’s GDP shrunk by more than a half, the national currency
devalued by more than 10,000 times and unemployment raised from virtually non existence to
official 9% with much more people been underemployed. A number of state owned enterprises
went bankrupt and even more barely existing. The practice of delaying payment of wages to
employees became common. A wave of strikes shook Russia in 1996-98 first time since a
communist party came to power in the beginning of the century.
What are the reasons then for the major multinational corporations and medium size businesses
to invest into Russia? For Mars Inc to build a 0.5 billion dollar factory in 1996, Wrigley 70
million dollar in 1999, Caterpillar $50 million in 1999, Ford $150 million in 1999-2000 and, of
course, Coca-Cola 3 bottling factories. These are just small sample of investments into Russian
economy. In these paper, the author attempt to show the potentials of this country and
demonstrate how doing business in this country and with this country could be beneficial for
foreign entrepreneurs.
III.
MODERN ECONOMIC HISTORY
To better understand business practices and culture of Russia as well as contradictions tearing
the country apart, it is very helpful to know history of development of the Soviet Union and
Russia during this century. In this chapter the author attempted to provide an abridged outline
of modern history of Russia and development of its economy.
Soviet Union
First to fully understand the journey Soviet Union had, it is necessary to remember the point of
departure. In their eagerness to discredit the ideas of genuine socialism, the apologists of the
"free market" conveniently forget a few details. In 1917, Tsarist Russia was, in fact, far more
backward than present-day India. It lagged far behind the West. It was the barbaric land of the
medieval wooden plough, used by peasants who had only achieved emancipation from serfdom
two generations before. Russia had been ruled by Tsarist despotism for centuries. The industrial
working class was a small minority - less than four million out of a total of 150 million. Seventy
per cent of the population could neither read nor write. Russian capitalism was extremely feeble
and rested upon the crutches of foreign capital: French, British, German, Belgian and other
Western powers controlled 90 per cent of Russia's mines, 50 per cent of her chemical industry,
more than 40 per cent of her engineering, and 42 per cent of her banking stock.
In 1936, Trotsky wrote that the "underlying service of the Soviet regime lies in its intense and
successful struggle with Russia's thousand-year-old backwardness. The Soviet regime is
passing through a preparatory stage, importing, borrowing and appropriating the technical and
cultural conquests of the West.2" Since that time, the Soviet economy advanced with seven
2
Trotsky, L. 1982. The Revolution Betrayed. p 20, New York, 1972 and London, 1982 editions
league boots. In the 50 years from 1913 (the height of prewar production) to 1963, despite two
world wars, foreign intervention and civil war, and other calamities, total industrial output rose
more than 52 times. The corresponding figure for the USA was less than six times, while Britain
struggled to double her output. In other words, within a few decades, on the basis of a
nationalised economy, the Soviet Union was transformed from a backward agricultural
economy into the second most powerful nation on earth, with a mighty industrial base, a high
cultural level and more scientists than the USA and Japan combined.
In the former USSR, out of a population that grew by 15 per cent, the number of technicians had
grown by 55 times; the numbers in full-time education by over six times; the number of books
published by 13 times; hospital beds nearly ten times; children at nurseries 1,385 times. Life
expectancy more than doubled and child mortality fell by nine times. Between 1955 and 1959
urban housing space (state and co-operative) more than doubled, while private space more than
tripled in size.
The second world war in Europe was a further testimony to the achievements of the planned
economy. The war had in reality been reduced to a titanic battle between the USSR and Nazi
Germany, with Britain and the USA as mere spectators. It cost the USSR an estimated 27
million dead. A million died in the siege of Leningrad alone. Vast areas of Russia were annexed
by Hitler or completely destroyed in the Nazi's "scorched earth" policy. Almost 50 per cent of
all urban living space in occupied territory - 1.2 million houses - was destroyed, as were 3.5
million houses in rural areas. "Many towns lay in ruins. Thousands of villages were smashed.
People lived in holes in the ground. A great many factories, dams, bridges, which had been put
up with so much sacrifice in the first Five-Year Plan period, now had to be rebuilt," stated
historian Alec Nove3.
In the postwar period, without any Marshall Aid programme, the USSR made colossal advances
on all fronts. Thanks to the nationalised economy and the plan, the Soviet Union rapidly built up
its devastated industries, with growth rates of over 10 per cent. Alongside US imperialism, the
USSR had emerged from the war as a world superpower. "World history knows nothing like it,"
states Nove. As early as 1953, the USSR had built up a stock of 1.3 million machine tools of all
kinds - double what it had prewar. Between 1945 and 1960, steel production had grown from
12.25 million tons to 65 million tons. In the same period, oil production had risen from 19.4
million tons to 148 million tones, and coal from 149.3 million to 513 million.
Before the war the Soviet Union was still far behind not only the USA, but also Britain and
Europe. Astonishingly, by the mid-1980s the USSR had overtaken Britain and most other
capitalist economies, with the exception of the USA. At least in absolute terms, the USSR
occupied the first position in many key fields of production, for example, in the production of
steel, iron, coal, oil, gas, cement, tractors, cotton, and many steel tools.
As Trotsky explained: "Even if the Soviet Union, as a result of internal difficulties, external
blows and the mistakes of its leadership, were to collapse - which we firmly hope will not
3
Nove, A. An Economic History of the USSR, p. 292. London, 1992
happen - there would remain as an earnest of the future this indestructible fact, that thanks solely
to a proletarian revolution a backward country has achieved in less than ten years successes
unexampled in history.4"
The advances of the Soviet economy over the first sixty years were however extremely uneven
and contradictory. They were far from the idyllic picture painted in the past by the "Friends of
the Soviet Union". Without doubt, a regime of workers' democracy would have far outstripped
what had been achieved under Stalinism with all its corruption and mismanagement. Within this
contradictory development of the Soviet economy lies the key to understanding the collapse of
Stalinism in the late 1980s and the move towards capitalist restoration5.
Independent Russia
After break up of Soviet Union in 1991, the deregulated economy plummeted. Production links
and distribution routes which were established under the old planned economy broke apart as
newly privatized enterprises were looking for new markets for their products and new suppliers.
State orders for products were cancelled and companies had to learn how to market their
products on the open market. As a result the GDP shrunk and inflation increased over 1,000%
per year during 1992. Period of high economic instability continued for a couple years.
In 1997, however, the Russian economy showed signs of consolidating macroeconomic
stabilization, as inflation fell to 11% on an end-year basis by December 1997, down from 22%
in 1996, and real yields on treasury bills — GKOs and OFZs — declined sharply up to early
October.
The downward trend in real output was reversed in the second half of 1997. GDP grew by 0.8%
in 1997 — the first time in the post-Soviet era. The drop in trade that accompanied the break-up
of the former Soviet Union has been reversed, and the bulk of Russian trade is with countries
outside the Commonwealth of Independent States (CIS), suggesting increased integration into
world markets. Leading exports include crude oil, natural gas, and processed metals, such as
copper, nickel and aluminum. The trade surplus steadily increased to US$23 billion in 1996,
with total exports of US$90 billion. However, with oil prices collapsing since mid-1997, the
trade balance has been shrinking rapidly with the prospect of a significant current account
deficit for 1998.
However, the implementation of structural reforms intended to create a favorable climate for
private sector development and new private investment have lagged behind. Consequently, the
resumption of strong growth continues to prove elusive. As a sign of the weak investment
4
5
Trotsky, L. 1982. The Revolution Betrayed. p 8, New York, 1972 and London, 1982 editions
Ted Grant, 1997, Russia: from Revolution to counterrevolution. Part One: The Balance Sheet of October.
http://easyweb.easynet.co.uk/~socappeal/russia/part1.htm1
climate, over 1994-1997, which is very low compared to levels elsewhere in Central and Eastern
Europe. Cumulative foreign direct investment was only an estimated $11 billion6.
Unemployment, as measured by International Labor Organization (ILO) standards, officially
stood at 9.3 percent at the end of May 1998. This data is based on a somewhat outdated survey
and may understate the overall level of unemployment. Moreover, official unemployment data
do not reflect the problem of late wages, which are common throughout Russia and in some
industries are many months overdue. An October 1997 survey by the State Committee for
Statistics estimates unemployment at 11.6 percent. Rates vary tremendously by region, with
Moscow unemployment very low, but very high rates in depressed regions such as Ivanovo.
Overall wage arrears reached $11 billion as of June 1, 1998, and are the major cause of labor
tension in Russia. Average nominal wages for the month of May were $174, a 12.2 percent
increase from the previous year.7
Poverty still remains a serious problem. The working poor, families with many children, and
single enterprise towns, where factories have been down-sized or closed, have experienced the
greatest difficulties.
Consequently, Russia is contending with a situation in which: (i) a debt crisis and devaluation
have effectively removed Russia’s short term access to private capital markets; (ii) the banking
sector is now effectively insolvent, with failure of the interbank market and lack of liquidity
now threatening the payments system, with profound implications for tax collection, wage
payments, import financing, and other vital transactions; (iii) greater pressure on the budget
from weak tax collection and higher expenditures resulting from the crisis is building, and
inflation is already rapidly accelerating; (iv) progress on continuing with structural reform risks
being retarded or reversed; and (v) there are risks of social instability rising, due to inflation
eroding real incomes along with greater pressure on both federal and regional budgets8.
IV.
DOING BUSINESS IN RUSSIA
There are a number of the areas which businessmen need to appreciate when considering
investing into Russian enterprise or trading with Russian businesses. Below there is a short
outline of these issues.
Legal and Tax System
During the past few years, the Government and the legislators have addressed many of the legal
inadequacies currently existing in Russian legislation - anti-monopoly, property and company
laws have been passed, together with the Civil Code, regulating company and contract law.
6
The World Bank Group. Developments: Russian Federation.
http://www.worldbank.org/html/extdr/offrep/eca/ru2.htm
7
State Department: Country Commercial Guides FY 1999: Russia, Chapter II. Economic Trends and Outlook.
http://www.state.gov/www/about_state/business/com_guides/1999/russia_nis/russia99_02.html</HEA
8
The World Bank Group. Developments: Russian Federation.
http://www.worldbank.org/html/extdr/offrep/eca/ru2.htm
Consistent application of this growing body of law has been lagging behind, but is beginning to
be addressed.
With regard to tax law, the present regime is complex and contradictory, with a large number of
separate laws regulating some forty taxes. A draft Tax Code, which seeks to rationalise the tax
system is currently before the State Duma. It promises to iron out many of the present
inconsistencies, to reduce the number of taxes by half and limit the penalties and interest which
might apply.
Currency Regulations
There is a strictly enforced network of laws and regulations covering currency and related
issues, with substantial penalties for transgression. There is a closed list of foreign currency
operations which can be performed without obtaining a Central Bank of Russia licence.
Russian legal entities, including companies with foreign participation, are required to convert
50% of their foreign currency export earnings into Roubles through the domestic foreign
exchange market. Within Russia, all sales (and purchases) must in general be made in roubles.
Foreign legal entities are allowed to maintain foreign currency and certain types of rouble bank
accounts. Each account may be used for a specified list of operations. Generally, proceeds
from sales in roubles can be converted into another currency and repatriated, or used to fund
local expenses.
Types of Business Entity
Foreign investors can adopt a number of different forms of business representation in Russia.
These include Russian legal entities or representative offices and branches of foreign legal
entities. Russian legal entities may be established in various forms including joint-stock
companies, limited liability companies and partnerships.
Representative offices of foreign entities may strictly undertake only liaison and support
functions, but in practice the authorities accept a much broader range of activities being
undertaken, although with the result - subject to the terms of any relevant double tax treaty - that
these are taxable. In terms of taxation, there is little practical distinction between a
representative office and a branch (which can certainly undertake most types of activity in
Russia), but hitherto branches have not been a commonly used form of business entity.
'Open' and 'closed' joint stock companies have legal personality and are broadly equivalent to
public and private companies respectively. Partnerships may also be formed, but under Russian
law and for tax purposes these are generally regarded as separate legal entities and are taxed
accordingly. Contract based agreements for joint activity do not have legal personality, and
share some of the characteristics of a tax transparent general partnership, with special rules
governing their tax treatment.
Corporate Profits Tax
The Profits Tax consists of two elements:
Federal Tax of 13%, and
Local Tax of up to 22% (30% for banks, insurance companies and intermediary activities).
The maximum combined rate in Moscow for most organisations is therefore 35%. In St
Petersburg, where the local rate is two per cent less, the combined rate is 33%. Certain types of
business, for example gaming, are taxed at much higher rates and with further limitations on the
deductibility of certain expenses.
Although, most types of business expenditure are deductible, including, for a branch or
representative office, there are a number of restrictions on the tax deductibility of expenses
including entertainment, advertisement, business travelling and interest.
Value Added Tax
VAT must be accounted for by the vendor on sales of goods and services on the territory of
Russia, and by the importer on the import of goods into Russia. Exports of goods (usually to
destinations outside CIS countries) and certain services are not subject to VAT. For crossborder services there are special tests determining whether they are provided within or outside
Russia. Services of a consultancy nature or related to patents, licences or similar rights,
rendered to an entity which has a place of economic activity in Russia are subject to VAT.
Services related to real estate in Russia are subject to Russian VAT.
Supplies which are subject to VAT are often made by entities which have no presence or tax
registration in Russia. In this situation, the Russian payer must withhold VAT from payment,
although this VAT may normally be credited by the payer as input tax.
Value added tax is charged at the rate of 20% on most goods and services and 10% on a range
of basic food products and children's goods.
Credit for input tax in respect of training, entertaining and advertising expenditure is limited by
reference to the same limits as for the profits tax deduction (see above). VAT on non bank
interest paid is not creditable. VAT on tax allowable expenses is creditable, and also that on
purchased fixed assets (except for business cars and minibuses). If sales are exempt from
VAT, as a general rule, the relevant input VAT is not credited but added to the relevant expense.
There are some restrictions on offset of input VAT, principally in respect of VAT on
construction, which must be capitalised and depreciated as part of the cost of the asset9.
9
Coopers & Lybrand. Business Tax Guide 1998 Russia.
Personal Income Tax and Payroll Taxes
Russian resident's income and gains from all are taxed at progressive rates, with the highest rate
being 45% on annual incomes over approximately 15,000 US dollars at the current exchange
rates. On top of the income tax contributions to social funds which have to be made by
employers are 40.5% of the employees’ remuneration.
There are also a number of taxes specific to certain industries, activities or localities. On top of
it compliance requirements could be complex and penalties for non compliance dragonical.
Russian Business Attitude Toward the United States
Russian firms and customers admire U.S. technology and know-how, and generally are
interested in business with U.S. companies. At the same time, there is a tendency in some
quarters to suppose that the United States is responsible for the changes which have occurred in
Russia, especially those which have caused most hardship to individuals and to industry. This
sentiment has attracted the support of some political leaders, and is given credence by a
significant proportion of the populace. At the same time, a strong U.S. commercial presence is
viewed in the Russian Far East as a counterbalance to other regional economic powers10.
Major Business Opportunities
After decades of separation from world markets, Russia today is a tremendous potential market
for most U.S. goods and services. Demand has emerged in waves. First, in the early 1990s,
came demand for U.S. food products, which has remained strong. Strong demand for U.S.
consumer products followed. 1995 saw a surge in demand for construction materials, hotel and
restaurant equipment, and furniture. With further legal reform and economic growth, there
should be strong demand for U.S.-made equipment and services, especially in hard currencyearning sectors (oil and gas, mining, timber) and telecommunications. Over the next decade, as
restructured Russian industries gain financial health, Russia will become a good market for U.S.
industrial equipment and components, particularly food processing equipment and industrial
process controls. Once market access and financing issues are resolved, Russia promises to
become a major market for U.S. aircraft, components and avionics. Broader-based growth will
eventually boost sales of autos and computer equipment.
It is important to note that many industrial goods produced by Russian companies and sold on
the domestic market are sold not for cash, but in countertrade or debt-swap transactions. This
greatly detracts from the reliability of estimates of total market size for products widely
produced by Russian firms11.
10
Department of State. Country Commercial Guide. Russia. Fiscal Year 1998.
http://www.ita.doc.gov/uscs/cc98/ccgoruss.html
11
State Department: Country Commercial Guides FY 1999: Russia, Chapter V. Leading Sectors for US Exports
and Investment.
http://www.state.gov/www/about_state/business/com_guides/1999/russia_nis/russia99_05.html</HEA
Most Western products and services are in demand in Russia. Of particular interest are:
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consumer goods, including poultry and meats, paper products, apparel, cosmetics, and
furniture,
industrial chemicals,
telecommunications equipment,
medical equipment and pharmaceuticals,
building construction equipment and materials,
food processing equipment, and
oil & gas and mining equipment.
Major Roadblocks to Doing Business
U.S. and other foreign companies operating in this market encounter major difficulties to both
trade and investment, including:
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ownership disputes,
high taxes, and a frequently changing tax regimen,
higher operating costs than anticipated,
lack of systematic and accessible credit information,
corruption and commercial crime,
financial illiquidity of many Russian firms,
changing requirements from regulatory bodies,
the lack of market information,
an infant commercial legal framework,
cultural and language differences,
infrastructure problems (telecommunications, roads,
banking system, ports, etc.)
payments arrears and frozen accounts, and
frequent changes in government personnel.
Nature of Local and Third-Country Competition
Business in Russia is regional, and so is third country competition. In European Russia and the
Urals, Western European firms, particularly those from Germany, Italy, Austria, France and the
United Kingdom offer U.S. business strong competition. Surprisingly, Korean and Chinese
firms have made strong progress in the Urals over the last year. In northwest Russia,
Scandinavian firms are active. In the Russian Far East and southern Siberia, Chinese, Korean
and Japanese firms are aggressive. Russian firms in all sectors offer significant, low-cost
competition, particularly outside the major cities Moscow and St. Petersburg12.
12
Department of State. Country Commercial Guide. Russia. Fiscal Year 1998.
http://www.ita.doc.gov/uscs/cc98/ccgoruss.html
Land Ownership
The constitution and a presidential decree issued in 1993 give Russian citizens general rights to
own, inherit, lease, mortgage, and sell real property (usually not including the land on which it
stands); however, legislative gaps and ambiguities impede the general exercise of these rights.
Russia does not yet have a land code to regulate land use and ownership. Thus far, Russian law
and practice appear to restrict or prohibit foreigners from owning real estate. The presidential
decree of 1993 gave joint ventures with foreign participants the right to own real property, and a
privatization decree issued in 1994 permitted foreign owners of privatized companies to receive
title to enterprise land; however, such rights have not been codified and legislation regulating
land use currently being considered by the Federal Aassembly could prohibit foreigners from
owning land outright. Although a 1996 presidential decree permits the ownership and sale of
land, including agricultural land, the Duma maintains that the decree is unconstitutional.
Uncertainty about more general rights to land title and mineral rights will persist until the Duma
and president agree on clear and comprehensive legislation to regulate land use and ownership.
Meanwhile, some regional legislatures are attempting to fill in the gap. In 1997 and 1998,
Saratov and Samara oblasts approved laws allowing the free trade of land in their regions.
Intellectual Property Rights
Since 1991, Russia has enacted several laws strengthening the protection of patents, trademarks
and appellations of origin, and copyright of semiconductors, computer programs, literary,
artistic and scientific works, and audio/visual recordings.
The patent law, which accords with the norms of the World Intellectual Property Organization,
includes a grace period, procedures for deferred examination, protection for chemical and
pharmaceutical products, and national treatment for foreign patent holders
The law on copyright and neighboring rights, enacted in August 1993, protects all forms of
artistic creation, including audio/visual recordings and computer programs as literary works for
the lifetime of the author plus 50 years, and is compatible with the Bern convention. The
September 1992 law on topography of integrated microcircuits, which also protects computer
programs, protects semiconductor topographies for 10 years from the date of registration.
Russia has acceded to the Universal Copyright Convention, the Paris Convention, the Bern
Convention, the Patent Cooperation Treaty, the Geneva Phonogram Convention, and the Madrid
Agreement. Under the U.S.-Russian Treaty on Mutual Protection of Investment (not yet ratified
by Russia), Russia has undertaken to protect investors' intellectual property rights. The U.S.Russia Agreement on Trade Relations mandates protection of the normal range of literary,
scientific and artistic works through legislation and enforcement.
While the Russian government has passed respectable laws to protect intellectual property,
enforcement of those laws has been a low priority. A new criminal code went into effect in
January 1997, which for the first time applies criminal penalties to IPR violations. However,
there are shortcomings in this law that need attention. Marketing of pirated videocassettes,
recordings, books, computer software, clothes and toys is pervasive, and is likely to remain so
until tougher action is taken to enforce the laws.
Crime and Corruption
The rise of organized crime (and crime in general) has received wide media attention since the
breakup of the Soviet Union. Corruption, a sometimes-related but also separate problem, has
also become a factor against which businesses need to be on-guard. While organized crime is
not new to Russia, recent years have seen an increase in the range and frequency of criminal
activity. Unfortunately, legal and judicial reforms have not kept pace with criminal advances.
Many Russian entrepreneurs in a survey reporting that they must pay kickbacks and protection
to stay in business.
U.S. firms have also identified both crime and corruption as obstacles. Some anecdotal evidence
suggests that these problems may be growing in terms of both the number of instances and in
the size of bribes sought. Russia has laws and regulations against bribery and other forms of
corruption, but penalties are often insufficient deterrents. In general, companies having the most
success in avoiding or countering crime have planned well, verified the bona fides of potential
partners, and have thoroughly researched appropriate local laws -- good business practice in any
case. U.S. firms planning to open offices in Russia should consider the full spectrum of security
issues before establishing operations. This includes the possible hiring of guard services,
installation of technical security systems, systematic evaluation of the reliability of Russian
partners and associates, and frank discussion with employees on the need to provide full
information on any criminal extortion attempts13.
Regional Perspectives
While Moscow and St.Petersburg are the most affluent and concentrated markets, especially in
the consumer sector, business in Russia is expanding into the regions at a rapid clip. The
ongoing revitalization of the Trans-Siberian Railroad as an increasingly reliable commercial link
is an overlooked development certain to have a major impact on West-East trade.
Below is an example of one region in the Ural Mountains chosen for your attention by the
author out of his personal sentiment. This is the area where he grew up.
Sverdlovsk Oblast
Sverdlovsk Oblast (4.6 million residents) is one of Russia's most urbanized areas. Its capital,
Yekaterinburg (1.6 million inhabitants), is Russia's third or fourth largest city. Sverdlovsk
region has the largest GDP of any oblast in the Urals, producing 5 percent of Russia's industrial
output and ranking second only to Moscow Oblast in that category. Heavy industry, ferrous
metallurgy and machine building form a large chunk of Sverdlovsk's economy, much of it
defense-related. Services have grown to 40 percent of regional GDP. Yekaterinburg is one of
central Russia's major road and rail transportation hubs, featuring air service to ten foreign
13
State Department: Country Commercial Guides FY 1999: Russia, Chapter VII. Investment Climate.
http://www.state.gov/www/about_state/business/com_guides/1999/russia_nis/russia99_07.html
countries. Its banking infrastructure is the best in the Urals, with over 200 branches. In 1997,
Sverdlovsk became the fourth oblast in Russia to receive an international credit rating, and had
planed to issue $300 million in Eurobonds in autumn 1998. Sverdlovsk Oblast leads the Urals in
attracting foreign investment. The oblast's top exports include steel, copper, chemicals,
aluminum, titanium and radioisotopes. Non-ferrous metallurgy remains a growth sector, and the
world's second-largest titanium producer (VSMPO) is located here. Growth has occurred in
transport, telecommunications and food services. Another key growth sector is food production
and processing, with firms seeking foreign equipment to upgrade production14.
V.
CONCLUSIONS
Businesses considering going into Russia should appreciate that doing business in that country
involves going through additional hurdles of bureaucracy, underdeveloped infrastructures in
remote regions and higher level of organized crime.
But in spite of the economic and political troubles through which Russia is going at present, it
still remains an attractive target for investment and trade. The country is reach in natural
resources and inexpensive educated labour. And although doing business in Russia is likely to
be a hard work, it could also be very rewarding.
14
State Department: Country Commercial Guides FY 1999: Russia, Chapter II. Economic Trends and Outlook.
http://www.state.gov/www/about_state/business/com_guides/1999/russia_nis/russia99_02.html
BONUS ARTICLE:
Russian consumer goods. The joys of devaluation
DATE 28-Nov-98
Economist
Russian consumer goods VYACHESLAV FOMICHEV, proud manager of the Smirnov vodka
factory 30 miles outside Moscow, is a stickler when it comes to vodka. The Russian kind—and
particularly his—is, he believes, the best in the world. But the bottles must come from abroad.
“You wouldn’t drive a Russian car, would you?” he booms. “And I don’t want my vodka in a
Russian bottle.”
Russian prejudices against locally produced manufactured goods run deep. Economics,
however, may be starting to shift them. The collapse of the Russian currency has given local
consumer goods a big boost. For example, Svoboda, a Moscow-based company that makes
products such as shampoo and toothpaste, has been taking market share from Procter & Gamble,
Unilever and Colgate. J -7, a local fruit-juice brand, now has around half the market.
The locals’ first advantage was their competitors’ disarray. Western fruit juices, for example,
were largely unavailable in the weeks following the crisis, as importers held back shipments and
distributors went bust. But price is a more enduring advantage. Most imported goods are midrange or premium brands, whose prices, which have typically gone up three times in rouble
terms, are now way beyond many Russians’ means.
Some Russian companies are launching products especially aimed at newly impoverished
consumers. Red October, the country’s best-known chocolate factory, is selling a new
“Sweetbar” made from cocoa powder, rather than cocoa butter, for half the price of its cheapest
chocolate bar. “It tastes just the same,” declares Yuri Yegorov, the company’s chief financial
officer.
Western companies are reluctant to follow Russian companies in this direction. “Down-market,
low-margin products are not our thing,” says a Moscow-based consumer-goods baron. Most
prefer to concentrate on premium brands, while keeping costs low. Some are moving their
manufacturing to Russia: Procter & Gamble already makes detergent and shampoo locally and
Unilever is scrambling to catch up.
Russian companies are also beginning to market more aggressively. Svoboda, for example, used
to advertise very little. Now it is booking big television campaigns at bargain prices—rates have
fallen by over three-quarters since Russia’s financial bubble popped. Such efforts would have
been pointless a few years ago, when Russian products were recognisable mainly by their dingy
packaging. That has changed. Only the small print on a carton of J -7 juice, for example, reveals
that it is made locally.
Yet overall this success is still limited. “You can have a higher share of a smaller market, but it
doesn’t necessarily mean you are doing well,” says Kim Iskyan, a consumer-goods analyst at
MFK Renaissance, a Moscow-based investment bank. Almost all Russian consumer-goods
companies still lag far behind their western competitors in such crucial skills as brand
management, distribution, and keeping their quality consistent, let alone in financial
management. Red October, for example, still believes that distribution is best handled through
its own shops, which means that the product is hard to find. Asked how it allocates capital
internally, Mr Yegorov replies, with disarming honesty: “Personal relationships, of course”.
The real test will come when, eventually, Russian spending power picks up—for example, if oil
prices rise. When Russian consumers can again afford to be a bit more choosy, they may once
more turn their noses up at the local stuff.