Russia – Open for business but has the Crisis changed anything?

On Thursday 25th June, the Russo-British Chamber of Commerce held its annual Business forum to discuss the past year’s trials and tribulations.  Given that a major global economic crisis has hit businesses across the globe, this business forum promised to be an important outlet for discussing how Russian-British business relations have been affected and whether any benefits will come out of the crisis.

Maybe because of the crisis or other factors, over the last 12 months we have seen a warming in Russo-British relations and this can be shown in no better light than the bi-lateral memorandum on economic cooperation for the Olympics that was signed between Britain and Russia at the St Petersburg Forum.  According to the UKTI Director, Caroline Wilson, there has been an increased drive to seek export support by British companies and one of the most popular areas for this is into the Russian market place.  In the last 12 months British business has been voting with its feet with British retailers and banks moving onto the Russian high street

So it is obvious that Russia is now a very attractive place for all levels of British business to be doing business, but why has this suddenly become the case, what has changed?   
For along time it has been known how highly talented and specialised the Russian workforce is, but only now does it seem that it is widely known among foreign companies of all size.  People are Russia’s greatest natural resource, so much so that we are starting to see an increased interest in recruiting Russian workers to work in countries abroad.   With the fact that the Russian state has become more aware over the last 12-18 months how important foreign investors are to the economy of Russia, Russia is an even more attractive place to do business especially for the SMEs rather than just the big boys.  This point was well proven for the retail sector by Stephen Ogden from Lenta Group.   7 years ago Lenta was an insignificant supermarket in St Petersburg, it is now the largest private supermarket in Russia with 38 stores nationally.  In the 7 years that Lenta Group has been operating, they have seen a marked increase in the development of ‘Modern’ retailing (i.e. hypermarkets, chains and big stores), in fact Modern retailing now accounts for 37% of all retail in Russia or $137 million.  In the next 10 years according to Ogden, Russian’s will greatly increase their spending particularly as Russian is a very rapidly growing consumer market.  Bearing this in mind and seeing how successful major foreign retailers like Auchan and Ikea have been this year in Russia, you can see why it will not be long before the huge American and British retailers like Wal-Mart and Tesco enter the Russian market, and when this happens we will see a great increase in the modernisation of the consumer industries in Russia.

This maybe the case and Russia might be a very attractive place, but given the global economic crisis perhaps this is not the best time for British Business to be entering Russia.  Well actually this is the ideal time to enter the Russian market place because Russia was not heavily affected by the economic crisis.  Advocated by Rostislav Blanco of Rostik Group, the average Russian was not affected by the crisis because Russian’s do not like to invest in shares, they do not have mortgages (only around 100,000 in Russia today) and they do not trust savings in banks.  In fact the main reason for seeing the crisis hit Russia was it’s reliance on external capital investment which disappeared when the global crisis struck and the fact that there was very little internal capital investment.  This is slowly changing but it has shown how reliant Russia still is (even if it may be in the short term) on the investment by foreign companies.  Maybe the best thing to show that Russia has not been heavily affected by the crisis is a point that came from Tremayne Elson of Antal International.  His company has carried out research over the last few months that shows 58% of companies in Russia are actively looking to hire people and are able to cherry pick the best.  According to the survey peoples’ perception for what is important in a job is also changing, with promotion perspectives becoming a higher priority and for the first time concerns like work/life balance featuring.

2008-9 has been an excellent year for business even considering the crisis, but what advantage can be taken from this crisis year , what reforms should be taken and what changes might we see in the coming year?

There are two main reforms that need to come in the next year.  A fiscal reform needs to take place whereby the basis for the high tax burden on businesses is changed from revenue to profit as on the international structure.   This will make Russia even more appealing to small and medium business coming from abroad and also internally in Russia.  Secondly and possibly the most important is a reform of infrastructure,  to improve trade between regions and to increase the appeal of conducting business in Russia there needs to be a vast improvement in the road systems in Russia which will ultimately lead to an increase in growth of both foreign and national companies.  Whatever reforms do take place we need to see a continuation in the growth of quality and innovation coming out of Russia so that it may take its deserved position on the world stage.  In the medium term the forum suggested that the two major things we will see come out of the crisis in Russia are a consolidation of the banking industry (there is no need to have 1100 banks in Russia) and a consolidation in the retail industry (the market leaders currently only have 9% of the market share, this is predicted to rise to 60% within 5 years).

Patrick MacPhail, EER