Transcript Strategies for Success in Russia

Wolfgang LEHMACHER
Global Russia Business Meeting
Strategies for Success in Russia
Ljubljana, 16-18 May
Executive Summary (1/2)
 Russia’s future is determined not only by global trends, but also by domestic processes
which underpin the economy
 Russia’s economy has been growing over the last few years. However, Russia’s
growing dependance on oil and energy raises concerns about the sustainability of its
growth model. In order to address this, Russia should focus on enhancing the
competitiveness of its manufacturing sector in global markets
 Good infrastructure is vital for Russia's development. Infrastructure is not simply about
technical development and construction of large projects, it is also about providing and
delivering efficient and transparent public services and basic services that people need
for everyday life
 This includes water, sanitation, traditional and modern energy, roads, transport and access
to contemporary information communications technology
 Russia is most probably aware of the need for fundamental improvements in its
corporate governance systems, which shall provide real protection for investors’
interests and rights
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Executive Summary (2/2)
 The steady growth in personal incomes and ongoing real ruble appreciation is expected
to increase the size of the retail market
 Cities with a population of more than 1 million will be the next big market for retailers
 Russia spends more on inputs into knowledge creation processes than most other
countries with similar levels of GDP per capita. It has an exceptionally large science
base inherited from the Soviet Union and despite the cutbacks of the 1990s, continues
to spend more on R&D than most emerging economies
 Given its large R&D expenditure, Russia’s performance on most generally accepted
indicators of innovation performance is mediocre
 Russia performs best on international innovation indices when they are weighted towards
inputs into R&D; it performs less well on indices that emphasize revealed technical
achievement; and it ranks worst of all on indices emphasizing economic incentives
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A Global Leader
 Russia, the largest country in the world,
has a wide natural resource base
including major deposits of oil, natural
gas, coal as well as many strategic
minerals and timber, all accounting for
more than 80% of Russian exports abroad
 Russia is a world leader in terms of
resource extraction, particularly in the
energy sector
 Leading producer and exporter of natural
gas in the world (currently, Russia delivers
gas to every fourth European customer)
 Second largest producer and exporter of
petroleum in the world
 The Russian Government has significantly
increased its support of the poorest
countries, aiming to reduce poverty levels
and improve the social well-being of the
population
2010
World Growth (%)
2011
2,7
3,2
76,0
76,6
5,0-5,5
3,5
-3,0
0,0
Current Account (USD bln)
32
19
Capital Account (USD bln)
30
50
Oil Prices (average, USD per barrel)
Russia
GDP Growth (%)
Consolidated Government Balance (%)
Source : World Bank
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Russia at a glance
Foreign Trade Indicators (million USD)
 Russia is a middle income country with a
population of approximately 141,8 million
people and a gross national income per
capita of US$9,760 in 2008
 After a decade of high growth, averaging
7% during 1999-2007 and solid growth in
2008 of 5,6%, the Russian economy is now
experiencing a recession in the wake of
the global financial crisis
 In 2009, Russia experienced its deepest
contraction in 15 years, with GDP shrinking
7,9%
500
450
400
350
300
250
200
150
100
50
0
2004
 Russia’s real GDP is expected to grow by
approximately 5,0% to 5,5% in 2010, due in
part to the fiscal stimulus package
 However the unwinding of fiscal stimulus
means the pace of expansion should slow
in 2011
2005
2006
2007
2008
Import of goods
Import of serv ices
Export of goods
Export of serv ices
Key Development
Indicators (2008)
Russia
EU &
Central
Asia
141,8
441,4
-0,2
0,3
1,608
3,861
5,6
5,5
Population
Population Growth (%)
GDP (USD bln)
GDP Growth (%)
Source : World Bank
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Trade Flows
The major trade flows are with Europe and Central Asia, with trade between Europe and
Russia growing strongly in recent years
Total Merchandise Exports (2008)
Total Merchandise Imports (2008)
By main destination – million USD
By main origin – million USD
1. Fuels & Mining 73,1
1.Manufactures 82,9
2. Manufactures 20,0
2. Agriculture
3. Agriculture
3.Fuels & Mining
5,3
11,7
4,2
Source: WTO
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Retail Market
Purchase of goods and payment for service
 Retail sales in Russia grew at a CAGR of almost 25%
during 2004-2008 and are expected to grow at a
CAGR of around 18% during 2009-2013, surpassing
US$800 Billion by 2013
 The size of the retail market is expected to increase
due to the steady growth in personal incomes as well
as ongoing real ruble appreciation
 The nature of household consumption in Russia
has changed significantly. The share of income
spent on foodstuffs has dropped with food
expenditure replaced by increased expenditure
on household facilities, recreation, education and
cultural services
(% of income)
74
73
72
71
70
69
68
67
66
2004
2005
2006
2007
2008
 Cities with a population of more than 1 million will be the next big retail markets for retailers
 Russia has seen the emergence of a middle class, comprised of salaried people working in large Russian or
foreign companies with consumption behaviors similar to that of Europeans. Thus, there is growing demand for
quality products even though the purchasing power of Russians continues to be lower than that of Europeans
The size of Russia, underdeveloped transport infrastructure and an absence of experienced
third-party logistics operators make supply and distribution a key topic
Source: Rostat, Internet
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Country Strategic Goals
The World Bank has endorsed a Country Partnership Strategy (CPS), marking a shift towards a
new way of cooperation. Russia’s objectives of improving the well-being of the population and
decreasing poverty, based on a more dynamic and competitive economy, are classified into
four themes
1
Sustaining Rapid Growth
 Correcting spatial imbalances and promoting
 Promote private sector development
 Strong progress in land registration and
cadastre listing
 Increase in availability of finance for Russian
entrepreneurs
 Implementation of financial sector regulation
reform
 Maintain macroeconomic stability
growth points
 Improve climate for growth and investment in
selected regions
 Progress in housing reform entrepreneurs
 I Drafting national regional strategy for
promoting growth points
 Improvement in regional trade through the
reduction of transportation logistics costs
 Remove infrastructure bottlenecks to growth in
 Increase diversification of the economy
 Implementation of Special Economic Zones, IT
parks and investment fund projects
 Monitoring of Russian firms and benchmarking
them relative to past, and other countries,
competitiveness measures
 Attraction of substantial private investment to
non-oil tradable sectors
 Increase in innovation rates
transportation, energy and other areas
 Successful formation of PPPs
 Power sector able to attract investment
resources on good terms
 Effective allocation of Fund and Federal
Targeted Program resources
 Enactment of energy efficiency laws and
development of secondary legislation for public
and private investments across Russia
Source : World Bank Report, 2009
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Country Strategic Goals
2
Strengthening Public Sector Management and Performance
 Creation of an efficient, modern and professional civil service that is motivated to improve the
investment climate and quality of public service
 Realization of public administration reform program for the re-organization of apparatus and conversion
to new principles
 Significant initiatives in regions for reforming government administration
 Rapid progress on administrative reform in regions
 Fiscal and administrative decentralization. Creation of effective local self government on the
basis of budgetary and administrative autonomy at the lowest municipal level of government
 Development of local self-government in pilot rural areas
 Increased capacity of Municipal Associations in Adygea, Penza and Perm
 Measurable increased participation of population in public decision-making
 Development and piloting of new modalities of interaction between the government and the population
 Improving the efficiency and results orientation of budgeting at the federal and sub national levels
 Improve the judiciary and other key public institutions
 Improvements in the quality of Russian statistics
 Progress in judiciary reform
Source : World Bank Report, 2009
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Country Strategic Goals
3
Improving Delivery of Social and Communal Service
 Improve the quality and the quantity of affordable housing and utilities available to the population,
including facilities for migrants in growing regions
 Improve the health of the population, increase life expectancy and reverse negative demographic
trends
 Implementation of National Project in Health and other programs supported by international organizations
 Modernize the education system with greater relevance to the demands of an open market economy
 Improve effectiveness of social assistance
4
Enhancing Russia’s Global Role
 Developing and articulating role as an emerging donor
 Fulfilling international obligations for global public goods
 Legal and institutional framework for carbon finance
 Increasing number of carbon finance operations in the country with increasing awareness of climate
change problems
Source : World Bank Report, 2009
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Critical Success Factors (1/3)
With Russia in a period of transition, and on a path towards modernization, there are a
number of factors which must be addressed to ensure success
 An evolutionary improvement in governance will result in a
decline in corruption and the growth of effective, stable and
predictable institutions
Governance
 An increasing number of decision-makers in government and
business should emerge whose formative years occurred during
Russia’s transition from totalitarian rule, and who are sympathetic to
more transparent and predictable structures of governance
 The huge demographic challenge facing Russia should be
ameliorated by immigration policies
Human
Capital
 With the improvements, Russia should experience a decline in
brain drain and become a destination for immigrants, particularly
from Central Asia
 Russian prosperity will allow it to absorb immigrants without
significant disruption or ethnic tensions
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Critical Success Factors (2/3)
 The economic downturn and a fall in global commodity prices
Economic
Diversification
emphasized the importance of diversification of output and exports for
sustainable long-term economic development
 Diversification will in turn rely on both innovation and further
integration into the world economy, as well as addressing the
infrastructure bottlenecks
 Russia should be able to diversify its economy beyond the extraction
of natural resources and into areas of manufacturing and service
 In cooperation with European countries, its intellectual capital should
be tapped to produce new goods based on scientific breakthroughs
 Russia is a world leader in terms of resource extraction, particularly
in the energy sector
Resource
Extraction
 Resource extraction will remain an important part of Russia’s
economy and Russia will continue to be a major producer and
exporter
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Critical Success Factors (3/3)
 Lower global demand highlighted the need to boost
competitiveness of Russian industry through market-based
restructuring and improved production efficiency, in particular
energy efficiency where there remains scope for significant
improvement. The reduction in global demand has also emphasized
the importance of developing the MSME (1) business sector
 Deepening Russia’s integration into the global economy and
World
Economy
advancing its membership in the World Trade Organization is an
important anchor to promote competitiveness of domestic
industry and services
 WTO membership will lessen trade frictions by providing a rulesbased framework and dispute settlement mechanism for
measures such as the recently introduced trade restrictions
 The sharp economic slowdown also highlighted the importance of
strengthening the financial sector and capital markets
development, and exposed the current fragility of the ruble markets
caused by the continuing de-dollarization of the economy
 Foreign direct investment in Russia should grow leading to a
more equitable distribution of wealth and a growth in Russia’s
middle class
1
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Micro, Small and Medium Size Enterprises
Business Challenges 2020
The key problems facing Russia are the low quality of public governance (corruption and the
lack of an independent, effective judiciary), inadequate infrastructure and a declining
population
 A shortage of skilled labor and a lack of
Low Population Level
personnel for construction projects are
key challenges for employers in Russia
High Corruption
 Two other issues perceived as crucial
for Russia’s future are the low quality
of public governance and the
inadequacy of Russia’s infrastructure
 The business community is also
concerned with political trends in the
country
 Economic challenges, either global or
domestic, do not produce any
significant anxiety among Russian
businessmen
70%
69%
Lack of independence and an
effective judiciary
67%
Disregard of law and citizens’
rights by the authorities
Growing presence of the state in
the economy
Low quality of pre-college
education
Inadequate infrastructure
Dysfunctional bureaucracy
60%
57%
56%
54%
52%
Survey by NES Russia and The Ministry of Economic
Development of the Russian Federation
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Strategies for Success in Russia (1/2)
To achieve steady growth, companies should consider investing time, money and human
resources on:
 Corporate Governance
 Good corporate governance is key to the integrity of corporations, financial institutions and
markets. Company executives, policy makers, regulators and shareholders must therfore pay more
attention to corporate governance
 Interest in improving the corporate governance increases the credibility of the companies
 Corporate governance does not eradicate criminal activity, but such activity will be made more
difficult as appropriate rules and regulations are adopted. It helps to develop a culture of values
for professional and ethical behavior on which well functioning markets depend
 Investment on Infrastructure
 The transportation infrastructure in Russia, which is mostly Moscow-centered, is underdeveloped
 Commercial transportation relies heavily on rail which is one of the most extensive railway
systems in the world
 The Russian waterways system is an important component of the transportation infrastructure
 Russia's telecommunications system is in the midst of the global telecommunications
revolution. Physical infrastructure remains a problem for ICT (Information and Communication
Technologies) advancement in Russia
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Strategies for Success in Russia (2/2)
 Innovation
 Russia’s innovation potential is greater than that of most other countries at comparable levels of
GDP per capita. The country benefits from a substantial science base and a well-developed
education system in science and technology
 Yet indicators of actual innovation activity remain disappointing. There is a striking imbalance
between the public resources devoted to knowledge creation and the observed outputs in terms
of innovation
 With regard to innovation, the intellectual property rights (IPRs) regime remains one of the primary
weaknesses
 First, the assignment of IPRs remains unclear, especially if they belong to the inventor, the
inventor's employer, or to the state that may have paid R&D costs. These uncertainties
complicate collaboration between private firms and public institutes, inhibit technology transfer,
and impair the development of spin-off companies into independent and growing businesses
 Second, registered IPRs are weakly protected due to the inability of public authorities to police
producers or importers of pirated goods
 Human Capital
 According to international standards, the Russian workforce is highly educated with the average
Russian citizen (25 and older) dedicating 10,5 years of his / her life to schooling
 Russia’s population is expected to decline from 142 million to 130 million by 2020, a problem
that will be compounded by a higher median age
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