RUSSIA

1
RUSSIA

• The Business of Politics and Politics of
  Business
  
• The Current State of Affairs in Russia

Helen Teplitskaia 2006
2
Current Issues

• Freedom of Press. Assassination of a
  high-profile Kremlin critic Anna Politkovskaya.
  
• Crisis in Russian-Georgian relations.
• Chechnya.
• Sakhalin-2 scandal.
• Gazprom will develop Shtokman without
  international partnership.
  
• WTO.
• Yukos-Khodorkovsky affair.
• Outbreak of xenophobia and nationalist crimes.
• Corruption.

3
Putinomics

• Despite international outcry about regression of
  democracy, Russian people continue to give
  president Putin a vote of confidence. According
  to Levada-Center poll, in September 2006, his
  approval rating reached 77 (over 71 in Sep.
  2005).

4
Russia Plays Energy CardGazprom freezes out
foreigners from Shtokman

• The announcement follows intense lobbying to
  participate in developing the vast field in the
  Barents Sea by US companies Chevron and
  ConocoPhilips, France's Total, and Norwegian
  companies Statoil and Hydro.
• Much of the gas from Shtokman would be supplied
  to Europe via the North European Gas Pipeline, a
  major new route being built between Russia and
  Germany under the Baltic Sea.
• Previously, much of the gas was expected to be
  shipped to the United States in the form of
  liquefied natural gas (LNG), with European
  markets targeted during later stages of the
  project.

5
Strategic Partnership -- No More?

• Geo-political rivalry over Georgia, central Asia
  and Ukraines recent aspirations to join NATO
  caused a deep rift in US-Russian relations.
  
• To date, the United States is the only developed
  country, which has not reached agreement with
  Russia over its accession to the WTO
  

6
Russian Economy- World Bank Russia Country
Brief 2006

• According to the World Bank Russia Country Brief
  - 2006, The performance of the Russian economy
  since the 1998 crisis has been impressive.
  Between 1998 and 2005, Russian GDP expanded by an
  estimated 48 percent, while real incomes of the
  population grew by 46 percent.
• Poverty (headcount) rates were cut in half and
  regional disparities declined somewhat.
  Unprecedented macroeconomic stability was
  achieved in the context of strong budgetary and
  current account surpluses.
• Important reforms in areas such as taxation,
  budgetary institutions, and the removal of
  administrative barriers to business facilitated
  the rapid development of market institutions in
  many areas.

7
Russia and G8 countries

• On January 1, 2006, Russia assumed presidency in
  G8. Last G8 meeting was held in St. Petersburg,
  Russia, in July 2006.
  
• According to the Russian Federal State Statistics
  Service, in the first quarter of 2006, comparing
  to the same period in 2005, Russia had the
  highest rate of real GDP growth among the G8
  countries reached 5.5, compared to 3.7, 3.4
  and 3.3 in the United States, Japan and Canada,
  respectively. The rate was 2.3 in Great Britain,
  1.7 in Germany, and 1.5 in France and Italy.
• Industrial production climbed 4.4 during the
  first six months of the year, putting Russia in
  second place behind Germany, with 4.8.
  
• Russia's consumer spending grew 10.7 during the
  first quarter, the highest level among G8
  nations.
  

8
Foreign Investment Boom in 2006

• Foreign investment in Russia soared 41.9
  year-on-year in the first half of 2006 to 23.4
  billion (Foreign investment fell 13.1
  year-on-year in the first half of 2005 but grew
  32.4 in 2005 as a whole, to 53.7 billion.)
• Foreign portfolio investment rose 190
  year-on-year to 499 million.
  
• Data from Rosstat

9
FDI in H1 2006

• Foreign direct investment in Russia grew 43.6
  year-on-year in the first half of 2006 to 6.445
  billion.
  
• FDI included 3.528 billion in equity
  contributions to companies, up 10.1
  
• 1.255 billion in loans from the foreign
  co-owners of enterprises, up 21.3
  
• 38 million in leasing payments, down 71.3 and
  1.624 billion in other direct investment, up
  13.9-fold.
  
• Data from Rosstat

10
Opportunities for Trade Investment

• Aerospace
• Banking
• Chemicals
• Metals
• Telecoms
• Construction/Infrastructure development
• Real Estate
• Automotive  
• Food/Agribusiness
• Engineering and Hi-tech
• Forestry

11
Investments go beyond natural resources

• Positive trend increased FDI in non-natural
  resources sector, like food and beverage
  industries.
  
• German Siemens just struck a deal for 564
  million dollars with Russian holding Renova to
  carry out infrastructure projects in Russia.
  
• German HeidelbergCement acquired three cement
  manufacturing plants and continues to look for
  more.
  
• International Paper invests close to 500 million
  in Leningradskaia Oblast.
  
• Norwegian Concern Orkla acquired SladCo
  company.
  
• Dutch Heineken acquired 3 beer manufacturing
  facilities
  
• US Cargill invested about 250 million in
  agribusiness projects, while Belgian InBev
  invested 650 million in beer production.

12
The Russians are Coming

• 'The Russians are coming here, not on tanks and
  with Kalashnikov assault rifles in their hands,
  they are coming with money, they deserve to be
  welcomed and helped in their work' .'It's not
  the Red Army which wants to come to Germany. It's
  just the same capitalists as you.'
• From President Putins speech at a business
  forum in Munich, Germany, October 11, 2006.
  

13
The Russians Have Come

• Lukoil in the US (Getty) and Eastern Europe
  (Biopetrol)
  
• Gazprom in Germany (holdings in Wingaz and BASF)
  
  
• Norilsk Nickel in the US (Stillwater Mining
  Company) and South Africa (GolfFields)
  
• Tatneft in Turkey (Tupras)
• Severstal in the US (Rouge Steel)

14
Russia in BRIC

• ...and Russia will rise from ninth to seventh
  place in the world according to the size of
  economy. Goldman Sachs (GS) released such
  forecast recommending to invest in growing
  currency and stock markets of the so-called BRIC
  countries (Brazil, Russia, India, China) in
  2006.
• GS predicts that by 2050, Russian GDP will grow
  more than tenfold to 55,630 per capita Goldman
  Sachs introduced the term BRIC in 2003. Then GS
  named the aforementioned countries the most
  promising "emerging markets" that would reach
  leading positions in the global economy by the
  middle of the century.
• According to a GS report, between 2000 and 2005,
  contribution of BRIC to the global GDP growth
  reached 28 (Russias contribution is 6). BRICs
  share in global trade grew from 7 to 15. BRIC
  countries became large recipients of direct
  foreign investments (since 2000, their share grew
  from 5 to 15) and occupied decent places among
  the donors with growth from 0.5 to 3.

15
Corruption

• Contrary to usual biases, Russia is less corrupt
  than other BRIC countries.
  
• India finished top of the Bribe Payers' Index
  2006 compiled by Transparency International on
  the basis of responses from more than 11,000
  business people in 125 countries to a World
  Economic Forum survey.
• China, the world's fourth largest exporter, was
  second worst of the 30 leading exporting
  countries which were ranked according to the
  propensity of their firms to bribe abroad.

16
Russias Accession to WTO Why Should the US
Support It?

• Simplification and unification of customs and
  tariffs.
  
• Trade disputes handled constructively.
• Need to comply with the WTO rules lessens impact
  of narrow interests lobbying groups, encourages
  good government.
  
• All of the above-mentioned benefits will result
  in dramatic improvement of the Russian market
  conditions and evolve into new business
  opportunities for global firms accustomed to
  Russian business culture.

17
Russia vs. China

• Chinese economy is overheated. Its soft
  landing is desirable, but is not a sure thing.
  Nevertheless, China has always been judged more
  favorable than Russia in Western (US) boardrooms.
  Ghosts of the Cold-War mentality still impact
  boardroom mindsets.

18
PBN Survey Results - March 2005

• The vast majority of current foreign investors
  are succeeding in Russia in terms of sales,
  profits and realizing their business plans.
  
• Nine in 10 current investors reported that sales
  had increased more than 10 in the past year in
  Russia, and more than 50 stated that their
  profits went up 20 and more.
• Two thirds of the companies not currently
  invested in the country said they have plans to
  invest in the next three years.
  
• The surveys were completed from January 18
  through February 21, 2005, and included 107
  companies that are currently investing in Russia
  and 51 that are not.

19
Russia Offers High Returns

• 57 of PBN study participants indicate that their
  returns on investments in Russia are higher than
  in Eastern Europe, Brazil or other former Soviet
  countries.
• Higher returns were achieved only in China, India
  and other South-Asian countries.
  
• Contrary to existing public opinion, 79 of those
  who are already doing business in Russia and 68
  of those planning to start operations there,
  Russia presents interest as a consumer of goods
  and services, and not just raw materials
  supplier.

20
MAIN ADVANTAGES/DISADVATNAGES TO INVESTING IN
RUSSIA

• PROS
• Market size
• Country's sustained economic growth
• High-quality and low-cost human resources
• Macroeconomic stability
• Government's fiscal policies and solvency
• CONS
• Corruption
• Administrative barriers
• Selective application of laws/inadequate
  legislation

21
Challenges Ahead

• Addressing poverty - About 20 of Russians still
  lives below the poverty line.
  
• Diversifying the economy.
• Facilitating legal and judicial reform.
• Overcoming disparity in economic development of
  the regions of Russia.
  
• Improving competitiveness.
• Encouraging the growth of small and medium
  enterprises.
  
• Building human capital.
• Improving governance.

22
Da to Strategic Partnership, Nyet to
Disengagement

• U.S. critics of Russia have every right to claim
  that this country is not enough democratic. In
  turn, many Russians consider the United States
  less than perfect as well.
• If opponents of the US-Russian alliance succeed
  in destroying strategic partnership, further
  progress in Russian political and social policy
  and legal and judicial reform will be the first
  to suffer.
• In addition to a weakened front on the War on
  Terror and non-proliferation, the US energy
  security and supply will also be affected
  negatively, since more Russian oil and gas will
  be redirected to the EU, Japan and China.

23
Those who dont risk, dont drink champagne
--- Russian proverb
Significant challenges and risks typical for a d
eveloping market economy do exist. However,
Russias rich natural resources, market reforms,
emphasis on competitiveness, diversification and
integration into global economy create new
opportunities for foreign investors.
24
Contact Information
Helen Teplitskaia Adjunct Professor, Northwestern
University Kellogg School of Management
Senior Vice President Imnex International, Inc.
1101 Pennsylvania Ave, NW 7th Floor Washin
gton, DC 20004 ht_at_imnexinternational.com Tel 202
-756-7721, Fax [phone] Cell 312-282-2282