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

Helen Teplitskaia 2006
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.

  • 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.

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

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

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.

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

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

FDI in H1 2006
  • Foreign direct investment in Russia grew 43.6
    year-on-year in the first half of 2006 to 6.445
  • 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
  • Data from Rosstat

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

Investments go beyond natural resources
  • Positive trend increased FDI in non-natural
    resources sector, like food and beverage
  • 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
  • International Paper invests close to 500 million
    in Leningradskaia Oblast.
  • Norwegian Concern Orkla acquired SladCo
  • Dutch Heineken acquired 3 beer manufacturing
  • US Cargill invested about 250 million in
    agribusiness projects, while Belgian InBev
    invested 650 million in beer production.

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.

The Russians Have Come
  • Lukoil in the US (Getty) and Eastern Europe
  • 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)

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
  • 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.

  • 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.

Russias Accession to WTO Why Should the US
Support It?
  • Simplification and unification of customs and
  • 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.

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.

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.

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
  • 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

  • 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

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
  • Building human capital.
  • Improving governance.

Da to Strategic Partnership, Nyet to
  • 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.

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.
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 Tel 202
-756-7721, Fax 202-362-4634 Cell 312-282-2282