Overview

There is a great potential in Russia, both as a market and as a resource. However, unlocking that potential will not be easy (if it were easy, everyone else would already have done it, right?); it will require patience, an open mind, flexibility, a willingness to involve oneself, and innovative approaches to joint business. Companies with these attributes and attitudes are likely to be very successful. The Russian market is not for everyone. But it can be very rewarding for those companies which can take a slightly longer term view of their business. As Russia's economy strengthens and political situation stabilizes, an increasing number of foreign companies - large and small, from consumer goods to energy - are establishing their presence there, making direct investments or expanding those already in place.

Some of the first direct investments into Russia were obvious and necessary. For a multinational firm with an international clientele, a Russian presence is strategic and not optional. Regardless of any potential from local business, this need to secure one's global reach is enough to drive the investments of such companies as Ford Motors, Microsoft, DHL, Cable & Wireless, SeaLand, etc.

Given Russia's immense size, this process is by no means over. Multinationals that have not yet set up a presence in Russia will have to do so, and companies who already have a few points on the map will need to extend networks to more locations.

Given Russia's natural resource wealth, it is not surprising that this sector has attracted a great deal of foreign investors' attention. British Petroleum, Chevron, Mobil Oil, Shell, Schlumberger and other international companies are active players in Russia.

Foreign firms are also active in the Russian ferrous and non-ferrous metals industries.

The lure of Russia's market, especially for global brands, has proven irresistible. It is now a market of almost 144 million people with huge demand for high quality food stuffs, garments, medicines, electronics, cars, construction materials, infrastructure development, technology transfer and services. Coca-Cola, Pepsi, Nestle, Sun Brewing Star Distribution Company, Kodak, LG Electronics, Hitachi, Ford Motors, KIA, Daewoo, Citroen, British American Tobacco et alia, have established local production, distribution and marketing.

And this is not just local manufacturing of foreign products. In several cases, chocolate, ice cream, snacks, beer and cigarettes, foreign firms have found it expedient to retain and enhance local brands for the Russian market, producing local products and brands for local tastes.

As most consumer goods companies have found, however, local manufacturing is not enough - distribution is just as important and requires just as much attention. A great deal of foreign investments has gone into distribution channels and marketing.

Foreign firms have also invested in commercial services, such as advertising and public relations.

Tapping into Russian brainpower is another area where foreign firms find good opportunities. The high quality of Russian scientists is not in doubt. Cut off from the free world during the Communist era, they still managed to build the world's second largest military arsenal, dispatched the first man in space, developed many advanced technologies. And often, Russian scientists were able to develop products with off the shelf solutions making the end product cheaper to produce.

About two million persons work in science in Russia, of which one million are researchers, far more than in any other country in the world. A large part of these were engaged in different defense-related branches, but non-military research is also important and there are 4500 organisations in the territory of Russia performing civil scientific research. Some of the better known R&D institutes are very large, each with several thousand active researchers.

Russian R&D institutes are very keen to take on sub-contract R&D work from overseas to supplement official funding and keep their staff working.

It will be much easier to find scientists looking for work in your field of interest in Russia than in any other country in the world. Moreover, they can carry out research work at a fraction of the cost of carrying out the same effort in other countries.

Technology (software, semiconductors, biotechnology, advanced materials, etc.) is one field where relatively small investments "sweat equity" in, say, project management and international marketing may result in new commercial products.

Motorola Semiconductor Products, for example, opened a research lab in St.Petersburg some time ago. Virtual Semiconductor, a Hong Kong firm, is having new semiconductor chips designed and produced in Zelenograd. Samsung has acquired and commercialized a number of advanced Russian developments in the areas of electronics and production of new materials.

Some original thinking can go a long way. The Russian Far East has been seen as a region of almost unparalleled potential for more than a century. The region with numerous unexploited opportunities is part of Asian Pacific and the gateway to the riches of Siberia. Significant part of Russian exports goes through the Russian Far East ports. The region itself has large reserves of wood, fish, medicinal herbs, pine seeds and other commodities which attract the attention of foreign firms.

Several foreign companies use the Russian Far East as manufacturing base for production of garments for re-exporting to America. These companies take advantage of the situation when "Made in Russia" garments are quota free in the United States and other countries.

Russian market offers 'surprising' opportunities

Technology companies are finding sales opportunities in Russia, thanks to changes in that country's infrastructure and its growing market.

The Russian economy has continued its strong recovery since the 1998 financial crisis, turning in healthy growth in 2005. GDP grew from $184.6 billion in 1999, to $570 billion in 2004.

High world prices for oil and natural gas have also continued to be the engine behind much of this impressive growth because exports of oil and gas provide a significant part of federal budget revenues.

The overall balance of trade continues to register healthy surpluses. In 2004, Russia's total exports were $182 billion and imports were $94.8 billion.

The country's financial situation also continues to improve, with a decline in sovereign debt levels and an increase in its sovereign credit ratings to investment grade. The Ruble has continued to appreciate against the dollar, dipping just below 28 Rubles to one U.S. Dollar at the beginning of 2006. Adding to overall economic development is a multi-year consumer spending and construction boom. This dramatic growth is beginning to spread beyond Moscow and St. Petersburg to the regions. Per capita GDP reached almost $4,000 in 2004. With a 9% growth rate in 2004, real disposable incomes continue to outpace GDP growth. Retail sales also were up an even more impressive 12%.

Though still underdeveloped, the small and medium-sized business sector is also growing and accounts for about 12% of the economy by value and 51% of total employment.

"We're now seeing a whole new chapter for Russia," said Mark Sanor, a partner in the Moscow office of Ernst & Young Corporate Finance. "It has political predictability, a strong fiscal position, trade and budget surpluses. GDP per capita is going up, and disposable income is even larger as they do not have home and car loans. There has been tax reform. We pay a 13 percent flat tax, 24 percent for businesses. And there have been other reforms, such as corporate governance and land reform."

And it has a considerable consumer market.

"There are 140 million people in Russia," said Daniel Satinsky, president of the U.S.-Russia Chamber of Commerce of New England. "There is a perception among U.S. companies that Russia has low purchasing power, but consumers there are sophisticated.

"Microsoft is the model," Satinsky continued. "They have established themselves quite securely in Russia and announced that their sales in Russia over the prior year rose by 80 percent, compared to its worldwide growth of 12 percent."

Yet smaller, local technology companies are finding success in the Russian market, too.

Phase Forward in Waltham has developed online software that helps manage clinical trial information and speed the drug development process.

Last year the company won a deal with PSI Pharma Support Inc. in St. Petersburg, Russia.

"We were talking with them for some time," said Ivan Aranicki, Phase Forward 's director of sales and marketing for Europe. "In terms of discussion and ability to proceed into a deal, on the business side it was hierarchical - coming from the very top. The CEO (of PSI) was there at all the meetings. It was more than you would expect in a company that size."

The work put into the deal hasn't deterred Phase Forward from pursuing others.

"There's a large pharmaceutical industry, and it is expected that this market will grow in Russia," Aranicki said. "Of course, Russia is facing finding funding and investment. The biggest challenge is that our software isn't exactly cheap. For us, there are a few top companies that are a potential; it is limited because of the price of our offering."

Another growing market in Russia is telecom. "It continues to grow substantially," Ernst & Young's Sanor said, "because it never had problems of excess - either excess debt or investment. There are growth opportunities for telecom equipment makers. Right now, Siemens and Alcatel have the lead. The Americans are benefiting, but they could be more aggressive."

One of those Americans is Artel Video Systems in Marlborough. It has a reseller deal with a Russian company called Elogar to sell Artel's system - which transports video onto and off of carrier networks - into Russia. It found Elogar after talking with companies whose technologies were complementary to Artel's and finding out who they were working with in Russia.

Jens Forum-Jensen, Artel's regional sales manager for Europe, Middle East and Africa, says the partnership is working out well.

"It's brilliant. We had two projects with (Elogar) last year and we've identified four or five projects for this year," Forum-Jensen said.

"It's surprising doing business in Russia. It's probably one of the last places you'd think of. Their markets have gone up and we're hoping to be successful there again this year."

Artel decided to follow the partnership route to sales in Russia because "it would cost a fair amount to set up a business there," Forum-Jensen said. "You need to be able to speak the language and have someone who knows the market. It's much easier to find a partner."

Satinsky agrees. "For most mid-size firms, it is not cost-effective to establish their own representative offices in Russia," he said. "The best approach is to find a Russian partner that is a distributor, consultant or systems integrator and knows that market well."

And a good partner will help you find the right deals.

Philips Medical Systems in Andover, a medical equipment division of Royal Philips Electronics, found deals to be had in Russia by following donation flows from foreign governments, the World Bank and United Nations.

"We work with donated money, which is a good source," said Margaret Lee, international business development manager for Philips.

"It is important to have a good distributor," she said. "We have someone who is local and established, who knows people in the industry, knows doctors, administrators of health institutions and knows which hospitals are refurbishing and have money."

Lenny Lozinsky, executive vice president of Alliance in Woburn, agrees that the best way to penetrate the Russian market is through a partner or distributor. His company provides marketing, business consulting services and distribution into Russia to a range of computer and electronics companies such as Gigabyte Technology, Mitsumi, Adaptec and Logitech.

"You must develop a trusted relationship with a partner and they become a vehicle for you to penetrate the Russian market," he said. "It is important to find a trustful partner and maintain this trust as long as you are in business. Business in Russia is more 'people-to-people' oriented rather than contract-based. I would do business in Russia without a contract if I know and trust the people, but I would never sign a contract with somebody I don' t know and don't trust."