Russia: Business in Russia

Aired March 2008

Over one eight of the earth’s total landmass but still a territory of which most outsiders only have a blurred idea.

A composite of the extravagant glories of old Russia and the drab legacies of the Soviet era, it's a country that both lures and captivates… a country on the edge of a new dawn.

Beginning with its diversity and size…spanning 11 time zones, this Eurasian land mass covers almost 7 million square miles. It encapsulates an unparalleled variety of landscapes…from the snowy peaks of the Caucasus Mountain range to the ancient domed majesty’s of Moscow and Saint Petersburg.

Throwing off the blanket of communist uniformity…with the dissolution of the Soviet Union visitors have now more than ever been free to explore all that Russia offers.

One of the most notable features of the present day enthusiasm of the country is a renewed celebration of its wealth.

Russia today is an exceptionally large middle-income country which has undergone a dramatic transition from a centrally planned to a market economy.

The Russian Federation is divided into 88 regions, which display very different socio-economic, climatic and geographic conditions. The population of about 142 million people includes 140 recognized nationalities and 40 ethnic groups.

This enormous regional and ethnic diversity complicates the task of ensuring an efficient and harmonious development of the entire country. But this challenge is something that the government is tackling with increased competence and success…

Russia’s evolution from its Soviet past and the chaotic early days of democracy has been swift. Judged against the standards of the Soviet Union, it now stands as a strikingly different country where basic political, civic and economic freedoms are both guaranteed and enjoyed in practice by its citizens.

It has maintained political and social stability, based mostly on a good economic performance and rising living standards. A dynamic private sector and the middle class continue to grow and a sizeable majority of eligible voters support the basic concepts of democratic governance.

A winning combination setting up a territory that is ripe and enthusiastic to capitalize on its natural riches…fast tracking the country on the path to become a focal point for global business and corporate traffic.

TRANSPORT & INFRASTRUCTURE

A top priority of the current government in Russia is to reform the infrastructure sectors.

The mandate is to create an efficient and effective regulatory regime that supports the creation of competition, which will assist in driving development forward. The authorities are determined to provide more effective protection to consumers in those spheres where competition is not possible.

This is in particular regard to transport. As Russia is such a vast country, the transportation network is a significant and vital industry in itself. However, up until recently developments in the sector remained relatively thinly spread.

The span of territory and distances that passengers and cargo need to travel demand a vast and developed network of roads and highways. This is of vital importance to connect the economic space and achieve fiscal development.

As a result the Government has recently earmarked over 63 billion US dollars for a new Federal Transport programme. The aim is to modernize the network system with the construction of main traffic arteries connecting Russia with international transit systems.

Air transport is one of the most dymanic modes in Russia and is growing exponentially on a yearly basis. According to the Russian ministry of Transport, passenger air travel is growing by over 15 percent year on year since 2004.

At present, there are almost 400 airports in Russia, almost all of them state-owned. The government has now pledged to leave the airport business and transfer airports to private hands.

There have been some overall changes in air traffic in the past four years. As before, more than 200 companies are involved in this business, but only five airlines account for half of all passenger traffic.

Along with Domodedovo International and Vnukovo.... Sheremetevo Aiport is one of the three international airports serving Moscow.

The sector has been dormant for many years but with increased demand and competition an overhaul of facilities is now well underway.

Due to the fact that Moscow is one of the largest urban agglomerates in Europe, public transportation is of high social importance.

Moscow metro which spans the entire Russian capital is one of the world’s most heavily used metro systems. It is well known for the ornate design of many of its stations.

In total, Moscow Metro has 170 miles of route length, with 12 lines and 176 stations. On a normal weekday it carries over 7 million passengers.

Presently, Moscow Metro has a set expansion programme that is due to be completed by 2015.

REAL ESTATE

Around the world, investing in real estate is one of the most attractive and profitable ways of making money.

Now experts are pointing to the Russian property market as the latest hot spot for investors to place their property capital.

With strong population growth, a large pool of qualified workers and greater integration with the world economy, Russia now has enormous potential in each property sector.

As the country becomes more transparent, international developers and investors are heading to Moscow.

It is the highlight, which has surpassed London for the first time this year and now is second in Europe only to Paris in real estate development and investments. The yields in Moscow are higher and as the legal system comes inline international banks are now willing to provide loans in Russia.

Moving hand in hand with the dynamic growth of Russian business, the commercial real estate market is in an exciting phase of development.

Many international players have entered the Russian real estate market and a plethora of investment opportunities have arisen for American investors.

While office property is the main aim of direct investments there is also a sizeable interest in housing. Similar in size to New York or London, Moscow has a population of roughly 12 million. A total of 18 million people live in the greater Moscow region, and most of them have more disposable income today than they ever have.

The situation has turned on its head the Russian mortgage market, which is just in recent years finding its legs. Homeowners are pulling equity from their properties by obtaining mortgages for the first time, and all of this money is being poured into the local economy.

Further opening to foreign investment is desirable as not only do international investors have the means to finance new construction projects; they also possess the expertise in market analysis, facility management, and building construction.

This is expected to act as a catalyst for bringing greater transparency to the market and provide Russia with a stronger capital market base for property financing. Going forward, it will be a matter of exploiting this potential to fulfill the government’s aim of having a property market that is the pride of the nation.

INVESTMENT CLIMATE

Fuelled by income from Russia's vast natural resources, not least in oil and gas, a new order is in place in the country. The economy has recovered and grown since the collapse of 1998 and the market of today represents potentially one of the greatest opportunities in the business world.

Russia holds the world's largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves.

Given this natural resource wealth, it’s not surprising that this sector has attracted a great deal of foreign investors' attention.

Government policies are now evolving and allowing for private and foreign ownership in major energy enterprises.

To continue the drive to exploit this prosperous position a certain number of reforms need to be put in place.

Primarily the government is looking to diversify and spread its interests and foreign direct investment is seen as a key contributor to this chosen path of evolution.

To encourage market reforms, a new Civil Code of the Russian Federation have been adopted which integrates various types of market-oriented entities. As a result Russia has seen swift growth in the number of newly established legal companies.

The economic policy is built on a strategy of high economic growth, with an explicit objective of doubling gross domestic product within a decade.

There is a great potential in Russia, both as a market and as a resource. However, unlocking that potential will not be easy.

With the break-up of the former Soviet Union, and the adoption of more liberal foreign investment laws, the representative office is now the main way in which a foreign company may establish a direct presence in Russia.

There remains an enormous demand in the domestic consumer market for imported goods and Russia's industrial infrastructure stands in need of significant Western upgrade.

Regarding external relations it’s not just local manufacturing of foreign products. In several cases foreign firms have found it profitable 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.

Foreign firms have also invested in commercial services…

The country's financial situation also continues to improve, with a decline in sovereign debt levels and an increase in its credit ratings to investment grade. The Russian Ruble has also continued to appreciate against the dollar.

Tapping into Russian brainpower is another area where foreign firms find good opportunities.

A whole new chapter for Russia with political predictability, a strong fiscal position, trade and budget surpluses is now in place. All the transformations to the economic framework are building the much needed confidence that was in the past the missing link. Today it concludes a robust package for the world’s business leaders.