Tom Moore investigates the challenges of doing business in Russia and speaks to manufacturers already there to reveal some of the wealth of export opportunities.
- Russia is the UK’s fastest growing export market with exports rising from £2.3bn to £4.8bn between 2009 and 2011
- Over 600 UK companies currently have a presence in Russia with manufactured goods being the main export
- In comparison with the other BRIC economies, exports to Russia remain behind China and India but are ahead of Brazil and other emerging markets such as Turkey, South Africa, Indonesia
- UKTI recently identified The Skolkovo Project – a £3bn science park development for up to 30,000 residents focused on ICT, biotechnology, energy, space and nuclear technologies – as a high value business opportunity for UK firms
- The Russian Government has established a number of special economic zones to increase direct investment from foreign companies, including Free Trade Zones, Export Processing Zones and Free Ports
Russia is the UK’s fastest growing export market. With increased spending power among its 142 million citizens, trade between the two countries rose 39% between 2010 and 2011 and is now worth £4.78bn.
Despite this increase, there are some clear challenges to overcome when exporting into Russia. According to the World Bank’s ‘Doing Business’ project, which ranks 183 countries in order of ease of doing business, Russia sits in 120th place, behind countries such as Nicaragua and El Salvador.
One reason behind this is that, as the world’s largest country with an area of 17,075 million km², there are discrepancies across Russia in the quality of infrastructure and general ease of doing business. However, Russia has been investing heavily in industry-related programmes to entice foreign companies. While growth in Western European countries remains static, Siegfried Wolf, chairman of the board at investment firm Basic Element’s manufacturing subsidiary Russian Machines, says that Russia has “the greatest economic potential in Europe.”
Wolf believes that “Russia’s economic success is partly down to the Russian Government and its common sense economic policies, such as accession to the World Trade Organisation (WTO), which encouraged foreign and internal investment. Infrastructure is continuously developing and improving to further increase investment potential.”
When you win Russian roulette
The Russian Government has a programme in place to expand and develop its automotive industry, with high state investment planned until 2020. For those selling into this market such as metrology firm Renishaw, the opportunities are already turning into profit. Renishaw has recorded a 20%-30% growth in sales between 2010 and 2011 and further double digit growth predicted year-on-year.
Russia makes up a core group of growing markets the company is hoping to balance against big traditional markets in the West with low growth. Rydian Pountney, general manager of ROW sales at Renishaw and board member on UKTI’s Advanced Engineering Sector group, says “Russia is becoming a bigger vehicle manufacturer and they need western equipment for that type of production.”
“Russia’s economic success is a partly down to the Russian Government and its common-sense economic policies” – Siegfried Wolf, Chairman, Russian Machines
However, the well-travelled sales manager says that despite this period of stability, there are times when sales can be affected by moments of political uncertainty. “Like with the recent election, you tend to get an element of nervousness in the market before and after, bringing everything to a grinding halt.”
Backed by big state procurement orders, Renishaw’s revenues are also benefitting from supplying the country’s booming aerospace and defence sectors. Pountney reasons, “If you have a good product there is definitely a demand but Russia isn’t the cheapest market to do business in and it can take quite a long time to break into.”
A land where price still means quality
If there is British technology not yet developed or sold within Russia, Mr Pountney asserts that companies will benefit from entering the market now to establish a “quality reputation that will last for years if it is maintained.”
Quality means everything to the Russian who tends look at the technical aspects of a product more than the cost. Renishaw’s Pountney says that although the cost to service a business is high due to geographical challenges, the company is able to maintain its margins in Russia as people are willing to pay for quality not just at the point of sale, but throughout the life of a product.
According to David Cant of Albion Overseas – a distributor specialising in the manufacturing sector and advice firm for companies entering Russia – it is not only Renishaw that is able to benefit from higher margins in Russia but manufacturers right across the board.
He advises against selling on price as there are other countries widely acknowledged as being cheaper than the UK. “It’s a different mindset. Manufacturers should be aware that Russia is not a price sensitive market like Western Europe. They want quality and are prepared to pay for a better product,” he says. Although Western Europe is still by far the leading export market for British firms, Cant asserts that manufacturers would be wise to look outside their comfort- EU-zone as a large number of firms are making the same thing here, whereas there are gaps in the Russian market that UK companies can fill.
Crime and punishment
However, many foreign investors are scared off Russia by poor legal safeguards, as well as high levels of bureaucracy and corruption. Stephen Hopkins, head of international operations at law firm Eversheds, pinpoints this problem as a central reason behind Russia’s low score on the ease of doing business charts.
With UK businesses being known to lose out on contracts because of bribes, Mr Hopkins warns: “If a Russian subsidiary or interest breaches legislation, it is punishable by UK law even though it takes place abroad. That is a big change and it has made companies more wary of what they are doing in territories that are known to have bribery or corruption going on.”
However, improvements are being made with the government making the fight against corruption a key priority. Putin’s Russia is very different from that of the Boris Yeltsin era and manufacturers will certainly benefit from the strides taken under his leadership – although perhaps the more diplomatic approach of prime minister Dmitry Medvedev can take the credit for this – including improvements to the education system.
“Russia is not a price-sensitive market like Western Europe. They want quality and are prepared to pay for a better product” – David Cant, Albion Overseas
A base with skills
Russia has one of the highest rates of people with doctorate degrees in the world and around 23% of the population have completed higher education. Combining this with a positive image of manufacturing that has been lacking in the UK in recent years, there is a good skills base available for British manufacturers to take advantage of.
Siegfried Wolf of Russian Machines has witnessed this canny investment and, as with many companies in the sector, has directly contributed to providing skills. “Russian schools and employers have invested much time and collateral building up the industrial skills base and now that policy is paying great dividends,” he says. “Manufacturing today is a very tech-consuming process so the series of programmes whereby enterprises support technical schools to create opportunities for graduates on the production floor is invaluable.”
Workforces do not stand still so this attitude from Russian firms will benefit any subsidiary that sets up there. By the same token, business doesn’t stand still either. With a mass of opportunities available in Russia, large UK firms are already reaping rewards. Smaller companies now have the chance for to come in and make their mark.