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Why Expand to Russia?

According to the Western business community, Russia - the largest country in the world - has a massive potential entirely undiscovered. Step by step, the veils still hiding it will flow away, in parallel with institutional and economic reforms necessary to complete the transition to a stable, rules-based and market-driven economy. To start, think about the opportunity that may arise in the upgrading the obsolete production equipment and technologies of the biggest natural gas producer in the world. Good start. Now we can go on and on.

With a population of 142 million mainly concentrated in the European part of the country, west of the Ural Mountains and along the southern border, Russia is a world superpower. It has the worlds largest reserves of mineral and energy resources, the worlds largest forest reserves and in its lands there is one-quarter of the worlds fresh water. It leads the world market leader in producing and exporting natural gas, and its the fourth largest nuclear energy producer.

Roughly three-quarters of the Russian economy has been privatized, although the Russian government continues to hold significant blocks of shares in many privatized enterprises. However, the privatization of remaining state holdings is scheduled to continue.

In a trend that has been slowed by the financial meltdown, Russian huge consumer market has experienced in the last years tremendous growth in areas such as automotive, consumer products, construction and real estate, telecommunications, financial and banking spheres. Every Russian city with a population over 500,000 is a target for Russian and international retail chains. Shopping is becoming popular.

The new Russian consumer is diversified and products for all areas are in great demand. Many businesses are proving successful due to the highly diverse range of products and services they sell or provide. There is huge potential for products for the growing middle class.

However, penetrating the Russian market can be challenging. Risks may be high and they should never be underestimated by companies wishing to expand in this country (see the challenges section). Investors face complex regulatory and legal system and a generally protectionist business environment. But as they say, when the going gets tough, the tough get going.

Whats the attraction for UK business?

According to the statistics, Russia is the UKs 12th export market, with historically strong performance in the field of engineering, financial services, ICT, power and energy and sport and leisure infrastructure. Economic forecast describe the commercial relationship between UK and Russia on the growth side. As superpower, Russia does have great strength, but it has also significant capability gaps. Here is where UK businesses come. Their cutting edge expertise in a range of sectors can make the differences. And money, of course.

Business opportunities

A detailed list of potential business areas for UK companies in Russia follows:

• Engineering (machine-tools and tooling, process and packaging equipment, rail transport means, airship manufacture, metallurgical plant, timber machining and/or processing, energy engineering)

• Financial Services (opportunities for banks, accountancies and solicitors, particularly in support of Russian London listings, UK educational qualifications in business and finance)

• ICT (Fixed line telecommunications, long distance telecommunications, broadband access, infrastructure, Internet security, Internet service provision, Internet access, Internet television, mobile handsets, 3G services, Wi-Fi technology, WiMAX)

• Power/Energy (offshore and subsea sectors, equipment supplies to both distributed power and grid power generation, advice and support on energy efficiency technologies and systems consultancy services for sector restructuring and emissions trading)

• Airports (hubs such as Domodedovo, Sheremetievo, Vnukovo, Pulkovo are undergoing huge reconstruction projects)

• Construction (services of civil engineering companies)

• Ports (modernisation of port and wider transport infrastructure, creation of logistic centres and single window logistic systems, modernisation of a wide range of equipment used in ports and loading/unloading complexes including cranes, rubber tire gantry, rail mounted gantry, loaders, trailers, container equipment, platforms, navigation and control equipment)

• Creative Industries (design, architecture, regeneration and city planning, interior design, branding, graphic design, product design and packaging, design education, music, television and film, publishing)

• Jewellery and Hard stones (add-value jewellery, tableware, business souvenirs)

• Rail (though the sector is not easy to enter, there are considerable opportunities in the sector of railway repair and maintenance and other related services)

• Pharmaceuticals (components and substances necessary for drug production, advanced vaccine technology and anti retroviral, clinical trials)

• Food (confectionery, alcohol, soft drinks, snacks, gastronomy such as ready-to-serve products, basic cooking ingredients and sauces).

• Biotechnology (hi-tech equipment at competitive prices)

• Sports & Leisure (Sochi 2014 Winter Olympic Games will open opportunities in the sporting goods, particularly those which have appeared in the Russian market only recently: alpine skiing, snowboarding, in-line skating.

• S & L Infrastructures: The Russian government has implemented a £6 billion Federal investment programme to develop the Sochi region into a year-round, world-class resort destination with state of the art infrastructure and accommodation by 2014.

Moscow is the biggest and most developed city in Russia. It is also bigger in terms of investment, population and economy than any Russian region.

Other regions developing fast are St. Petersburg, Samara, Kazan, Nizhny, Novgorod, Krasnodar (Sochi), Sakhalin and Rostov. Some of them have recently created Investment Promotional Agencies, which have websites in foreign languages.

Challenges

There are many. The Russian language and culture, as well as the general lack of knowledge on how to operate in Russia, have been considerable obstacles for foreign companies wishing to do business in Russia. They face complex regulatory and legal system (Russia has more government officials than in any other country!), widespread corruption, lack of respect for the rule of law and immature banking and financial markets, which provide very little or none at all financial assistance. You will need professional help to navigate the Russian administration.

In addition state-owned entities have a major presence in many strategic economic sectors. In those, the Russian government has repeatedly emphasized foreign investments critical role, but has been reluctant to allow unfettered access in practice. Foreign companies can find unclear which sectors are open to investment without Russian majority partners. Western suppliers should work with a knowledgeable adviser to set up a small team to identify the opportunities and risks and to understand current investment and business trends.

More competition may come from Germany and Italy, due to their proximity to the Russian market and their longstanding relations with Russian organisations and companies.

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