Doing Business in Northwest Russia : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Doing Business in Northwest Russia IN THIS PRESENTATION
Northwest Russia in Brief
Market Developments
Best Prospects for U.S. Companies
Northwest’s Comparative Advantage
Who are My Partners?
Why is Capital Lacking?
Oil and Gas Industry Highlights
Additional Resources
Northwest Russia in Brief : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Population: 14 million (St. Petersburg: 4.6 million)
Economic Growth Rate – up to 7%
Export in 2005 ~ US$ 20 bln (Export Leaders - St Petersburg, Leningrad, Vologda and Murmansk Regions)
Import ~ US$ 16 bln (Import Leaders – St Petersburg, Leningrad and Kaliningrad Regions)
Extreme Climate Conditions in the Northern Part
Karelia, Komi Republic, Nenetsky, Arkhangelsk and Murmansk Regions
Border with Finland, Estonia, Belarus, Latvia and Norway
Main ports: St Petersburg, Primorsk, Vysotsk, Murmansk, Kaliningrad, Arkhangelsk, Vyborg, Ust-Luga (under-construction)
St. Petersburg is Economic, Cultural and Trade Center
Saint Petersburg’s Consumer Market around USD 10bln
North of St. Petersburg, Economies are Usually Based on Raw Material Extraction/Basic Processing, Manufacturing is Limited (with rare exceptions)
Northwest Russia in Brief : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief
Main industries
steel making, non-ferrous metallurgy (St. Petersburg, Cherepovets, Leningrad Region, Murmansk Region, Karelia, Komi)
wood processing, pulp & paper (all Northwest regions)
oil & gas (Komi, Arkhangelsk, Murmansk, Nenetsky Region)
transportation (St. Petersburg, Leningrad Region, Murmansk, Kaliningrad)
ship-building, machine-building (Arkhangelsk, Kaliningrad, in St. Petersburg – 70% of Russia’s potential)
food processing (Kaliningrad, St. Petersburg, Pskov, Leningrad Region)
Fishing, fish-breeding (Kaliningrad, Murmansk, Karelia, Arkhangelsk)
Chemical (Leningrad Region, Murmansk, Vologda Region)
Production of Building Materials
Power Engineering (St. Petersburg), Machinery (Pskov Region)
Electronics, Software Development (St. Petersburg)
Northwest Russia in Brief : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Positive Trade Balance
Main Trading Partners (import) are Germany, U.S., Finland, Great Britain, Poland, Netherlands, Sweden, Italy, France.
Main Transportation Routes are through St. Petersburg
Imports are Dominated by Equipment/Technology and Consumer Products
Trade Turnover between Russia and the USA increased by 60% in 2005 and reached US$10 bln. Trade Turnover in 2006 is expected to reach US$ 25 bln.
Goods imported from the U.S. to Russia in 2005
MEAT import increased by 9% and reached 742.39 thsd tons (681.45 thsd tons in 2004)
TOBACCO import increased by 17,1%
MACHINERY - increased by 10%
OPTIC, MEDICAL and SURGICAL instruments - increased by 4%
Goods, exported to the U.S. from Russia in 2005 (Total export increased by 33,2% and reached US$ 738.16 mln)
IRON and STEEL – increase by 6,8% in comparison with 2004
OIL exceeded 20 mln tons
TIMBER
ALUMINIUM and NICKEL (18.3%)
CHEMICALS
Market Developments CONSUMER MARKET AND MANUFACTURING IN ST. PETERSBURG AND LO : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Market Developments CONSUMER MARKET AND MANUFACTURING IN ST. PETERSBURG AND LO CONSUMER MARKET
St. Petersburg Consumer Market $11 billion
(official figures are usually lower)
Per Capita Average Income in St. Petersburg: $300
Share of Supermarkets Growing Fast
Lenta, OKEY, Mega, Ramstor, Perekryostok, METRO, etc.
MANUFACTURING
Shortage of Construction Sites for New Facilities
Unstable Regulative Environment
Growing Rates for Warehouse and Production Premises
Difficult to Find Qualified and Dedicated Labor
Average Salaries:
Software Developer $1000 Regional Sales Manager $3500
Project Manager $1800 Financial Analyst $1100
Production Manager $2500 Lawyer $3500
Chief Engineer $1400 Chief Accountant $1900
Market Developments EXPANDING SECTORS : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Market Developments EXPANDING SECTORS Infrastructure
Ports and airports
Road construction (highways and railroads)
Telecommunications
Logistics (cargo terminals, warehouses, reloading terminals, office buildings, etc.)
Natural resource-oriented
industries
Wood processing, pulp & paper
Metals (steel, aluminum, gold, titanium, nickel, other)
Oil & gas
Diamonds, amber
Chemicals
Fishing
Environmental technologies Consumer market oriented sectors
Food processing and packaging
Fish processing
Printing
Medical equipment and pharmaceuticals
Textiles
Retail trade and distribution
Healthcare services
Financial services (asset management, insurance, mortgage)
Hotels and, in general, tourism infrastructure
Industry
Ship-building
High Tech (software development)
Machine-building (nuclear power stations, electrical generators, optics, trucks and automobiles, other)
Best Prospects For U.S. Companies in Northwest Russia : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Best Prospects For U.S. Companies in Northwest Russia Why Russian companies and Customers choose U.S. Products?
New Unique Technologies Unknown or Underdeveloped in Russia (Nanotechnology, etc.)
Similarity of Climate and Geographical Conditions in Russia and the U.S.
High Quality of Products and Good Reputation of U.S. Firms
Weak Dollar
New Oil/Gas Projects in NW Russia with U.S. Companies’ Participation
According to BISNIS Experience, Best Prospects are:
Various Equipment and Machinery
Automotive
Energy Saving Equipment
Building Materials and Construction Equipment
Oil and Gas Equipment
Security Equipment
Household Products
Food Products
What Could Be the Comparative Advantage? : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation What Could Be the Comparative Advantage? Labor is not regarded as cheap, but is not very “expensive”
Skilled labor is available, especially in microbiology, biology, chemistry, physics, software, ship-building, aerospace, optics and natural resources, but good management is often lacking
Access to plentiful natural resources
Expanding domestic market (especially St Petersburg, Leningrad and Kaliningrad regions)
Tax regime, governmental policies are still NOT primary inducements for investments
Northwest Russia in Brief What are the Problems? : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief What are the Problems? The key problems are with the customs, certification and various licenses (many licenses will be abandoned)
Frequently mentioned are The State Fire, Nuclear, Sanitary Inspectorates, certification agencies and similar organizations
Difficult to find premises or land for green-field in St Petersburg
Speculators buying land and property in hope to re-sell
Skilled labor is becoming scarce
Underdeveloped Financial Instruments and Infrastructure (high interest rates, etc.) For example the share of the North West Federal District in Russia’s stock market does not exceed 4%.
Deficit of information
Climate (half of Northwest territories are located in the Extreme North and the neighboring areas
limited consumer market mainly due to low income of the population (regions)
Transport and Communication systems require further development and modernization.
Northwest Russia in Brief Commitment Required : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Commitment Required Russia’s potential is small and medium companies, not big companies
Good local partners are key to success
Unexpected obstacles in “easy” things
Commitment to Russia required
Carefully research the market
Beware official statistics (services in GDP, import prices, profits and turnover)
Carefully evaluate potential partners
Consumer demand is strong – balance price / quality
Competition strong
Foreign (mainly European) companies are very active
Northwest Russia in Brief Who are My Partners? : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Who are My Partners? The total number of SMEs in St. Petersburg was 115,000 (2004), in Moscow – 231,000, in Kaliningrad –10,450, but just 2/3 permanently active
49.6% of SMEs - retail and public catering sector
14.5% - in industry;
12.5% - in construction
5% - in scientific research
19% - in other sectors
Six SMEs per 1000 inhabitants in Russia (in St. Petersburg - 23), in the United Stated - 74
Northwest Russia in Brief What are the Challenges for a Small Business? : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief What are the Challenges for a Small Business? Taxation and legal issues
56.4% of SMEs experience a lack of legal information
48.7% need information about foreign partners and FINANCING
46.2% - about terms of bank credit and bank’s reliability
43.6% - markets and suppliers and personnel training.
35.9% - potential partner’s reliability, search for partners
25% - accounting consultations, leasing services, etc.
IMPORTANT: inadequate supply of capital in this segment of the Russian economy.
Northwest Russia in Brief Why is Capital Lacking? : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Why is Capital Lacking? In the post-Soviet Russia a widely applied principle of business conduct is that everything that is not formally prohibited is allowed
Lack of trust between society and government
During Soviet times, the politics were based on suppressing individuality (and society as a whole)
People became used to neglecting the government and disregarding its words and actions
Lack of motivation to launch new business among middle class
Russia needs to have strong and adequate legislation
Oil and Gas Industry in Russia Overview : Oil and Gas Industry in Russia Overview Russian authorities desire to increase oil and gas export shipped via independent routes (free of transit states). It leads to:
Expansion of oil and gas export capacity on Northwest Russia
Development of oil and gas infrastructure
Money from oil and gas export contribute to overall economic growth of Northwest regions
Oil Transportation through Northwest Russia : Oil Transportation through Northwest Russia Oil refinery Oil exploration region
Waterborne oil export route Oil export region
Railroad oil reloading station Transit railroad reloading station
Oil pipeline overpass Projected oil pipeline overpass
MAJOR PROPOSED OIL PIPELINES: : MAJOR PROPOSED OIL PIPELINES: 1. Druzhba (Friendship) Pipeline Expansion The Druzhba pipeline is the largest of Russia's export pipelines to Europe.
Length: 2, 500 miles
Capacity: 1.2-1.4 million bbl/d
Route: one section Belarus, Poland and Germany; and
the other section running through Belarus, Ukraine, Slovakia, the Czech Republic, and Hungary.
Utilization: only 50%
Proposal: To extend the pipeline into Germany (specifically to Wilhelmshaven). It would reduce tanker traffic in the Baltic Sea. Also, it would allow for exports of Russian crude oil to the United States via Germany.
MAJOR PROPOSED OIL PIPELINES: : MAJOR PROPOSED OIL PIPELINES: 2. Baltic Pipeline System (BPS)
The BPS came online in December 2001 carrying crude oil from Russia's West Siberian and Timan-Pechora oil provinces westward to the newly completed port of Primorsk.
Capacity: Around 1 million bbl/d by December 2004. Pending government approval, the pipeline will be expanded to 1.2 million bbl/d.
Utilization is growing in order to reduce dependence on transit routes through Estonia, Latvia, and Lithuania.
Russian authorities have stated publicly that when allocating the country's exports, precedence will be given to sea ports in which Russia has a stake over foreign ones; in other words, BPS over other Baltic ports
MAJOR PROPOSED OIL PIPELINES: : MAJOR PROPOSED OIL PIPELINES: 3. Indiga and Murmansk
Construction of a new pipeline and deepwater tanker terminal in the Barents Sea is advocated the for several years. It would carry crude oil from Russia's West Siberian Basin and Timan-Pechora basin westward to Murmansk on the Barents Sea.
Note: Liquefied natural gas facilities at Murmansk and Arkhangelsk (to the southeast) also have been suggested, possibly allowing for more oil exports to American markets.
Capacity: Between 1.6 and 2.4 million bbl/d of Russian oil exports to reach the United States via tankers within only nine days travel time, much faster than shipping from the Middle East or Africa.
Obstacles for Construction:
Not all Russian and foreign oil companies support the project considering a shorter western route with a terminus at Indiga instead of Murmansk
The Russian government has given priority to the construction of the Taishet- Nakhodka pipeline
Transneft is reluctant to take on two large pipeline projects at the same time. It believes that Russia's expanding BP's system as well as a few other key export projects will be sufficient to keep pace with growing Russian oil production.
MAJOR PROPOSED OIL PIPELINES: : MAJOR PROPOSED OIL PIPELINES: 4. Adria Reversal Project Extends between Croatia's port of Omisalj on the Adriatic Sea and Hungary has been under consideration since the 1990s. Accounting Russia's booming production, the pipeline's operators and transit states have since considered reversing the pipeline's flow, thus giving Russia a new export outlet on the Adriatic Sea. Connecting the Adria pipeline to would require the cooperation of six countries Russia, Belarus, Ukraine, Slovakia, Hungary, and Croatia.
Capacity: Begin transiting roughly 100,000 bbl/d of Russian crude in the first year of reversal (less than 3% of Russian crude oil exports), with an ultimate capacity of approximately 300,000 bb//d.
Progress: Slow - the transit states wrangle over the project's details
MAJOR PROPOSED OIL PIPELINES: : MAJOR PROPOSED OIL PIPELINES:
Length: The Angarsk-Nakhodka route would extend roughly 2,500 miles, from Angarsk, around Russia's Lake Baikal, to the port of Nakhodka where a new export facility would have to be constructed.
Project Investments: Up to $18 billion (currently only US$7 bln received from Japan)
Capacity: 1.6 million bbl/d.
Export Locations: China, USA 5. Far Eastern Oil Pipeline: Angarsk-Nakhodka
The Angarsk-Nakhodka route will open up a new Pacific port from which Russian oil exports could be shipped by tanker to other Asian markets and possibly even North America.
Note: Russian executives realize there is no need to rush exports to the United States. Transneft president Semyon Vainshtok reportedly said that the Marathon terminal in Louisiana could only accept approximately 110 million barrels of Urals or Siberian grade crude oil per year.
MAJOR PROPOSED GAS PIPELINES : MAJOR PROPOSED GAS PIPELINES Yamal-Europe II
Blue Stream
3. North Trans-Gas Pipeline
(or North European Gas Pipeline)
MAJOR PROPOSED GAS PIPELINES : MAJOR PROPOSED GAS PIPELINES 1. Yamal-Europe II (expansion)
ROUTE: Natural gas from Russia to Poland and Germany via Belarus.
HURDLES: Gazprom and Poland currently disagree on the exact route. Gazprom is seeking a route via southeastern Poland to Slovakia and on to Central Europe, while Poland wants the branch to travel through its own country and then on to Germany.
2. Blue Stream Connects the Russian system to Turkey from December 2002.
Length: 750-mile pipeline, 246 miles of which extends underneath the Black Sea.
Capacity: 71 Bcf per year, which was to increase by 71 Bcf annually. Transport levels in 2004 estimated at approximately 565 Bcf/d.
North Trans-Gas Pipeline (or North European Gas Pipeline)
Length: 2,000 miles from Russia to Finland and the United Kingdom via the Baltic Sea
Capacity: approximately 0.7-1.0 Tcf of natural gas beginning in 2010.
Investments: $5.7 billion
HURDLES: There is no definite consortium between the Russian government and European oil and natural gas concerns developing the pipeline. Gazprom's CEO announced in February 2005 that the pipeline would be delayed from its 2007 start date to 2010.
ADVANTAGE for RUSSIA: Russia will no longer have to negotiate transit fees with nearly half a dozen countries or pay them in natural gas.
Key Oil and Gas Transport Infrastructure in Northwest Russia : Key Oil and Gas Transport Infrastructure in Northwest Russia The Northwest Region is experiencing a true pipeline and seaport boom
Not all of the projects described below will be realized.
1. PRIMORSK
Part of the Baltic Pipeline System (BTS), the Primorsk port is the biggest oil terminal on the Russian territory of the Baltic Sea. Primorsk serves 135 tankers and in April of 2006 the Primorsk port reached the project capacity of 60 million tons.
Oil Resources: Timan-Pechora Province, West Siberia, NIS countries.
Management: 100%-owned by Transneft’.
Further Development Plans: 1) Expansion of capacities for oil products and liquefied natural gas transportation; 2) Building of an oil refinery plant in Primorsk; 3) Construction of two oil products export terminals; 4) Construction of oil products transshipment facilities.
Key Oil and Gas Transport Infrastructure in Northwest Russia : Key Oil and Gas Transport Infrastructure in Northwest Russia 2. ST PETERSBURG OIL TERMINAL
Established in 1995 for oil products transshipment.
Capacity: 12 million tons.
Further Development Plans: To increase capacity up to 15 million tons.
3. VYSOTSK
Port facilities used to transport oil and oil products to Porovoo, Gdan’sk, Rotterdam and the US East Coast, where Lukoil purchased 1, 300 gas stations.
Capacity: 11 million tons. Serves 100,000-ton tankers.
Oil Resources: Lukoil’s oil fields.
Management: Lukoil
Further Development Plans: To increase capacity up to 15 million tons.
Key Oil and Gas Transport Infrastructure in Northwest Russia : Key Oil and Gas Transport Infrastructure in Northwest Russia 4. IZHEVSKOYE (Kaliningrad Region) Oil terminal
Capacity: 4.5 million tons. Can accept ships with a maximum deadweight of 20 tons.
Further Development Plans: 1)To increase capacity up to 6 million tons;
2) Railroad development around the port;
3) Construction of another 3 million ton terminal.
5. PRIVODINO – ARKHANGELSK – MURMANSK - BELOKAMENKA
Capacity: 4.2 million tons of oil
Oil Resources: Barents Sea shelf (Timan-Pechora, Prirazlomnoye)
Management: Severnaya Neft, Rosneft
Further Development Plans: To increase capacity up to 6-11 million tons, which
involves modernization of the Northern Railroad to increase the capacity of the latter.
Key Oil and Gas Transport Infrastructure in Northwest Russia : Key Oil and Gas Transport Infrastructure in Northwest Russia 6. VARANDEY – MURMANSK - BELOKAMENKA
The Varandey port is located on the Pechora Sea coast in Nenetsky Region
Capacity: 6 million tons to increase up to 12 mln tons in 2007
Oil Resources: Timan-Pechora oil; oil from the “Northwest Territories” field - after the drilling will start (ConocoPhillips participates in this project.)
Management: Lukoil
Further Development Plans: Current port infrastructure is temporary. Lukoil
plans to establish a permanent complex of storage facilities (415,000 cubic
meters), an oil pumping station, 35-km oil pipeline, and an oil reloading terminal.
Key Oil and Gas Transport Infrastructure : Key Oil and Gas Transport Infrastructure Other Future Projects:
7. The Bukhta Batareinaya oil products terminal
Location: Lomonosov district of Leningrad Region
Investments: $320 million
Capacity: 15 million tons with 7.5 million tons in the first phase. The total volume of the 20 projected storage facilities is 400,000 cubic meters.
Management: Surgutneftegaz
The project is included in the Federal Development Plan and is expected to take more than three years.
8. Vistino/Ust-Luga Projects (TNK-BP oil and oil product terminal)
Possible Location: Logi (Gorki) settlement near Kingisepp on the east coast of the Luga bay in the Gulf of Finland Leningrad Region
Capacity: 7.5 million tons of oil, 4 million tons of fuel oil, and 0.5 million tons of diesel fuel
in the include with a 12 million ton capacity
Management: TNK-BP
Other Interested Partners: the German Oiltanking Deutschland GmbH, Severo-Zapadnyi Alyans OOO (North-West Alliance) plan to construct an oil and oil products reloading terminal in Vistino, also in the Luga Bay, with a capacity of 10 million tons with a possible increase to 18 million tons.
Key Oil and Gas Transport Infrastructure : Key Oil and Gas Transport Infrastructure 9. Kharyaga-Indiga-Murmansk
YUKOS, Lukoil, TNK and Sibneft decided to invest in construction of an oil
pipeline from West Siberia to Murmansk.
Pipeline Length: 467 km
Capacity: up to 12 million tons.
Project status:
Currently, field studies are being conducted near Indiga, a settlement in the
Nenetsky Region, where construction of an oil terminal with storage facilities is
planned.
Oil and Gas Prospects for the US Companies in Northwest Russia : Oil and Gas Prospects for the US Companies in Northwest Russia The United States should benefit in at least four ways:
Thanks to Northwest Russia's development as a major node in Russia's intersection with world energy markets, more oil and gas produced and exported from Russia and certainly some of the exports from Russia's northwest will find their way to the U.S. market.
ConocoPhillips and perhaps other U.S. companies will reap rewards not just from upstream activities with Lukoil in the region but from the broader expansion of infrastructure already underway.
Russian expansion in refining should open opportunities for U.S. firms (investment, technology and equipment supply)
Finally, U.S. firms can be competitive in constructing or upgrading transportation facilities with world-class operating and safety standards.
Northwest Russia in Brief Additional Resources : www.bisnis.doc.gov www.bisnis-eurasia.org BISNIS Presentation Northwest Russia in Brief Additional Resources Establishing Operations in St. Petersburg
www.bisnis.doc.gov/bisnis/bisdoc/0312SPBEstablOper.htm
Background Analysis of Some Factors in Planning Russian Market Strategy
http://www.bisnis.doc.gov/bisnis/bisdoc/0507NWRStrategPlan_full.htm
Doing Business in Northwest Russia
http://www.bisnis.doc.gov/bisnis/country/nw.cfm
General Overview of St. Petersburg’s Labor Market
www.bisnis.doc.gov/bisnis/bisdoc/0409SPbLaborMarket.htm
Credit Reporting in Russia: Challenges and Opportunities
www.bisnis.doc.gov/bisnis/bisdoc/0306Credreru.htm
Market of Industrial and Warehouse Premises in St. Petersburg
www.bisnis.doc.gov/bisnis/bisdoc/0402NWIndustrRealest.htm
Infrastructure Projects in St. Petersburg – 2004 Update
www.bisnis.doc.gov/bisnis/bisdoc/0401SPBInfraProj.htm
Health Insurance and Private Medical Service Providers in St. Petersburg
www.bisnis.doc.gov/bisnis/bisdoc/0301StPeteHealthInsurance2003.htm
Current Consumer Market Developments and Retail Projects in St. Petersburg
www.bisnis.doc.gov/bisnis/bisdoc/0302StPeteConsuMarOver.htm
Venture Capital Industry in Russia
www.bisnis.doc.gov/bisnis/bisdoc/020304RVCI.htm
Foreign Trade of Northwest Russia in 2001
www.bisnis.doc.gov/bisnis/bisdoc/0312SPBEstablOper.htm
+ Overviews of all Northwest Russia’s regions and Monthly Commercial News Updates
www.bisnis.doc.gov/bisnis/country/nw.cfm
Julia Vlasova BISNIS Representative in Northwest Russia : Julia Vlasova BISNIS Representative in Northwest Russia
Phone: +7-812-326-2585
Fax: +7-812-326-2561
Julia.Vlasova@mail.doc.gov