“Business and Economic Development in Post Crisis Russia” : “Business and Economic Development in Post Crisis Russia” Daniel M. Satinsky, Esq.
President, U.S.-Russia Chamber of Commerce of New England, Inc.
© Daniel Satinsky, February 2004
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
Personal Background and Contact Information : Personal Background and Contact Information Attorney. B.E.A. Associates, Inc.; www.bea-associates.com; satinsky@bea-associates.com
Fletcher grad. Wide experience in Russian business development, particularly telecom and technology, with broad regional connections and special focus on Yaroslavl’ Region
U.S.-Russia Chamber of Commerce of New England, Inc.; www.usrccne.org
Past as Prelude: What Happened in Russia in the late 1980’s and early 1990’s? : Past as Prelude: What Happened in Russia in the late 1980’s and early 1990’s? Gorbachev’s reforms as a recognition of Soviet Union’s weaknesses and inability to continue arms race.
Yeltsin seized the opportunity opened by traditional Communists’ opposition to Gorbachev to destroy Soviet system.
Centralized control and management of economy destroyed with no clear alternative.
Impact of Disintegration of Central Planning Apparatus : Impact of Disintegration of Central Planning Apparatus Distribution system disappears – no “market” to replace it.
Non-cash economy becomes barter economy.
Working capital non-existent or available only at exorbitant rates
Dramatic decline of industrial sector, particularly military related industry
False Promise and Real Processes : False Promise and Real Processes “Boom” mentality of Western view of Russia in 1990’s
GKO bubble
Underlying process of division of state property
Crisis of everyday life
Reform and the illusion of reform
Opportunities of the Time – Niches from Collapse of Central Planning : Opportunities of the Time – Niches from Collapse of Central Planning Telecom
Trade and Distribution
Consumer goods – retail
Imported food
Mass media
Bankrupt state enterprises
Key Economic Players : Key Economic Players Red Factory Directors
Reforming Elite
New Russians
Small business
Foreign Expats
Who were the Foreigners? : Who were the Foreigners? Cautious multi-nationals
Multinational law firms & consultancies
Ex-military and intelligence professionals
Former social activists
Individual Entrepreneurs
Adventurers and Charlatans
Words of Caution : Words of Caution “Russians will not let foreigners in until the process of dividing state property is over.”
“In the West business takes priority over politics. In Russia, politics takes priority over business.”
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
August 1998 Watershed – Party Over and Russia Prematurely Buried in Western Perceptions : August 1998 Watershed – Party Over and Russia Prematurely Buried in Western Perceptions Bubble pops and boom mentality deflates
Credibility of Russian government finance destroyed
Currency devaluation curtails imports and causes crisis for dollar-denominated debt
Predictions of gloom & doom
Russia is seen as economically irrelevant
Structural Factors that Revived Russia : Structural Factors that Revived Russia Russia is the largest energy (oil + gas) producer in the world
Russian industry matured in early 1990’s and was able to supply and prosper in domestic market
“Hidden Middle Class”
Stability of Russian government under V.V. Putin
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
By the Numbers – Growth Post 1998 : By the Numbers – Growth Post 1998 2000 – 8.3%; 2001 – 4.9%; 2002 – 4.0%; 2003 – 6.8%
2003 GDP 22.6% higher than pre-crisis 1997 GDP
Construction increasing by 15%
Domestic investment growing annualized 13.5%
Inflation dropped from 17% in 2002 to below 14% in 2003
Federal budget in 2003 in surplus by 2%
Wages growing by 35% annually in 2003
Balance of Trade : Balance of Trade 2000 - Surplus of $60 billion
2001 – Surplus of $48 billion
2002 – Surplus of $46 billion
2003 – Surplus of $48.7 billion
2004 – Estimates surplus of $50 billion
2003 Central Bank Reserves - $77.8 billion
Russia as Key Strategic Market for Multinationals : Russia as Key Strategic Market for Multinationals “…If things go right, in less than 40 years, the BRICs [Brazil, Russia, India and China] economies together could be larger that the G6 in US dollar terms. By 2025 they could account for over half the six of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms by 2050.” Global Economics Paper No. 99, Goldman Sachs, October 1, 2003.
Russian Government Paper : Russian Government Paper Moody’s Investor Services raised Russian debt to investor grade status for the first time ever on October 8, 2003
Standard & Poor’s raised Russia’s long-term foreign currency sovereign credit rating to BB+ from BB on January 27, 2004. Ruble denominated sovereign debt is rated at BBB-, lowest rating on their scale. Indicates do not consider short term risks significant, but have concerns about long term.
Russian Investment Attractiveness : Russian Investment Attractiveness A.T. Kearney listed Russia as the 8th most attractive country in the world for investment on its 2003 list of 60 most attractive countries for investment. Russia is listed second, after China, for investors who have never invested abroad previously
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
Mobile Phones as Indicator of Change : Mobile Phones as Indicator of Change Backlog in fixed line service remains. Still long waits in some areas.
Dramatic increase in mobile phone usage. Rising from 1.7% in 2000 to estimated 21.5% by end of 2003.
Subscribers rising by 1 million per month
Wireless growth expected to continue : Subscriber Growth in Russia Wireless growth expected to continue Emerging Europe Cellular Penetration Source: Consensus forecasts
Slide23 : Main Russian GSM players Market share in Moscow as of Dec 31, 2002 Market share in Russia as of Dec 31, 2002 Source: www.sotovik.ru, January 04, 2003 MTS Megafon VimpelCom
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
Rising Real Disposable Income and Domestic Consumer Market : Rising Real Disposable Income and Domestic Consumer Market 2000 – Rise of 9.1%
2001 – Rise of 7.2%
2002 – Rise of 8.8%
Total Consumer market $270 billion
Trade & Retail growth 8% annually. Up 29% compared to 1997
Ranked #1 in Global Retail Development Index for World Emerging Markets – 2003 (AT Kearney)
Reorganization of Domestic Retail Distribution : Reorganization of Domestic Retail Distribution Small retailers continue to dominate. Share of top 3 retailers: Sweden 95%; Russia 1.1%
Tremendous potential for growth and reorganization. Outlets belonging to major retail chains doubled in 2001 & 2002; expected to grow 47% in 2003.
Number of modern stores in Moscow to double by 2006.
Foreign chains IKEA, METRO, AUCHAN & AVA/EDERA already in the market
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
High Tech/IT – Hopes and Realities : High Tech/IT – Hopes and Realities Fundamentals of skilled programmers and advanced scientific institutions provide basis for high tech/IT industry sector. A fact recognized by Intel, Boeing, Motorola and others who have already established development centers in Russia.
The heritage of the 20th Century Cold War conflict between the U.S. and the Soviet Union has given a strong basis for IT and technology to today’s Russia
Visible through:
High level research in fundamental science
Rigorous science and math education
Managerial experience with complex projects
Innovative problem solving spirit developed in response to Soviet period
Russian IT and Software Development Companies - Origins : Russian IT and Software Development Companies - Origins Companies emerging from universities and nonconforming, underground tech culture as new, independent entrepreneurial sector in early 1990’s. These companies are the core of today’s Russian private software outsourcing and IT industry.
Descendants of Soviet military research and development facilities carrying on cutting edge, world-class science. Not sophisticated in marketing themselves and best reached through U.S. government supported organizations:
International Science & Technology Center www.istc.ru
Nuclear Cities Initiative http://www.nnsa.doe.gov/na-20/nci/index.shtml
Human Resources - Science Students : Human Resources - Science Students % of total students World Bank, UNESCO, Federal Statistical Office of Germany
Human Resources - Total R&D Personnel : Human Resources - Total R&D Personnel World Bank, UNESCO
Dynamics of Russian Software Exports : Dynamics of Russian Software Exports
High Tech/IT Prospects : High Tech/IT Prospects Strong educational and scientific base for development of High Tech/IT sector from the Soviet period
Strong core group of Russian companies emerged from the 1990’s, participating in world IT markets, gaining the management and business skills necessary to complement existing strengths in science and mathematics. Still second tier in world markets
Tough international competition
Lack of any real government support
Presentation Outline : Presentation Outline Past as Prelude – “The Wild East”
August 1998 – Watershed
Russia defies Western Predictions
Indicators of Change – mobile phones, retail trade and high tech/IT
Future Prospects
Structural Problems Remain : Structural Problems Remain EBRD Cautions re Private Business
Need to diversify economy
Capital markets still primitive and lacking foreign direct investment
Concentration of wealth both by income category and by geography
Ongoing reforms required
Negative perceptions by foreigners
Summary – Old Themes in New Conditions : Summary – Old Themes in New Conditions Strong state revival
Elite commitment to restoring Russia’s role in the world, based on a revived economy
Strong notions of social justice and social equality within Russian population clashing with Russian reality
Postscript – What About Fletcher Students? : Postscript – What About Fletcher Students? Russia is far from irrelevant in world economy
Economic opportunities remain, but within competitive and “Russian” context
Professional skill levels required, plus personal flexibility and language skills
Best opportunities may be with Russian firms and in Russian Regions
You have to go there to find out