Russia’s economy is expected to contract by almost 9% this year. Inflation is in the double digits. Corruption is rampant. The horror stories of investors tied up in joint-venture conflicts for years and having millions in assets expropriated have been confirmed. And yet, many multinationals continue to set up shop and dig in for the long haul. For these global companies, the Russian market is simply too big and too rich to ignore. Almost 2 decades after the fall of the Soviet Union, nearly 140 million consumers are itching for imports. Demand is strong and petrodollars are plentiful. According to a recent Businessweek report, disposable household income is 30% higher than Brazils, four times China’s and 10 times that of India. Abundant natural resources such as metals, timber and oil are too attractive for MNC’s to overlook. And yet, access to these valuable commodities is difficult to gain and impossible to export without direct approval from and profits for the Kremlin.
Companies like John Deere, Unilever, and HSBC are all exploring market entry strategies into Russia. Wal-mart is also contemplating a Moscow based super-store, following the opening its French competitor Carrefour. Even Payless Shoes, owned by Collective Brands, plans to open 90 stores across the nation over the next 5 years. Intel is perhaps the poster-child for successful investment in Russia. Since entering the market in 1999, the corporation has invested over $800 million and employs over 1,000 engineers locally. Russia’s highly educated workforce is another comparative advantage to investing in less developed emerging markets. Only 20% of the Russsian consumer market owns a computer, leaving ample market share for Intel and new entrants like Cisco and Hewlett-Packard.
Although the prospects are appealing, companies must proceed with caution. In industries that are particularly strategic to the Russian government, such as telecom, energy, and aerospace, minority stakes in expensive joint-ventures are the only investment option. British Petroleum was forced to pull out after accusations of tax evasion and environmental destruction stemmed from a falling out with its local partner. Certain regions can also be more investor friendly than others. Leningrad attracts $300 -$500 in foreign investment from firms like Ford Motors and Kraft by offering tax breaks and government support. Finally, knowing how to avoid corruption means setting up procedures for strict accountability and transparency, especially when acquiring companies. Although many companies deny participating in routine bribery that is considered part of doing business, maintaining a strong reputation means shunning these practices no matter the delay or cost.
For companies willing to do their due diligence and face costly conflicts, investing in Russia can be an exciting and worthwhile endeavor.
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