people in motion

people in motion

samedi 29 décembre 2012

Doing Business in Russia

Doing Business in Russia (1992-2012)

A special report from The Moscow Times

A brief look over our shoulder at the past 20 years can give a glimpse of only a few companies that have shaped Russia since its transition to a market economy.

Some industries are more visible than others. There are young Russian freelancers creating the graphical user interface for mobile phone manufacturers and Russian wine makers matching the quality of better-known producers. There is a lively fashion industry: designers who make their clothes in Russia; others who manufacture in China and export to the world; and retail boutiques that are rapidly becoming chains.

But the transition is not complete. Some manufacturers are wedded to old technology. The engineering workforce is aging, while many young graduates are chasing opportunities abroad. The business climate is still evolving and that, above all, will determine how many innovators will make their career in Russia and join the ranks of its entrepreneurs.

See bottom Top 10 Russian Internet Companies in 2012

The Russian Evolution

It might be tempting to say “everything old is new again” in Russia, given the return of Vladimir Putin to the presidency after a four-year hiatus, an interesting development in the country’s political evolution. I think Russia has also evolved a great deal as an investment destination in the past two decades and holds great potential, although there is still more work to be done to open the markets and instill investor confidence.

Russia is the largest country in the world in terms of land mass (17 million sq. km),1 covers nine time zones and boasts a rich and ancient history, abundant natural resources and a resilient and well-educated population. The literacy rate is near 100% and there are more than 1,000 institutions of secondary education attended by more than 8 million students.2 Russia has often been characterized by its harsh climate, and its economy has weathered equally harsh challenges throughout its history. I’ll save the history lessons for the books, but from an economic standpoint the past two decades have been characterized by periods of growth and crisis leading to progressive steps forward—then back.
While it’s easy to criticize political missteps, I believe there are reasons to be positive about Russia’s economy and finances. In the first quarter of 2012, Russia was the only BRIC nation (the emerging economies of Brazil, Russia, India and China) to experience acceleration in GDP growth from the prior quarter (to 4.9% from 4.8%)3. Russia also boasts enviably low amounts of leverage in its economy; its debt-to-GDP ratio was 8.7%3 in 2011 and domestic credit as a percentage of GDP was 45.9%.4  It also has coffers of $500 billion in foreign reserves and is a major global producer of many commodities, including energy and precious metals.
Russia’s economy could be moving into another evolutionary stage as it just became the 156th member of the World Trade Organization (WTO). There will likely be some short-term adjustments (for example, the removal of tariffs and subsidies could hit certain industries), but this may bring potential long-term support in expanding trade, foreign investment and economic growth. According to World Bank estimates, joining the WTO could boost Russia’s GDP through 2020 to 11% above what it would be without membership, and its people could benefit from increased wages and an improved standard of living as a result.

Oil’s Handcuffs on Russia’s Economy
Energy is, of course, extremely important to Russia, representing about three-quarters of its exports. Russia is the world’s largest producer of crude oil, churning out some 10 million barrels per day, representing about 12% of the world’s oil.5  It also holds the world’s largest natural gas reserves and second-largest coal reserves.  As such, energy companies account for a big part of the country’s market. Major export destinations include the European Union (taking in nearly half its oil exports), China and Turkey. While Putin has pledged to diversify Russia’s economy and draft budgets that are less reliant on oil tax revenues, Russia’s future is still largely dependent on oil prices. Volatility in the price of oil, therefore, also contributes to volatility in the Russian stock market.

Higher prices don’t necessarily help oil companies, and at the same time, low prices don’t necessarily hurt them. With higher oil prices, Russian oil companies often bear the burden of more taxes. Companies prefer steady or perhaps slightly rising prices, rather than drastic fluctuations that are more difficult to plan for and react to. We like to look for opportunities across the energy sector, including companies that engage in exploration, production, refining and marketing. 

Turmoil in Europe (and the prospect of slower growth elsewhere this year) contributed to oil price declines this spring and summer, but our team doesn’t anticipate a dramatic fall in oil prices. Many individual companies in Russia have been able to prosper regardless of the dips, because the cost of commodity production there is so low that each company can still continue to capture profits. We believe a worst-case oil price scenario could already be priced into the valuations of Russian oil companies. Of course, if there is a severe depression in Europe or the U.S., it would likely have a negative price impact, not just on oil but also on other commodities—but we don’t think that’s likely to happen in the near-term.
Longer term, we think the greater possibility is an uptick in commodity inflation, as central banks around the world have been engaging in easy monetary policies to stimulate growth and provide liquidity. This could be very supportive to the Russian market, as long as inflation doesn’t spiral out of control.
Russia’s Stock Market and Investment Climate
In the early 1990s, Russia’s stock market was primitive. Trading began around three o’clock in the afternoon, give or take, when a vehicle would pull up to the stock exchange building carrying loads of cash. Brokers would sit at long tables waiting for workers and ordinary citizens who had been given share vouchers—which could be exchanged for shares in newly privatized Russian companies—to sell them on the exchange. Around six o’clock in the evening, the vehicle would return to collect the vouchers the brokers had bought on the cheap.
As investors there, we faced an extremely unstable environment and were often told “trust us!” with little basis to go on. And, the vast majority of Russian stocks were so thinly traded we had to wait days, or even weeks, to execute a trade. How things have changed!  The newly merged Moscow Interbank Currency Exchange (MICEX) and Russian Trading System (RTS) Exchange offers trading in a full range of equities, options and commodity futures products—on an electronic platform, day and night. The MICEX-RTS reported yearly trading volume of more than US$10 trillion in 2011.

In the first half of this year Russia’s market suffered from negative investor sentiment. Much Western capital took flight, and local investors lost confidence, too. The problem is there is a lot of uncertainty about what a new Putin presidential term means for the country. Some believe the Putin government is discouraging private sector growth and the economy will move even more toward a state-controlled economy than it already is. On the other hand, there are those who say foreign investment is being encouraged through various government mechanisms. The jury is still out.
As value investors, this has meant we could pick up shares at bargain prices. In our view, Russia appears to be one of the most attractive markets in emerging Europe from a valuation standpoint, with an average market price-earnings (P/E) ratio of about 5 in the first half of the year.6  To attract more foreign capital and instill confidence, the MICEX-RTS announced planned reforms that would affect new listings, including English-language reporting of quarterly reports and efforts to move toward a more traditional security and cash settlement trade transaction process.
From an investment standpoint, we are looking for opportunities not only in the energy sector, but also in areas including consumer goods and services, and shipping. Rail-container shipping is an area which we believe should see growth aided by increasing consumer demand, a potential improvement in the global macro-economy, and development of the country’s Europe-Asia transit potential. Increased privatization efforts in this area and others in Russia should help further stimulate investment. Russia’s effort to build a planned high-tech center outside Moscow (Skolkovo, akin to the “Silicon Valley” in the U.S.) is also an interesting enterprise that bears watching.
No matter what the future holds, Russia—and its people—have proven resilient time and again. I look forward to the next stage of Russia’s economic evolution.

1. Source: U.S. State Department, March 2012.
2. Source: U.S. State Department, 2008 estimate.
3. Source: CIA World FactBook, 2011.
4. Source: The World Bank,“Domestic Credit to Private Sector – % of GDP,” 2011.
5. Source: U.S. Energy Information Administration.
6. Source: Bloomberg L.P.

New Wave of Russian Privatization 

The French-Russian Observatory new analytical note on "New wave of Russian privatization". Its author is Sergei Guriev, the rector of the New Economic School and a member of the French-Russian Observatory's Scientific Board. The presentation of the note took place in Paris on January 14, 2013 during a conference-debate organized by the French-Russian Observatory together with the MEDEF International (Mouvement des Entreprises de France, the largest union of employers in France) and the Institute of International and Strategic Relations (Institut de Relations Internationales et Stratégiques, IRIS). This event was devoted to the macroeconomic situation in Russia and the forecast for 2013.

 Click here to read the full version of the note in English.
Top 10 Russian Internet Companies in 2012

Russia's online population has exceeded 60 million people, making it the largest Internet market in Europe. In 2012, the fastest-growing Internet companies in Russia come from online travel, cloud computing, social and advertising businesses.
Facing fierce competition from global brands, Russian Web companies were able to emerge as market leaders due to their focus on local user needs, the Western background of their management teams and the thorough technical education of their software engineers. Here are the top web companies in Russia in 2012.
Leading Russian online hotel reservations agency won the National Geographic Traveler Awards 2012 as the best Internet service. Backed by $15 million in venture capital from VTB Capital and Mangrove Capital Partners, offers the largest selection of hotels online in Russia. is headed by founder and CEO Marina Kolesnik.
Platform-as-a-service provider Jelastic has attracted web-hosting customers around the world with its Java-based offering. Funded by Alexander Galitsky's Almaz Capital and Serguei Beloussov's Runa Capital, Jelastic is a perfect example of how to build a global software business out of Russia, Ukraine and the U.S.A.
With venture capital funding of $25 million from Atomico and Phenomen, Onetwotrip grew to sell more than 10,000 airline tickets per day 1 1/2 years from launch. Headed by founder and CEO Peter Kutis, Onetwotrip attracts online users to its Web service by an easy-to-use Web interface and flexible affiliate program.
Funded by Prostor Capital and Runa Capital, has signed up more than 40 percent of secondary schools in Russia to its online school service. Launched in 2009, Dnevnik is based out of one of Russia's leading tech hubs, St. Petersburg. Headed by CEO Gabriel Levi, the service enters markets outside of Russia.
Founded in 2012, Tinkoff Digital aims to challenge advertising market leaders with the Real-Time Bidding (RTB) and Big Data technologies. Launched by serial Russian entrepreneur Oleg Tinkoff and marketing executive Anna Znamenskaya, Tinkoff Digital is backed by Goldman Sachs.
Published by former journalists from the Russian edition of Forbes magazine, is about entrepreneurs in Russia. Headed by editor-in-chief Nickolay Kononov, Hopes & Fears is a real storyteller for Russia's Internet generation looking to start their own businesses. The online journal was launched in 2012 by Look At Me, one of the top Web magazines in Russia.
Founded by Dmitry Grishin, CEO of Group, Grishin Robotics is focused on investing in technologies related to personal robotics. It also supports a robotics news and analytics aggregation service.
The mobile-only business accelerator and venture investor IMI.VC is headed by Igor Matsanyuk who previously sold his online gaming business to Group. The portfolio of IMI.VC includes mobile game publisher Game Insight, interactive book platform NARR8, photo-sharing app WeHeartPics and startup incubator Farminers.
Founded by Alexander Agapitov in Perm, Xsolla has moved to Los Angeles to operate its global in-game payment optimization service. Xsolla develops monetization tools for massive multiplayer, casual, social and mobile games.
Based in St. Petersburg, Topface offers online and mobile social dating based on your popularity ratings. First launched in April 2011, Topface reached more than 45 million registered users, most of whom comes from outside of Russia. Topface is headed by founder and CEO Dmitry Filatov.

Sources The Moscow Times. All rights reserved.

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