A Report on Russia’s Legal Climate

February 22, 2011

For those of us who live and work in Russia, you get a much different perspective on corruption than what one would receive from the US media.  Russia today is different than the Russia during the 1990’s.  There are even considerable improvements since the Russia of five years ago.  Below is a very interesting report from Laura Brank, Managing Partner, Moscow office (Head of Russia Practice) for Dechert LLP that I received from their mailing list:

While the 1998 Russian and 2008 global financial crises have prompted the Russian government to enact laws protecting shareholders’ and creditors’ rights and to make other reforms needed for economic growth, Russia’s pro-business efforts have gone largely unnoticed in the West. In an op-ed in The National Law Journal, Laura M. Brank, head of Dechert’s Russia practice and managing partner of the firm’s Moscow office, examines changes to Russian laws affecting foreign investment and their positive impact on Russia’s business climate.

Click here to read “Russia’s Legal Climate: Another Perspective”, by Laura Brank

S&P Raises Ukraine’s Credit Ratings

March 16, 2010

Once referred to as the “Bread Basket” of the region, Ukraine was also the industrial heartland for the Soviet Union.  However, post Soviet instability has brought economic stagnation and rampant corruption.  Later, the Orange Revolution of 2004 raised the expectations that Ukraine’s orientation towards the West would bring democracy and economic prosperity.  Instead, the Ukrainian government cut itself off from its large neighbor Russia which Ukraine relies on for energy and most of its trade, causing further economic decline.  After six years in power, the Orange Revolution was defeated by a Blue Wave.  Some analysts feared a Yanukovich presidential victory would mean sharing power with Prime Minister Timoshenko and thus causing more of the same stagnation brought about by a political tug-a-war.  However, President Yanukovich managed to form a government strong enough to enact the badly needed economic reforms Ukraine needs to attract investment.  Despite which direction the government orients itself to, when it comes down to investors laying their money on the line, stability is a critical factor.  Now that a new government has ushered in hopes of stability, investors seem to be once again lining up to enter Ukraine’s markets.

Read more on Bloomberg…

Fitch Raises Ukraine’s Rating from Negative to Stable…

AP: Fitch ups Ukraine’s debt rating outlook…

Russia and the rising Eurasian economic space

February 20, 2010

Russia is already the world’s largest country in terms of territory, with a consumer market of over 140 million people, vast natural resources, a highly educated workforce, and technologically advanced research and production capabilities.   However, the Russian market’s real potential is through its unified economic space which is emerging in the form of a new customs union and the formation of the Eurasian Economic Community (EAEC).  The EAEC originates from the Common Wealth of Independent States (CIS), a loose organization which replaced the USSR.  However, Russia has focused on transforming this space into a unified economic block as seen recently by Belarus and Kazakhstan which are entering a single customs union with the Russian Federation.

Consumer activity in this region has contributed to dynamic growth in trade, retail, telecommunications and services on the back of rising incomes and the development of consumer lending, Russia is transforming the region into a single economic space:

  • Russia and its neighbors from the post-Soviet space combined, has over 260 million people, whose incomes are increasing every year.  Currently 207 million consumers reside within the EAEC and Ukraine has recently expressed interest in joining the customs union with Russia, Kazakhstan and Belarus which will add another 50 million consumers. 
  • Free Trade accord between Serbia and Russia allows Serbia to become a bridge to Russian/Eurasian markets and expands the Russian market into Southeast Europe.
  • High consumption, spending will and capability throughout the region.
  • Large untapped potential, not only in Russia but also in resource rich Kazakhstan offer even more potential.
  • Russia has become the largest automotive sales market in Europe as of 1H 2008 sales results (PricewaterhouseCoopers study).  Combine this with large markets in Ukraine will make this region one of the most important automotive and truck sales market globally.

Even without factoring the performance of the entire region, Russia itself promises growth.  According to the Moscow-based brokerage Aton LLC report to Bloomberg, Russia’s domestic product may expand 6.4 percent, more than the previous forecast of 5.8 percent.

According to PricewaterhouseCoopers, Russia could become the largest European economy in two decades; soon leading economically ahead of Germany and France.  However, Russia’s ability to economically integrate the Eurasian space will be of greater interest in projecting how well this market will prosper in the coming decades.

Fitch raises Russia’s credit rating to BBB

January 22, 2010
Just in from Bloomberg:
Russia Credit Outlook Raised to Stable at Fitch
By Paul Abelsky
Jan. 22 (Bloomberg) — Russia’s credit rating outlook was raised to stable from negative at Fitch Ratings after a surge in commodities helped bolster government finances in the world’s biggest energy exporter.

Fitch raised the outlook on Russia’s credit rating to stable from negative and affirmed its long-term foreign and local currency issuer default rating at BBB,’ the company said in a statement today.  Read more…

Russian markets soar on start of 2010

January 11, 2010

Merry Christmas and Happy New Year!  Stock markets in Russia re-opened today for the first time in 2010.  Russian trading resumed on the first Monday following the Orthodox Christmas which is celebrated every year on January 7. 

On the opening day of today’s trading the Ruble gained the highest against the US Dollar in well over a decade as oil traded at $83 USDbbl. 

Click on the following links for more reports on the Russian markets.  I wish everyone a Merry Christmas and a prosperous New Year!  

Ruble Gains Most in Decade, Stocks Soar in 1st Trades This Year

Russian markets open up to 2010 with focus on upside

Goldman Sachs: Russia tops emerging markets for 2010

December 30, 2009
Russia Unbeatable as Kudrin Says Stocks Are Too High
By Michael Patterson

Dec. 30 (Bloomberg) — Russia is the top investment pick for the biggest emerging-market stock funds in 2010, even after the RTS Index’s world-beating 126 percent rally prompted Finance Minister Alexei Kudrin to say shares are too expensive.

Russia is the leading “overweight” holding among the world’s largest developing-nation mutual funds, EPFR Global data show. More than 95 percent of analyst ratings on Russian stocks are “buy” or “hold,” the highest level since Bloomberg began tracking the data in 1997. Goldman Sachs Group Inc. says Russia is the most attractive emerging market for 2010 and Troika Dialog, the nation’s oldest investment bank, predicts equities will climb about 40 percent.

Read more here…

Russia’s Construction Outlook for 2010

December 22, 2009

As we near the close of 2009, I have been posting various articles related to Russia’s economic outlook in 2010.  The following article was posted by ConExpo Russia 2010:

Russian Industry Outlook: 

Despite the downturn in the economy, market stability in Russia should return by 2010 with growth expected for 2011. Federal and public-private partnership investments will fund projects in roadway, rail, airport and power plant construction and modernization.The U.S. Commercial Service notes Russia’s need for new equipment: “The construction equipment market is characterized by a shortage of inventory and a high degree of equipment wear and tear. Depending on type, the share of worn out equipment varies from 45% to 75%. Local manufacturers suffer from insufficient investment in R&D; the result is a lack of modern technology, poor management and the absence of government support. As a result, the import of construction machinery continues to grow; about 50% of the equipment used by construction companies is foreign, either new or used.”
(Source: U.S. Russia Trade Office)

Infrastructure

Federal program will drive modernization of Russia’s transport system by 2015- total investment of $420 billion of which $147 billion is federal funding.

  • $1.5 billion contract for construction of the first section of highway between Moscow and St. Petersburg
  • In July 2009, the European Bank for Reconstruction and Development (EBRD) approved $500 million 10-year loan to Russian Railways (RZD) for upgrades to its rail network.

Commercial Construction The port city of Vladivostok in eastern Russia will host the Asia-Pacific Economic Cooperation (APEC) summit in 2012 which will require dramatic expansion of the hotel industry

  • Preparations for the Sochi 2014 Winter Olympics may well exceed $20 billion, the majority to be spent on the construction and modernization of roads, railways, tunnels, airport facilities, power infrastructure, and sports venues.

Utilities New energy strategy approved through 2030 to reduce the country’s dependency on fossil fuels while increasing the use of atomic energy, hydroelectricity and renewable resources.

  • $1.2 billion reconstruction of the Sayano-Shushenskaya Hydroelectric Power Plant and the construction of several nuclear power plants.

(Source: U.S. Russia Trade Office; Senior Construction Analyst – PMR Publication)  Read the original article here…

Morgan Stanley: Russia in 2010

December 19, 2009

Putin shakes hands with Morgan Stanley's John Mack.

There are many signs that Russia in 2010 will see an increase in direct foreign investment as money moves back into the markets.   But don’t just take my word for it.   As I reported in an earlier post, the presence of General Electric, Texas Pacific, Morgan Stanley and other heavy weights at the 2009 Investment Forum in Sochi proves the point.  Public offerings in Russia for 2010 are projected to increase 10 fold ($10 billon) according to OOO Morgan Stanley Bank (Moscow) in this recent article:

Morgan Stanley:  SPOs and IPOs to Increast 10-fold

Vladislav Kuzmichev, Russia Now

Interview: Public Offerings Offer Concrete Signs of Recovery

Western companies fear that Russian business partners are not transparent in their dealings, and that Russian law won’t protect the interests of Western partners. Morgan Stanley helps both sides grapple with these stereotypes, according to Elena Titova.

The Russian stock market saw a slump in late October despite encouraging macroeconomic news. Elena Titova, President of OOO Morgan Stanley Bank (Moscow), talks to Russia Now about the big picture.

The Russian government sounds optimistic and talks of economic revival. What caused such rapid growth in the Russian stock market after the squeeze?

Ironically, big investment funds remained intact, but their owners took a wait-and-see approach. Then they realized they could not afford to wait any longer as the global market stabilized. Although it was not clear what other markets would generate growth, apart from China, the storm seems to have abated. Funds took their money off the sidelines and started to invest again. Since the Russian stock market is relatively small, the ensuing growth was faster than in other countries.   Read full article here…

Read more about Morgan Stanley at the 2009 Investment Forum in Sochi, Russia.

 

Solving Corruption

December 15, 2009

Corruption maybe one of the biggest stumbling blocks for Western companies investing in the emerging markets.  Let’s face it, those of us who have been doing business in developing countries for the last couple decades, know too well that the rule of law takes a back seat when a country can barely keep above water trying to stabilize its economy, or prevent potential upheavals of national security.  Fighting corruption has only just begun to move in the forefront where countries are showing signs of economic stability and evidence of a middle class.  Some strong public statements made recently by President Dmitry Medvedev on this subject is just one indication that this issue is now taking a higher priority.    However, despite all the reforms and anti-corruption measures taken thus far throughout the region, corruption will not go away over night.  Even within the “developed” world, corruption still exists, so therefore, nobody should expect it to be wiped out completely from the emerging markets anytime soon as well.

For those of us who made the strategic decision to enter these markets, it is most important to consider how to deal with corruption in the now, rather than wait years into the future for “better times” when it may be too late causing your business to miss the opportunities that exist today.  Many of you out there already have heard or even have first hand experiences on how bad corruption is in this region.  On the other hand, there are also plenty of stories from those who have learned how to cope with it and can share more positive insight on this.   Please keep in mind that levels of corruption are different everywhere throughout the world.  Even in the U.S., the levels of corruption have been historically more evident in some certain cities than others.  In the emerging markets, this is no different.  We all know that Russia has had problems with corruption.  However, from my own experience, this varies from region to region and may differ from industry to industry.  Far as other former Soviet countries are concerned, they fare no better when it comes to high-levels of corruption, and in many cases Russia’s neighbors are even worse.  The problem here is that all too often Russia gets stereotyped as if corruption is a part of their genetic code, while the newly independent countries that have embraced Western democracy are stereotyped differently as open business havens for transparent and honest business.  This is nonsense, and if you have ever done business in some of these pro-Western “democracies,” then you know what I am talking about.   

The good news is, that despite how bad corruption is, overall it is much better now than a few years ago as the economies improve and governments have more resources to deal with it. If you were one of those first brave pioneers to attempt business in Russia, Ukraine or other CIS countries after the collapse of the USSR, chances are you probably packed up and went home frustrated.  Today, you may find a completely different environment with different conditions as compared to the wild 1990’s.  On the other hand, if you bribed the right person back then, you probably could have just about achieved anything imagined.  Today you may find it much different.  All the same, your business should expect, plan and take measures on dealing with corruption no matter where you decide to set up business overseas. 

Here are just a few solutions to consider regarding corruption.  Please keep in mind that you can apply these solutions just about anywhere keeping in mind that results vary.

Due Diligence  – You have researched the country, conducted market studies, analyzed the risks and competition;  now you have a solid plan to launch your operations.  But was corruption a part of your due diligence?  Hopefully yes, and while most companies do a good job conducting due diligence on their future partners, many forget to conduct due diligence regarding their industrial sector and location of business.  How well do you know how to navigate in the specific location where you will be registering your business?  With current intelligence and proper research, you can avoid corruption by selecting the right location.    This is why most companies prefer to set up shop in the capital cities rather than in some far off province where the ruling officials think the Soviet Union is still enforce.   Although sometimes this is not the case and the realities may vary.   And while Moscow and other big cities become over concentrated and too cost prohibitive for many operations, more opportunities are popping up in provincial areas. This means you will need to identify other places to start your market entry.

Public Relations and legal expertise – How you are perceived is very crucial when doing business.  If you are already doing business in the region, you already know full well that having the right local connections with the elites in your industry and local government are absolutely necessary to make your venture work.  More so than in developed nations, approvals are usually made at the highest levels of government, although this is starting to change in some places.   On top of all that, the locals will often have high expectations of foreign companies.  Sometimes this is OK for the overall public relations effect, but beware – often times it means the locals will think you arrived to their country with suitcases of cash.   While many companies think that they can just market themselves like they do back home, it is very important that you have expertise on not just the cultural trends, but political as well.  One of my first projects that I worked on received fierce opposition from the local trade unions.   Before you knew it, the local media was reporting that US companies were coming to take property and jobs away from the locals.  Once this story was out, we received interference from the government to carry out the project.  While understanding the root of the problem and knowing how to break through the cultural barriers, we convinced the trade unions and government officials about the benefit of our project and the jobs that it would create.  The result?  The next time they were on the news, the officials were promoting to the public that our project was their idea and not ours.  Although this is not corruption in a classic sense, there was no use going after the media for stating false information.  Instead we turned the situation around in our favor.  Bottom line, if you don’t get the buy in from both the customers and the civil authorities, you will be faced with tough obstacles ahead.

Nearly everywhere I have travelled in the region, I find that the locals have a more negative perception of their government than the foreigners.  This makes sense since with having all the memories of living their lives and trying to raise families in a corrupt system.  Even though many reforms have taken root and more rights are being established for the common person than the previous decades, the old fashion habits and plain cynicism prevents the average person from asserting their rights.  All too often, when a local official approaches a local business owner regarding a safety issue or tax error, the business owner just pays the bribe rather than challenge the official.  On the other hand, not only are most Western firms used to protecting their business interests, foreigners usually have better rights than the locals do.  And if you succeed at making friends at high levels and your business is aligned with their interests, then you need to make sure this is understood from a public relations stand point.  If the local tax inspectors perceive that your business has no “friends” then you will become vulnerable.   

A Russian businessman once told me that he loved the cartoon Tom and Jerry.  He explained that Tom represents the Russian bureaucracy and Jerry is the Russian business owner.  The locals in all these countries have been playing the game of cat and mouse for generations and they know how to play it. If you follow the temptation to do in Rome as the Romans and just pay the officials off or cook books, they will get greedy and your business will be forever under their vassalage.  Even if your local business friends advise you to play the game, don’t fall for it.  The best ammunition against the crooked inspector is to follow the laws and regulations how ever daunting this task may seem. 

Local Partners, Staff – Here is where you have to be careful.  Often companies put all their eggs into one basket.  They find a strong local partner who is well connected to the political elite and never have to worry about corruption.  Once I worked with a client in a Central Asian country on a very important project.  Our local partner had a strong and fruitful relationship with the government official responsible for making decisions.  Everything went well, and after substantial investments were made, there was a government re-shuffling and before you knew it, a new official took his place.  Despite contractual obligations and investments made, our partner was left powerless as a result.  In countries with shifting power allegiances, this is an added risk factor and you should never rely on one person to connect you to the decision makers on the top.  Here again, proper intelligence and due diligence from reliable resources and insurance can help reduce this risk.    

Managing your local staff and facilities is also crucial.  There is nothing worse than when you have invested in a local company, trained the staff and to find out they are selling your intellectual property on their own behalf or using their work hours to perform services using your equipment.  This was probably the first form of corruption I personally faced when starting up my first company.  Employee theft and internal corruption is not just a problem in the emerging markets.  It is a problem everywhere in the world if not put in check.  However, risks are much higher when much of your available human resources have grown to not trust the government, and as often is the case, they will not make a distinction between their employer and the state.  Furthermore, memories of crooked oligarchs and unpaid back wages are still in the minds of many workers.  As I mentioned earlier about my Russian friend’s analogy regarding Tom and Jerry, I prefer to have Tom represent the employer and Jerry, the local employee.  I don’t know about you, but when it is my company we are talking about, I do not want to be Tom the foolish cat.

Depending on the local security services available or type of industry you are involved in, there are many ways to put proactive measures in place to help reduce this risk.  The good news is, there is even more you can do to better manage your company.  And with the proper leadership and training, you can remove that negative perception the employees have against the ownership of the company.   If you take the time to know your local staff, study their culture and genuinely look after their interests, you will find that you have a very talented and honest team working on your behalf.

I also wish to emphasize that there is no magic wand to protect your business 100%, nor is there a perfect world in which to do business in.  I could have and will cover more in the future on how dealing with legal, tax, management and other related issues as well.  But like in all aspects of business, you minimize risk by planning for the worse, while realizing that greater the opportunity the greater the risk.  If you understand this, you can solve this challenge and find a way to succeed.   

Interested in implementing these solutions to reduce risk and corruption in your venture?  Check out more articles in this blog or contact me.  Whether you need some help with your existing operations or just need advice on planning your market entry strategy, email me at: andy.verich@missiondirectservices.com or Click here to learn more.

NOTE: WANT TO USE THIS ARTICLE FOR YOUR E-ZINE, BLOG OR WEBSITE?  You can, as long as you complete the following statement in its entirety:  Andy Verich is an Emerging Markets Expert covering the Balkans, Eastern Europe, Russia and the CIS.  If you are ready to empower your business with the vital tools and information to uncover the untapped emerging market opportunities, visit him now at: www.andyverich.com.

Where are investors going in 2010?

December 12, 2009
 

Construction for the Sochi 2014 Games

ANSWER: Emerging Markets.  As I reported in an earlier post, I attended the 2009 Investment Forum in Sochi, Russia, future site of the 2014 Olympics.  In Sochi, we got the chance to hear from Prime Minister Vladimir Putin, Russian economic officials and from business execs from GE, Morgan Stanley and Texas Pacific Group Investment Fund, the world’s largest equity fund.  You can read  more on this report in the following post: “Russia’s Second Round of Privatization.”

While Putin was listening, John Mack (CEO, Morgan Stanley) explained to us that according to their internal research data, over US$ 5 trillion in the United States and US$ 7 trillion in Japan is now waiting on the sidelines to be invested “somewhere.” He also said, “As this money moves into the investment market, Russia will be a huge benefactor of that capital.”   Since this forum took place in late September of this year, the Russian government made several significant announcements regarding the opening up of state assets to direct foreign investment that were previously closed while financial experts reported a number of interesting developments:

Although many experts do not believe Russia will return to growth levels for 2010 like it previously enjoyed prior to the economic crisis, its contraction has slowed while reports indicate companies are restocking depleted inventories that were depleted earlier this year.  While these are just some of the indications being reported, earlier this year there John Deere, Pepsi and Boeing announced they were increasing their investments substantially in Russia for 2010.  More on these deals here…

While President Dmitry Medvedev called Russia’s economic dependency on commodities “humiliating,” increased oil consumption in India and China will ensure that prices of oil (which are today hovering at $70/barrel and forcasted at $80/barrel for 2010) will keep the Russian juggernaught in place as Russia enters its next phase.  After Russia got its “wake up” call in 2009, the rising demands in commodities will provide the window of opportunity Russia needs to diversify its economy.   While some predicted gloom and doom for Russia in 2009, the Kremlin it seems, is turing this into an opportunity to shed some corrupt oligarchs while transfering assets to better qualified investors.  More on that later!

NOTE: WANT TO USE THIS ARTICLE FOR YOUR E-ZINE, BLOG OR WEBSITE?  You can, as long as you include the following statement in its entirety:  Andy Verich is an Emerging Markets Expert covering the Balkans, Eastern Europe, Russia and the CIS.  If you are ready to empower your  business with the vital tools and information to uncover the untapped emerging market opportunities, visit him now at: www.andyverich.com.