russia rebalances its economic focus _ update 16 may 2016
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RUSSIA REBALANCES ITS
ECONOMIC FOCUS:
Opportunities And Strategies To Enter The Market
Gwyneth TanCentre Director, Moscow Overseas Centre
16 May 2016, Sapphire Room, Lotte Hotel, Moscow, Russian Federation
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RUSSIA REBALANCES ITS ECONOMIC FOCUS:
Opportunities and Strategies to Enter the Market
A word about IE Moscow
Snapshot of Russia
Why still Russia? Why not Russia?
Opportunities in adversity
Succeeding in the Russian marketplace
Summing it up
Questions?
A word about IE Moscow
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Operating in Moscow since 2006:
Constitutes the Commercial Department of Singapore Embassy in Russia
Historically, operated by 1 Centre Director, 1 Business Development Manager, 1 Centre Secretary, 1 Driver.
Collaborates across Singapore ministries, agencies and NGOs to advance economic bilateral ties and cross
border business with Russia, Ukraine and Belarus
Cultivate and engages globally competitive Russian companies for anchoring in Singapore and Russian partners
to do business with Singapore companies.
Your IE Moscow team today:
IE Singapore Moscow Overseas Centre
Maxim ChulkovSenior Key Account
Manager
Artur KarlovBusiness Development
Manager
Diana BelyaevaBusiness Development
Manager
Victoria AraslanovaProtocol & Admin
Officer
Gwyneth TanCentre Director & Commercial Secretary
2013-2016
Raheed NargundRegional Director & Commercial Counsellor
2016 and beyond!
Alexander “Sasha” SertChauffeur & Logistics
Snapshot of Russia
Snapshot of Russia.
Official name:
Russian Federation
Area: 17,000,000 km2
No. of regions: 83
(Singapore does not
recognise Republic of Crimea
and Sevastopol City as part
of Russia)
Total population:
143,800,000 pax
Major cities:
Moscow (10.1 mln pax)
St Petersburg (4.7 mln pax)
Novosibirsk (1.4 mln pax)
Nizhny Novgorod (1.3 mln
pax)
Yekaterinburg (1.3 mln pax)
Current President:
Vladimir Putin
Current Prime Minister:
Dmitry Medvedev
Russia’s top banks:
Russia’s O&G + Defense + Dual-tech majors:
Snapshot of Russia.
2014 sectoral sanctions cut off Russia’s access to key Western resources for
developing and growing key sectors of its economy:
Note! Consult proper sanctions lawyers
to understand your specific case.
Snapshot of Russia.
Russia’s counter sanctions cut off a significant supply of staple food
imports which form the Russian basic diet:
• Fresh and frozen meat and smoked meat products (excluding canned
versions)
• Fresh and frozen poultry and processed poultry products (excluding
canned versions)
• Milk and dairy products
• Fresh and frozen fish and seafood
• Fresh vegetables, edible roots and tubers, fruits and nuts
Note! Consult proper sanctions lawyers
to understand your specific case.
Why still Russia? Why not Russia?
2014 2015
Interest rate: 17% 11%
GDP: US$1.86 tn US$1.2 tn
GDP growth: 0.6% -3.7%
Inflation: 7.8% 12.9%
Unemployment rate: 5.2% 5.8%
Total foreign direct investments: US$23.6 bn US$2 bn
Total exports: US$520.3 bn US$345.9 bn
Total imports: US$323.9 bn US$193 bn
Recent macroeconomic indicators of Russia:
Legend:
Green = improvement
Red = Decline
Looks like bad news… or is it?
In 2014, Western sanctions and plunging global oil prices struck a double blow to its
already slowing economy.
2010 2011 2012 2013 2014 2015
4.5% 4.3% 3.4%1.3%
0.6% Slight GDP contraction in 2015.
% growth
GDP
2010 2011 2012 2013 2014 2015
70bn55bn 50bn43bn
23bn
US$
FDIForeign direct investments
all but dried up.
US$105 US$38
Oil prices
plunged more
than 70% from
2014 to 2015.
-3.7%
2bn
In 2015, World Bank
expects Russia’s GDP
to contract over the
next 2 years.
On 11 May 2016, the EBRD expects Russia’s recession
to bottom out by end 2016 and the economy to return to
growth of around 1% in 2017 as oil prices recover.
…these?
Why not Russia? Is it because of…
Scary strong man. Scarier, stronger men. Dangerous beauty. Even more dangerous beauty.
Or these?
Realities behind top 3 perceptions of Russia. (1/3)
Perception 1: Putin is evil. As long as he is in power, we can’t do business in Russia.
Key takeaways for foreign businessmen:
A Russia ruled by a Strong Man backed by cohesive domestic support
and a fearsome military means:
No fear of social unrest – Russian citizens believe in their leader.
No fear of terrorist disruptions – Terrorists are effectively deterred.
No need for martial law – Post USSR Russia never needed it.
All the above lead to stable conditions for long-term business.
Perception 2: Russia is too corrupt. We can’t do business in Russia.
Realities behind top 3 perceptions of Russia. (2/3)
Food for thought:
Corruption is
everywhere: Out of 177
markets ranked by CPI,
only 14 or 7.8% are
developed markets
where corruption is
supposedly low or zero.
Even developed
markets export
corruption abroad.
Many developed
markets pose entry
barriers in terms of
market saturation,
established or
entrenched rival brands,
and protectionism.
Food for thought: Is it time
for Singapore businesses to
gain more sophisticated
firm-level capability for
handling corruption?
Realities behind top 3 perceptions of Russia. (3/3)
Perception 3: Russia is under sanctions. We can’t do business in Russia.
First thing Singapore should know about the sanctions:
1. EU and US sanctions on Russia are unilateral. They are not issued through UN resolution.
2. Singapore complies only with UN resolutions. Therefore the current sanctions on Russia
are not applicable to Singapore or Singapore entities.
3. Singapore does not join in unilateral sanctions imposed by one nation against another
outside of UN resolutions.
Second thing Singapore should know about the sanctions:
1. EU and US sanctions on Russia are imposed on specific Russian individuals, specific Russian
companies and specific Russian business activity, technology, know-how, and equipment.
2. EU and US sanctions do not bar everything under the sun.
Russia’s top banks:All EU & US
banks
Russia’s top enterprises:All EU & US O&G
+ dual tech
suppliers
Note! Consult
proper sanctions
lawyers to
understand your
specific case.
Tip! In Russia you need
to invest time and
resources to entertain
your customers. While
Russians like the
showiness, more
importantly they need
this to test your character
and get to know you.
Why Russia then?
Great place for business meetings: Moscow never sleeps. Today, it is a humming metropolis that
offers luxury to outlandish choices for you to entertain your customers.
Good eating and entertainment: Who says Russia doesn’t have good food?
Tip! In Russia,
dining out is about
being seen, showing
that you have
arrived. Self service
affairs are called
canteens, meant for
the poor and fast
food. Therefore, be
mindful of where you
take your guests!
Note! Russia ranks below
only 2 Asian markets and
above all African
markets!
Why Russia then?
World Bank’s Ease of Doing Business Index 2016: Russia ranks 6th out of all emerging
markets of Asia, Africa, Middle East and Latin America.
Southeast Asia 2014 2015
Malaysia 17 18
Thailand 46 49
Russia 54 51
Vietnam 93 90
Brunei 105 84
Philippines 97 103
Indonesia 120 109
Cambodia 133 127
Laos 139 134
Papua New Guinea 141 145
Timor-Leste 167 173
Myanmar 177 167
South Asia 2014 2015
Russia 54 51
Sri Lanka 113 107
India 134 130
Pakistan 136 138
Bangladesh 172 174
Emerging North Asia 2014 2015
Russia 54 51
Mongolia 59 56
Bhutan 70 71
China 83 84
Nepal 94 99
Latin America & Africa 2014 2015
Mexico 42 38
Chile 48 48
Peru 45 50
Russian Federation 54 51
Colombia 52 54
Puerto Rico 56 57
Rwanda 55 62
South Africa 69 73
Rest of Africa & Latin America 70-189 74-189
Middle East & Turkey 2014 2015
United Arab Emirates 32 31
Russian Federation 54 51
Israel 50 53
Turkey 51 55
Bahrain, Qatar, Oman, Saudi
Arabia, Kuwait, Jordan, Iran,
Lebanon, Egypt, West Bank and
Gaza, Iraq, Yemen, Syria,
Afghanistan
61-175 65-177
BRICS (Saudi / S. Africa) 2014 2015
Russian Federation 54 51
South Africa 69 73
Saudi Arabia 84 82
China 83 84
Brazil 111 116
India 134 130
Why Russia then?
Russia’s corporate tax rate is 20%: This is lower than the averages of most economic blocs.
Corporate tax rates: 20% Russia 20% in 2015 (steadily reduced from 43% in 2001)
Compare with: 20% Thailand, Cambodia, UK, Europe Average
25% Malaysia, Myanmar, Vietnam, Indonesia, China, Austria,
Netherlands, Colombia, Uraguay
26% Canada
28-29% Spain, Germany
30-31% Mexico, Philippines, Italy
33% France
34% Brazil, India
40% USA
Why Russia then?
Russia has proven itself to be capable of quickly managing financial crisis: Contrary to
popular news report, its economy did not collapse and is showing resilience to hold up under pressure.
RUB2.4 trillion
Anti-Crisis Plan
• 65% bank
recapitalisation
• 13.9% support of
enterprises which
account for 70%
of GDP
Prudent budget management:
• 10% cut in budget expenditure
for 2015
• Capping budget expenditure at
RUB15 trillion until 2017
Reserves (US$) 2014 2015 Change
RUSSIA386 bn 401 bn + 15 bn
GERMANY193 bn 194 bn + 1bn
USA132 bn 119bn - 13 bn
External Debt (US$) 2014 2015 Change
RUSSIA681 bn 515.3 bn - 165.7 bn
GERMANY3.6 tn 4.5 tn + 0.9 tn
USA17 tn 19 bn + 2 tn
Why Russia then?
Russia rebalances it’s economic ties with the world: It has learned the painful lesson of
depending on one economic bloc for growth. Russia has a long memory. It will not forget this lesson.
Europe & UKUS$318.17 bn (54%)
China, N Asia, S Asia & SEA
US$140.44 bn (24%)
CIS US$70.97 bn (12%)
USA & CanadaUS$23.44 bn (4%)
Middle East & AfricaUS$19.26 bn (3%)
C & S America & CarribbeanUS$12.72 bn (2%) Australia & New Zealand
US$0.6 bn (0.1%)
At end 2014, Russia’s trade relations was almost 60%
dominated by developed Western nations.After the USSR collapsed in 1991, Russia
reached out to Europe and the West for
resources to update its outdated Soviet
economy.
In 2013, Russia’s 10 largest investors were
Western nations who make up 84% of all foreign
investors.
Investments brought transfer of tech &
know-know
Imports of modern equipment, products
& services+
Food for thought: Singapore is heavily invested in China. Is there a living lesson here for us?
Why Russia then?
Russia looks East. First. Russia’s rebalancing of economic ties starts with Asia first. This extends to
Singapore. This shift is unprecedented. A critical window has opened for Singapore to secure long-term
traction in the market before competition heats up.
Why Russia then?
Russian market is diversifying with new players: While many Western SMEs have pulled out,
long-time Western MNCs have expanded operations by repositioning themselves to capture rising volume of
mass market consumption in growth spots. In the meantime, China and Thailand are coming in strong.
Invested US$165 mil in cosmetics production facility.
Invested US$35 mil in auto parts production plant.
Invested US$400 mil to expand auto plant.Invested US$1 billion as at 31 December 2015 including a
US$27 mil pig-breeding farm.
Won tender to construct fibre optic
communication in Russia Far East.
Commenced building auto plant in
Tula Region.
Opportunities in adversity
Prior to 2014, 54% (US$318.2
bn) of Russia’s overseas trade
is with Europe and UK.
Only US$110.8 bn is with
China, Japan and Korea.
While US$15.8 bn is with
Southeast Asia.
There is much room to capture
more Russia-Asia trade flows
from which Singapore traders
can also benefit.
US$15.8 bn
US$110.8bnUS$110.8bnUS$110.8bn
Russia turns towards Asia for new trade flows.
Provision of oilfield services, equipment, machinery and parts to Russia’s O&G producers and EPCs.
CompanyGas production
(bcm) % to 2013
432.03 -8.1%
53.56 +1.5%
37.33 +3.9%
18.73 +2.6%
Russia (total) 640.24 -4.2%
CompanyOil production
(mil tons, 2014)% to 2013
201.992 -0.5%
86.689 -0.2%
61.425 100%
50.942 +2.8%
26.223 +0.4%
17.808 +10.8%
Russia (total) 526.75 +0.6%
Russian oil producers: Russian gas producers:
Russian EPCs:
Staple food item Annual shortage (tonnes)
Beef (fresh, chilled and frozen) 59,050
Pork (fresh, chilled and frozen) 450,790
Poultry 338,730
Fish and seafood 457,190
Milk and dairy products 428,790
Vegetables 914,730
Fruits and nuts 1,599,570
Potential food trade as Singapore is unaffected by Russia’s import ban.
More than 50% rouble depreciation led to demand surge for mass market consumer offerings:
Russians continue to spend: Putting money away in savings is not a Russian characteristic, no
matter how bad the recession.
Domestic tourism demands:
Demand for low cost yet quality hotels, hostels, domestic destinations.
Economically priced yet hip F&B outlets:
Demand for healthy, tasty yet low cost mass market dining options.
Mass market consumer goods e.g. fast fashion:
Zara and Massimo Dutti stores giving way to Uniqlo and H&M.
Reasonably priced good quality baby products:
Russian parents would stinge on other areas to give their children the best.
Succeeding in the Russian marketplace
Tap on bilateral agreements and bilateral ties between Russia and Singapore to protect your investments and gain tax advantage.
Avoidance of Double Taxation Agreement (DTA)
Entered into force in 2009
Investment Promotion and Protection Agreement (IPPA)
Entered into force in 2012
Intergovernmental Commission (IGC)
Annual meeting co-Chaired by Russia’s 1st DPM Igor Shuvalov and Singapore’s DPM Tharman Shanmugaratnam
Next meeting in Singapore on 5 September 2016
Russia Singapore Business Forum (RSBF)
Annual flagship business forum driven by IE Singapore and graced by Russia’s 1st DPM Igor Shuvalov and Singapore’s DPM TharmanShanmugaratnam. Usually twinned with IGC.
1
Market is still
dominated by
large and complex
Russian and
Western entities
who share hard-
forged business
relationships built
over decades.
2
Recent economic
strain compels
Russia to seek
new business
partners –
window of
opportunity
opens for
Singapore to
secure hitherto
inaccessible
relationships.
3
Despite steady
improvements,
business
environment is still
complex – strong
local partners can
help navigate the
rules and market
practice.
4
Loyalty is long-
term in the
Russian business
perception – good
partners are
regarded as
friends for life.
Why? Russians do not trust easily. Hence it is very necessary to spend time to build relationships and trust with Russian business partners.
Strong relationships are paramount.
Why?
Offer differentiation, invest in due diligence, hire capable interlocutors, invest in payment protection.
4Ensure payment
protections are
in place.
Financial
sanctions have
caused Russian
businesses to
suffer payment
delays.
Be ready to
negotiate
amicably while
preparing for
longer payment
terms.
1Prepare to compete
against European
and American
standards and
quality with more
competitive pricing.
Russians are still
used to Western
quality standards.
3Hire able
interlocutors, not
just interpreters.
It is common that the
same English words
mean different things
to a Russian and an
English speaker.
An interlocutor
experienced in the
norms of the sector
can help prevent
costly
misunderstanding.
2Invest in physical
due diligence to
overcome low
transparency.
Online company
databases have no
backing by law to
make veracity
mandatory.
Desktop research
does not give
accurate picture.
Summing it up
In a nutshell:
4
Be aware of
massive
misreporting of
news about
Russia.
Balance your views
of Russia with these
other moderate
sources:
1
Russia and
businesses will
adjust to the new
environment.
Russia’s large
resource base and
highly specialised
talent pool will
provide stable
foundation for future
FDI and export
growth.
2
Singapore’s
competition in
Russia was
formerly from
Western players.
Going forward, Russia
will pay heed to maintain
diverse economic ties
with the world, not just
with the West.
There will be additional
competition soon from
China and North Asia
rivals.
3
The window period
for Singapore will
not last.
Russia’s pivot to Asia
does not mean Western
investors have left the
market place.
By end of 1Q2015, new
bargain hunters have
begun to fill the vacuum.
Over time, the Russian
marketplace is likely to
become more, not less
diverse, and more
competitive, offering
Russian customers a
wider choice of price
points and quality levels.
Questions?
Thank Youwww.iesingapore.com
This material contains confidential and/or official information. The terms and conditions governing its use can be found at www.iesingapore.gov.sg/Terms-of-Use.