As the world’s largest country in terms of area that is 1.8 times the size of the United States and spanning 11 time zones from Eastern Europe to Northern Asia, Russia and its a population of almost 142 million people represent a huge market opportunity for participants in many industries. Part 1 of this three-part series of articles introduced us to Russia. This article examines Russia’s value proposition.
 
RUSSIA’S VALUE PROPOSITION: MACRO ENVIRONMENT
 
Russia has a fraction of the population and land mass of the former Soviet Union and has gone through some difficult economic times. With vast natural resources and a highly educated workforce, the country has huge growth potential. Following the collapse of the Soviet Union in 1991, Russia launched reforms aimed at transforming its centrally planned economy into a free market system. Its value proposition is reflected in its abundant natural resources, favorable demographics, well-developed industrial sector, favorable tax structure, and improved distribution structure. These factors are discussed in this article.
 
Abundant Natural Resources
 
Russia has a wealth of natural resources. It is the second largest producer of petroleum in the world. It is also one of the main producers and exporters of diamonds, nickel and platinum. Russia also possesses roughly one third of the world’s natural gas reserves, which are mostly concentrated in 20 large fields, and currently supplies one fourth of all natural gas on the world market. Russia is a leading producer and exporter of minerals, gold and all major fuels. Russia also has the largest timber resources in the world accounting for 25% of the total global timber resources.
 
In the presence of a wide natural resource base that includes major deposits of oil, natural gas, coal, many strategic minerals and timber, there are formidable obstacles—climate, terrain and distance—each of which hinders the exploitation of Russia’s natural resources.
 
Favorable Demographics
 
With a total population of approximately 142 million, Russia represents 52.7 million households. The emerging middle class includes 25 million inhabitants and generates 80% of the demand in country. They appreciate the Western way of life. Russia's educational system has produced nearly 100% literacy. About seven million students attended Russia's 1,090 institutions of higher education in 2006. Russian medical, mathematical, scientific and space and aviation research is still generally of a high quality. The increasing purchasing power of the population has been the main driver behind the recent rapid growth of Russia’s retail and consumer sectors. In 2008, Russia was ranked the third most attractive retail market in the Global Retail Development Index for retailers seeking opportunities for expansion.
 
For example, in 2007, Russian automotive market sales increased 35% from the previous year to 2.8 million cars. Over the past six years, the demand for cars has risen five times in money terms, from $10 billion in 2002 to more than $53 billion in 2007. The main reasons for such rapid growth were a steady increase in disposable income, better access to car loans, and the expansion of dealership chains throughout the country.
 
Well Developed Industrial Sector
 
Russia has inherited most of the industrial bases of the Soviet Union. The most well developed sectors are chemicals, metallurgy, mechanical construction and defense. As a result of central planning and resource endowments, the industrial sector is heavily skewed toward heavy industries such as energy and metals. Machine building and metalworking remains the largest processing industry, followed by chemicals. The processing industry is concentrated in the cities of Moscow, St. Petersburg, Yekaterinburg and Nizhny Novgorod.
 
Key industrial sectors include a complete range of mining and extractive industries that produce coal, oil, gas, chemicals, metals, all forms of machine building from rolling mills to high-performance aircraft and space vehicles, defense industries including radar, missile production, and advanced electronic components, shipbuilding, road and rail transportation equipment, communications equipment, agricultural machinery, tractors, and construction equipment, electric power generating and transmitting equipment, medical and scientific instruments, consumer durables, textiles, foodstuffs and handicrafts.
 
Favorable Tax Structure
 
Tax reforms since year 2000 have reduced both individual and corporate tax burdens. Since January 2001, a flat rate of 13% for personal income tax was put in place. Corporate taxes were also reduced from 35% to 24% at the start of 2002. The basic rate of value added tax (VAT) was reduced from 20% to 18% at the start of 2004, and a regional five percent sales tax was abolished. The corporate tax rate was cut from 24% to 20% at the start of 2009.
 
Russia has adopted free trade agreements with countries of the Commonwealth of Independent States (CIS). Goods originating from CIS countries are exempt from customs duty for import to Russia. Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan form a Customs Union, and goods originating from these countries are not subject to customs duty within this Customs Union.
 
Sophisticated Commercial Infrastructure
 
The Russian banking sector has developed rapidly in recent years. Over the past few years, major Russian banks have attempted to reposition themselves as retail or universal banks. Banks currently offer only a limited range of commercial and retail products (compared to what is available in the EU and the US), but new financial products are being introduced to the market.
 
The Russian market for IT equipment, software and services is also one of the fastest growing in the world. The major part of the market in Russia is in hardware, with software and IT services accounting for approximately 18% of the total IT spending.
 
Improved Distribution Structure
 
Whereas distribution systems were practically non-existent at the fall of the USSR, the almost total privatization and liberalization of the distribution structure has led to a rapid market transformation. Supermarket chains began to develop in the 1990s and the present structure integrates components of the Western model. Supermarkets account for more than 50% of sales. Hypermarkets have begun to appear more recently when the first Auchan was opened in 2002. The distance selling market is also showing strong growth. The development of this activity is made easier by the rapid growth in the number of internet users and the density of the postal network, even in rural areas. The on-line payment system, however, needs to be further developed.
 
While the country has a lot going for it, not everything is rosy in Russia. Part three of this series of articles will look at the challenges of operating and marketing in Russia. ( linda )06 Feb,2012

Other News:
Mexican Soap Operas and Other Tools for Building International Rapport
Market Opportunities in Russia—Part 2
Dealing with Conflict in International Trade
Routed Export Transactions
Understanding International Trade Finance
Deciding on Appropriate Export Payment Terms
Explain the various types of bills of lading terms
Choose Your Incoterms Wisely to Help Minimize the Risks of Your Export Letters of Credit—Part 1