Business climate in Russia
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Information about Russia
Economic situation
Investment potential in the
History
Automotive sector
Building and Construction
Communications and IT
Consumer Goods
Mining and Metals
Oil and Gas
Professional Services
Tourism and Leisure
Spoiler: Russian legislation is apt to change easily; some information and documents may get outdated right after they are published. Please, consult Norsk Etableringssenter for updates and advice
Official name: Russian Federation
System of government: Federal republic
Head of state: President Dmitry Medvedev (since May 2008)
Head of government: Prime Minister Vladimir Putin since May 2008)
Legislature: Bicameral Federal Assembly—Federal Council (Upper House) and State Duma (Lower House)
Currency: 1 Russian ruble (RUB) = 100 kopecks
Capital: Moscow
Major cities: Moscow (approximately 14 million), St. Petersburg (4.5 million), Nizhny Novgorod,
Russian Federation comprises 85 federal subjects
Total area: 17,075,200 square kilometres (Russia is the largest country in the world, covering more than an eighth of the Earth’s land area)
Land borders: 20,017 kilometres
Coastline: 37,653 kilometres
Arable land: 7.33%
Population: approximately 142.1 million (2007)
Population growth: -0.37% per annum (2005 estimate)
Birth rate: 9.8 births per 1000 population
Age structure:
Life expectancy: 62 years (men), 73 years (women)
Major religions: Russian Orthodox, Muslim, other
Major ethnic groups: Russian (79.8%), Tatar (3.8%), Ukrainian (2.0%), Chuvash (1.2%), others (10.5%).
Language: Russian
Literacy: 99.6%
Main exports: Oil and oil products, natural gas, wood and wood products, metals, chemicals, weapons and military equipment
GNI per capita: US $7,560 (World Bank, 2007)
International dialing code: +7
Internet domain: .ru, .su
Trade organisations: CIS, APEC, EURASEC
Geography and climate
Russia is a vast country extending over much of the northern part of Eurasia. With an area of 17,075 million km² (6.6 million mi²), Russia is the largest country in the world. To the west, Russia borders Ukraine, Belarus, Poland and the Baltic countries; to the north, Finland and Norway; and to the south, Georgia, Azerbaijan, Kazakhstan, Mongolia, China and North Korea. Russia has coastline on three oceans: the Arctic, the Atlantic and the Pacific.
Russian topography is very diverse: from tundra in the north to
The Russian Federation comprises 85 federal subjects, which are grouped into seven federal districts that are administrated by envoys of the president. There are 11 cities with a population of over 1 million: Moscow (the capital), St Petersburg, Novosibirsk, Nizhny Novgorod, Ekaterinburg, Samara, Omsk, Kazan, Chelyabinsk,
Economy
Overview
Starting in 1991 with the USSR’s disintegration, Russia’s GDP continuously declined until 1998. After the 1998 economic crisis, the Russian economy began to recover, with annual GDP growth at around 7% from 1999 to 2007. Driving this recovery were sharp increases in prices for Russia’s main exports (oil, petroleum products, natural gas, metals), the import substitution effect caused by the rouble’s in 1998, tax reform, a tightening of fiscal policy, and greater social and political stability. Economic growth was also the result of an unprecedented boom in
The global economic crisis hit Russia in the second half of 2008. Following the world’s lead, the Russian economy began to shrink. Further GDP growth is expected to slow significantly as a result of the global economic crisis. One of the most significant factors was the steep drop in the price of Russia’s main export, oil. The economic picture in Russia now reflects that seen in Western Europe or the US: financing is drying up, sales are falling, businesses have had to cut production and staff, and unemployment is on the rise.
As per the Russian Ministry of Economic Development, GDP decreased by 2.4% in January 2009 as compared with 2.1% last December (seasonal and calendar factors were not taken into account). The economic decline in January 2009 was primarily due to significantly reduced industrial production, investment activity and construction as well as a slowdown in consumer demand.
Foreign direct investments were USD 60 billion in 2008. Mineral resource extraction, utilities, manufacturing, retail, real estate and construction were the favourite targets for both domestic and foreign investments.
By
The Russian equity market has plummeted even more dramatically than its western counterparts. Only three companies braved the market, raising a diminutive USD 918 million in comparison with USD 20100 million in 2007. This is the lowest level of IPO activity since 2003.
Inflation continues to be a challenge for the government. In 2007 CPI inflation was 11.9%; in 2008 it was 13.3%. During 2008 the rouble declined by 19% against the US dollar despite heavy rouble support by Russia’s Central bank. In January 2009 the rouble continued devaluating.
In August 2008 Russia’s gold and foreign exchange reserves peaked at USD 596.6 billion. Since the crisis hit, reserves have declined, down to USD 455.7 billion as of 1 December 2008.
In the first nine months of 2008, Russia’s M&A market reached USD 91.9 billion, down 3% year on year (USD 94.6 billion in the first nine months 2007). The first six months of 2008 saw 33% growth on the year, but in the third quarter, deal volume more than halved (from USD 36.9 billion in 2007 to USD 15.4 billion in 2008).
The number of deals in the first nine months of 2008 decreased 6.6% year on year to 888 (951 in the same period in 2007), and the average deal value was USD 121.1 million (USD 120.6 million in 2007).
The metals and energy sectors experienced considerable M&A activity, representing 52% of the market. In terms of number of deals, the service industry remains the leader year to year.
The labour force numbered 76.2 million people, or 53% of the total population. According to the Ministry of Public Health and Social Development, 6.4 million people (8.5% of work force) were classified as unemployed at the end of February 2009, under the methodology used by the International Labour Organisation. The state employment agency registered 2.0 million people without jobs, including 1.7 million receiving unemployment benefits.
The government has taken prompt steps to respond to the crisis, starting with a controlled devaluation of the rouble in response to falling oil prices. Prime Minister Vladimir Putin has ordered the 2009 budget to be recalculated based on a lower oil price; any potential deficit that results (it would be Russia’s first in a decade) will be covered by the oil windfall funds. As part of its economic bailout plan, the Russian government has approved a list of strategic companies requiring special attention. Energy, transportation, telecoms, metallurgy and a few other sectors will receive financial support.
Economic policy
Economic policy in Russia is primarily aimed at social, political and economic stability; further development of the institutional structure of the market; and economic diversification. In response to the crisis the government jointly with the Central bank have developed an
Business climate
The business environment in Russia has been steadily improving since the transition from a centrally controlled planned economy to a free market until the economic crisis occurred. Economic growth has been one of the fastest in the world, many reforms have been implemented, the tax system was becoming fairer and more transparent, Russia was increasingly integrated with global markets, and customs has improved noticeably in recent years.
However, real progress remains to be made to reduce the effects of a suffocating bureaucracy, corruption and a judiciary lacking independence. That said, corruption in Russia is no worse than in other emerging markets.
Statistics
- GDP (PPP) $1.709 trillion (2005 est.)
- GDP growth 7% (2007 est.)
- GDP per capita (PPP) $12,000 (2005 est.)
- GDP by sector agriculture (5%), industry (35%), services (60%) (2005 est.)
- Inflation 13.3% (2008 est.)
- Pop below poverty line 17.8% (2004 est.)
- Labour force 76.2 million, 53% of the total population (February, 2009)
- Labour force by occupation (agriculture 10.3%), (industry 21.4%), (services 68.3%) (2004 est.)
- Unemployment 6.4 million people, 8.5% of the labour force (February, 2009)
Main industries
Petroleum and petroleum products, natural gas, mining, machine building, defense, shipbuilding, agricultural machinery, construction equipment, consumer durables, textiles, foodstuffs, handicrafts
Foreign trade
- Exports $245 billion (2005 est.)
- Main partners: Netherlands 9.1%, Germany 8%, Ukraine 6.4% Italy 6.2%, China 6%, U.S. 5%, Switzerland 4.7%, Turkey 4.3% (2004)
- Imports $125 billion (2005 est.)
- Main partners: Germany 15.3%, Ukraine 8.8%, China 6.9%, Japan 5.7%, Kazakhstan 5%, U.S. 4.6%, Italy 4.6%, France 4.4% (2004)
Public finances
- Public debt $239.46 billion, 15.6% of GDP (2005 est.)
- External debt $230.3 billion (30 June 2005 est.)
- Revenues $176.7 billion (2005 est.)
- Expenses $125.6 billion (2005 est.)
- Economic aid (recipient) in FY01 from US, $979 million (including $750 million in
non-proliferation subsidies); in 2001 from EU, $200 million (2000 est.)
Investment potential in the
Rating of the areas in
Group:
Group: Leningrad region, Vologda region – medium risk – relatively high potential
Group: Kaliningrad region, Novgorod region, Pskov region – low risk, not so high potential
Group: Arkhangelsk region, Murmansk region – medium risk, medium potential
Group: Karelia, Komi – high risk, not high potential
Investment opportunities of the Murmansk region
| Name of the project | Volume of investments | Project initiator | Project volume of production and services | Number of employees | Project implementation period |
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History
Russia has been around for more than 11 centuries. The Russian Empire was abolished by the Bolshevik uprising in 1917 with the establishment of the USSR, which incorporated 15 republics.
After a costly victory in World War II, the Soviet Union consolidated its hold as a result of the Warsaw Pact and, as the dominant force behind the Eastern Bloc, entered into a
Mikhail Gorbachev’s late 1980s reform policy, known as “perestroika”, led to the disintegration of the USSR in 1991. Russia, however, maintains strong business ties and good neighbourly relations with many former Soviet republics.
Today Russia is a federal presidential republic. In 2008 Dmitry Medvedev succeeded Vladimir Putin as the president. Vladimir Putin became the prime minister.
Automotive sector
In 2007, Russian automotive market sales rose 35%, on 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 USD 10 billion in 2002 to over USD 53 billion in 2007. The main reasons for such rapid growth were a steady increase in disposable incomes, better access to car loans, and expansion of dealership chains all over the country. In the first half of 2008, 1.6 million units sold and market volume was USD 33.8 billion,
During the second half of 2008, auto sales in Russia fell sharply. The main contributing factors are customers’ difficulties in obtaining car loans (more applications refused, higher interest rates, higher deposits required); dealers’ difficulties in financing their operations with capital expenditures and working capital; the weakening of the rouble against the US dollar and euro (prices for many foreign brands are in dollars and euros); a rise in unemployment and the related deterioration of consumer confidence; slowed GDP growth and the consequent decrease in disposable income. Over the fourth quarter of 2008, both Russian and foreign car makers have been reducing their investment plans and output, anticipating further drops in demand. Total sales in 2008 in unit terms were 3,175 (14%
Russian car manufactures are losing their market share to foreign brands that are imported or have assembly plants in the country, but this may change due to increased customs duties on imported cars and the rouble’s depreciation. The Russian government has offered tax breaks to companies that start major assembly lines in Russia. Ford, Renault, GM, Toyota, Volkswagen, KIA, Great Wall, Hyundai, Fiat, SsangYong, Hyundai, Fiat, Isuzu and others are already assembled in Russia. Suzuki, Nissan, Peugeot Citroen, Mitsubishi and others are building factories or have announced plans to set up assembly plants in Russia. An influx of foreign car component manufacturers in the next few years is expected. Practically the same tax breaks are being offered to
Building and Construction
Russia’s building market has been very attractive for foreign investors during the last five years. This is symptomatic of Russia’s rapid rate of overall economic growth with a commensurate boom in building and construction across residential, industrial and commercial categories. In addition, Russian government policy has also sought to encourage both foreign and local investment in construction. The Federal Agency of Building and Housing has set out a national framework through to the year 2010.
Impressive growth
The appeal of the Russian building industry for investors and developers is confirmed by official statistics. According to data from the Russian Ministry of Economic Development, Russia has experienced a significant increase in building activity as a result of continuous though slowing growth in capital investments. For the first six months of 2004, capital investments in building increased 12.6 per cent, although the final annual figure was somewhat lower at 10.9 per cent. This compared with an investment growth rate of 12.5 per cent in 2003. This slowing rate of growth was reflected in construction completions, which stood at 81.4 per cent for
For the first nine months of 2004, capital investments in building and construction in Russia totalled US$1.3 billion dollars. Foreign investment provided US$197 million of this.
A stable market
The construction market in Russia is relatively stable. The most successful development companies in the Moscow region include
Moscow is very much a ’closed’ building market, so most new investors are looking to other regions such as the Russian Far East. However, potential investors should take into account the lower solvency of potential partners and clients in these regions.
The Russian State Building Committee (Gosstroy) manages the system of state regulation and coordination. About 130,000 building and building materials industry organisations work within this regulated system.
For further information on the Russian building market, see the following websites:-
www.irn.ru
www.
www.rway.ru
Building materials industry in Russia
The building materials market is one of the most dynamically growing areas of the Russian economy, with building ceramics a particular area of growth. The primary explanation for this growth is the rapid development of the building industry and increasing consumption of building materials.
The year 2004 saw a 5.3 per cent increase in building materials production compared with 2003. Building ceramics production increased even faster, with a 15 per cent annual growth rate. This increase was caused by changes in the composition of building and material consumption, an increasing volume of contract works (up by 110.1 per cent on the year before).
Strong growth in ceramics
Since 1997, there have been strong annual increases in ceramic slab and sanitary ceramic goods production. Local Russian industry has managed to overcome foreign growing competition after modernising its business processes and technological equipment using modern plant made by leading firms from Germany, Italy and Spain. This collaboration has helped improve the quality improvement of domestic products, which now meet the requirements of the modern building industry.
For Norwegian companies, Russia presents significant opportunities in the building materials industry, including the sale of modern production equipment, technology transfer and joint ventures.
The Russian building ceramics industry today consists of some 29 independent enterprises and 22 business units within larger industrial organisations. The leading companies include Experimental Ceramic Factory, Nefrit Ceramics, Sokol, Stroypolimerkeramika, Velor, Volgograd Ceramic Factory and some others.
Building ceramics production is not spread evenly throughout the country. The majority of enterprises are situated in the European heartland of Russia, which houses 12 major plants. Together these organisations produce more than 50 per cent of Russia’s building ceramics. Total output of these factories is 35.7 million square meters of slab.
The need for quality raw materials
One problem still facing the industry is reliable supply of quality raw materials. Traditionally Russian quarries were disadvantaged by low production quality and the lack of technologies for enrichment of raw materials. Quarry technologies and management present significant opportunities for Norwegian companies with suitable solutions.
In 1990s, two quarries for refractory clay were developed (Fedorovsky quarry near
Industry priorities
The development priorities for the Russian building materials industry are:
- Development of energy and
resource-saving technologies and equipment for making ceramic slabs and sanitary ceramic goods capable to compete with international suppliers; - Development of new kinds of ceramic slabs and sanitary goods with improved quality and betters aesthetic appeal;
- Development of technology and equipment to enrich domestic raw materials;
- Production of
ready-made ceramic masses for central provision to factories; - Development of ceramic mass mixtures and glazes for production of building ceramic goods based on domestic raw materials;
- Changing the existing standards of ceramic slab to correspond to the European standards.
Each of these areas provides significant business opportunities for Norwegian exporters.
Communications and IT
The Russian communications and information technology sectors have been developing rapidly and, according to the preliminary estimates of the Ministry of Communications and Mass Media, their revenues grew by 27% to reach USD 73.9 billion in 2008.
By the end of 2008, the mobile phone penetration rate had reached 129.4%. Russia had a total of 187.8 million mobile subscribers, an increase of 15 million from a year earlier. Mobile penetration is growing particularly quickly outside of Moscow and St Petersburg, stimulated by sharp competition among the three major national operators: Mobile TeleSystems (MTS), VimpelCom and MegaFon. Yet the statistics are inflated, as they count SIM cards that have not been used for up to three to six months and ignore the fact that many people use several SIM cards.
Under the 3G licenses that VimpelCom, MTS and MegaFon won in tenders in April 2007, the companies must have
In late December 2008, Russian Minister of Communications and Mass Media Igor Shchyogolev signed a ruling on licensing mobile virtual network operators (MVNOs), which the ministry expects will boost development in the communications market.
The
Broadband has been seen as a major revenue driver for the next several years, but telecom companies are already cutting their investment programmes for 2009.
In 2006 the government began liberalizing the
According to the preliminary estimates of the Ministry of Communications and Mass Media, the information technology sector amounted to USD 23.5 billion in 2008, which is 33% better than last year’s results.
Hardware is the major IT segment, accounting for more than 50% of the sector’s revenue. Hardware sales grew by 22.6% to reach USD 9.9 billion in 2007.
The software industry is also on the rise, with growth of around 43.2% and sales reaching USD 3.1 billion in 2007.
In July 2007, a federal target programme for the development of nanotechnology in Russia for 2008 to 2010 was launched. During the first International Nanotechnology Forum in December 2008, deputy premier Sergei Ivanov announced that the total funding for nano initiatives had been approved at some USD 10 billion for the
Consumer Goods
Russia’s economic boom has created a favourable climate for companies that sell consumer goods or produce components or raw materials for
Retail & consumer
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. However, personal consumption is expected to decline as a result of the economic downturn, creating new challenges for retail in Russia.
The retail industry’s turnover in 2008 was around USD 561 billion. Russian retail is still in a unique position given the limited number of multinational players on the domestic market. Both India and China are faced with intensifying competition from global entrants such as
State banks have come to the assistance of Russia’s largest retail chains that have lost access to affordable credit for development. X5 Retail Group, Seventh Continent, Magnit, Dixi, Mosmart, Victoria, Kopeika, Lenta, Holiday, and O’Key have requested loans, and the ten retailers could receive up to RUB 50 billion.
Russia’s increasing inflation rate has had a significant impact on the cost of basic foodstuffs in the last few years, raising the real possibility of government regulation of retail prices. Draft legislation already promotes the regulation of market consolidation levels for retailers, and there are indications of the government’s desire to control the distribution of alcohol. Recently, the government adopted new milk regulations in an effort to promote domestic production.
Multinational consumer companies are already either market leaders or significant players in many segments of the Russian consumer sector. The food and beverages industry is dominated by companies such as Danone, Carlsberg, Nestle, Mars, Pepsi and
Retail and consumer is still experiencing significant challenges for operational effectiveness and cost reduction. These are compounded by a shortage of good retail space, supply chain management issues (warehousing and logistics), shortages of labour and administrative barriers.
Market overview
Russia is one of the fastest growing emerging markets in the world. Since 1999 it has enjoyed six consecutive years of economic growth, averaging almost 7 per cent per annum. In 2005, Russia achieved estimated GDP growth of 6 per cent and the forecast for 2006 is 5.6 per cent, according to the Economist Intelligence Unit.
While some economic analysts remain concerned at the economy’s dependence on international commodities, all major indicators are positive:
- Foreign investment in Russia is increasing;
- Household disposable incomes are growing quickly;
- Natural resources are very competitively priced;
- Russia has abundant skilled human capital.
For these reasons, international businesses are lining up to enter the Russian market. Furthermore, because Russia has few preferred trading partners, Norwegian companies have equal opportunity to compete and expand in this rapidly emerging market.
Within the consumer goods sector, vast opportunities are now available across a wide range of product areas.
Cosmetics
The Russian cosmetics market is continuing to enjoy dynamic development. In 2004, the market grew by 15 per cent, reaching total sales of approximately US$6.2 billion. Analysts believe the market is far from saturation and has the potential to grow to US$
Our
Norwegian products are accepted as healthy, natural and safe.
International products currently attract a
Food and wine deliver rapid return on investment
The
The Russian food industry currently consists of about 30
Meat products: growing demand, changing tastes
The production of meat and meat products is a key component of the Russian food market. Total meat consumption in Russia is officially estimated at 6.2 million tonnes. The Russian Meat Association forecasts meat consumption to reach 10 million tonnes by 2010. This growth can be attributed to rising disposable incomes and a growing trend toward the consumption of meat and meat products.
Domestic production capacity currently stands at 4.7 million tonnes and local production is expected to continue to decline, providing further opportunities for Norwegian meat exporters. Russia’s cattle and sheep numbers continue to decline.
Supply of meat and meat products is currently well below demand. Meat is subject to import quotas and domestic production is unable to keep pace with the market.
Traditionally, domestic meat producers have been small, personal farm holdings, although since 2002 there has been some movement towards state supply. In 2003, 54 per cent of the domestic meat market was supplied by personal farm holdings with 44 per cent supplied by the state sector.Traditionally, beef and pork were the two most popular meats in Russia, while consumption of lamb and mutton was rarer. Meat consumption levels closely reflect domestic production levels. Growing disposable incomes and the emerging
Subject to import quotas, there are a significant market opportunities for Norwegian meat producers to fill this demand, particularly in regard to beef, lamb and mutton. Imported meats from Australia, New Zealand and the United States enjoy great popularity in Russia.
Market experts predict that the ongoing development of the restaurant market, in addition to growing disposable incomes, will continue to drive the demand for meat and meat products forward.
Milk products: steady growth, established import culture
Consumption of milk and dairy products in Russia has been steadily increasing since the late 1990s. According to experts from the Milk Alliance, market growth fluctuates between 4 per cent and 5 per cent annually.
The Russian milk and dairy market can be divided between natural milk and
Cheese is also contributing to the overall market development. However, compared to other markets, cheese consumption in Russia is quite low, around
WimmBillDann and Yunimilk are the two largest
Experts predict consumer demand for milk and dairy products will continue to rise. Increased demand will be driven by regional market expansion, consumption growth and the introduction of new products such as
The Russian milk and diary market presents a significant opportunity for Norwegian exporters.
Fresh fruit and vegetables
The Russian market for fruit and vegetables continues to expand. Over the last five years, the share of fruit in the consumer basket of Russian citizens has grown considerably, especially in urban areas. According to some sources, fruit consumption per capita in Russia stands at 45.6 kg during the
The largest volumes of Russian fruit imports is accounted for by three types of products: bananas (27 per cent), apples (22 per cent) and oranges (14 per cent). Pears account for around 7 per cent and grapes around 5 per cent. Most imported fruit is supplied to Russia via fruit exchanges in the Netherlands. Some large fruit importers that have proper storage facilities import direct from the supplier.
At present, the largest suppliers of fruit to Russia are South Africa (which supplied US$60 million in 2004), Turkey, Israel, Egypt, Chile and Iran (mainly exotic fruit like figs, pomegranate and persimmon).
Wine market: compelling quality, receptive consumers
The wine market in Russia is currently estimated at
The leading import companies in the Russian market are
Traditionally, cheap Moldovan wines comprised the largest share of wine imports, although a recently released report from the State Customs Committee of the Russian Federation highlighted a shifting consumer trend towards more expensive wines. As a result, the market share of Moldavian wine producers decreased in the
In the same period, wine products from other regions grew in popularity and several
- Argentina (0.27 per cent to 5.08 per cent),
- Chile (0.31 per cent to 0.93 per cent),
- France (6.66 per cent to 9.56 per cent),
- Germany (0.86 per cent to 1.14 per cent).
The
Mining and Metals
Russia holds approximately
To date, approximately 20,000 mineral deposits have been explored, of which more than
Oil and oil
Privatisation and restructuring
Until the early 1990s, the mining industry in Russia was almost exclusively state owned and funded. Following the collapse of the Soviet Union, the situation deteriorated. The breakdown in trade and economic ties between Russian production enterprises and their CIS partners led to a widespread industry crisis and a significant reduction in mining and natural resource extraction. The industry was also left a legacy of obsolete technology, low productivity and a shortage of electricity to sustain increased extraction.
Mining companies entered the 1990s in a difficult position. Nevertheless, privatisation, management restructuring, foreign investment and record commodity prices have contributed to a dramatic turnaround in the fortunes of the Russian resources sector.
Since 2000, growing international demand for raw materials and energy has enabled the Russian mining industry to recover strongly. New exploration and investment in green field projects are now at record levels. International experts forecast Russia’s mineral production to increase
Energy, utilities & mining
Russia has proven oil reserves of 60 billion barrels, most of which are located in Western Siberia. Russia’s share in international oil production exceeds 10%. Over 70% of Russian crude oil is exported.
The commodities market was affected by the downturn in the financial markets. In the second half of 2008, world oil prices fell by more than 60% from a record high of USD 147 per barrel in July to USD 51 in March 2009, as the global recession reduced the demand for fuel.
The general tendency for the first nine months of 2008 was for oil export revenues to continue to go up, while export volumes decreased slightly. In the first nine months of 2008,Russia reduced oil exports to 166 million tonnes, or by 6.5% year–
Russia’s oil production saw a slight (0.7%) decline in 2008: 488.1 million tonnes as compared to 491 million tonnes in 2007.
Russia is by far the world leader in natural gas reserves, with some 48 trillion cubic metres (1,680 trillion cubic feet). In the first nine months of 2008, production grew by 1.5% on the year to reach 484.8 billion cubic metres. Russian gas reserves are owned primarily by the monopoly Gazprom, which produces about 20% of the world’s and 85% of Russia’s natural gas.
In 2008 officials from Iran, Qatar and Russia decided to accelerate the establishment of an
Russia is the
Russia is the world’s
Metallurgy
Along with oil and gas, metallurgy plays a key role in Russia’s economy. Metals and metal products make up the
The leading players of Russia’s nonferrous sector are RUSAL, UMMC, Norilsk Nickel, and
Nonferrous exports started to decline in the first half of 2008. According to official data, there have been major declines in aluminium, copper and nickel production and export.
Problems and opportunities
Despite the global upturn, the Russian resources sector still has significant challenges to overcome. A persistent lack of investment in reconstruction and technical upgrades to facilities remains a major problem and one that impedes industry development. Compared to their western counterparts, Russian mining companies are often restricted by technical, technological, structural and managerial lags in both production and refinement.
At a structural level, the Russian Government and the industry are working to achieve stability and efficiency in production through:
- Development of new and existing sources of raw minerals;
- Improved cooperation between production companies and utility companies;
- Improving technical infrastructure and managerial expertise;
- Strengthening company finances.
The reconstruction of existing enterprises and construction of new plants is increasingly accomplished by the use of advanced technology for extraction and refinement, as well as the installation and utilisation of modern equipment and systems.
In order to accomplish these goals, the Russian mining industry is looking to collaborate with international partners in the following fields:
- Investment, including mergers and acquisitions;
- Technology transfer;
- Supply of mining plant such as trucks, loader gears and bulldozers, as well as spare parts, conveyer belts and large truck machinery;
- Leasing and acquisition of mining equipment;
- Business process consulting.
A vast market for Norwegian expertise and products
Norway is well placed to share its technical expertise with Russian resources clients. A significant number of Norwegian exporters are already realising the potential of the Russian market.With the rapid evolution of the Russian resources sector, Norwegian companies have an outstanding opportunity to share the benefits of their experience with their Russian counterparts for mutual profit.
Gold mining: rapid growth, improving investment climate
Russia’s gold mining industry is now among the fastest growing worldwide. Until recently, international investors did not pay much attention to gold mining in Russia because of industry disunity and the obsolete technology used for extraction. However, recent corporate consolidation and improvements in legislation such as the Agreement on Section Production have improved the investment climate considerably.
The gradual introduction of new extraction technology has drawn the attention of strategic and portfolio investors. Unlike the steel and
The gold mining industry in Russia extracted 181 tonnes in 2004, up from 143 tonnes in 2000—amounting to a 26 per cent increase over five years. Investment (including foreign investment) rose from US$40 million in 2002 to US$90 million in 2004, with a further rise to US$110 million expected in 2005. The cost price of the gold industry in Russia is on average 23 per cent below the world average.
Active gold ore deposits are located in several Russian regions:
- Krasnoyarsk region (27 per cent of total production),
- Khabarovsk region (17 per cent),
- Magadan area (13 per cent),
- Sakha (Yakut) Republic (7 per cent),
- Buryatiya Republic (5 per cent),
- Irkutsk and Amur areas (3 per cent),
- Sverdlovsk area (3 per cent),
- Chelyabinsk area (3 per cent),
- Other regions (22 per cent).
According to industry experts, the volume of gold extraction in Russia will grow 8.2 per cent per year on average over the next five years. The largest
Highland Gold, Peter Hambro and Celtic Resources are expected to develop into industry leaders. The
For foreign investors, the main restriction in industry development centres on politics. The Russian Government considers gold a strategic national resource and is extremely cautious about allowing foreign investors to develop gold ore deposits directly. Despite this, the
Oil and Gas
Russia is one of the world’s leading producers of oil and gas, holding 13 per cent of world reserves. Russia’s total continental shelf oil and gas concentrate reserves are estimated at 100 billion tonnes with an approximate value of US$15 trillion.
At this stage, only 15 per cent of Russia’s resources have been developed. The Russian Ministry of Natural Resources estimates national oil reserves at 44 billion tonnes, with 60 per cent of this found in the Ural region and Siberia. These areas also hold 40 per cent of gas reserves. The Russian Far East holds 6 per cent of oil and gas reserves. The balance of these deposits is dispersed throughout the country.
Total oil and gas condensate production for 2004 was 485 million tonnes, representing an increase over 8.9 per cent over 2003. This meant Russia reached the production level originally forecast for 2010 six years ahead of schedule. Moreover, a number of new pipeline projects have been approved or begun in the last year, including export lines targeting China and Japan.
The oil and gas industry is critical to the Russian economy as it generates the largest share of the country’s gross national product (GNP). Oil and gas account for 20 per cent of Russia’s industrial production, 49 per cent of exports and 29 per cent of Federal Government revenue. The Ministry of Economic Development expects the oil and gas industry to attract total investments of US$128 billion in production and transport alone by 2015. The continued development of this sector remains critical to national economic growth.
Industry profile
There are approximately 170 companies involved in oil and gas development in Russia. Of these, some 11 large vertically integrated companies (including the
- Bashneft
- Gazprom
- LUKoil
- Rosneft
- RuSSneft
- Sibneft
- Slavneft
- Surgutneftegaz
- Tatneft
TNK-BP - Yukos
International partners sought to help increase efficiency
Government and industry leaders are placing considerable emphasis on increasing industry efficiency. A
Modernisation and improved efficiency is closely connected to scientific and technological advances and the introduction of contemporary oil extraction technologies. It is in these areas that Russian businesses are seeking collaboration and investment from overseas partners.
High global oil prices and buoyant exports have given the Russian oil and gas industry sufficient funds to reinvest in itself and undertake these
Diverse opportunities for Norwegian companies
Russian oil and gas companies are enthusiastic about collaborating with Norwegian partners and suppliers. Opportunities for Norwegian companies exist in a number of areas, ranging from resource development to supplying the hardware, services and technical expertise needed to modernize existing oil and gas projects.
Key areas of interest include:
- Development of resources;
- Advanced extraction and refinery systems;
- Exploration and exploration technologies;
- Pipeline equipment, including valves and metering equipment;
- Production safety, OH&S, training aids and training to emergency services;
- Pipeline security and integrity technologies;
- Ecology and environmental security;
Anti-corrosion and advanced polymerisation technologies;- Gas analysers capable of handling multiple gas types;
- Software.
Professional Services
Russia offers significant business opportunities within the professional services sphere. With six years of strong economic growth and an increasing emphasis on quality of service, Russia today is fundamentally different from the past.
In 2004, services contributed more than 60 per cent of Russia’s gross domestic product (GDP), according to the State Statistics Committee of the Russian Federation. This represents strong growth over 2000, when services made up only 49 per cent of GDP.
Overview of the Russian professional services market
After evolving rapidly from a centrally planned economy to a free market,
Most Russian companies understand this need and are willing and able to pay for expert advice. Many businesses have a preference for proven commercial services, with price as a secondary consideration. This explains why Russia has become an important market for professional services firms around the world.
Market makeup
According to Expert rating agency, the value of the Russian professional services market is as follows:
- Information technology—43.6 per cent
- Legal and tax consulting—18.3 per cent
- Strategic planning—14.0 per cent
- Assessment—8.5 per cent
- Financial consulting—8.4 per cent
- HR consulting and recruitment—2.2 per cent
- PR and marketing—1.2 per cent
- Other—3.8 per cent
Emerging trends
In the past, most demand for professional services came from large industrial manufacturing companies such as highly profitable petroleum, chemical and multinational FMCG companies. However, in recent times there has been a clear shift in the market towards
Businesses in Russia are focused on developing and implementing strategies to ensure their
The focus on management infrastructure is creating significant opportunities for Norwegian professional services firms with relevant expertise and proven experience.
- Particular areas of demand for international expertise include:
- Appraisal of intangible assets and intellectual property (IP) for financial reporting according to IAS/GAAP standards;
- Analysis and development of marketing and brand strategies;
- Formulation of strategies to manage intellectual property assets more effectively through approaches such as licensing, franchising, etc.;
- Preparing companies for investment such as venture funding and mergers and acquisitions;
- Customer service and customer management.
Demand for professional services continues to grow as Russian businesses become more structured and more active in global investment markets.
Technology Equipment and Services
While the Russian economy has developed rapidly over the last five years, spending on information technology, process automation and productivity systems still lags considerably behind developed economies. This presents considerable opportunities for Norwegian IT and consulting companies to help Russian clients address technical and process changes needed to remain internationally competitive.
Russia is one of the fastest growing emerging markets in the world. Its economy has performed consistently well in recent years, achieving its sixth successive year of GDP growth in 2004. Russia’s average GDP growth rate of 7 per cent over five years is a rate that few other Central European countries have been able to match. In 2005, the official GDP growth forecast is 5.8 per cent.
Economic growth has been largely dependent on a number of external factors, including high world commodity prices for major Russian exports (oil, oil products, natural gas and metals). These export industries have carried the whole economy forward, encouraging new development in agriculture, industrial manufacturing and processing and consumer retail.
The birth of new enterprises and modernisation of existing facilities is encouraging rapid development of business infrastructure. Information technology, software, telecommunications, consulting and related services are in demand to fulfil Russia’s development ambitions. This provides outstanding opportunities for Norwegian companies. According to market experts, the Russian IT market in 2003 was worth US$
Currently Russian businesses spend on average just
Key areas of opportunity
The key areas of opportunity for Norwegian IT and consulting companies in the Russian and CIS markets include:
- Banking and financial software;
- Business applications and related services;
- Insurance systems;
E-government ;E-learning .
High growth in software and services
High
In 2004, IT services were greatly sought by financial services organisations, which accounted for 19 per cent of all services business. Demand for IT services was lower among manufacturing and telecommunication firms.
The Russian state sector is currently developing many new IT projects under a Russian Federal Government program called «Electronic Russia». The bulk of the IT services market is focused on
Increasing PC and internet penetration
Rising incomes and the need to upgrade business equipment have contributed to fast growth in IT hardware sales. Some
By 2007, it is estimated that 246 in every 1000 people will have a home computer. This will mean the number of home computers will have increased 2.7 times since 2002. The number of internet users is constantly growing and by 2007 will reach 32 million people. This exceeds the 2002 level
Booming telecommunications usage
Telecommunications is one of the most dynamic sectors in Russia, with estimated growth of 35 per cent in 2003. The telecommunications sector accounts for 2 per cent of GDP, compared to an average of 5 per cent in western countries. The combined value of telecommunications and related companies was estimated at US$28 billion in 2003. The small size of the domestic telecommunications manufacturing industry reflects customer demand for cheaper imported equipment or hardware supplied by manufacturers on credit.
Partnership opportunities abound
It is estimated that US$60 billion worth of investment is required to bring the Russian telecommunications industry up to international standards. While technical skills are in abundant supply, Russian IT companies often lack access to financing and management experience.
For this reason, the majority of Russian businesses requiring IT services prefer to use
Tourism and Leisure
For many decades, Russian people were greatly restricted in their international travel. With the collapse of the Soviet Union, overseas travel has become a popular leisure activity for Russians. Outbound tourism is a developing fast, with sales increasing by
Millions of Russians now take advantage of cheap charter packages to resorts in Egypt, Turkey and the Middle East. Other popular destinations include the Canary Islands, Cyprus, Croatia, the Seychelles, Spain and Tunisia.
Now, however, more and more Russians are looking beyond these cheap and traditional travel destinations in search of more exotic – and more expensive – destinations such as Africa, China, Cuba and South America. As Russian prosperity grows, people’s demand for new holiday destinations with concurrent levels of hospitality and service is also increasing.
Russian tourists have strong purchasing power
Travel statistics indicate that Russian tourists buy more organised group tours than their Western European counterparts. They also tend to be distinguished by their high purchasing ability. It is quite common for the Russian tourists to choose packages that include
The following sources were used
• www.pwc.com
• www.waytorussia.net
• www.russia.alloexpat.com
• www.moveoneinc.com
• www.
• www.
