Russian Business Outlook Winter 2014

Turning counTrywide opporTuniTies inTo worldwide success

Putin uncovered: Exclusive excerpt from biography of Russian President

World trade organisation: What has changed since membership?

sPotlight on sochi: Your guide to the Winter Olympics host city 9 789082 092011

ISBN 978-90-820920-1-1

rbo magazine | legal issue | WintER 2014 | www.rboutlook.com

260214_magazine_RBO.indd 1 26-02-14 20:13

2 Russian Business OutlOOk - Winter 2014

Tailors ofspecializedfi nancialservices• trust/trustee/nominee/fi duciary services;• corporate housekeeping services;• real estate investment services;• private wealth/family o� ce services.

BK Group International B.V. | www.bkgroup.com

+31 20 76 00 450 | [email protected]


3Winter 2014 - Russian Business OutlOOk

InsIde RBO MagazIne

4

5

8

10

12

17

20

24

26

30

32

36

40

42

Russian Business Outlook B.V.Peperstraat 9 5211 KM Den BoschThe Netherlands

Tel: +31 (0) 73 870 00 73Fax: +31 (0) 73 744 00 28

Editorial DirectorMaxim [email protected]

EditorAnne [email protected]

Published by:Russian Business Outlook in association with Ai2020 Publishing servicesinfo@rboutlook

Advertising [email protected]

NL Subscriptions & distributionAbonnementenland, Postbus 201910 AA UitgeestThe Netherlands

[email protected] Tel: +31 (0)900 22 65 263

cOntentedItORIalEditorial Director Maxim Hodak on why Russia is a safe place to do business.

news analysIsWe investigate what difference membership of the World Trade Organisation has made to the Russian economy.

PutIn InvestIgatIOnPresident Vladimir Putin is an enigmatic figure, but is at heart a patriot, reveals this exclusive extract from a biography of the Russian President.

ecOnOMIc OutlOOkThe latest data from experts at FocusEconomics shows that Russia’s economy looks set to recover in 2014.

legal fOcusOperating in Russia is not the legal headache that many foreign firms fear. Here, we investigate how the business environment is improving.

cORPORate gOveRnanceTop Moscow financier Alexander Branis explains why Russian business practices are as transparent as any you would find in the West.

Intellectual PROPeRtyEverything you need to know about copyright and patents in Russia.

InteRvIew: luc tRuyensThe CEO of Dutch bank ING explains why Russia is such an important market to his global firm.

RussIan-BelgIan BusIness RelatIOnsTrade between Russia and Belgium is strong and looks set to grow further.

Hedge fundThe director of one of Moscow’s newest hedge funds talks to RBO about Russia’s growing financial sector.

sPOtlIgHt On sOcHISochi, host of the 2014 Winter Olympics, hopes that investment in the city will continue long after the Games have finished.

MaRketIng fOcusSome Russian firms may still be sceptical of marketing, but the industry is proving its worth.

Q&aBelgian businessman Stefan Van Doorslaer on the highs and lows of working in Russia.

agendaA round up of the most important business events.

9789082

092011

ISBN

978

-90-

820920-1-1

ISSN 2214-577X



Why russia is safe for your business

maxim hodakEDitORiAL DiREctOR

In the launch edition of our new magazine we showed that Russia is a great place to do business – its economy is growing and the burgeoning middle class is keen to spend money. While the economic arguments are obvious, many foreign firms are wary of doing business in a country they still see as the “Wild East.” The Russian government is keen to dispel these fears and in our special focus on legal affairs and corporate governance (pages 12 to 16) we show how Russia is changing.

A leading advocate of the transformation in Russian business practices is Alexander Branis, a Moscow financier, who argues on pages 17 to 19 that Western investors have for too long ignored the potential of new Russian companies. The ambitious young businessmen and women at the helm of these “upstart” companies, as Branis calls them, are keen to ensure that they are run in an ethical and transparent way and do not want to jeopardise their growth by engaging in practices that might alienate foreign investors.

One such upstart company is Europe Finance, Russia’s first hedge fund to take a macro-economic approach to investments. Hedge funds are a fledgling industry in Russia and the excitement that one of its directors feels at working in such an undeveloped market is palpable in our interview on pages 30 to 31.

This issue also looks at the links between Russia and Belgium – links that were strong in pre-Soviet times and are becoming stronger again (pages 26 to 29). And one Belgian businessman shares his exhilarating experience of working in Russia, although he admits that he is not so keen on the long Russian winter (pages 40 to 41).

However, snow and ice mean that Russia excels at winter sports and the country received an impressive medal haul at the Winter Olympics in Sochi. The growing city is hoping to make the most of the Olympics effect and investment opportunities are still ripe as we show on pages 32 to 35.

Russian President Vladimir Putin is always keen to show off his sporting prowess and on pages 8 and 9 we feature an exclusive extract from a biography of the Russian leader which shows that he looks to a surprising predecessor for inspiration: Pyotr Stolypin, Prime Minister between 1906 and 1911 and a man who advocated peaceful reform rather than revolution. While political revolution in Russia looks highly unlikely today, a quiet business revolution is unfolding – and we hope to show you more of this in coming issues.



russia marks a year as member of the world’s most important trade club

FOcus On WtO

Russia finally joined the World trade Organisation in 2012, but what difference has

it made? Howard Amos reports.

It took Russia almost two decades of negotiations before it finally joined the World Trade Organisation (WTO), becoming the 157th member of the global trade liberalisation body. Despite some misgivings, the moment of accession, on 22 August 2012, was a moment of celebration for the former Soviet state, and was welcomed by the world’s biggest economies.

Russia’s drive to join the organi-sation was a matter of pride for the country as it was one of the few major economic powers in the world to remain outside the trade club. While Russia’s lea- dership has warned of short-term pain from membership of the WTO, there is an understanding that accession will bring long-term economic benefits.

Moscow’s bid was so slow because of complex negotiations to protect

Russia’s economy from a sudden shock and because of opposition from other WTO members. Not least of these was Georgia, which fought a short war with Russia in 2008. Georgia lifted its objections to Russia’s accession in 2011.

The question is, was the enormous investment of time, money and ef-fort in gaining Russia’s accession really worth it, and has WTO actually had much of an impact on the Russian economy?

big-bang accession

Many analysts, businessmen and officials have little concrete to say when asked for examples of how being a member of the WTO for over a year has helped or hindered the Russian economy.

“Frankly, I haven’t seen much of a change,” said Vladimir Tikhomirov, chief economist at Otkritie Capi-

tal, a Moscow-based brokerage.

In a recent survey carried out amongst businesses by the Russian Union of Industrialists and Entrepreneurs to mark the first anniversary of Russia’s accession, 86% of respondents said they had felt no effect from membership of the WTO.

Russia’s case could not be more different to what happened to the Chinese economy after it joined the WTO in 2001. Over the decade after its accession, Chinese exports quintupled, but few expected anything to happen quickly in Russia, particularly because the terms of Russia’s accession stipulate a long and gradual transition period.

Shortly after Russia’s accession, WTO director general Pascal Lamy warned that it would be wrong to expect any miracles for Russia’s >>



commodity-based economy. “I think China-2001 and Russia- 2012 are not really comparable,” he said. “This is not a big bang accession.”

domestic retailers

In the build-up to Russia’s acces-sion to the WTO, the World Bank predicted that the short-term value of membership would be about US $49 billion a year, a figure that would rise to US $162 billion annually as the longer-term impact on the investment climate began to be felt.

Few would be able to point to US $49 billion of extra money generated in the first year of Russia’s membership, but there are certain sectors where WTO membership has had a positive impact. The most prominent of these is Russia’s consumer sector, which is booming on the back of the growth of the country’s expanding middle class. Large retailers have also done well.

Falling import tariffs and customs duties under WTO have generated savings for big domestic retailers that import component goods for manufacture, or goods to be sold directly to Russia’s consumers.

Anton Titov is the head of a fast-growing Siberian-based shoe manufacturer, and a prominent

advocate of the benefits of WTO membership for Russian business.

“Accession to the WTO will help in the further growth of the shoe market’s attractiveness for inves-tors, which will help Russian shoe companies obtain financing for strong growth,” he said.

“There is another positive result from WTO accession – tariffs on the import of component parts and equipment for the manufacture of shoes were lowered.”

Titov added that apocalyptic predictions of WTO member-ship causing severe damage to Russian business have not come true. “There were worries that as a result of WTO accession foreign shoe chains would swoop down on the Russian market. But this has still not happened,” he said.

Economists say that WTO accession caused the price of some goods – such as shoes and video cameras – to fall inside Russia. Most companies, however, have not passed on any savings to consumers.

While effects have been mitigated by weak global demand, Russian companies working abroad have also felt some benefits. Metal ex-port companies, for example, have been boosted by reduced duties and consolidated their positions in some foreign markets.

“a sWimming Pool of sharks”

While 86% of respondents in the Russian Union of Industrialists and Entrepreneurs survey said they had felt no effects from WTO accession, 13% said they had experienced negative effects.

Aluminium tycoon Oleg Deripaska, one of Russia’s richest men, wrote in the Financial Times that there had been much disappointment at the treatment Russia has received in the WTO.

“Anyone who expected the WTO to suddenly plug the gaps in Russia’s growth story will have been both unrealistic and disappointed,” he wrote last October. “It’s obvious that the WTO is not a club of smiling, friendly people; it’s a swimming pool full of sharks.”

Indeed, this year economic growth in Russia has fallen to its lowest level since 2009. The latest predictions from the Russian economic ministry suggest that growth this year could be as low as 1.5%, down from 3.4% in 2012.

The sector usually identified as suffering the most from WTO membership is agriculture, where domestic produce cannot compete with imports that have been made cheaper by falling tariffs.



FOcus On WtO

The government has handed out billions of dollars in subsidies to struggling farmers but there is a limit on how much it can help. Under its accession terms there is a US $9 billion cap on the agricultural subsidies that Russian can distribute, a ceiling that must fall gradually to US $4.5 billion by 2017. The agreed limit has not been reached this year.

trade disPutes

The ink was barely dry on Russia’s membership agreement before trouble began to brew, with eco-nomic officials around the world accusing Moscow of not honouring its agreements.

“Since Russia has become a member of the WTO, they are doing exactly the opposite of what they are supposed to do or what they have been promising to do,” said European Union trade commis- sioner Karel De Gucht less than three months after Russia’s acces-sion. “I’m rather upset about all this,” said Mr Gucht, adding that the “clock was ticking” before the EU moved to take legal action.

The point of greatest acrimony has been a recycling fee on im- ported cars that Russia introduced nine days after its accession, and which critics have charac- terised as an illegal tax on foreign-made cars coming into the country. Russia says the fee is essential for recycling the vehicles, a process that it claims is more expensive for foreign- made vehicles.

Both the European Union and Japan have said that Russia has ignored their complaints over the issue and have referred it to the WTO for litigation. The Uni- ted States has said that it will also join the litigation process. Russia has said it is “disappointed” and “bewildered” by the decision.

Moscow has yet to use its power to refer trade disputes to the WTO, but many predict that it is only a matter of time before this happens.

One likely focus of Russia’s attentions is the EU’s third energy package – legislation that breaks up gas transmission networks from gas producers. Russia has said that the measures are anti-competitive and deliberately target state-owned gas giant Gazprom that supplies almost 50% of Europe’s gas.

a long game

How fast Russia integrates into the WTO is very much down to the Kremlin, said Alexander Morozov, HSBC bank’s chief economist in Russia.

“Everything is in the hands of the Russian government,” he said. “WTO membership is a challenge and a challenge can be addressed in different ways.”

The example of Ukraine, which joined the WTO in 2008, shows one direction in which Moscow could move. Russia’s former- Soviet neighbour has not seen deep changes from the WTO, and in 2013 was condemned by a host of fellow members after it used a legal loophole to raise tariff ceilings on 371 goods.

Tikhomirov predicts that there will be rise in the number of WTO trade disputes involving Russia in the coming years.

“Russia will try to create new protectionist measures to defend local producers and of course there will be retaliation,” he said.

And, while the first 18 months of Russia’s WTO membership has not involved any big sacrifices, or big gains, experts warn that the

stakes will get higher as time progresses.

“When Russia has to remove all remaining protectionist measures in five or seven years – that will be the critical period,” Tikhomirov said. rbo



Who is vladimir Putin?

the Russian President is many things to many people, but at heart he is a patriot,

say chris Hutchins and Alexander Korobko in PUTIN.

First impressions on the world stage were favourable when Vladimir Putin replaced an ailing Boris Yeltsin as Russia’s head of state in 2000. Even before that date UK Prime Minister Tony Blair had developed a ‘special relation-ship’ with the acting president and became his strongest advocate in the international arena. At the first meeting between the new Russian leader and the American President in 2001, George Bush peered into Putin’s eyes and thought he could see into his soul.

Russian liberals and Western con-servatives alike have demonised Putin as an anti-democratic KGB automaton; and he makes no secret of his links to the security services, or of his pride in being the KGB’s most famous “old boy”. Western tycoons eager to do business with Russia have embraced him.

Ask any twelve people who have met Vladimir Putin what he is like, and you are likely to get a dozen different answers. To his family he is loving, to his adversaries he is foul-mouthed and dangerous, to his religious friends he is a devout Christian and to many ordinary Russians he is the man who re-stored their nation’s pride.

Vladimir Putin is first and fore-most a Russian patriot. Putin believes in sovereign democracy or managed democracy rather than the Western variety; his democracy is one that operates through a rational, hierarchic system that he calls the vertical of power; in other words, power flows naturally downwards from the presidential office. Putin also claims to support a law-governed state which he calls the dicta-torship of the law. The degree

of democratic freedom here depends, of course, on who is making the law.

He does hold a terrifying trump card in terms of world power. If he cut off Russian oil and gas, there would be no smoke coming from many of China’s chimneys. The same goes for India. And what a chill Italy, Germany, France and the UK would feel if he did the same to Western Europe.

Alleged readiness to bring the world to its knees, however, should not be mistaken for willingness to do it, a close friend to Putin insists. “He’s a realist. He knows the power of his position and for him Rus-sia comes first, second and third; that does make him potentially dangerous.” As Putin himself once said in an open letter to all Rus-sians published in the newspaper



Putin PROFilE

Putin’s riches

So how rich is Putin and where has it all come from? One man has devo- ted much of his recent life to finding the answer to those questions: Stanislav Belkovsky, a political ex-pert with contacts deep within the Kremlin and the White House. He believes the Russian leader is now one of the richest men in the world, with a fortune close to US$ 40bn. Belkovsky alleges that Putin effectively controls 37% of the shares in Surgutneftegaz, an oil exploration company which is also Russia’s third biggest oil producer. That shareholding alone would be worth US$ 20bn. He also claims Putin owns 4.5% of Gazprom and at least 50% of Gunvor, a mysterious Swiss-based oil trader founded by Gennady Timchenko, through which the state company Rosneft sells 30 to 40% of its oil. Timchenko’s spokesman in London denies that Putin has any interest in the firm.

“There was a great conspiracy theory about who the mystery third party shareholder in Gunvor was and people put two and two together and made five – that is, it was Putin. I can tell you the third party was a Swedish businessman who was not an oligarch,” says his spokesman.

One leading Russian academic says of the ‘billionaire President’ theory: “If he were in possession of a fantasy fortune he would have a hard time spending it. If he were an oligarch at heart, he would have opted out of the Russian Presidency a long time ago – he would make much more money out of public life. Putin drives Ladas, not Bentleys, he likes fishing in Siberia, not swimming in the Côte d’Azur; and skiing in Sochi, not Courchevel... His mission is Russia, Russia and once again Russia.”

Izvestiya on 25 February 2000: “One insults us at one’s own peril.”

When he took office, Putin’s key aspiration was to unravel the mess that Yeltsin had left behind. One of his main targets were the oligarchs, the Russian tycoons who became fabulously wealthy when Yeltsin sold them valuable state assets at very low prices. Putin assessed the oil, gas and metal industries, and quickly realised many of the oligarchs were making considerable profits from them. The President, therefore, set out to make their lives intolerable.

Putin has never forgotten his humble roots, nor has he tried to hide them. In his autobiography, First Person, he is at pains to point out that he grew up in a loving family. He was brought up by his mother, Maria Ivanovna Putina, and his father, Vladimir Spiridonovich Putin, in the kind of grinding poverty that most Russians endured during the arms race of the 1950s – and many still do to-day. He was born in St Petersburg’s Snegiryov maternity hospital on 7 October 1952, and is his parents’ only surviving child.

Having lost her first two sons – one died shortly after birth, the other of diphtheria during Hitler’s siege of their home city, in which more than one million people perished – Maria Ivanovna took special care of her little Volodya. Fearing for his safety, she refused to send him to kindergarten, as most working mothers did, but instead took jobs close to home while her young son stayed in- doors playing on his own and he did not go to school until the age of eight.

Despite his own dismissal of a grand epitaph, Putin will perhaps be best remembered for restoring Russia’s national pride. He has en-joyed rather less success to date

in the war against the corruption, which has for generations per- meated through public life.

Many have made comparisons between Putin and Josef Stalin, but the leader he really draws inspiration from is Pyotr Stolypin, Russian Prime Minister between 1906 and 1911. Like Putin, Sto- lypin assumed office at a truly dramatic period in Russian history, a time of great political and social turmoil. Stolypin fought hard and successfully to achieve peaceful reform when all around him were advocating revolution.

Whereas Stalin wanted to shut the West out, Putin clearly wants Russia to be up there on the world stage just as Stolypin did. Having dug deep into his own pockets to make a substantial contribution towards a Moscow monument to Stolypin, Putin subsequently soli- cited similar personal subscriptions from members of his government. He may well hope that one day his successors will do the same for him. rbo

This is an abridged extract from Putin by Chris Hutchins and Alexander Korobko. The Dutch translation is published by Glagoslav.

www.glagoslav.com



Business magazine Forbes may have crowned President Vladimir Putin the most powerful man in the world last year, but the status of the Russian economy is not looking as strong. According to data from the Russian Ministry of Economic Development, published on Oc-tober 30th 2013, the Russian economy grew by just 1.2% in the third quarter of 2013, mirroring

the 1.2% expansion seen in the second three months of the year. While this growth may be small it still beats the Eurozone whose economy is expected to have

contracted by 0.4% in 2013.

The panel of experts making projections in FocusEconomics’ latest Consensus Forecast for Eastern Europe attribute Russia’s small level of growth in the third quarter to a disappointing perfor-mance in the agricultural sector. September was one of the wettest months on record in Russia and the

harvest was disrupted in some of the most important rural regions. For the year in total Focus- Economics panellists and the Russian government agree that

the economy grew by 1.8%. However, FocusEconomics predicts growth of 2.6% this year, com-pared to the government’s more upbeat prediction of 3%. This com-pares with a growth forecast of 1% in 2014 for the Eurozone area.

Industrial output accelerated slightly in September, rising 0.3% compared to the same month last year. This was an improvement over the 0.1% increase recorded in August. However, this was below expectations of a 0.5% rise. The acceleration was largely a result of increased production of elec-tricity, gas and water. The government was predicting that industri-al output will increase by 0.7% in 2013, compared to Focus-Econo- mics’ more optimistic prediction of 1%. This year the panellists predict industrial growth of 2.6%.

russia’s groWth stalls

Experts attribute Russia’s small growth to a disappointing performance in the agricultural sector as September was one of the wettest months on record.

Figures from a panel of economists show that Russia’s economy slowed down last

year but should grow again within the next 12 months.



EcOnOmic FOcus

The head of Russia’s Central Bank, Elvira Nabiullina, pledged to tackle inflation when she was appoint-ed last June and inflation in Sep-tember was 6.1%, compared to 6.5% in August. Inflation is at its lowest level since August 2012 and FocusEconomics panellists expect it to level at 5.1% in 2014.

The Central Bank also expects inflation to drop further this year which opens up the possibility of interest rate cuts. The bank believes that recent indicators suggest a continued slowdown in economic growth, due to

lower investment and external demand. The bank predicted infla-tion to reach the target range of 5 to 6% in 2013 and to drop further this year. Consumer prices rose 0.2% in September compared to August, mainly because of higher food prices.

In September exports increased by 3.1% compared to the same month in 2012. This figure compares to the 2.3% rise recorded in August and is the fourth consecutive increase. Imports rose by 5.4% in September, compared

to the 5.3% drop in August.

The price for Ural oil, Russia’s key export commodity, was broadly stable in October. On October 30th it traded at US$ 107.36 per barrel, 0.3% more than the price recorded on the same day in September. However, it is trading at 1.4% lower on a year-on-year basis. FocusEconomics panellists predicted that exports will con-tract 1.2% in 2013 and rebound by 2.5% in this year. rbo

POPulatiOn GDP

imPORts ExPORts

DOts ExPORts

DOts imPORts

Economists predict growth of 2.6% in 2014, compared with a growth forecast of 1% for the Eurozone area.

unemPloyment2013: 5.6%2014: 5.7%

Public debt2013: 11.2%2014: 12.1%

exchange rate – rouble to us$2013: 32.52014: 33.5

exPorts – in us$ bn2013: 5232014: 536

imPorts – in us$ bn2013: 3562014: 378

internal reserves – in us$ bn2013: 5332014: 542 external debt – in us$ bn2013: 7052014: 760

Every month FocusEconomics polls eco-nomic experts from the leading banks, think tanks and consultancies to obtain their projections for the main economic indicators for more than 70 countries around the world. For more information go to www.focuseconomics.com

For more information go towww.focuseconomics.com



government legal reforms aim to streamline business

The arrest and subsequent imprisonment of high profile businessmen such as Mikhail Khordokovsky has done nothing for the reputation of Russia’s legal system in the West. Khordokovsky received a surprise pardon at the end of last year but many foreign entrepreneurs fear that shady companies can act with impunity and that honest business people have no recourse to the law. However, the Russian government

knows that it must dispel these fears and has embarked on a series of legal reforms.

Last May, Prime Minister Dmitriy Medvedev, who has a degree in law, launched a roadmap that would make rules for entrepreneurs simple and clear, while amend-ments to legislation had already been put forward for consideration by the State Duma, the Russian parliament. These changes include

reducing the number and costs of administrative procedures for new foreign and domestic inves-tors, as well as the number of documents that investors are required to provide when setting up a business in Russia.

The reforms are based on mea-sures in the World Bank’s Ease of Doing Business rankings, where Russia currently stands at 112 out of 185 countries. President

Over the next five pages we show how Russia’s legal system is changing to make

things easier for business people both at home and abroad. Yekaterina Kravtsova

highlights the role of the new business ombudsman and asks legal experts how the

governance climate has changed.



FOcus On cORPORatE GOvERnancE

Vladimir Putin has set the ambi-tious target of being in the top 20 by 2018. The indicators include the ease of starting a business, enforcing contracts and resolving insolvency. According to the Economic Development Ministry, the recent legal reforms mean Russia would now score a lot better on indicators such as registration of a property (currently ranked 46th), obtaining a permit for construction works (117th) and trading across borders (162nd).

Last June, President Putin pro-posed the merger of the Supreme Court and the Supreme Arbitration Court, which considers commercial disputes, into a single body to introduce single judicial proce-dures for individuals, organi-sations, state bodies and local authorities. This will streamline the complaints process for such disputes for both companies and individuals.

The main innovation for Russian businesses has so far been the appointment of Boris Titov as business ombudsman, heading up a new government agency to help resolve the everyday problems facing business people, as well as looking at the large-scale legal barriers to doing business.

Titov, a liberal-leaning former

politician, business lobbyist and sparkling wine producer, was appointed by President Putin last year to head the newly established business ombudsman agency that represents both foreign and domestic entrepreneurs.

The day after his appointment Titov announced an amnesty for business people jailed for econo-mic crimes. However, this move was met with scepticism from both state officials and business people, especially when Putin said the amnesty plan must be improved before it could come into force. At the time of the announce-ment Titov told The Kommersant newspaper that 53 crimes could be wiped off the charge sheet. He said that between 2009 and 2012 “no fewer than 600,000

people were arraigned, resulting in 110,924 convictions.”

Titov is also claiming victory for an amendment to fraud legislation, which now stipulates that fraud cases cannot be brought with-out a complaint from a wronged party. In the past investiga-tors often used the threat of fraud charges to put pressure on business, he said.

Titov is closely co-operating with law enforcement and justice agen-cies and is also authorised to seek court action blocking officials’ actions harming investors’ interests. Disgruntled business-men can send a request to the ombudsman’s office if officials attempt to extort bribes, try to close their business, or their busi-ness activity is suspended due to bureaucratic red-tape.

The ombudsman has also appointed an official to work with foreign investors to ensure their rights when working in Russia. In June, Titov said that the agency’s work would also be focused on making Russia a place where foreign and domestic investors can successfully conduct business.

“We want to make doing business in Russia not only safe, but profitable as well,” he said.

Boris Titov

>>



“In general, things are getting better, but political decisions remain unpredictable. This is negative for the investment climate and it discourages foreign investors.“

timothy stubbs

How has Russian business law changed in recent years?We have seen several positive developments in legal reform. Bankruptcy laws and corporate governance rules have improved. The civil code is under amend-ment to make it more usable for business. All in all, the legislative reforms have been positive. At the same time, this has been counter-balanced by the decreasing inde-pendence of the judiciary and the perception of higher corruption in the state sector.

What do you think about the business amnesty which is currently implemented in Russia?This is an excellent move. Too often criminal courts have been used for political or raider purposes. This has created an unhealthy atmosphere in the business com-munity and has adversely affected the Russian economy. What are the most common legal challenges for foreign investors? This depends on the particular investment sector and geo- graphy. Problems can include misunderstandings with lo-cal joint venture partners, for example, due to the failure from

the outset to agree on clear pa-rameters for development or man-agement of a joint venture and the respective benefits and responsi-bilities of joint venture partners. They can also include the enor-mous red tape and bureaucracy in Russia and the lack of understand-ing by the executive branch of the need to support business and to streamline regulations.

is Russian business law similar to business law in other countries? There are many similarities with other well-developed jurisdictions. As a general proposition, Russia’s business laws are not badly drafted. In fact, the way laws are drafted is not the problem, they must also be rationally, fairly and impartially enforced and inter-preted.

What changes to the legal system would make things easier for foreign investors? The judiciary should increase its independence from the executive branch and political forces. The notion that a participant in a court matter can “call on its adminis-trative resources” to pressure the courts to decide one way or the other must be totally eliminated from the system.

What do you think about plans to merge Russia’s Supreme court with the High commercial court? I see this as a positive move, though again nothing will change unless and until things are done to strengthen the judiciary’s inde-pendence and accountability.

michael choi

How has Russian business law changed in recent years?In general things are getting better, but political decisions remain unpredictable. This is very negative for the investment climate. It discourages foreign investors.

What are the most common legal problems facing a foreign investor in Russia?Many laws are inconsistent and contradictory and tend to confuse foreigners. They would appreciate more clarity. They also complain about Russian judges’ and local

authorities’ lack of experience in cases where international inves-tors are involved in cross-border relationships: they often do not understand that international treaties such as double taxation agreements are valid and binding in Russia. Foreign employers are

Partner at Moscow and London offices of Dentons

Lawyer at Moscow office of Wermuth Asset Management GmbH, a German investment advising company



FOcus On cORPORatE GOvERnancE

quite upset about unfair labour laws. For example, employees may leave their job with two weeks’ notice, but firms have to pay their salaries for no less than five months.

What do you think about the idea of merging Russia’s Supreme court with its High commercial court?I am not sure about the impact. In general it helps to bring about justice if a court is specialised and familiar with the subject matter.

is Russian business law similar to business law in other countries? In theory, Russian laws are quite similar, but in practice there are huge differences.

What changes in the Russian legal system would make things easier for you?We would suggest changes that make the business environment similar to that in the West. Here the key words are predictability and less arbitrariness on part of the authorities. The rulings of the courts should be according to the spirit of the law rather than its language. Going by the letter of the law’s texts often leads to ab-surd results.

vasily vasilyev

How has Russian business law changed in recent years? Positive changes include such recent decisions as planned amendments to corporate legisla-tion and legislation that controls real estate and construction work, as well as planned broadening of arbitration in real estate disputes. There are also decisions that worsen the situation, such as making corporate disputes an ex-clusive authority of Russian courts.

is Russian business law similar to business law in other countries? Russian business law complies with the general principles of busi-ness law in other countries and there is a further development towards more compliance. The law is applied differently, and this is a problem for foreign investors.

High corruption levels and officials’ legal ignorance may lead to a situation when laws are not applied consistently and rigorously.

What are the most common legal problems facing a foreign investor in Russia?There could be risks when inves-ting capital into construction of premises for a company or purcha-

sing of already existing premises because Russian legislation can’t perfectly secure investors in these areas. However, despite an amendment that enables conclu-sion of shareholders’ agreements which has been introduced to the Civil Code, investors are still limited in the establishment of rights and responsibilities of shareholders. It’s difficult to invest in major construction works because legislation in this sphere is complex, inconsistent and not always transparent.

is the legal system bureaucratic? Unfortunately, a legacy of the Soviet system based on common suspicion still exists. Lots of administrative procedures are difficult due to bureaucratic red tape. For example, it’s difficult to get access to companies’ and entrepreneurs’ registers, increasing risks for those who invest in construction companies.

What changes to the legal system would make things easier for foreign investors? Increasing the flexibility of the Russian Civil Code to enable more freedom in the business contract. Increasing the number of disputes that can be considered by arbi-tration. Enabling the decisions of foreign courts to have a legal force in Russia would also make things easier.

>>

A lawyer with Khrenov and partners, a Russian legal firm



“Civil lawsuits are now considered much faster, within three months, and registration of a new business has been made much easier.”

yevgeny sWarovski

How has Russian business law changed in recent years?In general, the tendency is positive. Russian tax law became simpler and clearer. Civil lawsuits are now considered much faster, as the Russian legal system guarantees

that a civil lawsuit will be considered within three months, while in the United States it usually takes up to 15 months, leading to additional expenditures on law-yers. Also, in Russia registration of a new business has been made much easier.

What are the most common legal problems facing a foreign investor in Russia? All possible problems stem from the dependence of the Russian judicial system on the executive branch. Entrepreneurs try to re-solve disputes by bypassing the courts, believing that the court will not make a fair decision. This is not the right way to go about things. In every country investors face similar problems, and disputes are a part of business, but courts were created for this reason.

is Russian business law similar to business law in other countries? Compared with the United States Russian business law is more friendly towards business. Some-thing that in other countries can lead to a lawsuit, is not an offence in Russia. For example, if a customer slips and falls over in a restaurant in the US the restau-rant owner could end up in court and have to pay out. In Russia that would never lead to court. What do you think about the merger of Russia’s Supreme court and the High commercial court? I see it more as a question of public policy rather than of the legal system. The only thing which is important is that judges are independent and competent. The rest is a bureaucratic issue. rbo

A lawyer licensed to practice in Russia and the United States



GOOD GOvERnancE

Russia’s re-emergence as a major commercial player is of vital importance to the global economy. Yet the progress the country has made since the Soviet Union col-lapsed more than twenty years ago is barely remarked on in the global financial press. Since 1999, the Russian economy has grown tenfold in dollar terms. Having defaulted less than 15 years ago, Russia has since paid off almost its entire sovereign debt and has become a net creditor, while also amassing the world’s third largest foreign currency reserves.

Oil and gas, which accounted for 40% of gross domestic product in 2003, was just 17% in 2011, about the same as Norway. More diversi-fication is needed, and will happen, as the basic building blocks of the post-Soviet economy are put in place. The service sector, tiny at the time of the Soviet break-up,

commands a GDP share three-times that of the energy complex. When institutional investors visit our Moscow offices they are often surprised at the strength of the macro-balances and, more im- portantly, the quality of the companies and management teams we show them. On their return to New York or London they have to work hard to persuade senior colleagues to consider a Russia allocation, which can in-volve significant career risk, going against the view of Russia being mired in corruption and double dealing.

It is a myth that you need to bend the rules to be successful and compete effectively in Russia. Over the last seventeen years, Prosperity Capital Management (PCM) has avoided serious problems with Russian officialdom. We have

always paid very close attention to local compliance, doing everything by the book in all aspects of our business. We have never engaged in murky deals nor paid bribes of any kind. People ask, you refuse, you keep refusing and eventually they stop asking.

PCM has shown you can get ahead without using complex ownership schemes. We have been deter-mined to be beyond reproach, not only on principle, but also as the most effective protection against unscrupulous officials. Being involved in any kind of bad practice would not only threaten the business we’ve built, but undermine the very foundations of what we are trying to do.

Living and working here, making hundreds of company visits a year and viewing commerce up close, we see enormous improvements.

Alexander Branis has worked in Russia’s finance industry since the break-up

of the Soviet Union. Here, he argues that improvements in Russia’s business

practices over recent years have been largely ignored in the West.

>>

good governance makes good business sense



We are at the heart of exciting and important events, in a large, populous country where ordinary people, after decades of oppres-sion, are now free and increasingly prosperous.

Many overseas investors believe that all Russian stocks represent Soviet-era monoliths owned by absentee oligarchs and run by men in bad suits who steal. The reality is that many Soviet-era compa-nies, now privatised and restruc-tured, are unrecognisable today: they are more entrepreneurial and have made huge operational and commercial strides over the last ten to fifteen years. Overall governance standards across all Russian sectors, including the energy and industrial complex, are infinitely better than they were.

Many major Russian companies, far from being negatively affected by their Soviet past are actually entirely post-Soviet, having been established in the 1990s or later. Again, while this is obvious to any-one who lives and works here, it is not always appreciated abroad. An increasing number of Russia’s leading stocks represent new busi-

nesses run by relatively young owner-managers, who came of age as the Soviet Union was collapsing and are now hungry for success.

Such “upstart” companies, many of which have multibillion dollar turnovers, often have governance standards that are world-class. Having financed their expansions partly on overseas listings and strategic capital such firms fully understand, and have reaped the benefits of, transparency and good investor relations.

Legal obligations can still too easily be circumvented, though, if someone is really focused on breaking the spirit, if not the letter, of the law. Corruption is part of the problem, but, despite international perceptions, it is only a relatively small part.

A much bigger issue is that a few remaining Soviet-era judges, who have little experience of complex financial issues, reinforcing their tendency to interpret the law very literally. On a positive note, with the Soviet-trained judiciary gradually retiring, a new generation of more commercially-minded judges is coming through.

In the mid-1990s and early-2000s, if you tried to sue somebody, es-pecially a politically connected business contact, they would bare-ly bother entering into correspon- dence, so sure were they that the courts would side with them. That is not the case today and PCM has successfully challenged many powerful firms. Sometimes we lose court cases we should have won, especially when they’re very com-plex, but far less so than before. We know our way around the sys-

tem, case law is growing and the judiciary is improving.

It will obviously take time for Russia to build world-class capital markets infrastructure and a smoothly- running legal system, capable of keeping up with the country’s burgeoning commercial activity and dispute-resolution needs. In an environment where institutions are still a work in progress you need a multifaceted approach. So you go through the courts, you speak with the regulators, you work with other shareholders,

you talk to the media.

Over the last decade, Russia’s busi-ness environment has improved in leaps and bounds. The tax code has been streamlined, international accounting standards are the norm and transparency is far better – not least because a growing num-ber of Russia’s leading companies were established after the Soviet collapse.

A big reason why Russian govern-ance has improved so much is the emergence of functioning capital markets. Corporate owners have come to understand that creating well-run, transparent, public com-panies is the best route to financial success. Once they set that goal, good governance becomes a pre-requisite.

For some people Russia will always be “the evil empire”. Those who have no links to this country, have never visited and have perhaps not researched Russia’s transition from central planning and its sub-sequent commercial and political development, often cling to these stereotypes. Such tendencies will hopefully fade, as the genera-tions shift, and more Americans and West Europeans spend time in Russia. For now, though, many of

Alexander Branis

“Over the last decade Russia’s business environment has improved in leaps and bounds.”



GOOD GOvERnancE

the senior decision-makers, or at least board members, at Western institutional investors are still hos-tage to the mutual loathing and paranoia of the Cold War.

Mixed in with this post-Soviet angst is the reality that Russia seems to be held to much high-

er standards by Westerners than other emerging markets. These negatives, though, could ultimately be positives. If you have to prove yourself to a higher standard, that can lead to more transparency, deeper reforms and even better governance. rbo

voloshin committee

In 2010, then President Dmitriy Medvedev announced the creation of an international financial centre in Moscow a top government priority. PCM was encouraged by this news, particularly when we heard that Alexander Voloshin was to be appointed chairman of the financial centre working group, responsible for formulating proposals to be presented to the government. Voloshin, a former Chief of Staff to Presidents Boris Yeltsin and Vladimir Putin, also has hands-on business experience, as a former chairman of Norilsk Nickel, chairman at Uralkali and non-executive director at Yandex.

Voloshin decided to establish a corporate governance sub-committee to his working group and asked me to chair it. The sub-committee began its work in late 2010, taking evidence and formulating policies for consideration by Ministers and the State Duma (Russian parliament). One of our first proposals was to bring forward mandatory international financial reporting standards for public companies in Russia. This law came into effect this year, two years earlier than previously envisaged.

The sub-committee isn’t working alone. We have been bringing on board the best international expertise and experience. For instance, our group has looked closely at Novo Mercado - a listing segment of Brazil’s Bovespa exchange which requires companies to commit to demanding governance codes going beyond the law. This may be worth considering in Russia. Many international investors view corporate governance reform in Brazil as a success, and there are obvious parallels between Russia and Brazil.

Although the IFC project was launched by President Medve-dev, we have seen no sign of the Kremlin’s support weake- ning since the return of President Putin. It is also encouraging that the government features two senior Ministers, Igor Shuvalov and Arkady Dvorkovich, who are both vocal supporters of the work of the Voloshin Committee.

This is an extract from Corporate governance in Russia: Reality and myth by Alexander Branis, director of Prosperity Capital Management. A full version of his report can be found at www.prosperitycapital.com



Russia’s first ever court specialising in intellectual property disputes fi-nally opened last summer. It will hear thousands of cases each year regarding patent rights, copyright, trademark violations and other in-tellectual property disputes. It will show foreign entrepreneurs that Russia takes infringement of intel-lectual rights seriously and is try-ing to ensure their protection.

The Civil Code (Part 4) is the main legal act regulating intellectual property in Russia. It lays down an exhaustive list of the results of intellectual activity and of so called ‘means of individualisation’ (trademarks, trade names, service marks, etc.) where legal protection is granted.

Usually, for the results of intellec-tual activity and means of individ-

ualisation intellectual rights are recognised. These intellectual rights include an exclusive right - a property right - and, in cases provided by law, also personal non-property rights and other rights (such as droit de suite – where artists receive a fee on the resale of their work, right of access and others).

For every type of right, the law sets a time period during which the respective right is granted legal protection. As a general rule, the law allows assignment of exclu-sive rights or transfer of exclusive rights for use (under an exclusive or non-exclusive licence).

Copyright can apply to creative work, such as scholarship, literature and works of art as well as computer programmes, which

are protected as literary works. Derivative works, (works that are a reworking of another work) as well as compiled works (works that are by selection or placement of the materials the result of creative labour) are also recognised as objects of copyright rights. No registration or other formalities are required for the creation, realisation, and protection of copy-right rights in this area.

We often see entrepreneurs coming to Russia with an interesting idea or concept who are certain that because they are bringing some-thing new, this in itself provides protection under Russian copy-right law. However, this is abso-lutely not the case and entrepre-neurs need to be aware of this. Russian law states that copyright does not extend to ideas, concepts,

Russia takes infringement of intellectual rights seriously. Here, legal expert

Anastasia Korotaeva explains what you need to know.

the essential guide to intellectual property law



lEGal FOcus

principles, methods, processes, systems, means, solutions of tech-nical, organisational or other tasks, discoveries, facts or programming languages.

Clients are often surprised at the lack of legal protection under Rus-sian law in this area. They have also wrongly assumed that be-cause they have legal protection in their own country, this will protect them in Russia. Some even think they have legal protection in their own country because they have registered their business concept with i-Depot at the Benelux Office for Intellectual Property. This does not grant you legal protection, al-though it can help in disputes.

Intellectual rights to performan- ces, radio or television broadcasts, the content of databases, and also works of scholarship, literature or art first made public after their passage into the public domain are rights neighbouring on copyright (neighbouring rights). For the cre-

ation, realisation, and protection of copyright rights, neither regis-tration nor other formalities are required.

Russian law also recognises a se-cret of production (know-how). This term applies to information of any type (production, techni-cal, economic, organisational and others), including information on the results of intellectual activity in the area of science and technol-ogy. The information must have a commercial value, either actual or potential. The latter can be the case when the information is un-known to third persons, when third persons do not have free and legal access to information and when the holder of the information has introduced a regime of commercial secrecy.

This is a very broad definition, however, and in practice a lot of attempts to protect the results of intellectual activity as know-how are not successful.

One of the frequent mistakes made by clients is ignorance of the re-quirements of the commercial se-crecy regime. For example, it is not enough to include a confidentiality clause in contracts with customers. A commercial secrecy regime must be more complex, for example set-ting out the relevant internal pol-icies and the limitation of access to the know-how and others. The required actions are stipulated in details in the federal law On Com-mercial Secrecy.

The introduction of a commercial secrecy regime is important not only for the recognition of the rights to know-how, but also for further protection of commercial secrecy.

Rights to means of individual-isation of legal persons, goods, works, services, and enterprises include the right to a firm name, right to a trademark, right to a ser-vice mark, right to a designation of the place of origin of goods, and >>

the law defines the following types of rights, all falling under a similar legal regime:

• Copyrightrights• Rightsneighbouringon copyright• Patentrights• Righttoanachievementof breeding• Righttointegratedcircuit layouts• Righttosecretofproduction (know-how)• Rightstomeansof individualisation of legal persons, goods, works, services, and enterprises• Rightofuseoftheresultsof intellectual activity in the system of unified technology



right to a commercial designation. In Russia, the exclusive right to a firm name is valid provided it is in-cluded in the Unified State Register of Legal Persons, which applies to all commercial legal entities, estab-lished under the law of the Russian Federation, including subsidiary companies of foreign companies. In addition to the firm name in Russian, the company may also register the firm name in another language.

The exclusive right to a trademark (an indication to be used for indi-vidualisation of goods) or to a ser-vice mark (an indication to be used for individualisation of services) is recognised provided that it is reg-istered by the competent state au-thorities or under an international treaty of the Russian Federation.

Each of these means of individu-alisation mentioned above might be a component of another. At the same time they retain their own

legal protection. In practice, in Rus-sia as in other countries, it happens that trademarks (service marks or firm names), similar to the point of confusion, are used by different persons for the individualisation of goods or services of the same type. In case of dispute all the concerned parties have to show when they set up their trademark or trade name: the party whose name has the longest history wins the rights and protection.

Disputes on intellectual property rights in the Russian Federation are settled by courts. In some cases there is an obligation to address a petition to other state authorities before filing a lawsuit. For violation of intellectual property rights dif-ferent kinds of liability, including criminal, are laid down. The liability depends on the violation and the penalty could be a fine, or, in more serious criminal cases, a prison sentence. Recently, the Russian authorities

have taken steps to strength-en legal protection of intellectual property rights on the internet, but Russia is still behind Western Europe in this area. rbo

Anastasia Korotaeva – Lawyer and IP-expert at Juralink Moscowwww.juralink.nl



Netherlands-Russia Centre Going to do business with Russia? The Netherlands-Russia Centre is the knowledge and business center of your choice!

Netherlands-Russia Centre Antonius Deusinglaan 29713 AW GRONINGEN The Netherlands Web: www.nrce.nl E-mail: [email protected] Tel: +31 (0)50 3637823

We can advise you and support you with:

• Import/export,transport&storage

• Customsregulations&Сertification

• Translations&Visaapplications

• Marketresearch&Tradesupport

• Presentationsattradefairs

• ArepresentativeofficeinRussia/CIS-countries



When Luc Truyens told friends and colleagues that he was being transferred from Belgium to Russia with the Dutch banking group ING, they wanted to know what he had done wrong. They believed that a posting from the comfort of Brus-sels to the mean streets of Moscow must be a punishment for some terrible misdemeanour.

Truyens, who was appointed chief executive of ING in Russia in Sep-tember 2012, believes that this re-action was based on prejudice and speculation, rather than fact.

“No-one is neutral on Russia,” says Truyens, a Belgian national. “Everyone has an idea. The first question I ask is ‘have you visited the country?’ Most people have to admit that they have never been here.”

This veteran of ING admits that he perhaps did have some miscon-ceptions about the country and was “pleasantly surprised” when he arrived.

“When you are over here you see what is happening. I was surprised by the sophistication of the mar-ket. You can compare it with Lon-don and New York in that you have the same challenges, the same de-manding and sophisticated clients. But you also have a bond market

that developed quite fast and is still developing,” he says.

“I was pleasantly surprised by my management team – they are very well educated people, very client focused and great people to work with. That made it quite easy to get acquainted with Russia. I re-ally like working here, in a market that’s developing. It’s hard to find markets where there is still growth and where we can still provide added value,” he says.

Another big surprise was the size of the deals ING is involved in. One of the few he can talk about is the US$ 34bn deal with Rosneft, with ING joining a syndicate with other banks including Citigroup, Bank of America and Merrill Lynch to ena-ble the Russian oil firm to acquire TNK-BP. The loan has helped Ros-neft become the largest oil firm in the world and, according to the Times newspaper, it was the ninth largest loan ever granted in Eu-rope.

Deals like this mean that Russia is an important market to ING, where its focus is solely on commercial banking, while in several other Eu-ropean markets the retail banking presence is most notable. ING has a lot of local clients such as Sev-erstal and Lukoil and the revenues generated by commercial banking

here compare well to the reve-nues generated by ING Commercial banking in other territories, says Truyens.

ING, in common with many banks, was not immune to the global financial crisis and in 2008 the firm received a cash injection of €10bn from the Dutch government. As of June this year ING had already paid back almost €10.2bn and, if all goes to plan, it will have repaid the loan in full, with interest, by May 2015.

As part of the deal, ING had to re-duce its activities, separating its banking and insurance arms to ul-timately divest all of its insurance and investment management businesses. ING also withdrew from various markets, selling its mortgage and savings business in the US to Capital One, for example.

Despite the fact ING was founded in 1991, Truyens is keen to high-light its 200-year-old history in Russia via Barings Bank, acquired by ING in 1995. ING’s modern in-carnation in Russia dates back to 1993, and Truyens puts this lon-gevity down to the fact that the bank has always retained control.

“We have built up our business in Russia ourselves and by doing so we were able to establish the

“no-one is neutral on russia”

Luc truyens, cEO of Dutch bank iNG in Russia, was surprised by many things

when he arrived in Russia – not least by the amount of money to be made.

Anne Gulland reports.



culture that we wanted. The real challenge for a lot of people who bought banks is the corporate cul-ture and how to change that to the preferred culture. That is a chal-lenge that is sometimes very diffi-cult to overcome,” he says.

He believes ING’s model in Russia is one that any business can follow.

“You have to come and make your own choice about doing business in this country. Make sure you come over here and undertake a site visit, look at the fundamentals. Is it best to do a joint venture or go it alone? We did it ourselves and we’re very pleased that we didn’t partner anyone. Perhaps it goes a little bit slowly at first, but then you control it all,” he says.

He also advises businesses to re-cruit local staff. At the beginning of its Russian venture, ING brought in expatriates, but now 90% of Truyens’ management team is Russian.

“I don’t see a lot of value in bring-ing in more expats when we have all the competence we need here. It’s convenient if you can talk the language, which I don’t, unfor-tunately. All our people who are client facing are Russian. Most of them have been in ING a long time and this adds to our success,” he says.

ING has also weathered some heavy financial storms in Russia, including the country’s own eco-nomic crisis in the mid 1990s, as well as the global crash of 2008.

“2008 shook the market and there was a big liquidity crisis. A lot of banks left. ING stayed calm and we continued to support our clients in Russia and Central and Eastern Europe at large. You have to earn credibility in the market as bank-ing is about trust, you are in a rela-tionship with the client. One of the

key elements of ING’s success is that we have been active here for twenty years and we didn’t walk away when times were tough,” he says.

In 2008 the Russian government and Russian Central Bank stepped in and supplied liquidity. “This calmed a lot of people down,” says Truyens.

Russian President Vladimir Putin appointed a new head in June, for-mer economics minister Elvira Na-biullina, who has pledged to tackle the country’s inflation which is cur-rently at around 6-7%. “The role of the Central Bank is now under de-bate,” says Truyens. “The bank’s making sure that inflation is kept relatively low and that’s the main challenge. There is also a wider de-bate about whether it should low-er interest rates, as they are quite high and stimulate growth. People who have large debts in roubles are asking for more flexibility in the rates,” he says.

Truyens worked in Australia be-tween 2002 and 2004 where he was exposed to the Asian econo-mies, so he did have some idea of an emerging market environment before coming to Russia. Of course, Russia’s economy, like that of oth-er emerging economies, is slowing down. Russia’s economy grew by 8.5% in 2007, and the Internation-al Monetary Fund (IMF) estimates that figure will be just 2.5% this year. China’s economy grew by 14.2% in 2007, compared to an IMF prediction of 7.8% this year. President Putin is attempting to stimulate the Russian economy through “grands projets”, such as the construction of a new ring road around Moscow and a high-speed train line to Kazan in the Republic of Tatarstan, cutting the journey time by about eight hours.

The priority though, says Truyens, is for Russia to offer a more wel-

coming environment for business people, both domestic and foreign.

“Some simple things are real-ly complicated, such as getting access to utilities,” he says. “It makes it difficult for small compa-nies that want to set up here. On the other hand, if you go through the pain of the administration and get established, this is still a grow-ing market. I see small and big companies doing well. For compa-nies like Danone and Auchan, Rus-sia is a very important market,” he says. rbo

intERviEW: luc tRuYEns

luc truyens at a glance

• Studiedeconomicsat Leuven University in Belgium• FirstjobwaswithBelgian bank BBL which was acquired by ING in the mid 1990s• ExecutivedirectoratANZ/ ING Australia where he worked on banking and insurance in the Asia-Pacific region• ReturnedtoBelgiumwhere he headed the mid-corpo rates and institutionals team at ING• AppointedCEOandchairman of the management board of ING Commercial banking in Russia in September 2012



It took the Russian government just two weeks to approve Bel-gian firm Bekaert’s residency in thespecialeconomiczone(SEZ)at Lipetsk, confounding the view that any company wishing to get its toe in the Russian market will become tied up in endless red tape.

The firm, which makes steel cords for tyres and other wiring pro-ducts, had been trading with Russia since before the fall of the Soviet Union and felt that with Russia’s growing importance in car manufacturing the time was right to build a factory in the country. The company considered various options, including greenfield and

brownfield sites, before deciding to take up residency at Lipetsk, about 400km south of Moscow. The 130-year-old firm was the zone’s first resident and its facto-ry was officially opened in 2010 by Dmitriy Medvedev, Russia’s President at the time.

Tikhon Evdokimov, general ma-nager for the Russian side of Bekaert’s business and based in Belgium, says that the special eco-nomic zone was the natural choice: notonlydoSEZsconferspecialtaxadvantages on residents (resi-dents are exempt from property and land taxes and have certain income tax privileges), but they also come ready connected to utilities, a process which is notorious-ly difficult in Russia. The zone also has a manager whom you can call on to resolve problems. Lipetsk’s location in European Russia was also an advantage because of its proximity to the eastern European market.

Evdokimov says: “We were lucky that the concept of special eco-nomic zones had been introduced to Russia. Bekaert started to dis-cuss setting up a factory in 2008, perhaps not the best year for eco-nomic conditions. The firm under-stood that the crisis was perhaps

the right time to invest because you can get some things cheaper.”Bekaert is now one of about 25 residents at Lipetsk, about a third of which are Russian businesses. The largest player is a glass facto-ry, making bottles for soft drinks manufacturers which is 100% Russian owned and run.

Bekaert has become an ambas-sador for Lipetsk in the Benelux countries with a few firms following its example. Evdokimov, who is originally from Moscow, is under no illusions that Russia offers straightforward trading conditions, but special economic zones are an easier way in.

“We work in Russia, but we don’t face the usual Russian problems such as corruption and infrastruc-ture issues. We’ve got the Russian market and growth, but not the problems. And based on our ex-perience there’s positive discrimi-nation towards foreign investors,” he says.

He also believes that Russia is easier for foreigners than for home-grown businesses as they are less likely to face demands

the fast track to success

“We’ve got the Russian market and growth but not the problems, such as corruption. And based on our experience there’s positive discrimination towards foreign investors.”

When Belgian firm Bekaert wanted to set up in Russia, it found the perfect base.

Anne Gulland reports.

Baron Buysse (left), chairman of Bekaert, and Bert de Graeve, chief executive



for bribes. “It’s easier for foreign businesses to say ‘no’,” says Evdokimov. Another attraction for Bekaert was the attitude of the authorities, with the governor being particularly switched on about business and keen to attract for-eign firms to train the local work-force to become future “captains of industry”, says Evdokimov.

Bekaert has a policy of em- ploying locals in its plants around the world and this is no different in Russia. Lipetsk has a technical university and schools which are geared towards the region’s metallurgy industry so there is a supply of highly-

skilled labour to draw on.

The average age of staff at the plant, including managers, is 28. They receive a lot of training, spending three to six months in Bekaert’s European factories. This makes them attractive to rivals, admits Evdokimov.

“We’re always on the list of suspects for recruiters so we have to think how we can keep our young talent happy and motiva- ted,” he says.

A major headache for a company like Bekaert, which exports goods and imports machinery, is customs. Evdokimov has led presentations on Russian customs to Belgian and

other European businesses and the company has faced problems when not filling the documenta-tion in correctly.

He says that foreign firms should not harbour the illusion that Rus-sian customs exist to make life easier for business.

“Nearly a third of the Russian state budget is financed by customs duties. Customs is not a facilitator of trade as in Europe. Companies should help customs officers by doing the right paperwork and following the process,” he says.

If you fall foul of customs officials, blame yourself, says Evdokimov. “Customs officers work in line with the rules and Russian customs are not as bad as they are perceived to be,” he says. Knowledge of the regulations and a good customs manager is essential, he adds.

Russian-BElGian BusinEss RElatiOns

“Russian customs are not a facilitator of trade as in Europe. Companies should help customs officers by doing the right paperwork and following the process.” >>



The same is true in other aspects of Russian law, he says. “When you think of business law, don’t think about Pussy Riot,” he says, referring to the women arrested for singing in a cathedral and who have since become a human rights cause célèbre. He believes there is a distinction between civil and criminal law in terms of its fairness and transparency.

“We have had a few problems, yet they have usually been resolved before they got to court. We have

had disagreements with the tax authorities, but we have always won. As far as I am concerned the law is transparent, independent and professional,” he says.

Russia is still only a small market for Bekaert, making up just 1.5% of its global production, but the company believes the country has great potential for growth. At the moment the company is concen-trating on its Lipetsk plant, and it may one day open another closer to the Urals or even Kazakhstan.

Bekaert has plants in the other BRIC countries – Brazil, India and China - only none of these markets is offering Bekaert double digit growth, says Evdokimov. Russia also offers more stable trading conditions, he adds.

“There are private property rights and excellent intellectual property protection, which is not the case in China. You can also expect pay-ment on time, which is not the case in India. Those who don’t know Russia are afraid of it,” he says.

“As long as you are talking to the right people, in the right regions, choosing the right business model and the right part-ner, you are more likely to be successful than in any other BRIC country. To set up business in Russia is much easier than in Belgium. Russia is a piece of cake,” he says. rbo



Belgium and Russia’s commer-cial relationship goes back to pre- revolutionary times, says Arkady Arianoff, director general of the Belgium-Luxembourg Chamber of Commerce for Russia and Belarus. Belgian firms built many of the streets and houses around Mos-cow’s Red Square, as well as the elec-tric tramways in 33 Russian cities.

Trade relations between Belgium and Russia are getting steadily stronger, says Arianoff, with Belgian firms becoming more confident about investing in this large market. According to a survey carried out by the chamber, some 2,800 existing Belgian firms have sold something in Russia with around the same number also interested in doing business there. There are currently around 250 firms from Belgium and Luxembourg active in Russia.

The survey also showed that 84% of enterprises who have conducted business in Russia want to come back, with only 3% saying that they would not do it again. In 2012 there was some €14bn worth of trade between Russia and Belgium, with Belgian exports to Russia accounting for around €4bn and Russian exports to Belgium making up the rest. Most of the Russian exports were in traditional heavy industries such as oil, metallurgy and wood.

However, smaller scale Belgian firms are reaping the benefits of working in Russia, says Arianoff, and are recognising that Russia’s

growing wealth makes it an attractive option. In fact, the cham-ber has recently opened an office in Moscow, to help businesses on site as well as organising trade missions both in Russia, and Belgium and Luxembourg.

“Our main goal is to help people on the ground. Lots of small firms

want to set up and we can help them with things such as customs and registration,” he says. Some 80% of businesses in Belgium are small to medium sized enterprises and going it alone in such a vast and alien market is daunting.

Arianoff adds that 60% of SMEs find it hard to borrow money from the banks, so if they want to expand they need to look at other options – joint ventures with firms in a growing market like Russia makes sense, he says. Joint ventures in areas such as medi-cal and hi-tech are an attractive option for many smaller Belgian firms, and the chamber can help small businesses gain introduc-tions to firms with whom they might want to partner.

The Russian government is making it easier for foreign and domestic firms with the creation of special economic zones offering tax breaks as well as a streamlined settling in process. However, the zones are only suitable for indus-trial, technological, logistics or tourism businesses.

Arianoff says that misperceptions

around politics, the legal frame-work, the level of bureaucracy and corruption put people off from investing in Russia. Levels of corruption have decreased immea- surably, he says.

“Corruption was impossible to avoid ten to 15 years ago,” he says. “The situation is very different now,” he adds. “Small-scale corruption has almost completely disappeared,” he says.

Russian foreign minister Sergey Lavrov visited Belgium in 2013, highlighting 160 years of diplo- matic ties between the two countries. At a speech promoting the links between the two countries he said that despite the global financial crisis trade volume between the two countries had been growing steadily.

Lavrov said that Russia sees Belgium as a “reliable business partner” and that the number of Russian investors in Belgium was also growing.

“All of the above strengthens our confidence in the fact that the traditions of partnership, friend-ship and cultural cross-fertilisation which were laid one and a half centuries ago, will be further developed,” he said.

russia and belgium hail strong trade links

Russian-BElGian BusinEss RElatiOns

Arkady Arianoff

“The Russian government is making it easier for foreign firms with the creation of special economic zones offering tax breaks as well as a streamlined settling in process.”



Hedge funds are in their infancy in Russia, but last September an important step was taken in the development of the industry: the first Russian hedge fund to take a global macro approach to in-vestment was launched. A global macro approach means that the hedge fund will aim to profit from economic and political changes by hedging on interest rates, sover-eign bonds and currencies.

In 2008, the fund was launched by Europe Finance, a company founded by Garik Martirosyan, an Armenian-native, to provide con-sulting services to people wishing to launch a hedge fund. After building up a large network of clients Europe Finance began to receive requests for risk hedging, but its transformation into a fully- fledged hedge fund came with a bet on gold in 2013. Martirosyan placed a bet on the fall of gold prices and bought shares worth US$ 40,000. Within three month he earned US$ 2m.

“Now we have commitments with an overall value of US$ 50m,” says Yevgenia Slouchak, one of the fund’s partners.

Martirosyan, who used to remotely operate a portfolio of a British hedge fund and manage the desks of several Russian banks in the Ar-menian capital Yerevan, including the main Russian state bank Sber-bank, came to Moscow in 2008 with the aim of launching his own business.

The 2008 global economic crisis forced Martirosyan and his partner Georgy Ivanyan to lay aside their dream of launching a risk manage-ment company and instead to do market analysis and provide trai-ning for aspiring risk management specialists.

As the crisis abated in 2010, two other partners – Slouchak and Yury Shatskikh – came on board and the company focused on consultancy, advising on how to launch a hedge fund and operate crisis management.

“Our main purpose was to under-stand what the market needed because we didn’t understand that completely at the time. All we knew was that hedge funds were a great idea, but how to combine this idea with market needs was

very unclear to us,” says Slouchak. The company also helped to launch hedge funds in Russia by writing memoranda for companies, providing legal services, finding brokers and helping set up an institutional structure. Several funds were launched with the help of Europe Finance, with the Yeganovsky fund showing the best results, says Slouchak. Europe Finance became well known for building hedge fund infrastructure in Russia and helping to develop this new sphere of Russian finance, she says.

Slouchak estimates that there were around 60 hedge funds in Russia before the 2008 financial crisis, but about half that number have since disappeared. In the US, there are thought to be around 6,000 to 7,000 funds. “We have lots of work to do,” she says.

Russian hedge funds are operated completely differently from Wes-tern funds which have much more rigorous checks and balances. Western fund managers trade freely, but have to leave a clear audit trail, showing what results a fund achieved and whether it has acted fraudulently or not.

finance industry bets on success

Russia’s hedge fund industry might still be tiny, but one firm is hoping to take the

finance world by storm. Yekaterina Kravtsova reports.



There’s no such infrastructure in Russia, so most Russian hedge funds work on the basis of confi-dential management.

“Audited financial statements are very important as this makes the operating of the fund active. Whereas in Russia you can just say you earned a certain amount of money and this is it, you are not responsible for it,” Slouchak says. She cites the billion US dollar Pros-perity Capital Management, run by a Russian team in New York, as a good example of a successful Rus-sian fund which in 2013 was 40th on Bloomberg’s list of the top per-forming 100 large hedge funds.

Most Russian hedge funds are registered in the Cayman Islands, and Europe Finance is no excep-tion. The reason is not only the tax-free regime, says Slouchak, but the greater freedom and lower costs offered by the Cayman Is-lands compared to Europe or the US.

“The Cayman Islands have the best legal system and infrastruc-ture,” says Slouchak. “British legislation is applied there and investors trust it.”

Russia is unique, says Slouchak, because hedge fund activity is limited here.

“As our fund is very young and offshore, we can’t count on in-stitutional investors, which are banned by Russian legislation from investing in hedge funds. Our clients are private investors,” she says, adding that Europe Finance is hoping to attract foreign insti-tutional investors.

Yet, the main reason there are so few hedge funds in Russia is that it is still an industry in its infancy.“In the West, a 50-year-old cul-ture was developed by [finan-

ciers] George Soros and Jon Aisbitt. They are examples of a top career, while there are no such examples in Russia,” says Slouchak, adding that most Russian hedge funds are located in the West while be-ing run by a Russian team.

“A Russian hedge fund is some-thing exotic, but if we develop them, by co-operating with state bodies and the stock exchange, we will see more funds being able to work legally in Russia,” Slouchak says.

She hopes that Europe Finance’s success will help showcase the talents of Russians and the coun-try’s excellent maths education – both at school and at higher education institutions, such as the New Economic School (known as the Russian Economic School in Russia), the only institution that teaches students about risk in business, she says.

“We want to prove that a global macro fund can be run by a Rus-sian team whose advantage is mathematics brains,” she says.

One of Europe Finance’s interns, a graduate of the New Economic School, was so tempted by the complexities and challenges of working for a Russian hedge fund in Russia that he left an internship at Goldman Sachs in London.

“He is very smart, and we can offer very interesting tasks for him, he can do whatever he wants. In the West young specialists are limited in their responsibilities,” she says.

Europe Finance also hopes that Russian wealth will be attracted to this homegrown hedge fund. Consultants Deloitte estimate that by 2020 there will be 1.2m US dollar millionaires in Russia so the fund has probably launched at the right time.

The Russian market also offers great opportunities for investors, opportunities that are not always available in developed markets.

“Our market is thought to be an insider one in some sense, but it is possible to develop derivative and bonds markets here. Last year there was a brilliant chance to earn money when there was a point spread between Eurobonds. Opportunities like that can’t al-ways be found in Europe or the United States, but exist in emerging markets, such as Russia or Brazil,” she says.

Problems in the Russian economy stem from politics while the economy itself is stable, she adds.

“Of course we depend on oil prices, but it’s very unlikely that they will fall soon because no one wants problems in Russia which would make the situation worse in the Middle East,” she says. rbo

Russian innOvatiOn

different tyPes of hedge fund

• Long-shortfunds:Take both long and short posi-tions in securities in the hopes of using superior stock picking strategies to outperform the general market.• Market-neutralfunds:A sub-type of a long-short fund, however fund managers attempt to hedge against general market movements (thus the name “market neutral”).• Event-drivenfunds:An attempt to capture gains from market events, such as mergers, natural disasters or political turmoil.• Macrofunds:Take directional bets on the market as a whole, either long or short,baseduponresearchand/or the fund’s philosophy.

finance industry bets on success



The Russian resort city of Sochi was the focus of international attention this year when it hosted the Winter Olympic and Paralympic Games. The city has long been a favourite among Russian holiday- makers and it now hopes to reinvent itself as one of the world’s leading sport, tourism and business destinations. Billions of public and private sector roubles have been spent on building sport and recreation facilities as well as roads and other infrastructure. And the city hopes that the Games will be a catalyst for international attention.

“The 2014 Winter Olympics is a project of the century for our city, bringing brilliant prospects not

only for the city itself, but also for those ready to realise their invest-ment potential here,” said Anatoly Pakhomov, the mayor of Sochi.

The regional development ministry has ranked Sochi number 23 in a list of 165 Russian cities with high investment potential. Figures

from the city authorities show that Sochi’s economy is growing, and its volume in 2012 was 10.5% more than in 2011.

Alexander Ivanov, head of Sochi city council’s development depart-ment, says that the new infrastruc-ture developed for the Games will attract investment. “This makes the environment more comforta-ble for investors,” he said.

Since 2007, the city has renovated its general and public utilities such as sewers and water pipes, tele-communications and electrics, as

sochi aims to Win gold with Winter olympics

The unveiling of Sochi as the host of the Winter Olympics sparked a wave of migration to the city among the rich from Moscow and St. Petersburg who were seduced by new business opportunities and the city’s good climate.

Since winning its bid to host the Winter Olympics, Sochi has seen a boom in

construction. Yekaterina Kravtsova reports on how the resort city is hoping to

capitalise on the Games.



Population of Greater Sochi 437,600 people

DistancefromMoscow 1,630 km

Part of Krasnodarsky region and caucasus district

the longest city coastline after Los Angeles area

Mainindustries Tourism, agriculture, mining and processing industry, engineering

well as new roads and junctions. World giants General Electric and Italian generator producer Ansaldo completed public works contracts.Sochi is set to host other world-class sporting events after the Olympics such as Russia’s first Formula One race in October and will also be one of the host cities for the FIFA World Cup in 2018. Filmmakers have been visiting Sochi’s international film festival, Kinotavr, since 1991 and business people attend the Sochi Investment Forum and Inter- national Industry Forum.

Sochi has been attracting the Russian political elite since the 1930s, when Stalin built his summer residence here, and remains one of the political cen-tres in modern Russia, serving as

a summer residence for President Vladimir Putin.

The unveiling of Sochi as the host of the Winter Olympics also sparked a new wave of migration to the city. The rich from Mos-cow and St Petersburg were seduced by new business op-portunities, the city’s good climate, holiday atmosphere and proximity to Moscow – just two and a half hours away by plane.

According to the latest figures, the population of Sochi and its

surrounding areas has increased by 50,000 people since 2007 – the year Sochi was selected as the host city for the Games – and it currently stands at around 437,600 people.

Sochi is in the Krasnodar region in the south of the country and its fruit, vegetables, grains and livestock products feed the rest of Russia. The region has the largest tea production industry in

“Tourism is traditionally the main source for the city budget so development of the hotel infrastructure and entertainment industry is a high priority.”

REGiOnal FOcus

>>



the country, with tea being grown in Krasnodar since the end of the 19th century. Now, a large propor-tion is exported, with Japan and Germany being the main buyers.

Konstantin Turshuk, head techno- logist at Matsesta Tea, a company that owns 180 hectares of tea plantations near Sochi, said even though the company is fully privately financed, it brings great value for the region.

Turshuk added that he would like to see more support from the authorities, who currently seem more interested in attracting foreign than domestic companies to the area.

The Krasnodar region is rich in mineral resources – such as oil, gas, marble and gravel – and was the pioneer oil producing region of Russia, with the first well opening here in 1864. Sochi’s industrial sector is represented by more than 40 large and medium industrial companies in the food, construc-tion and agricultural sector, and

more than 700 small ones.

Krasnodar is strategically important to the whole of Russia as it is the only region that has access to the Black Sea, with most of the country’s imports and exports coming and going via the region’s five ports – Novorossiisk, Tuapse, Yeisk, Temryuk, and Kavkaz.

However, tourism is where the city’s main investment potential

lies and the city and its surrounding area has a 145 km long coastline. The Olympics have highlighted So-chi’s potential as both a summer and winter resort, with its sub- tropical climate giving average summertime temperatures of around 30°C and the snow-capped Caucasus mountains on its door-

step enabling skiing from Octo-ber to April. This pleasant climate may also present problems to the Games organisers, as Sochi is the warmest venue ever for a Winter Olympics and there were concerns over whether there would be enough snow in February.

According to the city authorities, four million tourists visited Sochi in 2012, bringing 12 billion roubles (US$ 364m) to the city budget, a 6% increase on 2011.

“Tourism is traditionally the main source of revenue for the city budget. Therefore, development of the hotel infrastructure and en-tertainment industry is a high pri-ority for us,” said Ivanov.

In recent years, a construction boom has overwhelmed the city, its coastline being built up with luxury holiday resorts and 26 new four and five-star hotels planned to be ready for the opening of the Olympic Games. In 2012, Sochi became the leading city on the Black Sea for high value residential properties and business centres, according to Macon Realty Group.

According to the city authorities 170bn roubles (US$ 5.2bn) were spent on construction projects in 2012, 20% more than in 2011.

A representative of Sochiark-proekt, a local architectural firm, told RBO that the influx of foreign construction firms had been enormous in the last few years. However, he warned foreign in-vestors to make sure they are fully up to speed with local business legislation.

In recent years a construction boom has overwhelmed the city, with its coastline being built up with luxury holiday resorts and 26 new four and five-star hotels built for the Olympic Games.



history of sochi

It is believed Sochi’s Eagle Rocks were the scene of the torture of classical Greek hero Prometheus whogavepeoplefire. Zeus, kingof the gods, punished Prometheus for this act of defiance by tying him to a rock where each day an eagle would pick out his liver. According to the legend, a young girl called Agura who brought water to Prometheus was turned into a river. The Agura river still flows through the city today.

Sochi is located in a territory that was once part of both Ancient Greece and the Byzantine Empire, which brought Christianity to the area. The city still has a considerable Greek population.

Sochi was founded in 1838 as a fort during the Caucasus war when the Russian Empire tried to annex parts of Caucasus. Only in 1917 did Sochi officially gain city status, after a resort – the Caucasus Riviera – was opened there in 1909.

Krasnodar region’s Ministry for Strategic Development has been officially appointed as a public body providing support for investors in the region. Support includes consultations and help with receiving necessary docu-ments to start the implementation of a project.

An investor must provide a busi-ness plan to the ministry along with guarantees that the project will be paid for within three years. An investor who wants govern-ment support also has to have at least one-year’s work experience in the relevant business branch.

According to the Ministry for Strategic Development, in the first three months of 2013, 128.3bn roubles (US$ 39bn) has been invested into the region, a 7.8% increase compared to the same period last year. Most of the money has gone into construction projects.

Russia’s Federal Statistics Service said foreign investors invested

more than US$ 284m into the region’s economy in January- March of 2013, 1.1 times more as the same period last year. Entrepreneurs from 28 states made these investments, with the United States, the Netherlands and Cyprus being top three coun-tries investing money into the region – though Cyprus is often used as an offshore conduit for domestic Russian investors.

Moreover, despite the fact that the contracts for building the Olympics venues have long been signed, new investment projects are still underway. In March, the city signed new investment contracts worth more than 21bn rubles (US$ 638m), including with VMP Real Estate for building a tourist centre at Krasnaya Polyana, the main Olympics site.

“There is a certain popularity of the region [for investors] because of Sochi, but investments are spread everywhere,” Ivanov said. rbo

REGiOnal FOcus



In Russia, marketing is a relatively new profession that took off in the early 1990s, alongside the finan-cial and banking boom. During the large-scale privatisation and the formation of financial-industrial groups that occurred from 1995 till 1999, banks encouraged com-panies to market their products. Commonly, banks would order market research from independent research companies on be-half of their clients, and then provide funding for the companies to set up marketing departments.

In the late 1990s, the advent of international companies in Russia

prompted domestic producers to use marketing more extensively to win the market share. Between 2001 and 2008 many Russian companies began to actively de-velop their marketing techniques.

Since the financial crisis of 2008, the focus shifted towards consolidating one’s market po-sition, keeping customers and developing an anti-crisis strategy. Some Russian companies, disil-lusioned with marketing, drama- tically reduced their marketing budgets in favour of administrative measures, but others did continue to focus on their marketing.

develoPment of the marketing Profession

Professional estimates show that marketing in Russia currently em-ploys around 70,000 to 100,000 professionals – a mere 0.1% to 0.2% of the total 71 million people working in the Russian economy as a whole. This figure is small compared to the United States and Europe.

According to a survey conducted by the Marketers’ Guild, 90% of large and 75% of small busines-ses have marketing departments. Although the crisis of 2008-09

Marketingexpertsmay still have toprove theirworth toRussianentrepreneurs,

but their influence is increasing, writes igor Berezin.

marketing goes from strength to strength



maRkEtinG FOcus

saw significant cuts to marketing departments, there has been growth in the last two years. Around 200 Russian universities have a marketing department and every year thousands of Russians graduate from universi-ties with a specialisation in marke-ting, though not all of them go on to work in the field. A further 1,500 to 2,000 people a year receive an MBA in marketing from one of Russia’s 50 to 70 business schools, some of which have links with institutions such as the London Business School and the Netherlands Institute of Marketing.

examPles of marketing success

The first major marketing achievements by Russian companies were made in the non-alcoholic drinks industry. In the 1990s, four compa-nies managed to restore the fortunes of the juice industry. These were Wimm-Bill-Dann, Lebedyansky, Nidan and Multon. They succeeded pri-marily through their marketing efforts: studied consumer desires and created attractive packaging, built a competent pricing structure, car-ried out successful advertising campaigns and formed good relation-ships with retailers. As a result, juice consumption in Russia increased tenfold, becoming the largest in Europe. All of the businesses were sub-sequently acquired by international companies PepsiCo and Coca-Cola for significantly more than their previous market value.

Russian businessman Oleg Tinkov is another example of marketing suc-cess. He used the capital from the sale of a chain of domestic appliance stores in St Petersburg to create the Daria brand of convenience foods. The initiative gained a strong customer base amongst its target audi-ence thanks to a quality product, successful product positioning and creative advertising. Selling Daria’s assets at a premium allowed Tinkov to invest capital (and the company’s good reputation) into building the Tinkoff beer brand. Through efficient marketing and brand positioning, Tinkoff earned a good reputation and won a 1% market share in compe-tition against the giants of the international brewing industry. Later on, the brand and its brewery were sold to Heineken at a profit. Now Tinkov is concentrating on developing his banking and credit card business, Tinkoff Credit Systems. Despite launching during the financial crisis of 1998, businessman An-drei Korkunov’s confectionary business performed remarkably well. The secrets of Korkunov’s success lay in understanding his customers, reli-able pricing and good market positioning. After ten years, the business was sold to Wrigley at a considerable profit.

With practically no advertising, Splat, formed in 2000, managed to gain a 10% share of the toothpaste market in ten years. The compa-ny achieved this by being innovative, understanding its customer base, competent pricing and good positioning. The Russian telecommunications industry is 85 to 90% controlled by three main operators: MTS; VimpelCom and Megafon. They have sur-vived in a tough market through their aggressive and coherent mar-keting strategies as well as their excellent communication with their customers. In retail, only three of the 30 largest companies operating in Russia are of non-Russian origin: Auchan from France, Metro from Germany and the Swedish Ikea. The two largest retail groups in the country - the X5 group and Magnit - are far ahead of their competitors in terms of turnover and pace of development, which is largely due to their use of modern marketing techniques. Magnit has drawn on the example of US retail giant Walmart by expanding from small stores in small towns focused on less wealthy customers. The company grew from its base in the south of Russia to other parts of the country, first in medium and then in large cities, successfully replicating Walmart’s tactic of targeting the lower middle classes. >>



Proving their Worth

The most difficult task facing mar-keteers and market researchers in Russia is to prove that their work has a positive effect on sales and profits. Russian entrepreneurs tend to regard money spent on marketing and market research as a waste, rather than an invest-ment in understanding their mar-ket and promoting themselves to it. This attitude has resulted in the low status of marketing special-ists and even marketing directors, especially when compared with heads of technology, commercial directors, heads of sales and other professional jobs.

A further problem is the lack of adequate information about the markets in the public domain. Currently, only the car industry provides rapid and accurate sales information on a monthly basis, largely due to the Automobile Manufacturers Committee of the Association of European Business-es (AEB). Data on mobile phone and IT equipment sales is avail-able on a quarterly basis from market research firms. Most other industries have to settle for data from Rosstat, the Russian state statistical service, which is not al-ways accurate or up to date and is thought to have a 10 to 30% mar-gin of error. There are also very few case studies available in the public domain. Russian companies are reluctant to share information, even about successful campaigns.

the marketers’ guild’s annual survey

The Marketers’ Guild, a non-profit organisation which promotes and supports the profession in Russia, has been carrying out an annual survey every year since 2001. In 2012, 250 experts from Russia, Belarus, Ukraine and Kazakhstan took part in the survey. Roughly a third of the respondents came from large state-owned or private companies, a third from medium companies, and a third from small businesses. A third of the respondents were CEOs of small to medium enterprises, a third were marketing managers or professionals from other sectors such as advertising, and the final third were other managers, consultants and educators. Their average experience in the business was ten to 11 years, although 40% of them had worked in marketing for more than 12 years. Some 85% of the companies they worked for had a specialised marketing department, which typically consisted of three to five individuals. However, a fifth of marketing departments employed over ten people, and 7% of them employed over forty people.

Almost 30% of respondents said that their company’s 2013 marke-ting budget would increase by 25 to 50% or more compared to 2012. These companies had clearly opted for an aggressive growth and marketing strategy. Another 23% of companies (though this went up to 30% amongst larger businesses) planned to increase their next year’s marketing budget by 10 to 20%. The measure gives an inflation- adjusted real increase of 4 to 8%, comparable with a moderate growth strategy. A fifth of companies planned to increase their marketing budget by 5 to 10%, which can be considered a holding strategy. Just over a fifth of the companies planned to keep their budget at the same level as 2012, perhaps planning to increase efficiency instead.

Expansion was not the only consideration for these businesses. Only 7% admitted that their company was continuing a process of ‘optimisation’ – or reducing their marketing budgets. A positive note is that the average forecast for growth of marketing budgets for 2013 has been the highest of the past five years at 22%. Another good sign is that the 2012 results were higher than end of 2011 projections for the first time in three years.

Data - Marketers’ Guild



maRkEtinG FOcus

marketing strategy

Anything from 50 to 70% of the Russian economy is still under di-rect or indirect state control - not only the so-called ‘natural monop-olies’ relating to infrastructure, but also large industrial compa-nies like oil refining, metallurgy, banking and insurance. For these companies, marketing is more of a ‘decoration’ than a necessity: their success depends more on good management, efficient cost-ing, and their relationship with the government than on meeting market demand. In truly market-based sectors like retail, consumer goods or beverag-es, attitudes to marketing depend largely on the company’s leader-ship. Today’s leaders understand the importance of paying atten-tion to marketing, and that their success is linked to the formation of a good marketing strategy.

future of marketing

Despite the challenges discussed above, the outlook for marketing in Russia looks promising. Faced with the slowing of economic growth and the continuing relatively high rate of growth in the population’s income, many com-panies are left with no choice but to devote more attention to the consumer in gaining a competitive advantage.

Marketing costs may still continue to grow at a faster rate relative to the growth in sales and media inflation. At the same time, com-pany executives are expected to demand more evidence from their marketing professionals of them influencing the success of their businesses. Marketing experts will have to master modern marketing techniques, improve their skills, and provide evidence for the need to modernise not only production

equipment, but also marketing approaches. In the next decade, marketing costs in Russia may rise in nominal terms by five to ten times the current value. Ad-justed for inflation this means an increase of about three times the current rates. rbo

Igor Berezin is president of the Marketers’ Guild



Russian Business Outlook (RBO): tell us a little about your job and the company you work for. Stefan Van Doorslaer (SVD): I’m the general director of Ahlers, a Belgian logistics company providing warehousing, transportation and customs brokerage with a huge range of customers in Russia. I cover Russia, the Commonwealth of Independent States and the Bal-tics, so I travel a lot. I’m responsible for all our offices and operations in the region and take care of strategy, development and guiding the management team. We’re a huge organisation and we’ve been active in Russia for 20 years. We set up here immediately after the breakup of the Soviet Union – we initially started in St Petersburg. Now we’re in Moscow, Chelyabinsk and Novorossiysk.

We concentrate on niche markets and regions and we’re currently thinking of expanding into Africa. Russia is a big market for us – about 40% of our turnover. We want to expand into other mar-kets, but we see Russia remaining at this large share.

Our future is to expand into the regions. People are consuming more and they want the good brands and the international com-panies want their products out there. They need warehouses, local distribution centres, trans-portation and so forth.

RBO: How long have you lived in Russia?SVD: I’ve been here since the beginning of 2008 and I’m based in St Petersburg. I came to Russia once in 1989 and then again in 2006, so you can imagine the changes since then.

RBO: What’s challenging about living in Russia?SVD: One of the biggest barriers for me is that I don’t speak the language and people here in St Petersburg don’t really speak much English. I had plans to learn when I arrived, but I travel so much for work that it’s hard to have regular lessons.

Another challenge here is the win-ter. You get up in the morning and you know that it’s not going to be light until 11am, and then it will be

dark again at 3pm. In April it’s still snowing. The summer was good this year, so that makes it a little easier. RBO: What are the main business challenges?SVD: The business culture is very different here. Until recently we had a fully Russian management team, but now we have two expats as well. We put a lot into Western style management and training. Russians expect a very clear struc-ture and they want clear directions and orders. Some people get a bit lost when they get too much free-dom, and they don’t believe they can take risks and make mistakes without being punished. We have had a few changes in the manage-ment team because people didn’t fit our way of doing business. Now we have a good mix.

The young graduates who come to us are very ambitious. They want to learn and are open to development and training. They know they have to work hard and start at the bottom. I’m not sure gradu-ates in Europe are like that – they want to know about their salary and their company car!

Based in Russia, Belgian national Stefan Van Doorslaer shares his advice for

working in the country, and his admiration for Russian get-up-and-go.

a country of extremes



RBO: What do you enjoy about working in Russia?SVD: Every year I’m talking about expansion: additional people, additional business, whereas in Europe you’re talking about cost cutting. There’s a lot of room for improvement in the way people work and you can make a big difference really quickly. When I give a presentation about working here, I always tell people that I never have a good day or a bad day. It’s always a dramatic day or a fantastic day. This is a country of extremes.

RBO: What do you think of the Russian way of doing business? SVD: Russians tend to be process driven, rather than results driven. I think that’s a result of their history and their education which is very technical. However, more private non-Russian business schools are opening up special programmes for MBAs which are run in a more Western way.

What always amazes me is how when Russians see a business op-portunity they go for it – they jump in without thinking. They have an idea, they go to the bank and they don’t think how they will pay the money back. I admire how they’re not afraid of a challenge. I suppose they’ve had more dramatic things happen in their history than having a business fail. They’re not like Belgians who are more cautious in their attitude to risk.

RBO: What advice would you give to someone thinking about setting up a business in Russia?SVD: You must plan for it and pre-pare well. Also, how do you want to do business? Do you want to work with a partner or go it alone? The markets here are very different – you cannot compare Kazakhstan, for example, with Rus-sia or the Baltic states. You should always take into

account the culture and the back-ground in Russia: 20 years ago it was a communist country. You need to understand that people who are 40-plus now, were brought up in a communist society. You should respect their background, but it doesn’t mean you have to accept it. If you want to do business here, you need to come here often and really understand the business cul-ture and the difficulties they face. The more you travel to Russia, the more you understand that things are not always so easy over here. I also think learning the language is useful, advice that I should take!

RBO: Do you have links with any other foreign businesses?SVD: I’m chair of the St Peters-burg International Business Asso-ciation, so I have a lot of contacts with international companies and Russian companies doing interna-tional business. We have a lot of meetings, and every two or three months we have a meeting where someone from the Russian authorities speaks. We help each other and give advice, share experiences, organise company visits, network events and much more.

RBO: Have you had much contact with the Russian legal system? SVD: We don’t have many legal is-sues with customers. We’re more likely to go to court over customs problems or with our properties. We’re probably there every six months or so on average. I find that the higher up you go, to the appeal court, the more objective, fair and transparent the courts become. Russia is not a dangerous country – I’ve never seen a guy on the street with a gun! I’ve never had any prob-lems with the police or anything like that. If you’re not too flam-boyant you’re perfectly safe here.

RBO: What do you hope for the future of Russia?SVD: I hope that Russia becomes more open to foreign investment.

When Medvedev was President [Dmitriy Medvedev, currently Prime Minister, was Russia’s President between 2008 and 2012] the country was more open to innovation and foreign investment, but now it seems to be closing itself off. Big interna-tional companies are basing their production here and are also star-ting to export their products, so that’s a good sign.

RBO: Has anything surprised you about Russia?SVD: The one thing I cannot understand is that people ac-cept the huge difference between the rich and the poor. There’s no revolution. The money goes to the happy few.

RBO: How different are Moscowand St Petersburg to the regions?SVD: The regions are very different. In the big cities you have a one big industry, say a metal factory, where everyone works. If that closes then everyone is out of a job. Labour is much cheaper in the regions and there’s much more room for expansion there. Moscow is a completely different market – it’s so expensive there. rbo

q&a

For more information about Ahlers go to www.ahlers.com

For more information about the St Petersburg International Business Association go to www.spiba.ru

Stefan van Doorslaer



What’s haPPening in russian business

We bring you a round-up of the most important business events

in Russia and Europe.

euroPean union-russia year of scienceA year-long series of events and initiatives to promote EU-Russia co-operation in research, higher education and innovation.

date: All year longvenue: VariousFor more information go to www.eu-russia-yos.eu

Winter olymPic and ParalymPic gamesAll eyes will be on Russia as the Black Sea resort of Sochi plays host to the winter sporting extravaganza.

date: 7 to 23 February and 7 to 16 Marchlocation: SochiFor more information go to www.sochi2014.com

russia PoWer exhibition and conferenceThe Russia Power conference and exhibition, now in its 12 year, return to Moscow. This is an opportunity to explore business opportunities and meet partners and decision makers in the power industry.

date: 4 to 6 Marchlocation: Expocentre, MoscowFor more information go to www.russia-power.org

transPort infrastructure conferenceThis conference will highlight innovation and best practice and brings together road-building experts with representatives from state and local government. The conference aims to promote modernisation of the road infra-structure in Russia.

date: 12 to 13 Marchlocation: MoscowFor more information go to www.roadinnovation.com/english

airPort develoPment conference and aWardsThe 4th annual conference will focus on a range of topics, including a look at regional airport development and the experience of the south of Russia in the light of the 2014 Winter Olympic Games.

date: 17 to 19 March location: Renaissance Moscow Monarch Centre HotelFor more information go to www.adamsmithconferences.com/event/airport-development-russia-cis



aGEnDa

russian automotive forumThis forum and exhibition provide companies with an opportunity to promote their products and services to the Russian automotive industry.

date: 18 to 20 March location: World Trade Center, MoscowFor more information go to www.adamsmithconferences.com/en/event/automotive-industry-russia- exhibition

bridge construction in euroPe and russiaThis bilingual English and Russian conference brings together bridge construction experts from Russian and European companies.

date: 19 to 21 Marchlocation: Bordeaux, FranceFor more information go to www.bridgesrussia.com

global russia business meetingSenior executives will take a practical look at what policies and strategies can support Russian firms.

Date: 6 to 7 AprilVenue: Valencia, SpainFor more information go to www.horasis.org/event_Russia_2014.php

russian Pharmaceutical eventThis exhibition and networking event gives attendees the chance to connect with senior representatives from Russia’s growing pharma industry.

date: 16 to 17 Aprilvenue: Lenexpo, St PetersburgFor more information go to www.cphi.com/russia/home

World economic forum on euroPe, middle east and north africa and eurasiaThe 2014 meeting will bring together 1000 business, gov-ernment and civil society leaders to look at ways to strengthen institutions, boost employment and create growth by fostering innovation and entrepreneurship.

date: 27 to 29 Aprillocation: Istanbul, TurkeyFor more information go to www.weforum.org/events/world-economic-forum-europe-mena- and-eurasia

st Petersburg international economic forum 2014This annual meeting plays host to business and political leaders from Russia and around the world. President Vladimir Putin and a host of big global names are regulars at this event.

date: 22 to 24 May location: St PetersburgFor more information go to ww.forumspb.com

ecWatech 2014This is the leading water and wastewater technology forum in Russia and Eastern Europe and is a key events for manufacturers, vendors, service providers, utili-ties and research and consulting companies.

date: 3 to 6 June venue: IEC Crocus Expo, MoscowFor more information go to www.ecwatech.com

meeting of the leaders of the g8 grouP of countriesRussia takes over the presidency of the G8 group of countries in 2014 and will host a leaders’ summit in Sochi.

date: 4 to 5 Junelocation: Sochi



Aeroflot invites you for a comfortable flight to Bangkok, Phuket, Beijing,Shanghai, Guangzhou, Hong Kong, Hanoi, Ho Chi Minh, Tokyo, Delhi and Seoul.We offer fast and convenient connections Via Moscow Sheremetyevo Airport.

Choose your destination now!


Russian Business Outlook Winter 2014

Documents

Transcript of Russian Business Outlook Winter 2014