European firms need patience in Russia
European companies looking to the behemoth on their doorstep, Russia, as a source of sales growth will have to combine great patience and local nous to make their investments pay
Russia has long been a conundrum for western Europe's blue chips. It may be resource-opulent, the nearest geographically of the BRICs, and have a growing middle class with plenty of disposable income, but few have found the going easy.
The reason: bureaucracy, a difficult legal system, endemic corruption and powerful oligarchs with turf to protect.
Analysts and speakers at the Reuters Russia Investment summit said problems were certainly big, but companies that adjusted to local practices, worked closely with local partners and kept authorities onside, would reap rich dividends.
"You can't just take people from business school and believe that they will understand how to deal with a plant near Novosibirsk or Yekaterinburg," Oleg Deripaska, the billionaire chief executive of RUSAL, told the summit.
"You can't just apply Western cases to understand what you do with social infrastructure or how to deal with extensive supply from your own facility....you need to have a partner and b commitment from the federal or local government."
Oil group BP (BP.L) got into a bitter tussle for control of joint venture TNK-BP with a quartet of Russian billionaires, but Russia's oil reserves were too important for BP to walk away and a solution was found after much squabbling.
France's Carrefour Europe's top retailer, left last year, however, just four months after gaining a foothold in what was once one of Europe's fastest-growing retail markets.
Norwegian group Telenor endured a half-decade long battle with its Russian partner Alfa Group, controlled by billionaire Mikhail Fridman, over Vimpelcom.
"Russia is still a country that substantially differs from the EU on overall climate of doing business -- there are certain things that frighten investors and the level of corruption is relatively high," Mikhail Alexeyev, the head of the Russian unit of Italian bank UniCredit said at the summit.
That may be putting it mildly. Berlin-based watchdog Transparency International placed Russia in joint 146th place in its Corruption Perception Index, along with Zimbabwe and Sierra Leone.
Earlier this year, Swedish furniture retailer Ikea sacked two executives for turning a blind eye to bribery by a subcontractor in Russia.
But the country's allure is unmistakeable. The president of Citi's Russian unit, Zdenek Turek, said that its credit card business had a record month in August.
"Pensions are rising by 40 percent a year and disposable income by 12-13 percent. We see the long term... growth being not debt-fueled but driven by genuine demand," Matthias Siller, manager of the $150 million Baring Russia Fund, said.
Not All Russia's Fault?
There are clearly things the European companies have got wrong -- underestimating the strength and resilience of local competition, arrogantly trying to transplant Western practices and running afoul of powerful figures close to government.
"Many European companies have tended to bring their own agenda into Russia, instead of trying to find a fit and a marriage with Russia as a diversified and multicultural country," said Robert Gruman, Partner, Advisory Leader for Russia at PricewaterhouseCoopers.
"They've been a bit arrogant and a bit naive. Because Russia is very close to the EU, they've come in with the understanding that the culture and business practices are the same as those in Western Europe."
Deripaska, one of Russia's richest men, said that foreign players had to adjust to local conditions and the country was no worse than other emerging markets -- its courts were easier than India's and copyright protection was superior to that in China.
"A global corporation is never going to be transformed into a classical local player... but major companies who cut and paste certain business models should remember that (managing in Russia) is an art," UniCredit's Alexeyev said.
Working closely with the state when appropriate is also a good idea.
"The first rule is to understand how the strategic sectors, such as energy and commodities, are treated: only cooperation with the Russian state will bear fruit," Siller said.
As for the oligarchs, European companies need to find a way to navigate around them.
"Don't deal with them," said Maarten van den Belt, CEO of Wermuth Asset Management. "You have to know your place here, you need to know what you can do and what you can't."
There's also an element of the companies blaming Russia for their own failings, Siller said.
"The management team wasn't up to the task but found it easier to blame Russia -- it's easy to blame the red tape, the bureaucracy and the corruption," he said, referring to French company Carrefour's hasty exit.
"Those domestic companies that enjoy high margins will not sit on their hands when someone comes in to eat their cake."
Disappointments haven't been limited to European companies. Rupert Murdoch's News Corp and ConocoPhillips have had their share, and the latter is selling its 20 percent stake in LUKOIL Russia's No. 2 oil producer.
Foreign investment into Russia fell 5.5 percent to $30.4 billion in the first six months of 2010, but European companies -- ranging from German to Cypriot ones -- still led the pack.
Assets could make relatively cheap acquisitions. According to Thomson Reuters data, Russian firms trade at 5.7 times forward earnings compared with between 9 and 15 times for companies from its BRIC rivals, Brazil, India and China.
The odd failure notwithstanding, most Western groups are hunkering down, determined to make Russia work out for them.
"Russia is among the few pockets of genuine growth left," Siller said.
[Source: By Sitaraman Shankar, Reuters, Moscow, 15Sep10]
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