Russian Business Guide

RUSSIAN BUSINESS GUIDE FOR THE CLEANING INDUSTRY LEARN MORE ABOUT THE RUSSIAN CLEANING INDUSTRY.

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RUSSIA IS NOW OPEN FOR BUSINESS. A uniquely vast and culturally-rich nation, Russia is the world’s largest country, spanning over an eighth of the planet’s inhabited land area.

And with more than 140 million consumers and an ever-expanding economy, Russia has plenty to offer investors in the way of a growing cleaning industry that is ripe for business development.

ISSA, together with its alliance partner, The Association of Russian Cleaning Companies (RCCA), has produced this guide- offering you a comprehensive look at this promising market, its growth potential, its cleaning industry, and additional useful information for conducting business there.

With ISSA and RCCA as your guides, you can explore this exciting country and make the right decisions for the future of your business in Russia.

– John P. Garfinkel, Executive Director, ISSA & Vera Ushakova, President , RCCA

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ISSA: Russian Business Guide

CONTENTS Introduction

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Facts and Figures

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Economy of Russia

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Economic Risk

Russian Cleaning Industry

Your Business Partner References

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For more information please contact: Martine MallÊe Marketing & Communications Manager EMEA E-mail: martine@issa.com ISSA Europe Europaplein 22 1078 GZ Amsterdam • The Netherlands www.issa.com/europe

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INTRODUCTION The Russian Federation is a country of vast landscapes, vibrant cultures and diverse people.

At approximately 17,075,400 square kilometres (6,592,800 square miles), and covering over an eighth of the Earth’s inhabited land area, Russia is the largest country in the world. The two widest separated areas in Russia are Kaliningrad Region – bordering Poland – to the west; and the Big Diomede Island – bordering the US state of Alaska – to the east. In total, Russia spans 9 time zones.

The Ural Mountains divide Russia into the continents of Europe and Asia. One fourth of the Russian territory lies in Europe, the rest lies in Asia. Being home to a huge variety of people from many different cultures, heritages and traditions, Russia is often viewed as a ‘bridge’ between Europe and Asia, both culturally as well as geographically.

With more than 143 million people, Russia is the eighth most populous nation in the world. Ethnic Russians comprise approximately 80 per cent of the country’s population. The Russian Federation is also home to roughly 160 other ethnic groups and indigenous people living within its borders.

Sizeable minorities include Tatars, Ukrainians, Bashkirs, Chuvash, Chechen and Armenians.

It is estimated that over 81per cent speak the official language of Russian as their first and only language, and most speakers of a minority language are also bilingual speakers of Russian. There are over 100 minority languages spoken in Russia today, the most popular of which is Tatar, spoken by more than 3per cent of the country’s population Though Russia has a large population, due to its enormous size, its density is relatively low. The population is most dense in European Russia, near the Ural Mountains, and in southwest Siberia. Seventy-three per cent of the population lives in urban areas, with 27 per cent living in rural areas. The capital and by far the most populous city of Russia is Moscow, and the second largest city is St. Petersburg, known as the ‘Northern capital’. Other relatively large and highly populated cities include Novosibirsk, Yekaterinburg, Nizhny Novgorod and Samara.

Following the Russian Revolution of 1917, Russia became the largest and leading constituent of the Soviet Union (the Union of Soviet Socialist Republics, or the USSR), the world’s first constitutionally socialist state and a recognized superpower. The Soviet Union played a decisive role in the Allied victory in World War II, and pioneered some of the most significant technological advances of the 20th Century, including the world’s first human spaceflight.

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ISSA: Russian Business Guide

WITH OVER 143 MILLION PEOPLE, RUSSIA IS THE EIGHTH MOST POPULOUS NATION IN THE WORLD. The Russian Federation was founded following the disintegration of the Soviet Union in 1991, but it is recognized as the continuing legal personality of the Soviet state.

Russia has the world’s 11th largest economy by nominal GDP, or the 6th largest by purchasing power.

It is recognized as one of the ‘Great Powers’, and is a permanent member of the United Nations Security Council, a member of the G8, the G20, the Council of Europe, the Asia-Pacific Economic Cooperation, the Shanghai Cooperation Organisation, the Eurasian Economic Community, the Organisation for Security and Cooperation in Europe (OSCE), the World Trade Organisation (WTO) and is the leading member of the Commonwealth of Independent States.

Source: www.kwintessential.co.uk Source: www.wikipedia.com Source: http://www.waytorussia.net/WhatIsRussia/Intro.html

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FACTS AND FIGURES THE EU-RUSSIA PARTNERSHIP – BASIC FACTS AND FIGURES The European Union (EU) and Russia are not only neighbours but strategic partners who cooperate on a wide range of bilateral and global challenges, based on joint commitments and shared interests.

INSTITUTIONAL FRAMEWORK The current legal basis for relations between the EU and Russia is the Partnership and Cooperation Agreement (PCA), in force since December 1997.

The Agreement provides for political dialogue, The current legal basis for bilateral trade and investment liberalisation, as well relations between the EU and as social, economic, financial, scientific and cultural Russia is the cooperation. It is automatically extended annually Partnership and Cooperation until replaced by the New Agreement. Negotiations Agreement (PCA) on a new, ambitious bilateral treaty were launched by the 2008 Khanty-Mansyisk Summit and have since made progress on a wide array of economic and political matters. The New Agreement provides a solid basis for strong EU-Russia relations, covering all areas of cooperation, including far-reaching trade, investment and energy provisions.

RUSSIA HAS THE WORLD’S 11TH LARGEST ECONOMY BY NOMINAL GPD At the St. Petersburg Summit (May 2003), the EU and Russia agreed to reinforce their cooperation by creating four ‘common spaces’ – areas of deep policy cooperation in a number of key sectors.

At the Moscow Summit in May 2005, detailed ‘road maps’ for the implementation of each of these common spaces were adopted. The Common Economic Space covers economic and trade relations and aims to make Europe and Russia’s economic and regulatory frameworks more compatible, thus boosting investment and trade. The Common Space of Freedom, Security and Justice covers justice and homeland affairs, rule of law, and human rights. The Common Space of External Security, which includes crisis management and non-proliferation, deals with bilateral and global cooperation between the EU and Russia. Finally, the Common Space of Research and Education allows for enhanced cooperation in these fields, including cultural collaboration.

To support Russia’s reforms in an even more targeted fashion, the 2011 Summit in Rostov-onDon saw the launch of the Partnership for Modernisation. This serves as a flexible framework for promoting reform, enhancing growth and raising competitiveness, while involving society at large.

The rule of law, the protection of citizens’ rights and ensuring a level-playing field for companies are all critical in this regard. The Partnership builds on the four Common Spaces and complements the bilateral partnerships for modernisation that exist between several EU Member States and Russia.

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ISSA: Russian Business Guide

Twice-yearly human rights consultations have been taking place since 2005, and allow open and frank exchanges on human rights issues in the EU and in Russia, including individual cases.

ECONOMIC RELATIONS Economic ties between Russia and the EU have grown substantially over recent years. Russia is the EU’s third most important trading partner in goods (after the US and China), with €66 billion in exports to Russia (6 per cent of all EU exports, 4th place) and €115 billion in imports in 2009 (9.6 per cent of all EU imports, 3rd place after China and US). The EU is thus the largest market for Russian goods.

In 2009 both imports and exports fell by a third due to the global economic crisis. But since 2010, trade has been picking up again significantly. Russia’s total account surplus rose by 47 per cent compared to 2009 and reached $79 billion.

Foreign Direct Investment flows from the EU to Russia reached €25.5 billion in 2008, before dropping during the global economic crisis. Still, Europe clearly remains the largest investor in Russia. In 2009, inverse investment flows from Russia to the EU amounted to €3.3 billion.

More specifically, Russia is the EU’s most important single supplier of energy products (oil, oil products, gas, uranium and coal), covering over 25 per cent of the EU consumption of oil and gas.

In turn, the European Union is the most important destination for Russia’s energy exports. Russia’s economy remains very dependent on the export of raw materials. For example, the EU accounts for 88 per cent of Russia’s total oil exports, 70 per cent of its gas exports and 50 per cent of its coal exports. The export of raw materials to the EU represents around 40 per cent of the Russian budget.

Energy represents 65 per cent of total EU imports from Russia.

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Russia is the EU’s most important single supplier of energy products, covering over 25% of the EU’s consumption of oil and gas

Financial cooperation between the EU and Russia began in the early 1990s, under the TACIS programme, which has in the meantime been replaced by the European Neighbourhood and Partnership Instrument. To help smooth Russia’s transition, a wide range of sectors were supported. Since 1991, a total of around €2.8 billion of assistance was provided through the European Commission. A number of TACIS projects are still being implemented, and will continue until 2013.

Given the significant recent improvements in the Russian Federation’s fiscal position, the need for large volumes of financial assistance has declined. In fact, Russia itself has become a donor. Financial cooperation is now specifically targeted to meet the objectives defined in the road-maps to the EU-Russia Common Spaces. Cooperation is now carried out on the principle of co-financing by the EU and Russia. Most notably, Russia is co-financing Cross Border Cooperation programmes. Emphasis is on higher education cooperation, with Erasmus Mundus and Tempus supporting the mobility of students and teaching staff.

Furthermore, funding for Russia also comes from the Nuclear Safety Instrument (€500 million since 1991) and a number of other thematic programmes. The European Democracy and Human Rights Instrument (EIDHR) financed 14 human rights projects in Russia in 2010 for nearly €2 million, and the Institution Building Partnership Programme supported 16 projects with NGOs for a total of €5 million.

Source: www.europa.eu

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ECONOMY OF RUSSIA Russia belongs to the BRICS countries together with Brazil, India, China, and South Africa.

Goldman Sachs describes the BRICS countries as emerging economic superpowers.

The country has a wealth of raw materials, including the world’s largest reserves of mineral and energy resources, and it is the largest oil producer and second largest natural gas producer globally.

Russia also has the world’s largest forest resources and its lakes contain approximately one quarter of the world’s fresh water. Russia exports large amounts of oil and gas, with the country being a key oil and gas supplier to much of Europe.

Russia is a growing market, with attractive prospects for investment. Retail and consumer spending grew more than 10 per cent a year before the global economic crisis. For 2010-2014, the Economist Intelligence Unit (EIU) expects growth rates in this sector of an average of 5 per cent annually.

After years of economic prosperity, Russia was hit hard by the global economic crisis. GDP shrank 7.9 per cent in 2009, although in 2010 economic growth returned somewhat - the Federal State Statistics Service (RosStat) estimated that real GDP grew by 2.9 per cent year over year in the first quarter of 2010. More recent data on industrial output, retail sales and other indicators suggest that the pace of recovery has accelerated even further. This assumption is also supported by estimates from the Ministry of Economic Development, which indicated that GDP was up by 4.2 per cent year over year in the first half of 2010.

THE COUNTRY HAS A WEALTH OF RAW MATERIALS, INCLUDING THE WORLD’S LARGEST RESERVES OF MINERAL AND ENERGY RESOURCES The return to growth is being underpinned by a large stimulus package, an upturn in external demand, and lower interest rates. In contrast to many other countries, the expected return to growth will be unencumbered by the need to deleverage a large volume of household debt, and this should support a recovery of private consumption.

Russia is a growing market, with attractive prospects for investment.

The economic development of the country is geographically uneven, with the city of Moscow and the surrounding areas contributing a very large share of the country’s GDP. Another problem is the modernisation of infrastructure, which, in many areas, is ageing and inadequate after years of being neglected in the 1990s. However, the government has promised a $1 trillion investment in the development of Russia’s infrastructure by 2020 to improve this situation.

Source: www.agentschap.nl

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ECONOMIC RISK Whilst it is undoubtedly an ever-growing economic power, Russia is affected by some fastchanging, dynamic political risks. Irrespective of these risks, Russia remains an attractive investment destination – particularly for the long term where the country scores well on resource security, infrastructure readiness and education.

So long as risks are assessed, monitored and managed in the short term, Russia remains, as do all of the BRICS group, an important growth economy and contributor to global economic recovery.

Foreign direct investment in the main emerging economies rose by 17 per cent over 2011, according to the World Bank, with the BRICS nations accounting for half of this increase. However, significant challenges for investors remain as risks such as an absence of the rule of law and a prevalence of corruption and conflict prohibit business and societies from thriving.

Jim O’Neil, Chairman of Goldman Sachs Asset Management, states: “Growth is happening where political risk is most challenging. So, meticulous monitoring and mitigation now will enable business to flourish and benefit from the opportunities presented by the future growth economies of the BRICs and Next 11”.

Source: www.maplecroft.comj

The AON Corporation is a leading provider of risk management services, insurance and reassurance brokerage and human capital and management consultancy. According to AON’s 2012 map, Russia is classed as ‘medium-risk’, and its ‘significant risks’ include ‘political interference’, ‘supply chain distribution’, and ‘legal and regulatory risks’.

Source: www.aon.comj

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ISSA: Russian Business Guide

RUSSIAN CLEANING INDUSTRY The cleaning industry in Russia is still in its early stages of development, moving away from a low level of standards to more sophisticated professionalism. Contract cleaning in Russia started after 1990, first in Moscow and St. Petersburg, and consequently in other cities throughout Russia. Contract cleaning makes up approximately 30-40 per cent of the total cleaning services in Russia. The market began as individual cleaning people working similarly to residential cleaners, but has grown to include professional cleaning companies.

There are about 2,000 various cleaning services companies on the Russian market – among them approximately 380 companies in Moscow and approximately 230 companies in St. Petersburg. In many companies, cleaners come from former Soviet Republics, including Uzbekistan, Tajikistan, Moldova. Managers may come from Ukraine and small towns in Russia, whilst Directors and CEOs are usually citizens of the cities where the company is located.

During the Global Financial Crisis of 2008, many businesses turned from contract cleaning to hiring their own, in-house cleaning staff in order to reduce expenses. Russian in-house cleaning staffs represent a mix of decision makers. Less sophisticated in-house customers purchase supplies from local stores, while more sophisticated ones purchase from local distributors.

The market for outsourced cleaning in Russia is likely to grow further in the near-future, in addition to other general cleaning services as the economy improves and building owners seek a higher level of cleaning quality.

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There are about 2,000 various cleaning services companies on the Russian market - among them approximately 380 companies in Moscow and approximately 230 companies in St. Petersburg.

Often, when new contract cleaners first appear on the market, they use traditional cleaning practises involving very little innovation. Modern cleaning technologies are very often ignored with the explanation that it keeps costs down in the short-term to use the readily available cheap-labour and use the most basic of equipment and cleaning methods. However, as contract cleaners become more sophisticated they start to look for new innovations to set themselves apart and increase efficiencies.

Due to the large space of trade centres in Russia, hard floor cleaning accounts for the highest percentage of the country’s cleaning services (50 per cent), whilst sanitary rooms (restrooms) also take a large percentage.

Due to the long and cold Russian winters (-10 to -15C), windows must be serviced at least twice a year. In addition, a large percentage of total cleaning services in Russia during winter months are concerned with snow removal and other weather-related services. As much as 20-40 per cent of contracted services relate to winter-weather needs.

RUSSIAN CLEANING SUPPLY MARKET Whilst for many international contract cleaners the Russian market may seem risky due to price pressure and difficulties with reliable staff, there are many exciting opportunities for international manufacturers, primarily in the production of equipment and machines with for a focus on floor machines, sweepers, and small and medium street cleaning machines. International investors in equipment and machines will find a high demand for affordable floor cleaning equipment and sweepers.

One incentive for manufacturers interested in the Russian market is government guaranties that are available through the Russian Department of Economical Development. To learn more, contact invest@economy.gov.ru or call the Department head, Sergey Belyakov at +7(495)651-7964.

The supply chain for the Russian cleaning industry works mainly via the distribution of imported equipment, chemicals and supplies. There are few producers of mopping systems in Russia, still less producers of cleaning equipment. However there is a moderately large number of local producers in the washing and disinfecting chemical categories.

Local producers and distributors of imported products usually organise extensive supply chains all across Russia, as the country is so vast and it is difficult to operate effectively from one fixed base.

Products and technologies are promoted at seminars, exhibitions, conferences and, of course, producers and distributors will usually have sales departments whose team will visit potential customers and demonstrate equipment, chemicals and machines on a regular basis.

Most professional products are sold via distributors, called trade companies. There are many distributors in large cities and most have smaller branches that cover outlying towns. Though there are smaller distributors that focus in smaller geographic areas.

Source: The Russian Cleaning Companies Association

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ISSA: Russian Business Guide

YOUR BUSINESS PARTNER The Association of Russian Cleaning Companies (RCCA) was founded in 2001 as the professional association of cleaning companies and suppliers of products for the cleaning industry in Russia.

The Association’s key strategic goals and objectives include the development of cleaning services in Russia, and offering of support and advice to Association members.

The Association’s activities include: - Coordinating networking between members of the Association; - Fostering programs for the development of business cooperation in the Russian cleaning industry; - Creating networks of regional branches for strategic decision-making regarding specific problems in the professional cleaning industry; - Providing assistance to members for the introduction and advancement of new technologies; - Representing and advancing professional cleaning through interaction with the government, the public, the international community and other organizations; - Providing consulting help and support to the members of Association; - Facilitating an exchange of experience, opinions and offers by way of seminars, publications and public work; - Advocating for Russian Federation legislation favorable to the cleaning industry and the organization of professional education programmers.

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EXCLUSIVE BUSINESS MEETINGS Using their combined, extensive experience, RCCA and ISSA facilitate the linking of businesses from all over the world with Russian cleaning companies. ISSA and RCCA are on hand to help you find the right contact to develop your business in the Russian market.

Organizing custom-made business programs, ISSA and RCCA can offer you great ideas for company activities and agendas.

Please go to the following link to find the most up-to-date agenda points: issa.com/europe.

The Russian Cleaning Companies Association (RCCA) Contact: Vera Ushakova Tel.: 7-812-448-0033 E-mail: yr@aruk.ru Web site: http://www.aruk.ru

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The Worldwide Cleaning Industry Association (ISSA) Contact: Keith Baker Tel.: E-mail: keith@issa.com Website: www.issa.com/europe

ISSA: Russian Business Guide

REFERENCES SOURCES European Union’s Europa, europa.eu Kwintessential UK, www.kwintessential.co.uk Maplecroft Global Risks Portfolio, maplecroft.com NL Agency – Ministry of Economic Affairs, Agriculture and Innovation, www.agentschapnl.nl Russian Cleaning Companies Association, www.aruk.ru

CLEANING INDUSTRY RESOURCES ISSA

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RCCA

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www.aruk.ru

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ISSA – The Worldwide Cleaning Industry Association Europaplein 22 • 1078 GZ Amsterdam • The Netherlands – Europe 7373 N. Lincoln Ave. Lincolnwood, IL 60712-1799 – USA 800.225.4772 (North America) • 847.982.0800 Fax: 847.982.1012 E-mail: info@issa.com

The Russian Cleaning Companies Association (RCCA) Contact: Vera Ushakova Tel.: 7-812-448-0033 E-mail: yr@aruk.ru Web site: http://www.aruk.ru

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ISSA: Russian Business Guide