BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA
...Marching towards a common future
WEDNESDAY, OCTOBER 13, 2010
Partnership Despite many problems, Moscow remains New Delhi's trusted partner and source of high-end technologies
NEWS IN BRIEF ALEXEY DRUZHININ_RIA NOVOSTI
Decks cleared for 5th-Gen jet fighter Russia and India are set to crown decades of defence cooperation with joint production of two projects: a fifth generation fighter aircraft and a multi-role transport aircraft. VLAD SOKOL RIBR
Crowning decades of successful defence cooperation, India and Russia have firmed up plans to jointly design, develop and manufacture the fifth-generation fighter aircraft (FGFA) and multi-role transport aircraft (MTA), two of the most challenging joint projects taken by the two strategic partners. The preliminary design contract for FGFA, India’s biggest-ever defence project, is expected to be signed during President Dmitry Medvedev’s visit to India in December. The decisions were taken at the 10th annual meeting of the Indo-Russian Inter-Governmental Commission on Military-Technical Cooperation (IRIGC-MTC) held in New Delhi early October. Over the past decade, India and Russia have transformed their multi-billion-dollar defence interaction from a buyer-seller relationship to joint development of high-end technologies and advanced weapon platforms. The FGFA is poised to propel India into the exclusive club of global powers – the U.S.,
Russia and China, who have or will have the capability to build it in the foreseeable future. The Indian Air Force (IAF) plans to acquire 250 to 300 of these stealth fighters. They will give the IAF unquestionable air supremacy in Asia.The FGFA is tipped to be superior to the comparable F-22 Raptor while costing just over half the price of the American 5th-generation jet figter. India will contribute about 30% of the plane’s total design by providing composite material components, some avionics, electronic warfare systems and cockpit displays. Indian designers will also be responsible for re-modeling Russia’s single-seat fighter into a two-seater version for the IAF. The MTA project, too, got the final go-ahead at the 10th IRIGC-MTS session with the signing of a shareholding agreement providing for a 50% contribution by each side to the plane’s cost and development. It is the first Indo-Russian project where India will be involved right at the drawing-board stage. The 20-tonne MTA will not only give the Indian and Russian air forces a new workhorse, but will be modified later into a 100-seater passenger aircraft.“In the coming 10 years, the FGFA and MTA projects will be the flagship programmes in In-
do-Russian defence cooperation,”India’s Defence Minister A. K. Antony said after co-chairing the 10th IRIGCMTC with his Russian counterpart Anatoly Serdyukov. He lauded the two projects as “shining examples of defence cooperation between the two countries”. Russia, which heavily dominated the Indian defence market for the past 50 years, today faces strong competition from leading arms exporters – the US, Israel, France and other European countries. Russia has also faced flak for delayed deliveries, cost escalations and inadequate product support. Antony flagged off India’s concerns at his talks with Serdyukov, who promised to address these issues soon. However, Russia has a key advantage over itsWestern rivals: it is willing to share with India any defence technologies.“There are things that we can get only from Russia. No one else would give them to us,”Indian military diplomats in Moscow admit. Next March, India will get the Nerpa nuclear-powered submarine from Russia on a 10year lease. It will help the Indian Navy train the crew for its first indigenously built nuclear submarine, INS Arihant, whose design is also based on Russian Akula-class submarines. India is the only country with
Russian railway carriages and locomotives could soon appear in India. Russia’s Transmashholding and India’s HE&I are in talks to launch joint production. The proposed cooperation includes both direct deliveries of rail equipment to India and the construction of a joint venture in India. “If Transmashholding offers good prices, it may well find demand on the Indian market. India needs cheap railway carriages and locomotives,”says Alexei Bezborodov, general director of InfraNews says. Another Russian producer, Power Machines Company, is also discussing a joint venture with Indian partners. In cooperation with India’s CetharVessels, Power Machines Company plans to produce turbines and generators in India. A memorandum of intent has already been signed. The partners expect to sell their Indian-made equipment both in Russia and abroad. Svetlana Sorokina
India will remain the number one destination for Russian defence sales in days to come. which Russia has a long-term programme of defence cooperation, which was extended for another 10 years till 2020 last year. The plan envisions about 200 joint projects in
aviation, shipbuilding, armour and missile technologies. Cooperation in strategic technologies is the next frontier. “Russia does not have, nor will ever have in the future, any restrictions on the supply of most cutting-edge military technologies to India, because it is in Russia’s national interests to see India as a strong regiona l a n d g l o b a l m i l i t a ry
power,”said Ruslan Pukhov, head of the Moscow-based Centre for Analysis of Strategies and Technologies (CAST). “India will remain the number 1 destination for Russian defence sales. In 2010-2013, India will account for 54.4% of Russian weapons exports estimated at over $15 billion,” says Russia’s Centre for Analysis of InternationalWeapons Trade (CAIWT).
The prescribed pill for success MINPROMTORG.GOV.RU
Much like its defence ties, both countries are poised to graduate from buyer-seller to co-developers and producers in the pharmaceutical sector. LILIYA TRUSHINA RIBR
Trade and Industry Minister Viktor D. Khristenko (right) at the meeting with the leaders of India’s pharmaceutical business
ber 10 m e v o N r 13/ Octobe
Indian expertise and technology into the Russian pharmaceutical industry, which is expected to grow to $60 billion by 2020. Much like the decades-old sturdy defence relationship, the India-Russia collaboration in the crucial area of pharmaceuticals has graduated from the seller-buyer model to that of co-production and research.“There are plans to sign a memorandum of understanding between the Russian Federation’s Minis-
try of Industry and Trade and India’s Ministry of the Chemical and Pharmaceutical Industries at the end of this year,”a beaming Khristenko said after the meeting. “Moreover, we expect that a whole package of agreements concerning specific projects involving both parties will be on the negotiating table together with the memorandum.”These pacts are expected to be inked during the visit of Russian President Dmitry Medvedev to
India in the second half of December, sources said. The Russian minister unfurled a new collaborative strategy that fitted in with Pharma 2020, a trademark Russian government strategy aimed at developing an innovative pharmaceuticals industry using foreign experience in research and production.“Today, we are actively proposing to our Indian partners that we get together. This is the start of an intensive dialogue in search of decisions, the first high-level meeting on issues concerning long-term cooperation in the field of pharmaceutics and biotechnologies,” said the minister. He offered a slew of incentives for Indian companies wishing to set up factories and start business in Russia. “Good conditions have been created for full-scale partnership in the pharmaceutical industry.” The response from the Indian side was enthusiastic.“We are ready for progress. I am sure that we shall soon achieve concrete results,”said Mukul Joshi, top Indian official in charge of the pharmaceutical industry. Representatives of leading Indian companies concurred.“We want to be involved in implementing the Russian programme, which promises to benefit both
countries, and we shall be happy to do so,” observed Ramesh Adige of Ranbaxy. “We are happy to work with our Russian partners and are willing to expand cooperation, especially in the area of innovation,”said A. Sawhney, Managing Director of Ranbaxy, whose tryst with the Russian market goes back nearly two decades to 1993. Sawhney, however, called for greater transparency in operations.
Indian companies are eyeing Russia, a big market for antidepressants, cough and cold products. The Russian delegation also visited National Institute of Pharmaceutical Education and Research, Chandigarh and Dr. Reddy’s Lab facilities at Bachupally near Hyderabad to garner first-hand knowledge of Indian pharmaceutical enterprises. In what could be a perfect marriage of technology, resources and market, Russia is increasingly looking to Indian pharmaceutical companies to cut down its dependence on foreign drugs (which account for 80% of its needs). India is a natural partner be-
The assembling of the fifth-generation fighter aircraft at the Sukhoi design bureau.
cause its annual export of pharmaceuticals to Russia is about $500 million and has modern manufacturing technologies at its disposal, says Mikhail Rapota, Russia’s Trade Representative in India. Joint ventures, says India’s Commerce and Industry Minister Anand Sharma, hold the key in the field of pharmaceuticals. Calling for scaling up the current level of IndoRussian bilateral trade of $4.54 billion to $20 billion by 2015, Sharma has stressed on the desirability of cooperation in the test and analytical facilities in Russia to certify standards to enable access of Indian pharmaceutical products to Russia. He also pitched for fast track registration of India’s pharma products within three months. Encouraged by incentives, Indian pharma companies are avidly eyeing Russia, a big market for anti-depressants, cough and cold products and lifestyle disorder drugs. "In 2008-09, India exported drugs worth Rs 1,244 crore (around $275 million) to Russia and that market is growing at about 18.5%, one of the fastest growth rates among all drug exporting destinations," says K Appaji, executive director of Pharmaceutical Exports Promotion Council (Pharmexcil). Our company is also open to marketing alliances with other companies in the Russian market, including those from India, says Satish Reddy, managing director of Dr Reddy’s Lab, the largest Indian pharma company in Russia.
Russia&India Business Report in
Kudrin gets 'Finance Minister of 2010' award REUTERS/VOSTOCK-PHOTO
Russian Vice Prime Minister and Finance Minister Alexei Kudrin has been presented with the Finance Minister of theYear 2010 award by Euromoney magazine. Padraic Fallon, the Chairman of Euromoney Institutional Investor, handed the award to Kudrin at the autumn session of the International Monetary Fund and theWorld Bank inWashington. Euromoney highly assessed Kudrin’s efforts in the formation of reserves from oil revenues coming to the Russian budget in the period of oil price growth. Fallon noted that the RF finance minister having overcome a considerable political pressure secured the creation of the Reserve Fund that allowed Russia to come out of the global financial crisis in a much better shape than the experts had expected. ITAR-TASS
A book on Lev Tolstoy and India released RCSC
“A HundredYears of Lev Tolstoy & The Indian Connection” by Achala Moulik, I.A.S.(Retd.), Former Education Secretary, Government of India, was released by Russian ambassador to India Alexander M. Kadakin at the India International Centre on September 28.The solemn ceremony was organised to commemorate the 100th death anniversary of Lev Tolstoy. In the welcome speech, Kadakin reminded that in India, Leo Tolstoy personifies a philosopher and a tireless seeker of satya.“Tolstoy’s greatness as a thinker, social activist and enlightener lies in the ideas expounded in his literary and epistolary oeuvre. They prove to be as relevant and valid today as one hundred years ago”,he stressed. RIBR
Octobe r 27/ N ovemb er24
TWICE A MONTH IN TWO DAILIES
The Economic Times
India and Russia are reviving the joint military exercise that focuses on counter-terrorism training.The 'Indra-2010' will be held in Chaubattia in Uttarakhand between October 15 and 24. The Russian contingent will have 257 personnel and the Indian side will be represented by an infantry battalion. The first of the Indra exercise series was conducted in India in October 2005 and the second was held in Russia in 2007. Since then, the two armies have not held an exercise under the series for the last three years. RIBR
Russian railway carriages and turbines for India
Sector Russia is increasingly looking to Indian companies for modernising its pharmaceutical industry
Buoyed by a recent upswing in bilateral trade, CEOs of top Indian and Russian pharmaceutical companies sat for an intense round table discussion Sept-end in a luxury hotel in Delhi that lasted for hours. Led by visiting Russian Trade and Industry Minister Viktor D. Khristenko, the meeting proved to be a big success, with both sides fleshing out concrete proposals for joint projects in the area of developing and manufacturing medicinal products.The Russian delegation included top leaders of Russian pharma industry, including Alexei E. Repik, chairman of the board, R-Pharm JSC, Igor Kyrlov, general director, Pharmastandard JSC, andVikram Singh Punia of JSC Pharmasyntez. Dr Reddy’s Laboratories, which notched up $130 millon sales in Russia in 2009, and Ranbaxy were among those Indian pharma companies who participated in the brainstorming session. The meeting was aimed at attracting a healthy dose of
Russia and India hold anti-terror drills
Russia&India Report in www.indrus.in
The Times of India
Companies
BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, OCTOBER 13, 2010
Glitter Time Armed with a new strategy, Russian government plans to sell 20-25% stake in Alrosa through an IPO in 2011-12; targets $1 billion exports to India REUTERS/VOSTOCK-PHOTO
REUTERS/VOSTOCK-PHOTO
Diamond miner braces for a sparkling makeover Diamond crystals from the Yakutian deposits
One seller for hundreds of buyers
FACT FILE Yakutia is Russia’s largest and coldest region, the world’s biggest administrative unit within a single country. It's 3.1 million sq km in size (roughly same as that of India), but has a population of only 950,000 people. Photo: Mir mine in winter
THE QUOTES
Yegor Borisov PRESIDENT OF YAKUTIA
SVETLANA SOROKINA RIBR
Alrosa, the world’s largest diamond miner, is on the cusp of a defining makeover as a successful market player with global ambitions. Russia’s diamond monopoly has won preliminary approval to change its legal status and sell shares to finance its ambitious investment programme. Legislators in Siberia’s Yakutia region, which owns 40% of the diamond monopoly, recently gave the green signal to restructure the financially troubled company into an open joint-stock company. They have passed the first of three required readings of the legislation that would allow Alrosa, owner of about a third of global diamond reserves, to go public and issue an IPO to raise money.
How it all began A six-hour flight from Moscow, Russia’s diamond zone, situated amid dense coniferous forest, permanent frost and temperatures below -50C (down to -70C in some areas), could not have been more remote and mysterious. On June 13, 1955, Soviet geologists searching for diamonds in Yakutia sent a radio message: “Smoking the peace pipe, excellent tobacco”. This was their code for informing about the discovery of the USSR’s biggest diamond deposit, the Mir kimberlite pipe (“mir” meaning“peace”in Russian). The discovery was the turning point in the region’s destiny and formed the bedrock of its economy after Alrosa set its base in the industrial centre of Mirny. All revenue from diamond sales remained inYakutia, generating 80% of the regional budget. A few years ago, when it became clear thatYakutia’s government alone was unable to protect Alrosa against international companies, the Russian government took control of the company, with the Federal Agency for State Property Management controlling 51%, the government ofYa-
"
The recent global financial crisis has demonstrated that in such circumstances we can live for a time and then we’ll run into a deadlock. Alrosa is becoming a more and more expensive company. The transition to underground mining is a clear proof of this. The company needs to develop. It is necessary to diversify production and develop other types of business. As for making the company public, this will bring about new jobs, greater tax payments and improved efficiency of its performance."
Sergey Goryainov ANALYST AT ROUGH & POLISHED.
"
The company needs to develop; it objectively needs money for a programme of underground mines, because existing fields are close to exhaustion. This decision will increase transparency, which is important to attract investors. Even if the Yakutia’s share will be reduced to 25% plus one share, it does not mean that they will lose control of the company. In terms of legislation, they have saved the block-package and the opportunity to influence the fate of Alrosa. The company needs money. And this argument is prevailing."
kutia 32%, eight municipal administrations 8%, and another 9% held by individual and corporate shareholders. The ownership structure is set to change again with the federal government deciding to make Alrosa a public company by selling a large stake to strategic investors.
The economic crisis The global financial crisis proved to be a baptism by fire for the Russian diamond monopoly, leading to a sharp fall in demand and prices dropping 50-60% in 2008– 2009. Before 2001, De Beers had been buying almost all of Russia’s rough diamonds, including small ones. By 2009, however, De Beers’ share in Alrosa’s exports dropped to zero. The cash crunch puts Alrosa, Yakutia’s biggest employer, in a bind. Despite mounting financial pressure, not a single employee was dismissed, nor was a single hospital closed, swelling the company’s debts.“In the six months from December 2008 to June 2009, Alrosa’s debt grew by over $1.5 billion,” says the company’s public relations director Andrei Polyakov. Finally, Alrosa’s management had to accept $1 billion in government support. Subsequently, Alrosa, which continued its mining operations, became the world’s largest producer with an increase in its global share from 22% to 29%, while De Beers, which suspended production, saw its share fall from 30% to 23%.
stock company into an open joint-stock company remains a hot-button issue, experts feel that it will boost the company’s investment appeal, reduce its debt and enhance management efficiency. Even if Yakutia’s share will be reduced to 25% plus one share, it does not mean that they will lose control of the company. The company has to“go underground” and build new mines. Its investment programme for 2011–2012 is worth less than $1 billion, says Polyakov. Agreements have already been reached with three investment banks that will join in the IPO, according to a source in the finance ministry. JPMorgan recently valued Alrosa at $7.3 billion to $9 billion (excluding obligations) and placed the company's broader valuation range at $5 billion to $10 billion. A company source said that the IPO could take place as soon as 2011-2012. Alrosa is counting on selling 20% to 25% of its shares for $1.5 billion to $2.3 billion. At least two groups of buyers are expected to fight for Alrosa’s shares: the Indians and Chinese. Indian diamond cutting firms have recently signed a memorandum to buy $490 million worth of diamonds annually, and might be willing to buy more.The Chinese, who are actively purchasing African deposits, are also bound to be attracted by the offer.
Prospects
New Marketing Strategy
Although Alrosa’s restructuring from a closed joint-
Over the next five years, Alrosa plans to increase output
Long-term contracts for rough diamonds Russia and India are negotiating supply contracts to boost imports of rough diamonds to India. The discussions also touched upon Alrosa opening an office in India. Commerce Minister Anand Sharma met his Russian counterpart Victor B. Khristenko in New Delhi in late September and underlined that cooperation in the diamond sector would expand bilateral trade and foster stability in the world dia-
mond markets. Though India’s cutting methods are considered the cheapest, the country remains the world’s No. 1 diamond producer, accounting for 59% of global production, a far cry from Russia’s 4.8%. In Russia, Indian diamonds are in demand. According to RusJewellerExpert, Indian companies are leading in the most in-demand segment of so-called mass market products (upto 5,000-
10,000 roubles per piece), which accounts for 60% of the jewellery market in terms of quantity. Typically, these are lightweight jewellery pieces weighing 2-3 grams. The average price segment (between 10,000 and 25,000 roubles) constitutes 30% of the market, while the remaining 10% are high quality (25,000 to 100,000 roubles) and premium products (above 100,000 roubles).
to 165-167 million carats a year (in 2009, production was down to 115 million carats). The company’s experts hope that market prices for rough diamonds will go up by 55% by 2018. Along with its IPO, Alrosa will also change its sales strategy to look more like De Beers by controlling its supply of rough diamonds and selling them to a small num-
ber of trusted customers. In accordance with its sales strategy through 2012, Alrosa will sell at least 70% of its rough diamonds through long-term contracts. In 2010, Alrosa hopes to bring its share of such contract sales to 56% of revenue, up from 21% in 2009. The company is currently working to build a pool of loyal customers. In the spring of 2010, it
exported. While most of Russia’s rough diamonds are exported, the country's diamond jewellery market is dominated by imports. Until 2009, Alrosa did not sell rough diamonds directly in international markets, but sold everything to South African De Beers. On the domestic front, Alrosa’s main clients are: EPL Diamond Group and DDK in Yakutia, Ruis Diamonds Ltd. in Moscow, and Kristall in Smolensk. The State Repository (Gokhran) acts as a storage facility.
signed a three-year agreement with India’s Rosy Blue, Diamond India Limited, and Ratilal Becharlal and Sons to supply rough diamonds. The company signed long-term contracts with fifteen Belgian companies this summer worth about $500 million.Talks are going on with companies in China, Armenia, Belarus, and Israel. Russia exported 12.452
million carats of diamonds in the first quarter of 2010 for $765.779 million, against 6.649 million carats worth $414.836 million in the first quarter of 2008. Belgium and India were the largest buyers in JanuaryMarch 2010, accounting for 66% and 17%, respectively. Alrosa is planning to bring its exports of diamonds to India to $1 billion.
‘The risk taken was worth it,’ says Choron CEO Rajesh Gandhi, CEO of Choron Diamond, Russiabased jewellery company, is upbeat about the prospects of doing business in Russia.
CHORON DAIMOND
Russia’s diamond monopoly is set for a transformation into a De Beers-like marketsavvy global giant with an ambitious plan for an IPO.
Russia’s diamond market is an intricate structure in which one supplier serves hundreds of buyers. Russia produces rough diamonds worth around $3 billion annually. Older deposits, developing since the late 1950s, account for approximately 60% of total reserves. Alrosa produces 99% of Russia’s rough diamonds, while the diamondcutting sector consists of 100150 small firms. Slightly less than half of the diamonds produced, or 44.2%, are sold domestically while 55.8% are
SVETLANA SOROKINA RIBR
How was Choron Diamond affected by the global crisis? What is your turnover today and what is your forecast for the sales this year? Since October 2008 – a year before the full effects of the financial crisis were felt – we have worked with tremendous caution and kept a close eye on the market through our strong 350 retailers who sell our products.We have reorganised our product and strategy. We brought the production to a minimum in 2009. We foresee an increase of 25 per cent of our sales than in the year 2009. This policy has proven successful,especially when the going gets tough. In 2007, you planned to invest $65 million in creating a network of retail shops. Has the crisis changed your plan? After an in-depth analysis of the property market in Moscow and St. Petersburg, we came to the conclusion that the property market at that time was overheated. However, we have not given up and are looking for the right time to plunge back. What is the structure of Russian subsidiary of Choron Diamond?
Rajesh Gandhi, General Director of Choron Diamond.
At Choron Diamond Russia, we are processing the full life cycle of a diamond. Right from procurement of rough diamonds from the miners to selling of diamond studded jewellery to the consumers, we are polishing rough diamonds at our hi-tech manufacturing unit in Yakutsk (Yakutia region). The polished diamonds are then sorted by qualified gemmologists. Based on the assortments and the demand for the internal markets, the polished diamonds are either exported or offered to jewellery factories and wholesalers across the Russian Federation. Similarly, the diamond-studded jewellery is sold through our retailers. The next logical step is to enter retailing and start our own retail network.
You have factories in both, India and Russia. How do you leverage this advantage? It helps to get the most from the experience that specialists from both countries have. In fact, the company does not only own factories in Yakutsk and Mumbai, we also work intensively with our partners in China, Thailand, Italy and other countries. We want to keep up with all the changes in the moods of customers so that we can offer them worldclass products. Our products are the result of work done by specialists from all over the world. That is one of the keys to our success. Your family has been involved in cutting and polishing diamonds for over 65 years. When you started your busi-
ness in Russia, how did your relatives react? Initially, my relatives did not like the idea of working in Russia and opposed it. But after a few years of successful working, they started joining the business. My elder son, my wife and three of my cousin brothers are already an integral part of the group. Soon, my younger son will enter the business and I can’t wait to see that day. Coming to Russia was a risk but now we can proudly say that it was worth it. The company has been in the market for 11 years. In 2008 and 2009, Choron Diamond was named the Best Exporter in the industry and in 2010, the Best Taxpayer. It was adjudged by the Indian Business Alliance as the Best Indian company in Russia. What were your first impressions of Russia? I remember when I came to Yakutsk, it was - 40 degrees outside and in the centre of the city, opposite to the cinema there was a billboard with an advertising of the Shri 420 film, starring Raj Kapoor. I couldn’t believe my eyes at first. Probably, this billboard was a sign from above, a sign that I will succeed. Initially, there were some difficulties. However, the moment I learnt the Russian language, things became much easier for me. People in Russia welcomed me wholeheartedly and continue to make me feel at home here.
in@rbth.ru
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BUSINESS REPORT
Finance
IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, OCTOBER 13, 2010
M&A Multinationals target local iconic brands as Russian companies go global by buying assets in new markets
BUSINESS IN BRIEF
A new breed of emerging market MNCs has arrived
Moscow tumbles down to 56 in world’s expensive cities list
REUTERS/VOSTOCK-PHOTO
A new class of emergingmarket multinationals is rapidly establishing footprints in the world's fastest-growing markets. BEN ARIS BUSINESS NEW EUROPE
Riding on the back of rockbottom prices, mergers and acquisitions (M&A) are booming in Eastern Europe as a new class of emergingmarket multinationals come into their own. Deals are going in both directions: multinationals are taking advantage of a pause in Russia’s boom to grab cheap assets as a part of their longterm strategic plans to expand in what was already (briefly in 2008) Europe’s largest consumer market. At the same time, Russian companies are cashing in on the economic malaise in the developed world to diversify away from the domestic market and begin the process of building up true Russian multinationals. The Coca-Cola Company grabbed the headlines at the start of September by completing the purchase of one of Russia’s biggest juice producers, Nidan Soki. Coke bought a 75 per cent stake in Nidan from London-based investment firm Lion Capital, as well as the remaining
25 per cent held by Nidan's founders. The juice maker has facilities in Novosibirsk and the Moscow region town of Kotelniki.The acquisition will bolster the US firm in its fight against archrival PepsiCo, which bought the Russian mineral water producer Lebedansky in March 2008. With over 50 years in the local market, Pepsi is seen as a Russian drink by Russians. Pepsi opened its first factory after an agreement between Richard Nixon and Nikita Khrushchev during the US president's visit to Moscow in 1959. "Acquiring Russian brands is a way to compete," says Ilya Plakhinas, head of the marketing division at Soldis Communications. The Nidan deal reflects Coca-Cola's confidence in Russia's potential and its commitment to invest more in the future, Ahmet Bozer, president of Coca-Cola's Eurasia and Africa Group, told The Moscow Times. In August, mining giant Rio Tinto was reportedly sniffing around Russia’s leading potash company Uralkali, just as global mining giant BHP Billiton launched a hostile bid for Canada’s PotashCo, the biggest producer of fertiliser in the world. However, by the end of the month, Uralkali had decid-
Gold producer Polyus Gold plans to end acquisition talks with KazakhGold by November.
Eastern Europe Transactions
SOURCE: BUSINESSNEWEUROPE.EU
ed to bolster its global position through a merger with Russian peer Silvinit in a deal that is expected to be finalised soon. Investment is going in the other direction. Russia’s biggest mobile phone operator VimpelCom is in talks with Egyptian billionaire Naguib Sawiris for acquiring a 51.6% stake in Orascom Telecom Holding (OTH), a leading Middle Eastern operator, and 100% of Italy's Wind Telecomunicazioni. According to reports in the Italian newspaper Il Sole 24
Ore,VimpelCom and Sawiris are close to signing off on the $6.4bn deal. And stateowned oil major Rosneft caused a stir after it announced that it was in "advanced negotiations" to buy controlling stakes in four German oil refineries at the end of August that belong to Germany's Ruhr Oel. Activity by emerging market companies aimed at developed economies jumped 25% in January through June from the previous six-month period, KPMG said in its latest Emerging Markets International Acquisition Tracker. India leads the way in terms of the number of deals and the US was the biggest target, with 54 agreements struck in the period out of a total of 243 deals in developed economies by emerging market companies. The KPMG study tracks completed deals in which an acquirer took at least a 5% shareholding interest. "It appears that a new breed of emerging-market multinationals are establishing footholds in the world's fastest growing markets," Mark Barnes, principal in charge of KPMG's US high-growth markets practice, was quoted as saying. And volumes are expected to increase. According to consultancy MP Corporate Finance Group, the amount of combined domestic and international agreements in Russia spiked in July when a record 314 deals were struck worth an estimated $2bn – double the amount from a year earlier – with telecom deals leading the way.
Big Picture Putin allays worries w.r.t the winding down of the anti-crisis program as public debt dips, FDI reaches $25 bn
'Forget stagnation, better times ahead' Unlike many developed countries, Russia won't face stagnation after winding up anti-crisis programme, assures Prime Minister Putin. IRINA FILATOVA THE MOSCOW TIMES
Optimism is not exactly the middle name of Russian Prime Minister Vladimir Putin, but it would increasingly seem so. “I think the Russian economy can avoid a repeat of the negative scenario that is under way in many European markets — we can see it now — when a long stagnation period follows a winding-down of state programmes,” he predicted at VTB Capital's investment forum in Moscow. The level of Russia's public debt is much lower compared with most developed countries, where the figure
has already exceeded “the safety threshold”of 60 percent of GDP, Putin said. Russia's public debt currently stands at only 11 per cent of GDP and is not likely to exceed 20 per cent, he said. The unflappable leader, who turned 58 on Oct 7, underlined the government's commitment to enhance the attractiveness of the Russian market for foreign investors by creating a system of tax preferences.Many bills aimed at stimulating foreign investments to modernise the economy have already been sent to the State Duma, and another one will be sent in the coming days, he assured.The new bill cancels the profit tax for investors selling securities that are not publicly traded and have been held for at least five years.“We appreciate the fact that even more investors
choose Russia's economy and its stocks to invest capital,” Putin said, adding that foreign direct investment has reached $25 billion this year. Alluding to the three-year budget plan sent to the Duma last month, he said the country won't need “a reserve cushion”to cope with problems. The response was enthusiastic.“Excellent,”said Dominique Cerutti, deputy head of NYSE Euronext. He said that he was “positively impressed by the personal commitment of the prime minister”to turn Moscow into an international financial hub. “I think the understanding of the need of diversification of the economy is one of the main parameters that stand out here," said Telenor chief executive Jon Fredrik Baksaas.
Putin stressed that the plan for privatisation, which is expected to raise $50bn, would represent a "structural shift in the Russian economy", and reassured investors that minority interests in state-controlled companies would be protected. When asked about jailed oil oligarch Mikhail Khordokovsky that stirred fresh worries about corruption, Putin said,“Yukos is a special case; it is a criminal case." Striking an upbeat note, presidential aide Arkady Dvorkovich said projects with Skolkovo, the Russian SiliconValley will be one of the three pillars of the future growth of country's economy. Privatisation of state-owned companies, the second driver of the growth, will boost investments, he said.
Russia and India buy gold in large quantities to raise the profile of their national currency and to build reserves across the globe. DMITRY BUTRIN KOMMERSANT
Buying gold has been a golden strategy for Russia and India, who were among the largest buyers of yellow metal in 2009-2010 to shore up their international reserves. The statistics published by Central Bank of Russia show that the Central
Bank of Russia was behind the Central Bank of India, which saw the largest increase in gold reserves from 1st July 2009 to 1st July 2010. India’s gold reserves increased by 199 tonnes, while Russia’s gold reserves were up 159.7 tonnes. The Indian bank pursued a more aggressive policy on the market, increasing its international reserves by 55.7 per cent over the period compared to 29% in Russia. The percentage of gold in the Central Bank of India’s re-
serves grew from 4.1 to 7.8%, compared to an increase by Russia from 4 to 6.1%. Among the world’s leading reserve holders, only the Central Bank of the Philippines chose a similar strategy. But its operations were modest: the Philippines’ international reserves climbed 14.3 tonnes, while the percentage of gold in the $48.7 billion worth reserves edged up from 11.9 to 14.7%. The physical increase in the gold reserves was just 9.1%. Russia’s Central Bank
climbed from 9th to 8th position in the ranking of the world’s largest gold reserve holders. The policies of the Russian and Indian central banks differ from those of the world’s leading gold reserve holders. Sweden’s Riksbank was the only one to sell gold actively, reducing the percentage of gold in its reserves by 4%, while physical gold sales stood at just 5.2 tonnes. The gold sales of the European Central Bank and the Eurozone countries were just 0.1% of overall reserves. In other respects, the holders of large gold reserves, including China, have been pursuing a very conservative policy, keeping their reserves almost unchanged from 1st July 2009 to 1st July 2010. In this situation, India and Russia seem the only countries to pursue their ambitions as potential global capital markets.
Moskva City (the Moscow Business Center) is one of the city's largest and most ambitious construction projects
The crisis has knocked Moscow off the top of the most expensive cities to live in list and sent it tumbling from the top three down to number 56, according to Swiss bank UBS. In 2009, Moscow was ranked as one of the most expensive cities to live in the world, according to American magazine Forbes, which ranked Mosocw at number 4 and it was top of the list as the most expensive place to live on the planet in 2008. The list is topped by Oslo, followed by Zurich and Copenhagen. Moscow also placed 42 on wages, according to UBS. In
Moscow, it takes 21 minutes to earn enough to buy a Big Mac at McDonald's and 36 hours for an iPod Nano, the survey said. The highest wages on offer in the world are in Copenhagen but Zurich is best place to work as it takes the least time to earn enough to buy a Big Mac or an iPod: 15 minutes and 9 hours respectively. Another British bank, HSBC, found foreigners living in Russia, Saudi Arabia, Bahrain, the UAE and Singapore have the highest pay than in any other country: Russian expats earn more than $250,000 a year. BNE
Russia to build first biofuel plant, green energy high on priority Russian Technologies – a state holding for various companies involved in innovation – announced in mid-September that it plans to begin construction of the country's first biofuel plant in the spring. Based in the Irkutsk region in the east of Russia, the plant will use wood chips and other timber byproducts to produce biobutanol, said CEO Sergei Chemezov. Whilst in Brazil and Europe, biofuels are made from sugar cane, corn, rapeseed, in India from jatropha, the huge timber industry will form the basis of the industry in Russia. In 2007,
experts estimated the total wood biomass available for production of energy at 800 million tonnes. Unsurprisingly, given its huge reserves of fossil fuels, green alternatives have struggled to gain the Russian government’s attention over the years. However, a state program to get a biofuels sector up and running was announced in 2008, at which time timber industry players were told that the government was ready to back upto 30 production plants. Russia has expressed a keen interest in enhancing cooperation with Indian biotech firms. BNE
Sberbank set to follow in VTB's steps to open an Indian branch
Optimism is the middle name of Prime Minister Vladimir Putin
Currency Strong ruble behind ban
Goldmine Russia's reserves up 159.7 tonnes, India's 199
A golden strategy for shoring up international reserves
GETTY IMAGES/FOTOBANK
RIA NOVOSTI
Curtains down on small forex booths Marking the end of an era, Russia on Oct 1 banned standalone foreign exchange booths that sprang up after the fall of the Soviet Union. The small, windowless kiosks dispensing foreign exchange could be seen all over Russia not too long ago. All that is history now, thanks to a strong ruble. "You no longer need to convert your wages into foreign currency twice a month to be able to buy a fridge," says Central Bank board member Mikhail Sukhov. The increased popularity of credit and debit cards has also reduced the need for cash currency conversions, he said. In the late 1990s, following
the collapse of the ruble in 1998, there were more than 11,000 exchange booths but, as confidence in the ruble and the banking system surged during nearly a decade of oil-fueled growth, the exchanges began to close at the rate of 1,200 to 1,500 a year. Besides, the global crisis could not dent confidence in the national currency. The Central Bank says the ban will make it easier to spot illegal operations and will reduce swindling, common in such places. Russians who want to change money can now do so legally in more than 24,000 places, including bank branches. The Moscow Times
Buoyed by burgeoning trade between India and Russia, Sberbank, Russia’s oldest and largest commercial bank that boasts of $8 billion revenues and 20,000 branches, is now planning to open a branch in New Delhi before the end of this year. Over the next two years, the Indian office will be researching the Indian market, looking for a new niche, says Sberbank’s CEO and Board Chairman Herman O. Gref. The bank has already got the green signal from the Reserve Bank of India and is completing the formalities for obtaining banking licence from the RBI and hiring staff. Gref says that Sberbank will be developing its Indian business “along with increasing its client base and implementing potential opportunities for massive entry into the market”. By 2012, Sberbank hopes to gain a controlling stake in Troika Dialog, one of Russia’s leading investment companies. According to The Banker magazine, Sberbank ranks 43rd in terms of Tier 1 capital among the world’s top banks.The Central Bank of Russia has a 60.3% stake, while foreign investors hold slightly more than 32%. Sberbank is the second Russian bank to target the growing Indian market. Russia’s second largest bank,VTB,
opened a branch in New Delhi in 2008. Sergei Bulayenko, who heads the New Delhi branch, speaks to RIBR: How is VTB New Delhi doing? From the start,VTB has been placing funds in India at high rates, which allowed us to minimise losses at the market entry stage. The Indian branch earns well on conversion operations, lending and even guarantees transactions. In 2009,VTB New Delhi’s profit rose over $133,000 (by Russian accounting standards). Are you happy with the turnover and client base? Not quite.There has been neither quick growth nor broad expansion, but gradually, we are gaining a foothold in India, and shaping our niche. Our main target audience here is India-registered companies with Russian capital, as well as Indian companies working with Russia and other CIS countries. Our Indian branch continues efforts to attract new clients, especially among Russian companies newly registered in India. Our competitive advantages are the high quality of customer service and quick decision making. Vladislav Kuzmichev Full version at indrus.in GETTY IMAGES/FOTOBANK
Sberbank CEO and its Board Chairman Herman O. Gref
Technologies
BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, OCTOBER 13, 2010 Athens 2004 ITAR-TASS
IMAGO/LEGION MEDIA (4)
Sport Sochi to hold the most innovative Olympics ever, organisers claim
New technologies, green solutions to sparkle 2014 Games ''
Torino 2006 We have made an unprecedented decision - to involve everyone in the design of the Olympic Mascot, so to ensure that every voice is heard"
Sochi 2014
DMITRY CHERNYSHENKO
Sochi can become an experimental platform for innovations through Olympic Games. The 2014 Olympics will be the most innovative in the entire history of the Olympic Games, says Svetlana Konina, operations director VLADISLAV KUZMICHEV RIBR of Mace International Ltd. Preparations for the 2014 This company has consulted Olympic Games in Sochi are Russian officials ever since in full swing, with many Russia started preparing bid Olympic venues set to open for the Winter Olympics. in a year or two. It is already “Construction technology, clear that the Sochi Games’ equipment, technical soludefining feature will be tions and experience in state-of-the-art innovative building Olympic facilities and green solutions. In fact, in Sochi will all influence Russia can draw upon the experience of other countries in hosting major sport events, including Delhi Commonwealth Games, for construction and stadium management.
the development of the construction industry in the future,”says she. Some experts calculated that the Sochi Olympics, estimated to cost around $2 billion, would be around 3.5 times more expensive than previous Winter Olympic Games. The companies involved with the project, however, say the large budget is due both to complex building conditions and a more ambitious target compared to the previous games. “The Sochi Olympics Games are a truly global event, with the Sochi region set to be-
Mascot search goes global, ideas flood in the foreign supporters of the Olympic and Paralympic Games. During three weeks of the competition, applications have been coming from the United States, Austria, Belarus, Estonia, Ukraine, and Kazakhstan. All applications from foreign nationals will be processed according to the competition rules and, if complied with the criteria, will be posted on the competition’s official website, talisman. sochi2014.ru. Winners will be selected through a nationwide vote on 7 February 2011, three years before the Games commence.
LONELY PLANET IMAGES/ITAR-TASS
Thousands of Russians have already sent their Olympic Mascot proposals, ranging from fairytale characters to real animals. And yet, the Sochi 2014 Organising Committee decided to expand the number of competition participants through a decision made on October 4. Everyone can send their own pictures and proposals, regardless of citizenship and country of residence. Members of the Organizing Committee say that their decision was made due to a large number of proposals from Russians living abroad, as well as from
West Asian leopard is one of the most popular images offered for the Olympic mascot.
come a world-class international resort. In this sense, all costs are justified, and they will pay off over time,” says Konina. For example, the newest infrastructure solution, "the Sochi 2014 transport model," will be deployed to serve as a tool to forecast the burden on the transport system during the Games. This model has already helped find solutions to optimise the transportation system. In addition, the huge Olympic Park (about 800 hectares) will be managed from a single centre using an advanced intellectual system that will help effectively use electricity, heat and water, thus leveraging costs.“Sochi 2014 is leading the roll-out of new, ultra-modern construction standards across Russia, resulting in a more sustainable future for our country. The steps that we are taking to ensure environmental sustainability include ensuring that several of our sport venues are BREEAM compliant.We are committed to following international best practice in energy efficiency, smart engineering, environmental management, sustainable procurement, reporting and communications – leaving a sustainable legacy for the whole of Russia,”said Dmitry Chernyshenko, President and CEO of the Sochi 2014
PRESIDENT AND CEO OF THE SOCHI
Moscow 1980
2014 ORGANIZING COMMITTEE
PHOTOXPRESS
Salt Lake City 2002
Los Angeles 1984
TALISMAN.SOCHI2014.COM(4)
Olympic mascots of previous years and contenders for Sochi 2014. The Zapashnye brothers, celebrated animal trainers, proposed tiger cubs as the mascot (2nd from the left, lower row)
is set to loom large in the preparation and holding of these “waste-free” Games. Developer companies will be certified on their compliance with environmental standards, and a number of Olympic venues are equipped with technology for water re-usage, rainwater collection and use of soil temperatures for heating ventilation and air condi-
Organising Committee. Moreover, a single identification system will be deployed, allowing any guest to connect his or her mobile phone or pocket PC. The same device will combine tools for access isolation, electronic tickets, navigation, payment system and a broadband channel to provide information on the Games. The environmental agenda
Techtalk Investors, major banks make a beeline, Sberbank forks out $70-80 mn loan to Skartel
Mobile The market for 'babushkaphones' is growing VASILY SHAPOSHNIKOV_KOMMERSANT
Yota dreams big, 4 G networks get cracking
Now, no-frills phones for your grandma iPhone may be the in-thing, but Russian operators are courting the elderly with cheap, no-frills, easy-tooperate mobile phones. NATALYA FEDOTOVA
The 32-year-old Denis Sverdlov, head of Skartel, Russian company which operates Yota brand, is upbeat about 4G networks. PAUL DUVERNET RIBR
Whatdrewyoutowardsthe international market? In order to dominate 4G – this completely new sector – we immediately assembled a solid team with a lot of expertise. It is important to note
To advertise in this report contact Julia Golikova golikova@rg.ru ph. +7 (495) 755 3114
You have chosen to expand into countries like Peru, Nicaragua and Belarus. We were interested in Central America because the population density there is very high with 50 million people. Even in poor countries, there is a good percentage of the population – 10, 15 or 20% – that can purchase wireless Internet, a percentage that is growing rapidly. Governments in these countries are hurrying to attract foreign investment and de-
velop their economies. The telecommunications sector is a key sector for their development. They are interested in the latest technologies. That is why we get massive support in those countries. Do you intend to enter bigger or more developed markets? Everything depends on the position of closed regulators that favour local players. Obtaining a licence is extremely expensive in India, for exa m p l e . T h e i m p o rt a n t indicator for us is the per capita cost of the licence. From that point of view, neither India nor China is very attractive. In Europe, existing providers are very strong and regulators more or less close the market to new providers. The cost of a 4G license is huge, and even dominant local providers are not always able to buy them.This slows down the development of this technology in larger
RIBR
Denis Sverdlov, the young CEO of Skartel, is brimming with ambitious plans to expand the reach of 4G networks.
In just one year, the network covers 5 Russian cities with 1,000 base stations in Moscow alone. countries. It is simply too expensive to be profitable. Who are your shareholders and what is the source of the funds that have allowed you to expand so rapidly? TheTelconet investment fund controlled by Russian businessman Sergei Adonyev holds 74.9%. Russian Tech-
nologies holds 25.1%. In the beginning, it was our own shareholders who came up with the financing because they believed in the project. Since October 2009, when our sales overtook expenses and we were becoming well known, we have received offers from major banks as well as from companies who sell us equipment. The biggest bank that puts its trust in us is state-controlled Sberbank, that has already loaned us between $70 and 80 million. Full version at indrus.in
they happy with the tendency towards smaller size as their eyes are not as good as those of young customers,” he adds. Simple to operate, the Just5 phone comes equipped with big keys, a large screen, a powerful speaker, sensitive microphone and an emergency key. It is ideal not just for pensioners, but also for the uneducated, children, the disa b l e d , a n d e m e rg e n cy services personnel. Clearly, babushkaphones and iPhones have different target audiences, says Maksim Nogotkov, president of Svyaznoy Group, one of Rus-
The 1990s were a lost decade for mobile technology in Russia. But with breathtaking changes sweeping the international mobile phone market, Russian manufacturers, too, are coming out with new innovations. At a time when iPhone is a rage in some parts of the world, Russians have come out with simple no-frills phones, called“babushkaphones”. Babushka, in Russian, means granny and these cheap phones without any special gadgets or additional functions are just ideal for the elderly who find new fancy instruments befuddling.“Older men and women often find it difficult to get used to modern multi-functional mobile phones with many excessive (in their view) functions,” says Mikhail Nikolayev, president of Orbita Telecom, which manufactures Just5 With big keys, they are ideal phone in Russia. "Nor are for the elderly
ULLSTEINBILD/VOSTOCK-PHOTO
You expanded your network in just one year… Yes, we have only existed for one year, but our network already covers five Russian cities with 1,000 base stations in Moscow alone. No other 4G service provider has built their network as fast as we have. In Moscow, we are installing over 100 new base stations per month. Our main objective is to develop the network rapidly.
that it is a totally different model of service consumption.The network’s architecture is very specific. We have mastered 4G and have become one of the biggest networks in the world. We understood that this knowledge and this expertise were exportable. Russia regularly exports its raw materials, but that is why our position is unique.
free environment have already been agreed upon at the state level, and now they will be tested at the Olympic facilities. In Sochi, local authorities took an unprecedented step recently: the chief architect and members of the city administration drove through the city in wheelchairs to see all the difficulties faced by the physically disabled.
tioning systems. Environmental innovations and advanced technologies will be practically applied by graduates of Russian International Olympic University established in Sochi this summer. Preparations for the Paralympic Games also involve special arrangements for the physically disabled. Standards for the barrier-
sia’s leading mobile phone retailers. Those buying iPhones are image-conscious; they want to check their email and go online. And those buying cheap phones just want to call and send text messages. While babushkaphones currently form just 1 per cent of the market, according to Smartmarketing, sales have jumped tenfold over the year. “Since the end of last year, we have already sold several dozen thousand such phones (closer to 100,000)," says Nikolayev. MegaFon, one of Russia’s top three mobile operators, joined the game in August 2010, by launching a phone with large keys. Thanks to this button, anti-iPhones are also purchased for children. With these phones, parents can be sure that the child won’t download endless pictures and music. OrbitaTelecom is already selling phones in more than 30 countries in Western Europe, the US, Canada, and almost all of Latin America. Mobile market experts see babushkaphones as a sign of market maturity.
www.rusembassy.in www.indrus.in/expert
Web-site of the Embassy of the Russian Federation in India