BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA
...Marching towards a common future
WEDNESDAY, FEBRUARY 9, 2011
Biz Diplomacy Unfazed by Moscow attack, Medvedev tells global elite 10 good reasons why they should invest in Russia
BEYOND TERROR
Davos calling: Invest, we are the way we are
An elusive resilience Oksana Antonenko RUSSIA PROFILE
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strategic companies fivefold – mainly those that cannot be privatised and those in which foreign investment is complicated, Medvedev said. The president first told delegates at the St. Petersburg International Economic Forum last summer that he had signed a law that reduces the number of strategic enterprises from 208 to 41. Secondly, Russia is set to embark on a large-scale sell-off of state assets to modernise its country. The privatisation could see assets of such potentially attractive companies as the Aeroflot airline,
TAI ADELAJA RUSSIA PROFILE
Unfazed by a deadly bomb blast at a Moscow airport that killed 36 people, Russian President Dmitry Medvedev flew to Swiss ski resort Davos on Jan 26 for the annual edition of the World Economic Forum and made a vigorous pitch for Russia’s ongoing modernisation and privatisation drive. Speaking to the global business elite, he said the terrorists had expected him to cancel his trip to Davos, but pointed out that they had "miscalculated" and allayed fears of political instability in the wake of the terror attack. In a keynote speech, Medvedev listed pivotal areas where the Russian leadership is gradually strengthening the economy while also improving the investment climate. "The main goal is to make the companies themselves more efficient and improve the competitive environment for business in our country," he said. Medvedev spelt out ten reasons why foreign investors should feel much better dealing with Russia. Russia has slashed the number of its
Klaus Schwab, Executive Chairman of the Davos Forum and Dimitry Medvedev, President of the Russia during the 'Opening Address' of the Forum.
SWIIS-IMAGE.CH
special tax on banks and the financial sector to attract additional capital into the country. Analysts say the move could give Russia some competitive advantages over other countries which are planning to impose regulatory restrictions on banks in the wake of the global financial crisis. Meanwhile, the Kremlin is pressing ahead with efforts to transform Moscow into one of the top ten global financial centers as part of a drive to diversify the economy away from energy exports. Experts say that hugely undervalued blue-chip companies, such as Gazprom The Russian and Rosneft, could benefit in government plans to the form of higher market capitalization if they operraise $32 billion by ate in a developed financial selling stakes in 10 environment. state assets by 2013. Medvedev also reaffirmed Russia's ambition to join the television company Channel World Trade Organization One, telecoms operator and the Organization for Svyazinvest, oil producer Economic Cooperation and Zarubezhneft and oil pipe- Development, as well as to line monopoly Transneft in establish a common ecoprivate hands. nomic area with the EuropeThe government is expected an Union. to raise one trillion rubles Eight, Russia is presently de($32 billion) from selling veloping a mechanism that stakes in ten state assets by would help it share technol2013, Economic Develop- ogy – especially military ment Minister Elvira Nabi- technology – with other naullina said. Medvedev also tions, as exemplified in Insaid Russia is poised to cre- dia-Russia deals and a reate a“special sovereign fund” cent deal which saw France to attract foreign capital. selling advanced military The president forcefully re- technology to Russia. France iterated at Davos that Russia won a tender in December to will refrain from imposing a build a Mistral-class assault
In a stirring speech at Davos, Medvedev made it clear to critics that Russia is pressing ahead with its modernisation drive and aksed foreign investors to bet big on his country.
warship. Russia continues to invest heavily in its human resources, the president stressed, including trying to educate future businessmen and officials abroad. "Our task is to make Russia more attractive for foreign experts to work in," Medvedev said. Medvedev, an avid Internet user who loves to tweet and blog, fiercely opposed any attempt to curb the freedom of the Internet, and backed disclosures by WikiLeaks. And finally, Russia is also pushing to interest
investors in projects related to the development of sports and large athletic events in preparation for the Olympic Games. Russia will host both the 2014 Winter Olympics and the 2018 World Cup. He defended Russia, which is trying to be an open modern and innovative country under his dispensation, against critics.“Russia is rebuked for the lack of democracy, authoritarian tendencies and the weakness of the judicial system," he said. "Today we are the way we
are. Russia indeed faces many difficulties in building the rule of law. " "But one thing should be understood. We are moving ahead in fighting corruption and modernising the judicial system, although we have not yet scored tremendous success. But we will persevere. We are ready to receive friendly advice, but we do not need lecturing," he said in a veiled criticism of Western media that never gets tired of portraying Russia in a negative light.
Trends $34bn M&A deals were struck in last quarter of 2010 alone, modernisation drive gets boost
eyeing Russia’s abundant natural resources and its 142m-strong population. Analysts expect the pace to pick up this year and Medvedev attended the signing of $1 billion joint venture between Exxon Mobil and Rosneft at the forum itself.“The deals don’t necessarily mark a turnaround in sentiment,” suggests Pavel Sorokin, an analyst at investment bank Alfa,“but may be a first step. These deals are being made in strategic enterprises which are the pillars of the Russian economy.” Last year’s focused drive for high-tech investment has provoked pledges from the likes of IBM, Siemens, Phillips, and Microsoft to open R&D facilities.This year, the hot sectors are likely to be transport and infrastructure; late January already saw a plan to build a 50 billion euro high-speed rail network for the 2018World Cup, with private companies contributing a third of the financing. Russia is best known for its natural resources, but the PepsiCo deal highlights that Russia’s emerging middle class is now capturing the attention of multinationals like PepsiCo, which has become Russia’s biggest food producer after the deal. Italian bank UniCredit is also rapidly expanding to tap into the pool of household money, saying it will add hundreds of retail branches in Janaury. And the Thomas Cook Group travel company has also taken the plunge into a country widely predicted to become the biggest consumer market in Europe within a decade.
Russia bounces back, mega FDI deals pump up confidence The twin BP and Pepsi deals have bolstered confidence of global investors in Russia. The FDI spike is set to boost the modernisation drive by bringing cash and expertise.
Inflation may derail recovery
TIM GOSLING
Russia India REPORT
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If sceptics thought President Medvedev was doing a hardsell in Davos, they are a bit out of sync. Big-ticket multibillion FDI deals preceded Medvedev’s trip to the Swiss resort, underlining an increasing global confidence in Russia's business climate. Oil giant BP’s share swap deal with Russian state-controlled oil company Rosneft kicked off 2011 with the same message that Pepsi’s $3.8 billion record breaking investment into juice-maker, Wimm-Bill-Dann offered at the end of last year – Russia is a“must-do”investment for leading strategic investors. The two deals have been welcomed by the Kremlin that launched a major initiative to modernise the country last year by luring large investors that bring not just cash, but badly needed technology and management skills. Modernisation climbed to the top of Russia’s political
PepsiCo Inc has established itself as Russia’s largest foodand-beverage business with a $3.8 bn takeover of juice and dairy king Wimm-Bill-Dann.
agenda following the 2008 economic crisis, which exposed the flaws of the economic model built since 2000. “The slump proved that the model was not capable of delivering stable longterm growth,” says Roland Nash ofVerno Capital. Foreign investors can also bring in more efficient management, expertise and technology. At the same time, they bring capital and competition to spur growth. The twin BP and PepsiCo deals hold the key as they will bol-
ster the confidence of other strategic investors to invest in Russia, but many commentators were more concerned with the Russian government’s entry through the stock swap.“Very few see this deal for what it was -- the next logical step in the modernisation of Russia and a milestone in attracting largescale foreign direct investment (FDI) into the Russian economy,” says Plamen Monovski, chief investment officer at Renaissance Asset Mangers. Russia has a rela-
he bombing at the international airport at Domodedovo near Moscow on January 24, killing 36 and injuring over 150 people, is the latest reminder of Russia’s vulnerability to terrorist threats. Despite recent efforts to target the leaders of militant groups waging terrorist campaigns across Russia and President Dmitry Medvedev’s initiative to address the root causes of violence in the North Caucasus, the scale of the terrorist threat has not diminished. Today, the cancer of insecurity has spread from the south to the very heart of Russia. Even more damaging than the acts of terrorism themselves is the widespread perception that Russia’s leaders have no clear strategy on dealing with the insurgency. Prime Minister Vladimir Putin promised that the second war in Chechnya would help restore security, but whatever positive effects came from it were soon superseded by the spread of violence beyond Chechnya. President Medvedev was correct to bring the Caucasus problems back onto the federal policy agenda and openly acknowledge that instability there poses a strategic challenge to Russia’s future development. Yet his measures – replacing some regional leaders and pledging more funds for economic programmes – have made so far little real difference.The important task for any government is to help define a strategy to end terrorism and accelerate that process. Some tips for this strategy can be taken from Professor Audrey Cronin’s book. She analyses 457 terrorist campaigns, explaining how they can be understood as a “triad” of interaction between three actors: the group, the government and the audience. Cronin identifies six patterns that have contributed to the ultimate demise of terrorist campaigns: capture or killing of a group’s leader (decapitation); entry of the group into a legitimate political process (negotiation); achievement of the group’s aims (success); group’s implosion or loss of public support (failure); its defeat and elimination through brute force (repression); and lastly, transition from terrorism into other forms of violence, such as crime
As Russia emerges from the economic crisis, it’s running straight back into more traditional tussles. With food prices soaring, inflation now threatens to become a real drag on a return to strong economic growth, whilst capital inflows threaten more bubbles. Inflation came in at 8.8% last year, after running in double digits for more than two decades. However, at the same time, the price of the monthly basket of basic goods used to define the
poverty level jumped 22%, to $87.50. “The reappearance of inflation could derail Russia’s economic recovery as it hits the Russian consumer’s pocket directly. With oil prices expected to be more or less flat in 2011, it will be the strength of internal consumption that will set the pace for economic growth this year,” says Alexey Moiseev, chief economist at VTB Capital. “The rise in food prices is the major concern and a part of the current global upward trend," he said.
tively poor track record in attracting FDI, weighed down by a reputation for bureaucracy, sleaze and poor corporate governance.While the levels of FDI started to recover to $40 billion in 2010, the second highest amongst all emerging markets, it is still half that of 2008. However, the pace picked up fast at the close of the last year. A third of global M&A deals were struck in emerging markets last year, but Russia closed $34 billion of transactions in the last quarter of
2010 alone, on a par with China’s $38 billion and well ahead of Brazil and India. "We are being asked what has changed in Russia, why now all these deals are being signed.The regulations have changed considerably; normal conditions have been created," BP Chairman CarlHenric Svanberg said in Davos. Indeed, while the total volume of deals remains depressed, the size of the deals is going up as strategic investors commit themselves,
in THE TIMES OF INDIA
or insurgency (reorientation). If we apply Cronin’s methodology, we can say that many of these approaches have been tried, but failed. Russia has tried repression and decapitation, which have given some results – the elimination of terrorist leader Shamil Basayev, for example, helped to stop the number of attacks in the short-term, but in the longterm, these measures led to the mutation of a more consolidated nationalist campaign with clear goals to a more dispersed movement. The fact that no one clearly understands the underlying objectives of the Domodedovo bombing – unlike, for example, the Beslan hostage taking – illustrates this trend. Now, it’s critical to address some pressing questions: Which constituency supports terrorism? How can their grievances be addressed by the state, civil society and public-private partnerships? And finally, it’s important to help bring about the internal implosion of groups engaging in terror. It’s critical to understand the groups, to collect credible intelligence and to analyze their struc-
The important task is to define a strategy to end terrorism. tures, which are much more akin to a mini Al-Qaeda than to the IRA or ETA, or even PKK. Also, it is important to analyse their recruitment techniques and find ways to prevent the future expansion of these groupings. We know that a lot of young people join out of revenge or by succumbing to pressure and blackmail.There should be clear alternatives for these people to protect their dignity and that of their families. The results of this strategy are likely to be seen in one or two generations, not in one or two years. Moreover, its implementation is closely connected with other key political and economic reforms in Russia – enhancing the rule of law, fighting corruption and improving regional governance. Investment in economic development, improved education and promoting inter-ethnic integration through internal migration programs in the North Caucasus are also important as key enablers of this strategy. Finally, more effective work from law enforcement and security services in preventing actors of terrorism and managing its consequences are required.
NEWS IN BRIEF Nanotechnology head meets Indian industrial magnates Head of the Russian Nanotechnology Corporation (Rosnano) Anatoly Chubais is holding talks with the chiefs of the industry during his five-day visit to India.The program of the visit includes meetings at the Center for Nanotechnology Research of the Indian Institute ofTechnology, talks with the representatives of HAL, Indian Space Research Organization, the Defense Research and Development Organization and other companies. RIA Novosti
Russia, India bet on GLONASS Russia’s federal operator of Glonass, the NIS company, is strongly interested in India’s market, the deputy head of the NIS company Vladimir Vozhzhov said. Last year the Russian Federal Space Agency, the NIS company and ISRO signed a MoU to establish a JV that would provide navigation services on Indian territory. A draft agreement has been finalized already and now is due to be considered in Delhi. Voice of Russia . Read more on Indrus.in
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Energy
BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, FEBRUARY 9, 2011
Petro Prosperity Russia set to ramp up energy supplies to energy-deficit Southeast Asia, which is projected to provide 75% of world demand by 2030
Vladimir Bogdanov, said in December last year that the company “could achieve growth by enhanced recovery, which would not be profitable with today's tax burden.”Rosneft-BP deal, which will see joint exploitation of large untapped reserves on Russia's Arctic shelf, was accompanied by a promise from Prime Minister Vladimir Putin that the government will create a“very favourable tax regime for the realisation of the project.” Following the marriage of Russian gas supplies BP and Rosneft, other key issues to be resolved in 2011 to Asia may reach include potential partnerthe same level as ships. The decision of who that of Europe in a will join Bashneft in its exvery short time. ploitation of the huge Trebs and Titov field is significant. trend of the coming year.” Many consider Lukoil the The forces driving oil and most likely contender. gas companies away from Novatek, the largest indeRussia, home to one of the pendent gas company, is also world's biggest reserves of likely to seek a partner this energy, include high domes- year, possibly a foreign one, tic tax levels and uncertainty to assist with extraction over future burdens. work on theYamal PeninsuMany companies control re- la. For the gas industry, a deserves that are on the verge fining moment will take of profitability, but are hold- place in the second half of ing off investment decisions the year when gas supplies in the face of the state's un- start to flow through the first clear taxation plans. The line of the Nord Stream pipehead of Surgutneftegaz, line connecting Russia di-
HOWARD AMOS THE MOSCOW TIMES
Someone peeping through a second floor window of the large office on the embankment opposite the Kremlin on a cold evening in December would have been puzzled by a group of people excitedly huddled around someone. The offices were those of Rosneft, Russia's largest oil company, and the person who was the centre of attraction was Eduard Khudainatov, the company's jocular new president. He was outlining his vision for the company and his assessment of 2010 — the year that saw oil extraction in Russia peak to a post-Soviet record high — to a crowd of journalists and industry analysts. Khudainatov, a graduate of Russia's orphanage system, stressed specially on Rosneft's goal to become a global producer cutting across continents. In mid January, he proved as good as his word with the announcement of the biggest deal in Rosneft's corporate
BP Chief Executive Bob Dudley and Rosneft president Eduard Khudainatov sign an agreement at BP headquarters in London
Big-ticket deal on Arctic shelf oil BP and Rosneft will work together in the exploration and development of a 125,000-square-kilometer area of the Kara Sea on Russia's Arctic continental shelf — one of the world's last remaining unexplored basins. This is the first time a foreign company has been granted such extensive access to Russia's Arctic resources. Prime Minister Vladimir Putin said the area contains some 5 billion tonnes of crude oil, about one-tenth of Russia's Arctic zone's 51 billion tonnes, which is enough to fully meet global demand at current levels for about five months.
The two companies also announced plans to establish an Arctic technology center in St. Petersburg that will liaise with research institutes and develop specialised technologies. To cement the agreement, BP will swap 5% of its shares, valued at $7.8 billion, for 9.5% of Rosneft. BP will become the biggest nonstate equity holder in Rosneft, a company 75% controlled by the government, while Rosneft will have the second-largest stake in BP, after Blackrock Inc., with 5.93%. The shares are subject to mutual lock-in restrictions for a period of two years.
Geopolitics Russian giant invited to partner in 2 Indian offshore, onshore fields
Asia-Pacific energy race hots up, Gazprom bets big time on India would be more practical for Gazprom to produce gas in India.“Gazprom-Zarubezhneftegaz’ s first offshore exploration experience in the Bay of Bengal, however, was not satisfactory. This does not mean that other projects
With the European gas market stagnating, Russian giant Gazprom is upping stakes in the Indian market to spread its wings in the region. VENERA REZTSOVA RIBR
Access to India's gas and LNG market will make Russian gas giant a prominent player in the region.
the focus is on the Krishna Godavari offshore field located in the country’s southeast and on another field in India’s north-eastern Mizoram state.The offer is being considered, but a final decision is yet to be made. There are currently 34 oil and gas blocks available for development in India, including eight deep-water, seven shallow water and 19 onshore sites. Besides Gazprom, Zarubezhneft, Rosneft, Stroytransgaz and other
REUTERS/VOSTOCK-PHOTO
There are three key areas in which the 'gas dialogue' between Russia and India is active today: gas exploration and production, LNG supplies and gas transport projects.With its ambitious plans to expand into the Asia-Pacific region, Russian gas giant Gazprom sees India as an important and a promising partner. None of this comes as a surprise. The stagnation in the European gas market and booming Indian and Chinese economies are radically transforming the global energy market. Access to the Indian wholesale and retail markets will allow Gazprom to become a much more prominent player in the region before international energy giants such as Exxon, Chevron, BP and the Chinese state oil company CNPC get a toehold in it. Sergey Pravosudov, the General Director of the National Energy Institute, feels it
would be unsuccessful,”said Pravosudov. Between 2006 and 2010, Gazprom drilled three offshore wells in the Bay of Bengal, but failed to find any commercially recoverable gas reserves. At the end of last year, it was reported that Oil India invited Gazprom to become an operating partner on two projects, one offshore and one onshore. Dmitry Kumanovsky, Head of Research at the LenMontazhStroi Investment Company, said that
Gas supplies to India and Pakistan are likely to increase significantly reaching a total of 100 billion cubic metres per annum
viability because of the fall in demand for LNG in the US, which is increasingly turning to unconventional gas reserves, including shale gas.The final investment decision on Shtokman, the first phase of which has a price tag of $15 billion, will be taken in spring 2011. Asia is an important destination as Russia looks to increase energy supplies to the East. Gazprom head Alexei Miller said in November 2010 that “the volume of Russian gas supplies to the Asian market may reach the volume of gas supplies to Europe in a very short period of time.” Oil exports, however, shot up first. Barely had Russians turned off their televisions after the president’s annual
rectly with Germany via the Baltic Sea, as the $10 billion project nears completion. Many big-ticket decisions loom for the country's energy strategy in the mineralrich but largely unexploited Arctic region. Presently, attention is focused on the enormous Shtokman gas field in the Barents Sea — operated by Gazprom, Total and Statoil — which last year postponed its start date for gas deliveries to 2016. “Will Russia produce LNG in the Arctic within the framework of this project, which has been complicated by the state of the US market,”asked Maria Kutuzova, editor of Russia's Oil. “That remains an open question.” Doubts have been voiced over the project's financial
Tie-ups Trebs and Titov oil fields may need $5-6 billion Russian companies are exploring opportunities. LNG is another sunshine area of bilateral cooperation. India is potentially a large LNG market that the Russian gas giant intends to start tapping as early as this summer. In December last year, Gazprom Marketing &Trading and Gujarat State Petroleum Corporation signed an agreement whereby the Russian holding company is planning to supply 300,000 tonnes of LNG to India in the next two years. In 2009, Gazprom and its Sakhalin-2 partners finished building the first Russian LNG plant on Sakhalin Island. The project made it possible to start supplying Russian LNG to the AsiaPacific markets on a regular basis. Part of Gazprom’s strategy is to up its LNG production to 80-90m tonnes per annum, thus gaining a 25% share in the world LNG market.“India is a strategic market for us. GSPC is a key player in the Indian natural gas and LNG market,” said GM&T’s Executive Director Frédéric Barnaud. Russia’s involvement in theTrans-Afghanistan pipeline connecting Turkmenistan, Afghanistan, Pakistan and India (TAPI) has also opened up new possibilities. In December last year, India invited Gazprom to participate in the project; in one of the interviews that followed, President Dmitry Medvedev stated the company was ready to accept the offer. Gazprom can be involved at all stages of the project, from engineering and construction to production and sales to Afghanistan, Pakistan and India.
ONGC win-win deal with Sistema Bilateral energy cooperation got a boost with a pact between ONGC and JSFC Sistema during Medvedev's visit to India last year. NATALIA FEDOTOVA RIBR
Russian President Dmitry Medvedev’s visit to India in December last year saw a landmark pact between JSFC Sistema, a Russian conglomerate and India’s state-run Oil and Natural Gas Corporation Ltd. (ONGC), a key step that will boost energy cooperation between the two emerging economies. Under the framework agreement, Sistema, the owner of the Indian mobile service provider MTS, is prepared to pool its shares in Bashneft and RussNeft with those of ONGC’s whollyowned subsidiary Imperial Energy, currently a major independent producer inWestern Siberia.The parties have agreed to outline the transaction terms, which have not yet been released, by the summer this year. ONGC is interested in Bashneft’s projects, including the lucrative Trebs and Titov oilfields in the Nenets District of northern Russia. The field reserves are estimated at 140-200 million tonnes of oil (about 1.4 billion barrels).
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history, tying the company to international oil giant BP. Rosneft is not alone in outing its global ambitions. Last year saw TNK-BP's acquisition of assets worth $1.8 billion in Venezuela and Vietnam while Lukoil said in September that it sees more potential petroleum in West Africa than in West Siberia. “The oil industry is ready to expand abroad,” said Lev Snykov, an analyst at VTB Capital,“and this will be a
Russia's oil giant Rosneft's deal with BP has whetted global appetite of Russian energy companies. The East is their new promised land.
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From Arctic to Asia, oil & gas go up and east
NewYear’s Eve congratulations when at 00:30 on Jan. 1, crude oil began to flow to China through a new pipeline.The Skovorodino-Daqi n g p i p e l i n e , b u i l t by Transneft and China National Petroleum Company, was christened by Russian President Dmitry Medvedev and his Chinese counterpart Hu Jintao in September, 2010. In January alone, 1.3 million tonnes were expected to flow through the pipe and across the border. Moscow's increasing interest in the East is underwritten by predictions that Southeast Asia's energy deficit could grow sevenfold over that of Europe and America's during the next 20 years and that the area will provide 75% of world demand growth through 2030. Finally, there are predictions about the volatile price of crude oil — the key for a government that receives 45% of its federal revenues from oil. In 2010, the average price for a barrel of crude was $77.50, but a steady five month rise saw the price close at $100.37 recently, a 27-month high. Analysts at JP Morgan and Goldman Sachs have said the oil price will continue to soar in 2011, reaching $120 sometime in 2012. The Economic Development Ministry is less bullish, predicting that the average price per barrel in 2011 will be $81. Not everyone, however, agrees that the high oil price is good for Russia in the longterm.“From the standpoint of health and the quality of the economy, I would prefer to see the government trying to find solutions using fiscal instruments rather than relying on an increase in oil prices to solve all problems,” said Cherepanov of UBS.
The Trebs and Titov reserves are estimated at 1.4 bn barrels
ONGC used its subsidiary Nord Imperial to bid in the field development tender. The Russian regulatory authority, however, rejected the bid. Eventually, Bashneft won the right to develop the strategic field. The agreement showed that India was not intending to give up the opportunity of developing this major Russian oil field. “The negotiations have been rather dynamic, but it is still too early to discuss specific details; joint-venture options may also be considered,” a source close to Sistema told Kommersant newspaper. Bolstered by the partnership, Bashneft, in which Sistema has a 75% direct stake, will be able to mitigate its opera-
tional and financial risks on the Nenets District field. As reported earlier by Bashneft director David Yakobashvili, developing the field may require $5–6 billion in investment. But it would be worth it, as the field reserves would provide enough oil for Bashneft’s own refineries. Besides, cooperation with Imperial Energy will encourage Bashneft, which produces 13 million tonnes of oil from fields in Russia, to shift its focus from production to processing, which is a profitable business. Most important, ONGC, which has been eying a share in Bashneft for a long time, will give the latter access to the international market, where it is not currently represented.
BUSINESS REPORT
Economy
IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, FEBRUARY 9, 2011
Merger New potassium behemoth can produce 13 mn tones: to focus on BRIC and South-East Asia markets
OPINION
Making of a fertilizer empire
A Russian splash at Bangalore, sans MiG-35
A new Russian potassium fertiliser giant is being created. It is set to give PotashCorp, the global leader, a run for its money.
BRIC to drive up demand
A new international industrial giant is being born in Russia. There are only 13 manufacturers of potassium fertilizers in the world, but one of those companies may soon fall out of the ranks. In summer of 2010, Russian oligarch Suleiman Kerimov heading a group of investors became the majority shareholder of two major Russian manufacturers of fertilizers, i.e. Uralkali and Silvinit, and decided to merge them to create an international potassium giant.After merging, the corporation will become one of the top three leading world manufacturers of potassium fertilizers and might soon squeeze the global leader, Canadian PotashCorp. PotashCorp is the world’s biggest potassium manufacturer with the production capacity of 12.8 million tonnes, followed by the American Mosaic (11.2 million tonnes).“Now, the combined capacities of Uralkali and Silvinit are 10.6 million tonnes. In 2010, both companies worked close to full capacity (the combined output was approximately 10.3 million tons).The companies are going to ramp up their facilities: the merged company will be able to manufacture additional 13 million tonnes after modernising their production capacity by 2012,” Vladislav Baumgertner, Director General of Silvinit, told Russia&India Business Report. The Russian giant’s competitors, meanwhile, are far from being complacent: Potash is planning to expand its capacity to 17.1 million
ITAR-TASS
RIBR
Billionaire Suleiman Kerimov is close to creating a national potash mining champion
Boards of merged companies have cleared the deal. It's now upto shareholders. tonnes by 2015. Uralkali, however, has another ace up its sleeve. Belarusian Potash Company, the Russian giant’s trader in the global market, has its own manufacturing facilities. As a result, Uralkali will control 40-45 pc of the world trade in potassium fertilizers through BPC.“It means that taking into account another 40 pc under direct or indirect control of Canpotex, which is headed by PotashCorp, more than 80 pc of world trade turnover will go through these two traders. There are no similar examples of such an unprecedented market concentration in the iron ore or diamonds
market”,said Mikhail Stiskin, an analyst with Investment Company Troika Dialog. According to industry experts, the global consumption of potassium fertilizers was approximately 52 million tonnes in 2010. 2011 is expected to see an upsurge in demand with some analysts saying potassium chloride market could reach 55-60 million tonnes. Given that in 2008 demand peaked at 57-58 million tonnes, it can be forecasted that the market will be in full recovery this year, says Baumgertner. “The pricing policies are determined by the supply and demand and depend on the market conditions, rather than the expected Uralkali and Silvinit merger. Currently, the market is on its way to recovery and, given the growing demand, the potassium prices are to be going up in the mid-term,”he said when asked how the merger could
affect the prices. Apparently, another manufacturer of mineral fertilizers, PhosAgro, is looking to bolster its positions in the global market. Last year, the company was reportedly considering acquiring PotashCorp. The striking difference in the companies’ values (Potash Corp’s market capitalisation is over $40 billion, while PhosAgro is valued at $7-9 billion) was never an obstacle for the ambitious Russian manufacturer. PhosAgro held consultations with the Russian government, banks and even asked Prime Minister Vladimir Putin for support. Several months ago, PhosAgro also contemplated merging with Silvinit. It is too early, however, to say if PhosAgro would be able to take over the giant, since it usually takes at least several months to arrange such deals. In spite of its size, the merged
Russian giant Uralkali will keep focusing on the most attractive markets, in particular BRIC and South-East Asia – the most dynamic developing regions where analysts predict the fastest growth in the demand for fertilizers. Other target markets with a high level of agricultural development and technology include Europe and the United States, said Baumgertner. Belarusian Potash Company is the world’s leading supplier to Brazil and India.These countries have recorded the highest potassium consumption growth: it doubled there over the last 5-7 years. As for Argentina, the potassium producers have a different sort of interest: the resources attract them rather than potassium consumption levels (Argentina’s share in the total sales is not that big). At present, they are at the exploration and preparation-
for-production stage, the launch of which is scheduled for 2014-2015. Now, the most important step for Uralkali, however, is to finalise the merger with Silvinit and shun the temptation of further international expansion, at least for the time being. Once the merger is formalised, Silvinit will cease to exist, while shareholders will receive Uralkali shares in exchange for their interest in Silvinit. Uralkali will continue: its ordinary shares will be listed in the Russian stock exchanges and foreign investors will be able to buy and sell depository receipts at the London Stock Exchange. The Russian potassium giant will be founded in the second quarter of 2011; by this time, the merger is due to be completed.The boards approved the terms of the deal, and in early February the companies’ shareholders supported them.
Mining Russia has the second largest explored reserves of rare earth metals; Great potential for tie-ups with India
REM stakes: A rare chance for Russia China's dramatic export cuts of rare earth metals have opened a new window of opportunity for Russia to raise production of REMs. IVAN RUBANOV
In a dramatic move, China announced last year that it will further reduce exports of rare earth minerals (REMs) by 10% in 2011. The decision sent shockwaves across the industrialised world as world manufacturers are heavily dependent on China for these minerals, which are essential for making a range of sophisticated electronic goods, such as TVs and PC monitors. What compounded the worries was that China enjoyed a virtual monopoly, providing 97% of the world's supply of these minerals. Beijing’s decision was strategic in nature. In July, the People’s Daily published an article by Li Bing, an international strategy expert of the Central CPC School. He asserted that poor China should no longer sell its valuable resources cheaply to capitalist countries and declared that REM exports “must be gradually reduced and, ultimately, stopped”. By August, the Chinese authorities announced reductions in export quotas in the second semester by 72%; later, in the first round of export quota distribution for 2011, it cut them by another 11.4%. In September, China completely halted exports to Japan; in October, supply shortages were felt by industry in Europe and the USA. “The market did not hesitate to react to the reduced supply with a sharp price rise:
AP
EXPERT MAGAZINE
Economic concentrations of REM are generally hosted in alkaline igneous rocks and carbonatites
Key to electric cars, solar batteries, lasers, magnets REM include scandium, yttrium, lanthanum and another 12 lanthanides, cerium being the most widespread. REM are found in nature in dispersed form. They are present in hundreds of minerals, while not more than 50 are of any industrial significance, and only two — bastnäsite and monazite — are mined on any significant scale. As a minor admixture, REM often play a decisive role in determining the key application characteristics of industrial items. In metallurgy, REM are com-
Russian industrialists should become proactive in developing strategic rare earths industry.
ing into ever increasing use in the production of cast iron, steel and non-ferrous alloys. It is difficult to overestimate the role of REM in glass production, where cerium is used. Nearly the entire range of REM is used in laser manufacturing. In the nuclear industry, they are added to control rods to slow down the reaction, as well as to special radiation protection coatings. For several decades, REM have been used to produce catalysts, primarily for the oil industry. Significant quanti-
ties, above all of samarium and neodymium, are used in manufacturing permanent magnets. One of the most promising areas involving REM is the growing industry of electric and hybrid car production. The Toyota Prius is a classic example. The design of the latest model includes over ten kilograms of rare earths (mostly lanthanum and neodymium) — in the batteries, catalysts and metal alloys. Another innovation topic is use of rare earths to produce solar batteries.
most rare earth products appreciated by a factor of 1.5– 4; some of them, by an order of magnitude or more,” say analysts of METALResearch. Beijing’s unilateral quota triggered a hysterical reaction and also sparked a search for alternatives. India
has already declared its readiness to export REMs, but it has only some of the rare earth metals supplied to the global market by China. India needs serious investments and technologies, including ones aimed at ensuring environmental safety of production facilities. The
REM crunch, however, may prove to be an opportunity for Russia. Presently, there is practically no REM production in this country; rare earth metals are mostly produced as a by-product. In Northern Russia, for instance, the Lovozersk integrated mining-and-processing plant mines loparite ores (which contain a wide range of REM: tantalum, niobium, zirconium, lanthanum, cerium, etc.) and the Solikamsk Magnesium Plant (SMP) processes concentrates of these. But these facilities focus on magnesium production; to them, the rare earth business is merely auxiliary. Yet, in terms of explored reserves of REM, Russia holds the second place globally (about 30%); in terms of anticipated reserves, it holds first place (5.2 million tonnes). A good example is the Lovozersk deposit in the Murmansk Region (in Northern Russia). “It consists of three main minerals in about equal shares,”says Alexandr Samonov, a researcher for Institute of Geology of Ore Deposits, Petrography, Mineralogy, and Geochemistry of the Russian Academy of Sciences. “Besides loparite, the triplet includes eudyalite, an exceptionally rare mineral, which, outside the Kola Peninsula, is found in small quantities only at two locations in the world. For the production of rare earths, it is much more attractive than loparite, as the content of REM in it is 2–3%, i.e., twice that in loparite. Ore reserves that can be surface mined are estimated at 80 million tonnes even now. The second gem is the Tomtor deposit in Yakutia. REM con-
tent in its ores reaches a phenomenal 12%. Moreover, its proven reserves amount to 150 million tonnes, while possible reserves virtually exceed all the rest of the world’s reserves combined. Finally, there is another quite promising source: Apatite ores have been mined on a massive scale on the Kola Peninsula to produce phosphorus fertilisers. Comprehensive processing of the apatite raw material might produce approximately 40,000 tonnes of rare earths a year. REM production facilities in Russia are, however, concentrated in the hands of a few Russian entrepreneurs, who have been in no hurry to invest in developing the sector. SMP and the Lovozersk IMPP are controlled by Suleiman Kerimov’s Sylvinite. Apatite is controlled by the Fosagro holding company, which has shown no apparent interest in REM. However, the conditions have changed. Unlike fertilisers, REM are exceptionally expensive and are appreciating by the day. Russia can make good use of the window of opportunity opened by China by leveraging its mining capabilities and associated infrastructure. Moreover, supplying semifinished products to developed countries that face crunch might constitute a good starting point for establishing the advanced stages of the rare earth production chain in the RF and for spurring production of innovative goods. Russian industrialists should become proactive in establishing a strategic rare earth industry. Our collaboration in this field has also potential.
JOUNALIST SPECIALLY FOR RIBR
ero India-2011, which opens in Bangalore today, will host big stars of Russia’s aircraft industry, including Sukhoi Company, IRKUT Corporation, Ilyushin Aviation Complex, United Industrial Corporation Oboronprom, and others. Their products will mainly be exhibited as scale models, stands, various equipment and existing models. Rosoboronexport experts say that bringing real prototypes to the other end of the world is not economically feasible. India, after all, accounts for upto one third of Russian defense exports, valued at over $40 billion. Unlike other countries, Russia generously transfers licenses and technologies as well as arms and weaponry to India. Many types of Russian weaponry and equipment are used by the Indian Air Force, including Sukhoi SU-30MKI fighters produced by Irkut Corporation and assembled under the Russian license by HAL. Russia has supplied cutting-edge weaponry to India like MiG 29K seaborne fighting aircraft that Moscow delivered to Delhi for the INSVikramaditya, currently being retrofitted in Severodvinsk, and the BrahMos supersonic anti-surface missile. However, Aero India-2011 will see a whole new splash, and a very odd one at that. The aerospace exhibition in Bangalore will not host the MiG-35 prototype, a modern Russian fighter. The strange part is that Russia announced this combat aircraft as a part of its bid to provide 126 medium range multifunctional fighters under the MMRCA (Medium MultiRole Combat Aircraft) programme to Delhi. Six combat fighters - American F/ A18E/F Super Hornet by Boeing and F-16IN Super Viper by Lockheed Martin, French Rafale by Dassault Aviation, European Eurofighter EF-2000 Typhoon by EADS, Swedish Gripen NG (Saab) and Russian MiG-35 – will participate in the bid for the $11 billion long-term contract. It was MiG-35 that the sponsors of the air show in Bangalore did not hesitate to call “the absolute best” while speaking on the radio during Aero India-2009. Can this omission be explained by pragmatic costcutting? Russian Aircraft Corporation MiG confirmed that. They say that MiG-35 passed all necessary tests, including armament tests, in India. Aviation experts from Delhi spent many weeks in Moscow and at the MiG facilities, familiarised them-
A
selves with the technology and manufacturing equipment and received all the documents required for them to make the right decision. Therefore, there is no point in spending more money to flaunt its excellent flight and handling qualities yet again at the Bangalore exhibition. Yet, there is another point of view that has recently been voiced by an Indian military publication. In its January issue, Strategic Affairs referred to an advisor to the Minister of Defence of the country, who spent several weeks in the US and allegedly guaranteed Boeing that its F/A18E/F Super Hornet aircraft would win the MMRCA tender. Such speculation, regardless of whether they are true or not, are at odds with the robust defence relations between India and Russia.The recently signed contract for building a 5th generation one-seated aircraft on the 5th generationT-50 platform that will ensure high technology contracts for dozens of Indian enterprises within HAL (Hindustan Aeronautics Limited) and unique air power for the Indian air forces, is a sign of genuine trust between Russia and India. At the same time, the Russian design bureaus and defence enterprises should keep their eyes open. The competition for the Indian arms market is growing by the day as India is striving to diversify its defence supply base so that it does not put all its eggs in one basket. American firms are particularly active. As soon as the US Senate lifted some restrictions on cooperation with Delhi, Boeing, Lockheed Martin and big corporations such as Northrop Grumman, Sikorsky, McDonnell Douglas opened their representative offices in Delhi, looking for access to senior officials and local movers and shakers to promote their companies. Washington is not only seeking to conquer the Indian arms market, but also to create a powerful competitor to China. According to experts, Delhi is not ready to “sink into Washington’s arms” though, and is still resisting closer military and technical cooperation with the US. India knows that the White House and the Senate can, at any time and at the slightest pretext, impose sanctions against its enterprises, whereas Moscow has never done and will never do anything like that. Moreover, the US, while cooperating with India, never stopped arms and weaponry supplies to Pakistan – a rival and a headache for India. Again, this is not the case with Moscow. Therefore, exhibitions are exhibitions, and a splash, in the end, is nothing new. But India knows the value of long-lasting and reliable military and technical cooperation with Russia.
PHOTO
RIA NOVOSTI
According to the UN Food and Agriculture Organization (FAO), the consumption of meat and dairy products, grains, oilseeds, fruits and vegetables has tripled over the past 50 years. People in developing countries, particularly BRIC, are spending more on food and their diets and are now seeing more variety. The world’s population is constantly growing, while arable land is shrinking. That's why land needs fertilizers to ensure higher crop yields. Potassium's main advantages include the capacity to retain water in the soil and improve nutritious value, taste and colour of food products.
NATALIA FEDOTOVA
Viktor Litovkin
BEHIND THE CURTAIN BATTLE ON FOR IAF TENDER FOR ATTACK CHOPPERS The Aero India 2011 will be tense with anticipation over the outcome of the Indian Air Force tender for attack helicopters. In the fray for the $1.5 billion contract are
the United States with AH64D Apache Longbow and Russia with Mi-28 NE (Night Hunter). The 'Night Hunter' is the latest variant of Mi-28 attack helicopter.
BUSINESS REPORT
Lifestyle
IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, FEBRUARY 9, 2011
Movies Pact signed for digitisation, financing remakes of Raj Kapoor films
Bonanza Pay packets to Russian executives rise by 19%
Happy days are back: Bonus rains on high-fliers The long night of recession seems to be over. Top Russian executives brace for hefty multi-million dollar pay package, outpacing their European colleagues.
Bollywood bridge gets a new sparkle When Medvedev came to India last year, he visited a film studio in Mumbai. Not just stars, but joint ventures flowed from Bollywood. SVETLANA SOROKINA RIBR
In this story, there are no full stops. Russia’s love affair with Bollywood continues. When the youthful Russian President Dmitry Medvedev dropped in at the famous Yash Raj Studios in Mumbai during his visit to India in December last year, sparks flew. A fan of the legendary Raj Kapoor, who enjoyed an iconic status in Russia, it was sheer joy for Medvedev to see his grand-daughter Kareena Kapoor dance with her costar Shahrukh Khan on the sets of Ra.one, an upcoming Hindi superhero flick. “We wanted to shoot the song in his presence, but due to security problems, we just showed him the dance steps we were rehearsing,” said Khan while recalling his chat over coffee with the Russian president. Medvedev spoke fondly about a 24-hour television channel dedicated to Indian movies in his country.“Russians love the bright, original, ethnic-oriented movies made in India. The symbols depicted in the movies are easy to understand,”he said.
“We find the way you dance very interesting and fascinating. The love for Indian cinema is long-standing in Russia," he said. But the brief visit to the film studio was not simply nostalgia and tinsel town talk. Business and diplomacy deftly blended with showbiz. Medvedev spoke about an Indo-Russian venture entitled ‘The Hindu’, starring Indian actress Panchi Bora and popular Russian actorsYegor
Medvedev spoke fondly about a 24-hour TV channel dedicated to Indian movies in Russia. Beroyev and Marat Basharov, which is doing well in cinema halls in his country. The film is about a great surgeon who tries to create a new implant to make broken bones heal quickly. Russians first saw it in October, 2010 on the Rossiya 1 channel.The film is now going to be released in India, with two channels, having purchased rights to screen it. DD plans to show the film in 150 countries. Joint ventures were also firmed up and unveiled. Russian World Studios (RWS) and Reliance Media Works Ltd., India's leading cinema
and entertainment company, signed a pact on joint restoration and digitisation of films. The joint project will finance remakes of films by Raj Kapoor, featuring Russian and Indian actors. The agreement also involved Obyedinennaya Gosudarstvennaya Kinokollektsia (United State Film Collection), Russia’s federal state enterprise that preserves and manages the Russian film archive. Clearly, many film moguls in Russia are thrilled by the prospect of cooperation with the world’s biggest film factory. “We are ready to provide good conditions for the work of Indian film-makers on our market. Incidentally, we are all interested in regulation of the cinema, in the sphere of copyright and financing opportunities being more transparent, more understandable and more universal,” Medvedev said. Another idea that cropped up during the meeting was to make a sequel to the SovietIndian film “A Journey Beyond Three Seas”, based on the travel notes of Afanasy Nikitin, a Russian merchant from the town of Tver, who visited India in the 15th century. “I promise that the love affair between our films and your country that began 60 years ago will continue,”
No biz like showbiz: $1 bn and growing Russia's film distribution market grew by 40% in 2010 to finally breach the $1 billion revenue threshold, becoming the fifth biggest in the world, says Russian Film Business Today. TIM GOSLING RIBR
The film distribution business has recovered with a vengeance. It is expected to touch around $1.05 billion, says website Kinobusiness. com. Russian distributors dominate the CIS space,
whilst Russian revenue accounts for around 97% of the total. The result represents a strong recovery from last year, when receipts plunged to $736 million from $831 million a year earlier. The rouble’s rapid fall that year played a significant role. According to analysts at Nevafilm, local currency box office revenues still grew by 13 pc. Whilst the financial crisis softened consumer spending, the corporates mostly bore the brunt. Ordi-
nary Russians merely tightened their belts a little. PricewaterhouseCoopers forecasts that the Russian entertainment & media market will expand at a compound annual growth rate of 9.3% in its report entitled ‘Global Entertainment & Media Outlook 2010-2014’. Higher ticket prices has driven up the revenues. Cinema audiences only increased by 14.9%, indicating Russian consumers are ready to pay more for higher quality.
Randhir Kapoor, son of Raj Kapoor, star of Awara (The Vagabond), said. Awara became so popular in Russia that it continued to shine on the cinema screens until 1986. It was seen by 10 million people. Looking at it as a good alternative to Hollywood, the Soviet government bought 250 Indian films at one stroke. Jawaharlal Nehru, India’s first prime minister, joked that Kapoor was better known in Russia than he was. Building upon this legacy, film makers are thinking up joint projects. “Of course, India and Russia have very different audiences,” says Sapronov, general director of RWS. “Making a joint project that would interest both you and us is a challenge. But opportunities for cooperation do exist.” “Russia is looking for various forms of cooperation with India. Because Indian cinema was hugely popular in the USSR, it was decided to start from there. India produces as many as 1000 films a year, more than Hollywood,” says film critic Daniil Dondurei. "Medvedev naturally believes that India’s leadership could be adapted to our interests even though Indian films are not yet bought for distribution,” he added.
The Russian box office will continue to grow at a similar rate to the overall E&M rate, to the point where it will account for 63% of the total receipt growth in all CEE countries and peak at $1.78 billion by 2014. Modern multiplexes are the biggest driver of the move to quality and consequent rise in ticket prices, with more than half of Russia’s modern screens now housed in retail and entertainment developments. These modern screens have helped as Hollywood blockbusters such as Avatar and Shrek Forever After demanded 3D presentation. The share of multiplexes in the total number of modern screens in Russia was until recently increasing at a rate of at least 30% per year.
RIBR
Research shows that Russian bonuses are outpacing those in Western countries. After reviewing more than half of Europe’s top 500 companies by market capitalisation, Hay Group, a global management and consulting firm, found that executive compensation packages rose by a median 6 pc in 2010, whereas the total cash increase to Russian executives was 19%. “Commodity companies, such as oil and natural gas and metals, naturally pay the highest bonuses, followed by banks and large financial institutions,” said Yuri Virovets, president of HeadHunter, an employment website. “Real estate developers and major retail chains come next, while transport and IT companies round out the list.” According to Russian business media, Oleg Deripaska, owner of aluminium giant UC Rusal, became the high-
NIKOLAY KOROLYOFF
KINOPOISK.RU
Shooting a scene for the TV serial ‘The Hindu’
NATALYA FEDOTOVA
Oleg Deripaska is laughing all the way to the bank.
Deripaska became the highest-paid CEO, with 885.26 mn roubles in bonuses and salary. est-paid Russian chief executive in 2009 with 885.26 million roubles (about $30 mn) in salary and bonuses. National Media Group chairman Alexander Rodnyansky was second with 831 million roubles ($28.5
mn); Lev Khasis, the owner of X5 Retail Group, Russia’s largest retail company, took home 545 million roubles ($18.7mn); Vladimir Strzhalkovsky, general director at mining and metals group Norilsk Nickel, was ranked seventh with 136.33 million roubles ($4.7 mn); while Gazprom CEO Alexey Miller is 10th with 111.3 million roubles ($3.8 mn). The financial crisis has shown that a company’s financial performance is not
always the only deciding factor. “Our bonus programme is directly linked not only to budget priorities, but it also affords an opportunity to be rewarded for one’s personal contribution towards achieving certain priority business goals set by each structural division of our company," says Marina Storozhenko from the Pronto-Moskva media holding company. At times, bonuses are a tool to retain a highly valued specialist, or are evidence of the management’s attitude towards an employee. Sberbank, Russia’s largest bank, has become a pioneer by linking employee salaries to performance. The bank had already introduced incentives programmes for chief executives: in March, executive compensation was linked to the bank’s key performance indicators. Russian senior executives will receive a new portion of their bonuses in four to five months’ time. Says Maksim Lobada, an analyst with Investcafe:“Bonuses will rise compared to 2009 if only because markets have been recovering this year, and many companies dramatically improved their performance.” “Only rank-and-file employees, mostly in stateowned companies, got them in 2008. Private-sector managers – and far from all of them – saw their bonuses return only at the end of 2009.” He expects that 80–90% of managers will be paid bonuses for 2010 from among those who received them in 2007. Some Russian companies, however, prefer to turn to the so-called 13th salary – an annual bonus copycat, whereby an extra month’s salary is paid, most often to regular employees, at the end of December.
Trends Only 27 pc Russians expect financial boost; retail sector still growing
Confidence still shaky, shopaholics play safe Long known for their lack of thriftiness, Russian consumers are, however, cautious as the growth prospects remain fuzzy. TAI ADELAJA RUSSIA PROFILE
A new Consumer Survey by Credit Suisse Research Institute found that very few Russians expect their personal financial situation to improve in the coming months, while many even expect times to get tougher. The report explores the spending patterns and preferences of consumers in the Brazil, Russia, India and China (BRIC) markets as well as Egypt, Indonesia and Saudi Arabia. There is an across-the-board increase in consumer confidence in the emerging markets, with 38% of respondents saying they expect some improvement in their personal finances over the next six months, compared to 9% who expect some deterioration, according to the survey. Brazil and China topped the list of countries with the most confident consumers, with 63% of Brazilians and 45% of Chinese saying that they expect an improvement in their financial situation. 43% of Indians agreed with it. Russia followed Egypt, which sits
on the last rung of the consumer confidence ladder. Only 27% Russian consumers said they expect financial boost, while 10% said they expect it to get worse. A large proportion of households in countries surveyed live on less than $1,000 a month, but those in the high income brackets are expected to continue to see much greater growth than the lowincome earners in all markets, the report states. The disparity in income is expected to translate into high demand for essential items such as protein consumption or mobile phones among the low-income earners in India, Indonesia and Egypt, while
the consumption of highticket items will be more widespread in relatively rich markets such as Russia and Saudi Arabia. “There is no doubt that there is a steady increase in the standard of life for most Russians over the past year, especially for those in the top income bracket. But many Russians do not see any reliable basis for such growth that could help them make critical decisions about future consumption. This is why many Russians are very cautious about spending at this stage,” said Marina Krasilnikova, the head of consumer research at the Levada Center which conduct-
Will the state of your finances be better, worse or the same?
ed a poll in December last year. The survey notes substantial structural differences in the savings culture across these markets. China and India both exhibit strong savings cultures, while Brazil and Russia have low saving habits. Only 24% of households in Russia have bank accounts, compared to 37% in Indonesia and 80% in China. Stock market investments or life insurance policies barely register for the average household in Russia. But while the shopaholic tendencies of early 2008 are still a long way off, analysts said there are many Russians who are willing to open their purses to feed another round of shopping frenzy in the near future. Renaissance Capital consumer-market analyst Natalia Zagvozdina said the modest growth in the economy this year has already boosted consumption in the country’s retail sector. “The retail sector continues to grow at a phenomenal rate in real terms,” Zagvozdina said. “There is more consolidation in the sector and many big players like X5 and Magnit are expanding market share or increasing their investment in the sector by several million dollars in the New Year.”
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