Bilateral relations may be frosty at times but the business ties remain firm

Designed to strengthen business ties between Great Britain and Russia, the Russo-British Chamber of Commerce Business Summit was this year held at the Institute of Directors on Pall Mall in London.  It bought together both leading Russo-British business men as well as those from some of the SME businesses that trade between Britain and Russia.   The day was split into 4 sessions each looking at a specific area of the Russian economy and how British and Russian companies interact in this marketplace.

Foreign Direct Investment Review

In this session the official lines from the Russian and British side, represented by HE Yury Fedotov, Russian Ambassador to the UK and Andrew Cahn, CEO of UK Trade and Investment (UKTI), were presented.  According to HE Yury Fedotov, the importance of the Russo-British relationship can clearly be seen by the spread of Russian as a spoken language which in recent years has become the most widely spoken foreign language in London.  Economic cooperation has been going from strength to strength irrespective of the political atmosphere however the ambassador asserted that this will see increased benefit if there is stability and continuity on the political stage.  Not only is trade increasing (almost doubling since 2003) but there is currently $26.3bn of investment flowing into Russia from the UK which means that 13% of all FDI into Russia comes from Great Britain.  Britain leads the way in investing in the stability of the Russian markets, with all major British banks now having concerns within the Russian market.  This is not a one way trend, according to HE Yury Fedotov, there are more than 55 Russian companies trading at the LSE and who exceed $350bn on the London securities market.  Mr Cahn echoed the importance that the British place on a strong Russia by stating that the UKTI would very much like to see Russia within the WTO and that this will not only help Russia but the global community as a whole.  Mr Cahn affirmed that although Britain puts a lot of financial investment into Russia, it also invests knowledge, skills and training within Russia.  Exports to Russia last year stood at £2.8bn, with Cadbury’s locating its largest factory outside the UK within the Russian Federation.

We then heard from several leading FDI specialists within the Russo-British market.   Michael Calvey, Managing Partner- Baring Vostok Capital,  recommended that Russia be considered among the top three best macro-economic environments in the world because debt has gone from 10 times GDP to almost no foreign debt in a very short time.  It has a fiscal policy that many around the world should be jealous of and as such its biggest fear is currently from inflation.  Calvey affirmed that for top managers within Russian firms it is the specific producer price inflation that is of concern.  He sees that this inflation is largely due to a catastrophic drop in fixed investments during the 1990s from which Russia is still recovering.  Dr Carlo Gallo, Senior Russian Analyst at Control Risks, looked towards the change in presidential power and echoed views that are widely shared amongst the Russo-British business world.  Putin has come to mean so much to the people of Russia that it would have been hard for him to have gone out of the limelight.  Putin remains a very much enhanced PM and retains the informal authority within Russia.  Although this could lead to moves towards a parliamentary system, this is unlikely to occur if Mr Putin wishes to run for President again.  It seems likely that although Medvedev appears to be a figure head at the moment, Mr Putin will want Medvedev to grow into the role of President.  Dr Gallo finished his presentation by stating that although Russia and Europe share common ground on many points, it is the sticking points that need to be concentrated on and sorted out.  It is hoped that Medvedev will help to do this within the early years of his Presidency.

Natural Resources

This Session was chaired by Sir Roderic Lyne, Senior Advisor to JP Morgan and BP.  The presentations were started by Alexander Mikhailiants the Strategic Communications Director for TNK-BP.  In light of the recent troubles for TNK-BP within Russia, Mikhailiants gave a brief outline of how the company is currently doing within the marketplace and whether there is room for Russo-foreign joint ventures within the Petroleum industry in Russia.  TNK-BP remains a healthy company producing 1 in 25 oil barrels of the European consumption.  It is cleaner and safer than ever before leading the way in Russia for low injury rates in the field.  This means that overall TNK-BP is in a good position to sustain development well into the next decade and beyond as long as political issues do not affect its operative ability.   The Managing Director of the Society of Petroleum Engineers, Lawrence Slade, reiterated the fact that we often get too carried away by looking at the monetary value of the natural resources industry in Russia,  we forget how much knowledge, information, training and skills have gone into and come out of this Russian industry in recent years.  Russians themselves have a certain lack of understanding regarding the importance of skills particularly within the Petroleum industry that has only recently begun to change with the sharing of standards and practices from other countries around the world.

Infrastructure & Manufacturing

This section was led by Stephen Clark, Deputy CEO – VTB Bank Europe who was extremely positive about Russian and her government, saying that Russia is treating her resources with restraint and control.  The government according to Clark has shown prudence when dealing with the funds that they have as well as pushing money into infrastructure which is helping to stimulate and increase growth in the Federation.   PWC were represented by two directors who discussed issues to do with Russia’s financial state, as well as looking towards how Russia has developed its mergers and acquisitions market.  Ivan Berkes informed listeners that Russia was in 4^th place in global markets for IPOs in 2007 and although the credit crunch caused this to stop in the early part of this year, there are currently $30 million worth of IPOs from Russia in the pipeline for the rest of the year.   M&As are rapidly growing in Russia with a noticeable shift from private investor deals to private equity.  Over recent years the majority of M&As have been within the extraction industries however according to Berkes there is a huge growth in the consumer and infrastructure industries which will cause us all to see them dominating the news regarding future M&As.

Karina Luchinkina led on from her colleague by asserting that there is a huge potential for bilateral M&As yet this has not been fully realised due to several problems: (1) Higher managers from the west were not comfortable working in Russia, (2)the Russian markets have a perception problem in the eyes of the west, (3) Russian companies are often seen to have governance issues as well as safety concerns which leads many foreign governments and unions into blocking the purchasing of companies by Russians.  The fact is, although this is a two sided problem, Russian companies could do a lot to improve their own image which would make the M&A process easier and far more appealing for western managers.  Alexander Fedorov is the President of one of Russia’s fastest growing retail brands called Wild Orchids.  They are producers of women’s lingerie.  When the company first set up they were supplying largely European manufactured  luxury goods to the Russian  marketplace, and are still known for selling the top brands of lingerie, however in 2005 they started manufacturing their own brand.  They found that it was far more efficient to have a factory just outside Moscow than to bring the lingerie in from other countries.  Wild Orchid is doing so well, they own a huge chain of stores that is rapidly growing across Russia and by 2011 they plan to have over 300 stores nationwide.  One of Russia’s greatest problems today is its critical problem with its demographics.  When asked what could be done to tackle this problem Mr Fedorov said, although he recognised that this was a problem , Wild Orchid as a company did not see this because every time a new store was opened the demographic of the local area went up very quickly.  In fact he jokingly said that the workers of Wild Orchid had petitioned the Russian government to declare the lingerie industry among the list of strategic industries in Russia.

Real Estate

Real Estate both residential and commercial is one of the fastest growing industries in Russia with new buildings going up in the capital every day.  The last session of the business summit, although short on time, gave listeners a brief account of how successful this industry is and where it is going.  We heard many interesting things about the industry however it was largely a quick over view and as such the reader is asked to look out for further articles over the coming months in relation to this topic.  However one of the major points that came out of this discuss was that we need to look towards sustainable development.  We need to find ways of developing real estate that is environmentally friendly and that will fit into the future cityscapes.  Listeners were assured that the real estate industry in 10 years from now will be very different and the building techniques of today will no longer be acceptable forms of development therefore we must act now.

Overall the conference was a very successful event and one of the best events of the Russo-British business calendar.  It is the perfect platform to bring together the leaders of both Russian and British business and a chance to develop contacts and new business which can only strengthen the Bilateral ties between Russia and Britain.  With more events like this and with the efforts of organisations like the RBCC, one can only hope that bilateral relations will go from strength to strength and that business can help to thaw the frosty political relations between the two countries.  With Russia’s growing importance globally Britain should be leading the way in bi-lateral and multilateral relations with Russia.  We should help to show that Russia is a nation that can be trusted and is a valuable business partner, without which there cannot be global stability.

By Patrick MacPhail

EER Magazine