AmCham finds business as usual

Cash, Calculator, Pen

(Moscow News – themoscownews.com – Nathan Gray – April 29, 2013) The American Chamber of Commerce cleared the decks straightaway at its annual investment conference last week, in the wake of a difficult year in Russian-U.S. political relations.

“One of the purposes of this conference is to emphasize the fact that basically it’s business as usual, despite some of the geopolitical tension,” AmCham president and CEO Andrew Somers said in his introduction.

Despite a tense 2012, economic ties between the countries remain strong, though Somers described doubts among American businesses based at home as to whether they should venture into the market.

“There are some boards of directors and some companies that are a little hesitant about investing when they read about the various political tensions,” he said. “Our job is to reinforce that we believe very strongly – based not just on our opinion, but on the performance of our companies – that the Russian market is a place to invest, a place where they can get great returns.”

Deputy Economic Development Minister Sergei Belyakov reinforced Somers’ description of doubts among American firms about investing in Russia by citing a decline in investment in 2012. While not directly connecting this decline with the political relationship between the two countries, he acknowledged the impact politics in general have on economic ties.

“Unfortunately, trade relations depend on the political climate,” Belyakov said. “I’d like for business relations to be less dependent on politics.”

U. S. Ambassador Michael McFaul was more sanguine about the current environment, describing the bilateral relationship as an “undervalued stock,” performing better than the public perceived it to be. Citing the meeting of Presidents Barack Obama and Vladimir Putin at Los Cabos, Mexico, on the sidelines of the 2012 G20 summit, McFaul told how Putin stopped a discussion on Syria to talk first about the cooperation agreement between ExxonMobil and Rosneft.

“He wanted to signal to Obama, and Obama agreed with him 100 percent, that when we’re talking about U.S. – Russian relations, we have to give more pride of place to the economic dimensions of our relationship,” McFaul said.

Safety and corruption

The importance of the “unprecedented” cooperation between the companies was emphasized  by Glenn Waller, president of  ExxonMobil Russia.

“It’s the first truly global partnership that ExxonMobil has entered into,” he said. Additionally, “Rosneft has oriented some of its projects to the United States,” including participation in projects in Mexico, Canada and Alaska.

The risks of supply depletion are overstated, with Russia bound to produce more hydrocarbons in the 21st century than any other country, Waller said. A rise in global demand by 35 percent over 2010 by 2040, forecast by ExxonMobil, will put Russia in focus even more, especially since much of this rise will occur on Russia’s doorstep – in Asia.

Safety concerns – a prime issue for the oil and gas industry – should not be an impediment to investment, he added, citing the Sakhalin-I site in the Pacific Ocean.

“Sakhalin-I has the best safety record of any ExxonMobil project anywhere in the world, and that’s with an 85 percent Russian workforce,” Waller said. “So don’t let anybody tell you that you can’t work safely in Russia.”

Another traditional concern for foreign investors in Russia is corruption, an issue discussed by United Technologies’ vice president for global compliance, Kevin O’Connor.

“We’re very proud of our record in compliance here in Russia, because we’ve gotten into business with people who share our values,” O’Connor said. “When it comes to ethics, our businesses in Russia outpace our businesses in many other parts of the world, including the United States.”

In addition to the reputation and transparency of its Russian partners, he attributed the company’s ability to adhere to its ethical standards to the engagement of local compliance lawyers, to work along with the business units.

Diversification

Another significant issue for Russia’s economy is diversification away from natural resources, which remain the bedrock of investment and GDP.

“Oil and gas, and extractive industries in general, are still, one might say, at the core of this economy and its background,” said Peter Reinhardt, head of the tax legal practice at Ernst and Young. “But it extends well beyond that to other extractive areas – gold, nickel, you could go pretty much all the way through Mendeleyev’s table and find that Russia has a leading
position in the global economy there.”

Still, the consumer market remains an open field for investment that has only started to be tapped, he said, with 143 million consumers and a population that is stabilizing after years of decline.

Harnessing this potential are companies like Cisco Systems, whose vice president and general manager, Pavel Betsis, expressed concern at a palpable slowdown in growth in the first quarter of 2013.

“At the same time, there are lots of opportunities that are based, in our field, on the fact that Russia still has some catching up to do in terms of penetration of technology,” Betsis said. “All of these things in a very calculated manner contribute to economic development and the prosperity of the economy in general.”

For Cisco, training is a key part of their strategy, both in technology and entrepreneurship throughout the regions, as well as in Moscow.

“Some of it is even socially oriented, focused on either retired military personnel that are coming back into the economy and don’t have a lot of choice, maybe on some disadvantaged segments
of the population,” Betsis said.

The potential rewards of technological growth are high, he added, as the value of goods, services and data not currently connected to the Internet could be as much as $14.5 trillion.

The Value of Russia

Jiri Lang, managing director, DuPont Russia

We have been in Russia almost 40 years. What I want to mention here is that we have not been here for almost four decades just selling goods. We, since the very beginning, have also been present here in partnering with Russian companies. We’ve been bringing technologies…  Even back in Soviet times, we were coming with the fluorinated rubber industries, we were coming first with the local production of herbicides for crop protection. We were certainly the first ones bringing the technology of water-based paints and coatings to Russia. So we have a broad and long history of cooperation, building the relationship step by step, regardless of headwinds.

More importantly, within the last 12 months, we’ve been able to build new offices, like in Yekaterinburg, new research centers for agriculture [for] Pioneer in Lipetsk. And we also opened recently what we call an innovation center….  This is a way to bring research and engineering capability of a company much, much closer to the marketplace. We elect to do it for the most prosperous, most dynamic countries in the world, and I’m very happy to show that Russia was the first country [where] we established an innovation center in the whole of Europe, the Middle East [and] Africa. This is the way to connect much more closely the 10,000 engineers we have available around the world with the reality in each given market…

All-in-all, I believe it’s [fair] to say that the overall processes of certification and qualification are certainly – based on our experience – much longer than desirable, but we clearly see good trends. We clearly see that the authorities are much friendlier than they were 10 years ago. We clearly see a new generation of experts and support in the regions, as in Moscow, that [are] starting to understand the value of the solutions, invest into them, and see the life cycle costs and value of products.

Andrea Lockwood, U.S. deputy assistant energy secretary for Eurasia, Africa and the Middle East

We see Russia as a huge opportunity for American companies, and we know that Russia sees itself – and we see the great potential for Russia – to be a reliable, critical, transparent player in the global energy market. Russia is the world’s largest oil producer. It’s second only to the United States as a producer of natural gas. This is a remarkable achievement of where Russia was 10 years ago, where production was declining and people were very concerned about Russia’s role in our critical energy markets.

This achievement is not an accident, it’s the result of a determined effort by public and private managers and stakeholders – many of the energy companies represented here today – to apply modern management, equipment and expertise to what were then considered depleted brownfield sites, and what are now producing at much higher levels than was previously expected…

A national energy policy that’s focused only on expanding production at brownfield sites will not keep Russia in a leadership role in oil production. Russia recognizes that, and is looking for ways to expand opportunities in the energy sector to look at higher-risk exploration in frontier areas, and ways to encourage the deployment of increasingly cutting-edge technologies.

The Russian government estimates that the implementation of these new technologies and getting into these frontier areas will require nearly $600 billion in the oil and gas sector in the next 20 years. That’s going to be a lot of partnerships and a lot of investment opportunities.

The Ministry of Natural Resources… sees the potential. They see 100 billion tons of untapped conventional oil and gas resources. We see that if Russia opts to bring these resources to market, there are substantial technological challenges, that companies – many of you – already know how to get that oil out of the ground, how to gain those gas reserves, and how to translate that into jobs and profits both here and in the United States.

Silviu Popovich, senior vice president and general manager, PepsiCo Russia

When I got this question that we had to explain whether Russia is an attractive consumer market, for PepsiCo, the answer is obvious. We’ve invested $9 billion in Russia over the last [few] years, and if $9 billion for oil and gas sounds like petty cash, for an FMCG [fast-moving consumer goods] company, it’s a very big investment – it’s the biggest investment in Russia so far. My statistics say [the middle class] will be 40 [percent]…. It’s a very, very attractive market….

The per capita consumption is still far away from where it can be. In our categories… there is great, great potential for growth…  If you look here in Russia and at Russians, and at how Russian people are buying stuff, people like shopping.

More importantly, even from our perspective, people like brands, and in the future, that means that the stronger brands you have, the better chance you have that once consumers get more money, they’ll start to buy your products.

Moreover, there’s another thing that I think has not been touched until now, the role Russia plays in the region as a springboard for accessing another 140 million people around the CIS. And all the economies, actually, around Russia are growing even faster than the 3 percent we get in Russia, so it’s also a big, big opportunity here….

We have a lot of international brands like Lipton or Pepsi or Lay’s, that are flagship brands worldwide, and we are dealing [in] those, but the second thing, you cannot win in Russia if you do not have locally relevant brands….

Two companies, PepsiCo and CocaCola, they spent hundreds of millions of dollars developing the cola [category], a category that 20 years ago was very small. And until six years ago it was the biggest soft drink category until someone made an innovation which was very local-level: they put kvas beverages in PET [plastic] bottles.

And now the market for kvas, which is a very traditional drink in Russia, is bigger than the cola market.

Portfolios and old-style economics underrated

Roland Nash, senior partner and chief investment strategist, Verno Capital

Hedge fund money, portfolio finance, that side of private capital, has tended to have, I would say, a poor reputation in terms of driving anything very much, particularly over the last three years, and some of that has been quite justified.

It’s also been, I think, particularly and unfairly considered not such a positive influence in the Russian context. Most government officials will tend to look at foreign direct investment as the “good” investment, and portfolio investment as what comes in anyway.

I want to try and perhaps defend my capital a little bit, and explain why I think it’s a major driver of positive change and therefore innovation in Russia.

First of all, in terms of the scale of portfolio investment in Russia…. For various reasons, there are different measures of [cumulative foreign direct investment], but Rosstat [the State Statistics Service] at least measures it at roughly $160 billion in cumulative foreign direct investment over the last decade.

Putting portfolio investment into context of that… if you look at the amount of the equity market in Russia which is owned by foreign investors, it’s roughly $140 billion. If you then add in private equity – and I’ve been very conservative at assuming about $15 billion of private equity in Russia – then the ownership of companies by portfolio managers is roughly the same scale as the foreign direct investment that has come into Russia over the last decade. It’s roughly $150 billion.

Obviously, that fluctuates a lot more with the value of the equity market, but currently, as of today, it’s about the same kind of scale as the cumulative foreign direct investment.

If you then add in debt investment… then clearly all the portfolio flows including debt may actually dwarf the foreign direct investment that’s come into Russia over the last decade. When you add it all together, you get something around $500 billion in foreign portfolio flows that have gone into both debt and equity. So in terms of scale, clearly, portfolio flows are important – arguably as important, if not more important, than foreign direct investment.

Vladimir Osakovsky, chief economist on Russia and the CIS, Bank of America/Merrill Lynch Russia

As the Russian economy is moving closer to stagnation or recession, there is an intensified debate on what we can actually do to prevent that. Of course, it’s always good to sit back, relax and think about it, but what we would suggest to happen and encourage you to do is, while thinking of new solutions and new recipes for economic recovery… basically do not forget about very good old, traditional textbook solutions, such as the improvement of government institutions and monetary support.

When we are in a global economic crisis, when [all of] economic theory seems to be compromised, there is always temptation to say, “Now we need new solutions, now we have to rely on new sources of growth, new technologies,” things like that. And in the case of Russia, it usually boils down to the creation of some kind of development institutions or funds…. We have Rosnano and many other [structures].

Why we think that this approach is not good and we should still be talking about the good old institutional improvement is that… the quality of this standing actually is quite weak, but the most important part is that nobody really knows exactly what technology, what could actually work.

A few years ago, when oil prices were skyrocketing, I was personally thinking that the technological response to that would be something like fuel cell technology, basically the technology of transportation [by] electricity or something like that….

I would say that you never know what will happen, what will work, and that’s why we think we should be talking more about the creation of conditions which will make these innovations and technologies actually come about in the market and be efficient, and actually hit the market….

The infrastructural limits, the infrastructural bottlenecks in Russia [are important], but I would strongly argue that it’s not really the key constraint for Russia. Infrastructure is not the major problem for Russia. It is a big one, but it’s not the major one. If we are urging the government to spend more on infrastructure, again, we are talking about the efficiency of how this could be done….

But again, I think that the institutional footwork, the rule of law… the stability of trade relations are much more important for Russia than infrastructure.

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