NEW DELHI - The SARS (severe acute respiratory syndrome) epidemic in China had revved up hope here that orders in textiles and other sectors would be diverted to India. But that may not happen. A new contender for foreign direct investment (FDI) could be Russia, a country whose president, Vladimir Putin, confessed in his Council of Federation address in 2001, "The problems haven't gone away," and extolled the Russian people, "No one is our enemy in today's world, yet no one is especially waiting for us out there, either. We must struggle for our place under the sun of economy."
Russia set ambitious targets for higher rates of growth at that point, and committed itself to a deep restructuring of its economy, whose main plank was the creation of an enabling environment for investments, foreign and domestic. The steps taken then, combined with the structural changes to the underlying superstructure, are beginning to yield results today. If independent experts such as the Moscow-based Interactive Research (IR) group are to be believed, it has resulted in the creation of a pulsating domestic consumer-goods segment, creating new opportunities for investors and the domestic entrepreneurial class alike.
If one looks at the decade gone by, oil profits were and still are the life-blood of the Russian economy. This is best exemplified by the US$6.75 billion deal between BP and Tyumen Oil, considered to be not only the deal of the decade but also the largest since the fall of the Soviet Union. The part cash, part share-swap deal created one of the largest oil conglomerates in the world, but it has also resulted in the dawning realization that Russia cannot indefinitely depend on oil for growth, leaving its economy open to shocks from oil-price volatility. As Steven Dashevsky, oil and gas analyst at Aton brokerage, told Johnson's Russia List, "The oil and gas industry was the locomotive that pulled Russia out of the mire, but going forward it will have to be domestic consumption that drives it."
Interestingly, because the general focus has been on oil and the concomitant problems arising from Russia's over-dependence on it, most casual observers have missed a new trend that lies hidden under the grand canopy of the oil economy, says the IR group. This is the emergence of a new entrepreneurial class, different from the already known and listed companies, such as Baltika, Wimm-Bill-Dan and MTS. They are the companies of the future, the vehicles for domestic growth, and the fodder for future global acquisitions and alliances by global majors.
Significantly, these companies are in consumer goods, a segment that until now had been considered unimportant. And if the IR group's projections are right, there could be a whale of opportunities for overseas investors.
In a report released last December as well as in a new study just released titled "Top 100 Emerging Companies of the Russian Consumer Market", the group argues that contrary to public perception, the Russian economy is not as dependent on oil as is perceived and the country's nominal gross domestic product (GDP) is about $450 billion to $500 billion, about 40 percent higher than official estimates. The consumer economy is four times the official estimates of its size. Less than 20 percent of Russian consumer spending goes into the consumption of imported goods and the country's consumer market could be 2.5 times its exports. Further, consumer incomes are growing at about 8.5 percent annually (2002 figures) and the consumer goods segment, worth $260 billion to $270 billion by the group's estimates, is growing at a healthy 13-13.5 percent.
Further, the group paints a glowing picture of a growing middle class (about 30 percent of Russia's 140 million population), defined as those who spend more than 35-40 percent of their income on essential commodities and who have incomes to spend on consumer durables, education and health services. Predictably, this population is concentrated more around Moscow and less in the interior. This explains why more than 30 percent of the top 100 emerging consumer-goods companies are concentrated in Moscow and St Petersburg. The group points out that the share of middle-class disposable incomes is growing. Further, this growth is increasingly in services and consumer non-durables, and not merely food.
The report admits that income disparities are high in Russia, with the bulk of consumer spending falling in the 20th percentile of the population. However, what is not widely known is that Russian individual incomes are subject to low rates of taxes and that Russians do not have to pay large sums in electricity, gas and water bills. Most Russians own their apartments and do not carry heavy liabilities in terms of debt and mortgage payments.
Further, the IR group offers a list of 100 companies it calls "tomorrow's [consumer goods] companies identified today". This list excludes the oil majors. It also excludes the known and listed companies as well as those that have undergone foreign acquisition. This leaves a list of relatively unknown consumer-goods companies in such diverse fields as meat processing, semi-manufacture, tea, coffee and other foods, ketchup, sauces, cosmetics, perfumery, bakery, pharmaceuticals, textiles, clothes, consumer electronics, building materials, packing, printing, financial services, travel, wholesale distribution and retail trade.
Under meat processing the group lists promising names such as Compomos, Mikoyan, Klinsky, Omsky Bacon and Parnas-M. In the category of ketchup, edible oil, margarine and fats, there are names such as Efko, Baltimor, Nizhegorodsky MZHK and Petrosoyuz. In textiles, names such as Russian Textiles, Gloria Jeans and Tchaikovsky Textiles figure on the list. For furniture, there's Shatura, and for electronics, Aquarius and Formoza. Promising distributors include Rusimport and retailers include Kopeyka. In financial services there's Russian Standard Bank and Alfa Bank among others. And on tourism and transport figure Siberian Airlines and Natalie Tours.
What is interesting about the IR group's report is that though it is at variance with the general perception of Russia, early entrants to the economy could reap benefits of the early-bird incentive in case the group's estimates are correct. Besides, the group's study, focused entirely on the consumer-goods segment, is one of a kind, with no other comparable studies available. Perhaps this focused approach has helped the consultant group discover underlying trends in the Russian economy that have thus far escaped most studies, most of which have adopted a blanket approach to classification of companies. Thus, while there are reports identifying the top 100 Russian companies, there are none identifying them in the consumer-goods segment.
To understand what is happening in Russia, one needs to look at the country's development map during the decade gone by. The early 1990s saw the domination of the economy by large state-owned enterprises in the core sector, particularly heavy industries, and a slew of low-quality, high-volume consumer-goods manufacturers. The concentration on what the state considered "essential" led to a demand spiral for so-called "luxuries", resulting in long queues outside government-run distributors of these products.
All this changed with the disintegration of the Soviet Union. The transition saw the creation of a new economy fueled by "shuttle trade", or the illegal import and distribution of computers, alcohol, sports wear and a load of other consumer goods by the bagful from China, Turkey and Poland. The shuttle trade resulted in the creation of many of Russia's modern-day tycoons, but it stunted the growth of domestic industry.
Against this background, Russia witnessed a financial crisis in August 1998. This crisis undermined the Russian banking system, cut consumer incomes and led to the devaluation of the ruble. However, it also proved to be a blessing in disguise, as it kicked off the debate in Russia on structural reforms. The year 1999 saw the Institute of Economics, Russian Academy of Sciences, circulate the country's first-ever discussion paper on a long-term strategy of social-economic development up to the year 2015. Until then, there had been no move to evolve a long-term strategy even at the government level in the new era.
At the micro level, the financial crisis of mid-1998 also had another positive fallout. The devaluation of the ruble made imports unattractive. This spurred demand for cheaper domestic consumer goods, resulting in the development of a vibrant domestic consumer-goods industry, under the grand canopy of the known oil conglomerates. It is this growth that is now being captured by experts such as the IR group.
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