Russia: An emerging marketPresented by: Philip Geanacopoulos 2013.01.23
Moscow city at night
Red Square in Moscow
Kremlin in the winter
Russia: An emerging market Overview of Russia The people of Russia Russian economy Russian health system Doing business in Russia Russian market opportunities and challenges Development of Russian market entry strategy
Russia she‟s big
Russian stereotypesStereotypes of Russia may depend on one‟s cultural background. In the UK, most people think about Russians as veryrich people who buy real estate in London. The same thing in Switzerland. At the Geneva airport there is a reference toRussia: an HSBC avert stating that Russian billionaires are 18 years younger than their American ones on average.
Russian stereotypesIn Germany they pay more attention to Russian natural resources, especially gas. Another problem is that on the map ofEurope you always see only a small part of Russia. The rest just doesn‟t fit onto the screen or page. So it is hard tounderstand Russia because it is moved into the subconscious.
Russian stereotypesFor Americans it‟s even harder because Russia historically is the Arch Rival. Also Russia is broken into two parts on anAmerican map of the World. America is in the center and Russia is surrounding the World from the left and from theright. This is quite uncomfortable notion for most people‟s minds.
A different perspective But actually Russia is not so huge. To understand that you should look at Russia… from space at night. Most activities are located in Central Russia and near this zigzag of light, which is the Transiberian railroad.
Russia – 9 time zones
Russia – temperature -30c up to +50c
Population densities in Russia’s regions
Flag of Russia
Russia currency The official Russian currency is the ruble or rouble and abbreviated as RUB. The exchange rate is: 30 Rubles to 1 US dollar, 40 Rubles to 1 Euro, 49 Rubles to 1 British pound, 5 Rubles to 1 Chinese RMB
Snapshot of Russia Full Name: Russian Federation Population: 142,517,670 (July 2012, 9th in the world) Capital: Moscow Area: 17,075,400 sq. km (largest in the world) Major language: Russian Monetary unit: Ruble or rouble, RUB Internet domain: .ru, .su, .rf International dialing code: +7
Facts about Russia It has the world‟s largest reserves of mineral and energy resources. The lakes in Russia contain approximately ¼ of the world‟s fresh water. Russia has the world‟s largest forest reserves and is known as the “lungs of Europe” and is second only to the Amazon rainforest in the amount of O2 it produces.
Top ten Russian cities by population
Moscow – the capital Population of 11,514,300 Situated on the Moskva River in the Central Federal District of European Russia. Europe‟s largest city. Four international airports, nine railway stations, Moscow Metro. World‟s 3rd most expensive city, down from 1st .
Moscow – an emerging city Fast forward Moscow city facts: • 25 – 30% of Russian GDP will be produced in Moscow (2025) • 20% of Russian population will love in Moscow • The city will grow by 2.5 times (Big Moscow) • 150km of new tracks and 70 additional Metro stations will open What are the implications? • Global economic force on its own • Hub and spoke business model • Diverse and dynamic socio- economic mix • Tech-savy citizens connected 24/7 • Mega-corridors: Moscow – St. Peterburg, Moscow – Nizhniy Novorod
St. Petersburg Population of 4,848,700 Located on the Neva River at the head of the Gulf of Finland on the Baltic Sea. Europe‟s 4th largest city. Most western city in Russia. Gateway to Scandinavia and Eastern Europe.
St. Petersburg Fast forward St. Petersburg city facts: • Home to a large number of international corporations and banks • Major trade gateway to Europe, financial and industrial center of Russia specializing in oil and gas trade, instrument manufacturing • Scientific and educational center and leader in information technology What are the implications? • Financial and industrial center of Russia • 2nd highest per capita income in Russia with rising incomes • Major investments in healthcare infrastructure
Beyond Moscow – the next game changers5 to 7 cities will emerge as alternative growth centers by 2020, bridging thewelfare gap between Moscow and St. Petersburg.
The new locomotives of growthVladivostok – “San Francisco” in the Far East “Open sky” status – transit between China and US Modernization of Vladivostok Marine Trade Port Educational, scientific, travel and business center linking Europe, Asia and America Tomsk 3.0 – Cognitive City of the Future Post-industrial, innovative economic development Strong scientific and education complex Comfortable living environment and social infrastructureVekaterinburg – “The City” of Ural Economic and financial center Important transportation hub – multi-modal logistics, the fastest growing airport Economic and financial center
Commonwealth of Independent States (CIS) A regional organization whose participating countries are former Soviet Republics, formed during the breakup of the Soviet Union and established in December of 1991. Member states are: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan Unofficial member states are: Turkmenistan, Ukraine
Commonwealth of Independent States
CIS history The Commonwealth of Independent States (CIS) is an interstate association of the former republics of the Soviet Union.
Russia’s people Median age: Total: 38.8 years Male: 35.6 years Female: 42.1 years (2012) Population growth rate: -0.01% (2012) Country comparison to the world: 192
Russian culture Russian distrust anything cheap. The English word “bargain” cannot be adequately translated into Russian. Although Russian distrust anything with a cheap price, they are fine with freebies. Russian people avoid speaking about their jobs. The intelligency level of Russian people is considered up to 99 percent. There are nearly 600 universities in the country and having a university degree is the main reason to be prompted for a good job offer. Russian people strive to be a European nation as their belief that everything European is better than Russian is quite difficult to change.
Gender roles Russia is still a very conservative society in terms of gender roles. Men always pay for women. Age is very important. Unless she is an attractive young woman, Russians prefer to deal with a more senior and experienced person.
Small talk Russians are proud of their culture (ballet, opera, literature, arts) and sport (football, tennis, hockey). Try to get the names of prominent Russians in your area of interest and praise them. Avoid talking about politics.
Price and pricing Russians better understand price in USD or Euro Less than 5% of Russians will be able to understand your message in English. However, they understand certain English words like “sale”, “present”, “exclusive”, “luxury”, “VIP”
Russian greetings„Dobra-yeh „ut-rah - Good morning„Dobryi dyen‟ - Good afternoon„Dobryj „vye-cher - Good eveningKak u vas dyi „la? - How are you? Spa „siba - Thank you Hara „sho - Good, ok Pa „zhaluysta - Please, welcome
More greetingsEta? - This oneSleva? - Left one?Sprava? - Right one?Vot, pa‟ zhaluysta - Here it is for you, please „Posle vas - After you Vot „vashi pa „kupki - Here are your purchases Dasvi‟ daniya - Goodbye Pri „haditye ye‟ shyo, pa‟ zhaluysta - Come and visit us again
Gift giving Russians like to give and receive presents, even when doing business.
Russian customs When giving away flowers they must always be an odd number. Giving even number of flowers is only for a funeral or the dead. At the time of greeting, Russians usually do not kiss. Neither men nor women. Men shake hands and women only by tilting the head. If invited to a client or business partner‟s home, do not forget to take off your shoes.
Religion of Russia Russian Orthodox Church professed by about 75 percent of the people.
Ten largest economies (2012)GDP in trillions
Proportion of nominal GWP for countries with 10 Highest nominal 2012 GDP Gross world product (GWP) is the combined gross national product of all countries in the world. In 2012, Russia had 2.7 percent global share of GWP.
Global economic outlook Global outlook for growth of GDP, 2013-2025
BRICS GDP per capita income growth GDP per capita income is GDP divided by number of people in the country.
Russian economy In 2012, the Russian economy grew 3.5%. GDP was $2.1 trillion USD, ranked 9th in the world. In 2012, Russian per capita income was $13,547 USD or ranked 55th in world according to the World Bank. BRICS countries per capita income: Brazil 58th, India 141st, China 91st , South Africa 76th BRICS grew 6.1% in 2012 and expected to grow 6.9% in 2013 according to Goldman Sachs.
Unemployment rate in Russia The unemployment rate averaged 5.8% in 2012, down from 6.6% in 2011.
Russian GDP since fall of Soviet Union During Putin‟s presidency between 1999 and 2007, the Russian economy grew 110%. Source: International Monetary Fund; GDP in billions
Russia’s GDP annual percentage growth What caused GDP to contract 8 percent in 2009?
Oil is Russia’s main export
Major events and world oil prices, (1990-2011)
Reliant on oil Lower oil prices negatively affect Russia‟s economySources: Thomson Reuters (oil); International Monetary Fund (GDP)
Foreign trade overview Russia is fairly open to foreign trade (which represents around 50 percent of the GDP) despite the nationalistic attitude of its leaders and strict legislation and fare policies. Russia is amongst the 10 primary exporters and the 20 primary importers of the world. Russia‟s main trading partners are China, Germany, The Netherlands and the United States. Russia shows a high trade surplus and this should continue regardless of the drop in raw materials prices and the deterioration of the global economic situation.
Russian economy - imports$322.5 billion (2011) Import goods Machinery, vehicles, pharmaceuticals, plastics, semi-finished metal products, meat, fruits and nuts, optical and medical instruments, iron, steel Main import partners China 15.6%, Germany 10%, Ukraine 6.6%, Italy 4.3% (2011)
Natural gas exports In 2012, Russia had natural gas exports totaling $65.5 billion.
World Trade Organization (WTO) After 19 years of negotiations, Russia official joined the WTO in August of 2012. Expected to benefit Russian consumers through reduced prices and add about 4% to GDP. Reduce average import tariffs to 7.8% from 10% and increase overall trade. Membership will hurt domestic industries like automotive, agriculture, forestry and light industry due to increased competition.
Consumer spending profile in Russia 1.9% 3.2% 5.70% 11.2% Food & beverage Clothing 14.1% Durable goods 39.1% Other goods 6.9% Housing Insurance 13.1% 13.2% Transportation Healthcare Other servicesSource: World Bank (2011)
Socio-economic indicators of Russia
Small and medium size business (SME) Engine for innovative growth Positive trends Restraints 1.7 million SMEs, 4 million individual Only 5% have international contacts entrepreneurs Only 2% - innovative SME 17 million employed, 22% of working- age population US – 40% of GDP, Europe – 60% of GDP 21% of GDP Barriers – tax system, lack of available 2000-2005 growth – 7%, 2005-2010 – financing, corruption, red tape 40%
Russian middle classMiddle class• Boom in consumer expenditure, stimulating overall economic grow• The largest consumer market in Europe• Higher demand for intangible products – services, leisure and entertainmentWellness and wellbeing• Healthy nutrition• Healthier lifestyle – sports and fitnessSocial mobility• She-economy• Small and medium size businesses• Reverse brain-drainEducation• RUB 140.5 billion investment• From quantity to quality• Corporate and federal universities, national research centers
The Putin years – how Russia faired
Russian health system
Russian healthcare system overview
WHO healthcare rankings 1. France 2. Italy 38. United States 112. India 125. Brazil 130. Russia 144. China 175. South Africa
Minimal wages of doctors internationally Country USD per month USA $14,500 Switzerland $7,800 France $6,000 Japan $5,401 Denmark $4,600 Kuwait $2,371 Poland $1,500 Lithuania $900 Russia $586 China $350 Ukraine $199 Georgia $100
Russian doctors experience: Low social status Poor working conditions A lack of prospects for development Very low salaries Poor funding of healthcare overall
Russian life expectancy
Natural population growth of Russia
Population of Russia
Alcohol and smoking Russians are #1 in smoking and #4 in global alcohol consumption.
Global HIV infection 703,781 - Official number of registered HIV-infected people in Russia (2012). HIV is spreading five times faster in Russian than the global average.
Common causes of deathSource: World Health Organization (2011)
Russia’s drug spending per capitaIn USD 2011
Russian healthcare crisisFast forward facts: Life expectancy among the lowest in the developed world. Unhealthy lifestyle and inefficient healthcare system. Number of population decreased by 7 million between 1991-2009. 2025 forecast: optimistic / pessimistic scenarios ~ 139/131 million Russia‟s healthcare is the most urgent problem in Russia
Russian health system Until the late 1980s, the structure of health services in the Soviet Union was highly centralized. After the dissolution, the healthcare system followed the new decentralized administrative structure of the country and is now divided into federal, regional (oblast-level) and municipal (rayon-level) administrative levels.
Regional budgets Because regional budgets fund the bulk of healthcare costs, standards and health statistics vary drastically across Russia‟s economically diverse regions.
Russian health system The Russian Constitution provides all citizens the right to free healthcare under Mandatory Medical Insurance in 1996. In 2006, a national project “Health” was launched to improve the country‟s healthcare system through improved funding and healthcare infrastructure. Includes: building new medical centers, equipping hospitals and clinics with advanced, high-end equipment, ambulance systems, nation-wide vaccination programs, free health checks.
National Health Program Government will provide substantial funds to build 15 specialized health centers. The higher purchasing power of hospitals and active government support is assisting the expansion of the medical device market.
Russian health system 30% of the population receive primary care through work related clinics and hospitals. For certain employment groups such as police, railroad workers, and high-level government officials, special health services exist.
Hospitals / Healthcare providers There are a number of different types of hospitals and healthcare clinics in use. They include: Rural Health Posts – These offer basic health checks and facilities including routine examinations, immunizations and minor injuries. They cover a population of about 4,000 people. Health Centers – These cover larger rural populations of approximately 7,000 people and offer a range of primary care services. They are able to perform minor surgeries and are normally staffed by a team of nurses in conjunction with a pediatrician, a therapist and a midwife/gynaecologist.
Hospitals / Healthcare providers Urban Polyclinics – These provide services which are normally considered general practice and include screening, treatment for chronic illnesses and on-going care. Depending on their size, urban polyclinics would also house approximately 3-4 specialists from fields such as cardio, oncology and obstetrics. Special Focus Polyclinics – This is where pediatricians and specialist ambulatory pediatric care treat children up to the age of 19.
Hospital beds and doctors, International comparison1210 8 6 Hospital Beds Doctors 4 2 0 Brazil Russia India China South France US AfricaSource: Economist Intelligence Unit; per 1,000 population (2011)
Organizational structure of the healthcare system in Russia
The Ministry of Healthcare and Social Development The Ministry of Healthcare and Social Development is the highest administrative level, headed by a minister appointed by the Prime Minister and approved by Parliament. It is the central policy formulating body for the Russian Federation and retains nominal rights to oversee the work and decisions devolved to the Regions. Its main official responsibilities include: Developing and implementing state policy in healthcare Developing and implementing federal health programs, including initiatives on diabetes, tuberculosis, health promotion, health education, disease prevention, etc. Developing draft legislation and presenting it to the State Duma Governance of federal medical facilities Medical education and manpower development Epidemiological and environmental health monitoring and health statistics Control of infectious diseases Development of health regulations Developments of federal standards and recommendations for quality assurance Control and licensing of pharmaceuticals Minister is Tatyana Alekseyeuna Golikova
Financing of healthcare services in Russia
Financing of healthcare services in Russia 62 percent from Federal and Region budgets 37 percent from employee payroll taxes 1 percent from Federal Social Security Fund
Generalized flow of state health expenditure
Compulsory medical insurance (CMI) Managed by the Medical Insurance Fund (Law No. 326-FZ, 2010.11.29) Provides the (mainly) free healthcare and hospital services. Employers and their employees are liable to pay insurance contributions through the withholding of a percentage of their salaries.
Compulsory medical insurance law Have you assessed the impact of the compulsory medical insurance law on your company?Source: Ernest & Young survey (2011)
Russian healthcare spending In billions USD160140120100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 In 2012, healthcare spending was about USD $110 billion and projected to grow to $145 billion by 2015.
Per capita healthcare expenditures (2000 vs 2012)9000 +79%8000700060005000 +78%4000 2000 201230002000 +388% +939% +373%1000 +861% +626% 0 Brazil Russia India China South France US AfricaSource: World Health Organization; in USD
BRICS healthcare spending as a % of GDP Brazil - 7.9%, ranked #43 in the world Russia - 6.2% , ranked #79 in the world India - 6.1% , ranked #85 in the world China - 5.8% , ranked #97 in the world South Africa - 8.7% , ranked #32 in the world Global average is 6.2%
Healthcare in Moscow Undertaken by the Moscow Healthcare Department and provided by a broad network of out-patient clinics, hospitals, preventive medical institutions, and pharmacies. Moscow‟s municipal free healthcare program is expected to cost almost 261 billion rubles ($8.6 billion), rising to 283 billion rubles in 2014, 319 billion rubles in 2015. 660 medical institutions covered by CHI.
Private healthcare market In 2012, Western investors, along with Moscow city government, invested in Moscow‟s healthcare system to merge three of its state hospitals with private medical clinics across Russia operated by Medsi Group. Private healthcare market expected to be $25 billion by 2014 and is growing at 16 percent a year. 10-year tax holiday on new healthcare investments.
Pharmacies The Russian Federation has an estimated 17,500 pharmacies, of which 23% belong to regional governments, 60% to municipal authorities and 17% are privately owned. There are also about 50,000 pharmaceutical kiosks. Pharmaceuticals are provided for inpatients by the hospital, while outpatients must purchase them. While the availability of drugs has increased through imports, drug affordability has fallen and many Russians are unable to purchase necessary medications (17.8% of the population were below the poverty line in 2006). While efforts have been made by the government to set margins for wholesale and retail prices, enforcement of the regulations by local governments is extremely patchy, with widely variable prices found across the regions.
Free services to be covered by government budgets: Urgent medical care Ambulatory, polyclinic and hospital care provided to patients with socially significant diseases, including: skin and venereal diseases tuberculosis AIDS mental health problems drug addiction pregnancy and delivery abnormalities some types of conditions of children and infants Dispensaries monitoring healthy children Specialized pharmaceutical care and prostheses Some types of expensive medical care
Free services to be covered by the Mandatory Medical Insurance funds: Ambulatory, polyclinic and hospital care provided to patients with: Contagious and parasitic diseases Cancer, endocrine system diseases Nutrition abnormalities, nervous system diseases Blood diseases, immune system, pathology, heart and circulatory diseases Digestive system pathology, all types of injuries and poisonings Bone and muscle diseases Some types of inborn adult pathology Some other diseases
Global diabetes spending (2011) Mean diabetes-related healthcare expenditures per person with diabetes (20-79 years) in USD
Global diabetes projections Global projections of the number of people with diabetes (20-79 years), 2011 and 2030
Diabetes in Russia Diabetes patients are “sequestered” meaning the disease is given special attention. Patients are treated by specific doctors and receive medication free from the government including test strips, glucose tablets and insulin; glucose meters are not reimbursed. Access to physicians is free for all patients. Doctors received primary specialized training of 4 to 10 months in diabetes and only physicians with training in diabetes are allowed to care for such patients.
Key facts on diabetes in Russia Patients are on average 60 years old. Newly diagnosed are almost 5 years younger than previous figures from 2006. Average age of newly diagnosed is 51.4. Use of insulin has nearly doubled, from 19 percent in 2006 to 36 percent in 2011. Use of non-insulin medication is in decline, with 61 percent of patients in 2006 treated exclusively with pills, dropping to 47 percent of patients in 2011. Use of lifestyle therapy is declining, from 20 percent of diabetes patients engaging in diet and exercise to manage the disease in 2006 to just 13 percent in 2011.
Key facts on diabetes in Russia Almost 94 percent of diabetes patients experience four to five associated conditions, on average. Cardiovascular affects 82 percent and hypertension 68 percent. Most cases the conditions are treated with medications. 83 percent are overweight or obese. 62 percent of patients express a desire to know more about diabetes management. Apart from health care professionals, the sources of information are typically friends, family, other diabetes patients and television/radio. 18 percent use the internet to search for diabetes information, up from 4 percent in 2009.
Doing business in Russia
Cultural context of business in Russia Dictatorship Democracy Command economy Market-driven economy 1000 year feudal Individual responsibility dependence
Mix of business cultures What is Russian business culture of the 21st century like? It‟s a mix of European and Asian business culture, but with a Russian flavor. Today there are more and more Russians who think and do their business the same way as Europeans. They have European educations and know one or several foreign languages.
Impact of cultural factors on business in Russia Lack of respect or trust of organizations and their policies. Fear and distrust of outsiders. Respect for “position” not automatic, trust must be earned. Reluctance to put things in writing. Intolerance of personal risk. Personal agendas. No trust in long-term or managerial promises. Very high standard of education – lack of familiarity with western business concepts.
First contacts Sometimes Russian are a bit cold with people they don‟t know well. So you will have the break the ice with them and show them you are a reliable person. And after that they actually become very nice and kind people.
Building relationships You can not underestimate the importance of building relationships with Russians. It takes time, but is well worth it.
Cultural part of negotiations and Russian hospitality Russians are very hospitable. They like to treat their guests and spend time sitting at the table with food and drinks, and saying toasts.
Business traditions in Russia Business is conducted in quite a professional manner. Important to be on time, don‟t be late. If coming for a meeting or conference, it is considered polite for company to give you a guide to show you the city.
Doing business in Russia1. Build personal relationship with partners. When there are contract disputes, there is little protection for the aggrieved party because of the time and effort needed to legally enforce the agreement.2. Use local consultants. Because the rules of business have changed so much in recent years, it pays to have a local Russian consultant working with the company.3. Ethical behavior in the United States is not always the same in Russia. For example, it is traditional in Russia to give gifts to those with whom you want to do business with.4. Be patient. In order to get something done in Russia, it often takes months of waiting.
Doing business in Russia5. Russians like exclusive arrangements and often negotiate with just one firm at a time.6. Russians like to do business face-to-face. So when they received letters or faxes, they often put them on their desk, but don‟t respond to them.7. Keep financial information personal. Russians wait until they know their partner well enough to feel comfortable before sharing financial data.8. Research the distributor. In dealing effectively with Russian partners, it is helpful to get information about this company, its management hierarchy, and how it typically does business.
Doing business in Russia9. Stress mutual gain. The Western idea of “win-win” in negotiations also works well in Russia.10. Clarify terminology. The language of business is just getting transplanted in Russia so double-check and make sure that the other party clearly understands the proposal, knows what is expected and when, and is agreeable to the deal.11. Be careful about compromising or setting things too quickly because this is often seen as a sign of weakness.12. Russians view contracts as binding only if they continue to be mutually beneficial, so continually show them the benefits associates with sticking to the deal.
Appearance expectations in Russia Wear dark suits and well tailored dress shoes. Do not take off your jacket in negotiations. Keep your hands out of your pockets. Women dress rather conservatively and should wear skirts. Dinner in a business partner‟s home, casual dress is appropriate.
Business expectations behavior1. Patience is key.2. Don‟t expect late Russians to apologize. It is probably a test of your patience.3. Some Russians will refuse to back down.4. Final offers are not the end of negotiations.5. Can usually get a better deal by holding out.6. ALWAYS be on time.7. Russians say “privet” in an informal situation then they kiss on the cheek.8. Russians say “zdravstvuyte” in formal situations then they shake hands.9. Eye contact is very important.
Do’s• DO shake hands firmly when greeting and leaving your partners and make direct eye contact.• DO partake in small talk that involves talk of family and personal matters, before dealing with business.• DO make a gift that symbolizes the stature of our company, preferably an item characteristic of our local area of one that display‟s the Acon company logo.• Knock before entering an office.• Close the door behind you, when leaving an office.• Supply beverages and snacks during business meetings.• Go out and have a drink with your counterparts, it‟s a good way to break the ice.• Bring small gifts for the children of a home you visit.
More do’s• Understand where we are doing business.• Commit (time, money, presence).• Prepare.• Gain knowledge of the Russian language and culture.• Use local partners and advisors.• Be entrepreneurial, flexible and patient.• Trust be check > Never assume anything.• Create win-win situations in which we have a clear added value.• Stay in control and keep the initiative.
Don’ts• DON‟T be afraid to show some emotion, the Russians won‟t.• DON‟T as the Russian proverb states „hurry to reply‟, but „hurry to listen‟.• DON‟T praise or reward anyone in public as it may be views with suspicion or cause envy and jealousy. Remember the collective rules over the individual.• Wear lavish clothing or jewelry.• Use a restaurant as a place for doing business – it‟s for celebration.
More don’ts• Be afraid of Russia.• Underestimate the market or Russian partners.• Stick to your own perspective.• Think Russia is Europe.• Think that Russia is cheap.• Think we know what is going on.• Let ourselves in with corruption.• Judge on the basis of first impressions.• Forget we are outsiders.
Be aware of business partners Naïve, less professional, less ethical. Gentlemen‟s agreements. Vague understanding of contractual obligations and consequences. Use of structured schemes.
Rules for foreign business entities and individuals Same rules for foreign and domestic entities and individuals. Regulations: Law on Foreign Investments (“the Grandfather Clause”), international conventions and treaties, Russian legislation. Benefits (treaties on avoidance of double taxation, tax incentives).
Foreign-invested enterprises in Russia Top five countries (No. of companies, 2001-2010)
Russian legal system. Main traits Legal system is becoming more predictable and reliable Court precedents – an independent source of law Uniformity of court practice principle Courts prefer to support business vs. state (minor exceptions).
Emerging market opportunities in Russia
Poll results If you had to invest $1 million USD in one of the countries below, based on the arguments, which one would it be?
The Russian market. Main traits Enormous market High returns Vast territories High price for advertisement and lack of efficient market offers Bad infrastructure Restrictive nature of Russian authorities Distinct market with specific rules
Why enter into the Russian market Russian Market Russia has three credit ratings of investment level (Fitch, Moody‟s and S&P) and the trend is positive. Russian non-extractive companies show excellent financial statements and place their shares on the main foreign stock exchanges. Russia shows growth in the living standard Accession to the WTO in August of 2012.
Why enter into the Russian market Russian Market Russia has become more attractive to foreign businesses because of its strong potential for growth, strong consumer spending by the emerging middle class, cost-competitive labor force and shrinking unemployment. According to Ernst & Young, Russia is now in the 5th spot on the list of the most attractive emerging-market regions according to Ernst & Young‟s Capital Confidence Barometer.
Does Russia Belong in the BRICS? Financial Times, 2010.01.20“In economic development, Russia is superior to the other BRICS. Among the BRICS, Russia has by far the highest GDP per capita, in 2008, it was $12,000 in current US dollars, four times that of China.”“Russia‟s higher income level is also evident in superior social indicators. In most regards, Russia is slightly more advanced that Brazil but head and shoulder above China and India. Most impressively, more than two-thirds of Russians of university age are enrolled in university, compared with less than one-fifth of the Chinese.”“In term of education, Russia matches the West The difference with the BRICS in consumption are also great. There are 14 times more cars in stock per capita in Russia than in China, and three time more computers. In many ways, Russia is already converging with the West.”
Russian market opportunities and challenges
World Bank ‘Ease of Doing Business’ Index (2012) #112
Russian weak points Russia‟s unstable investment climate, complicated and sometimes contradictory accounting regulations and legislations, infringement of intellectual property, many sectors closed to foreign investment as considered strategic.
Outstanding issues Corruption Some progress, but not enough Main political topic with approval rating of Russian government below 40 percent Crowdsourcing in fighting corruption (Navalny and Ospil) Demographics Population stabilized (growth rate -0.01% in (2012) Main growth comes from CIS countries and minority ethnic groups Russia is expected to have a Muslim majority by 2050
Business risks1. Mainly economic risks2. Mono structure of the Russian economy3. Problems in remote areas (Far East, Kaliningrad, Northern territories4. One factory towns5. Poverty gap6. NPLs7. Double dips (Russia shows boom and bust patterns)8. Oil prices9. Ruble exchange rate10. Parliamentary and presidential elections11. Business partnerships
Profits outweigh the problems Inward investment: Companies in for long haul despite endemic problem Financial Times, 2009.10.13“Despite its Byzantine regulatory environment, growth in Russia‟s market of 140 million people, whose incomes are supported by a steady trickle of oil wealth, make it a difficult place to walk away from. Companies such as Telenor and IKEA have dug their heels in, mainly because the profits outweigh the problems.”
Self monitoring of blood glucose in RussiaToday Low diabetic per capita usage of glucose meters. Small market, less than $80 million for total diabetes market.Tomorrow Fast and attractive SMBG market. Rise in government support for diabetes care.
Russian opportunities1. Concentration of wealth in and aroundMoscow and St. Petersburg. • challenges2. Many regulatory and legislative hurdles.3. Big four have been in the Russian marketfor a couple years.4. Hesitation about working with foreignproducers: high transport and customscosts.5. Price is the most important motivator inthe Russian market.1. Grow potential in these two main citiesis huge. • opportunities2. Local partners are essential to deal withthe market hurdles.3. New goods need investment inmarketing.4. Imported products need to have uniqueselling points.5. Flexibility during negotiations with localpartner.
Russian medical devices market One of the top 20 largest markets in the world, 2010 sales of more than $5.6 billion USD. Annual market growth of 13.8 percent in the next 5 years. Strong hospital infrastructure. 80 percent of equipment needs to be replaced. Two-year USD $44 billion being invested by the National Healthcare Program (2010) to modernize the Russian healthcare facilities.
Russian medical device market by segment Medical Apparatus 19% Medical Equipment 6% 41% Medical Instruments 24% 12% Medical Goods made of Polymeric and Glass Materials Medical Purpose Supplies According to the Russian Ministry of Industry, Science and Technology, from the point of view of production, all medical goods are divided into five major categories (2011).
Russian medical devices market Imports account for 81 percent of the market. Largest share of imports are high-tech market segments, i.e diagnostic imaging devices. Low-tech market segments, preference is given to local distributors. Prospective client groups: Public medical centers Uneven distribution of funding Procurement is done by the Russian government (tenders) Private medical centers: The market only started to develop within the last 10 years. Mostly concentrated in the 13 largest cities.
Glucose opportunities1. The Russian market is experiencing steady growth.2. Increased government spending and the need for new meters equals an opportunity for foreign producers.3. The demand for medical devices comes mostly from state-owned clinics. The private sector has only been developed in the last 10 years.4. Potential foreign producers have a lot of opportunity to gain market share and grow the business.
Development of Russian market entry strategy
Strategy requires1. Continuous attention.2. Twice the time to manage.3. A personal hands-on approach.4. Substantial investment of time, money and effort.5. A medium- to long-term strategy.6. Attention to the language barrier.
Things to focus on1. The Russian medical device market is highly competitive. European producers are well represented and have a strong track record with the Russian governments and hospitals. Chinese producers are strengthening position on the market with good transport links and high price-quality ratio.2. Preference is given to foreign producers with a wide product range.3. Price is the most important motivator in the Russian market.4. Hesitation to work with Latin American producers because of no established reputation, high transport costs and price, and spare part service is expensive.
Russian distributors1. Need for a distributor because of: Need for a network Market intelligence (lack of market transparency) Specific tender system State programs After sales (service, consumables, replacements)2. When dealing with a distributor: Certification in Acon‟s name Exclusivity or not Regions Sectors (glucose, EIA, clinical chemistry) Client groups Formulate targets (turnover, market share) Strengths are usually only in certain market segments Consider Language Company size Transparency
Profile of distributor capable of selling in Russia This profile applies in the majority of cases for companies that have been successful: Russia, in general, is not suitable for start-up companies. Healthy turnover needed (circa $5 million per year optimal). Experience in non-English speak markets. Strategic, information based approach to business development is required – willing to look at the big picture and quantify opportunity. Capable of a hard sell and expect long sales cycle. Willing to invest time and resources to see results: travel expenses, local representation, certification, translation, localization etc.
Development of Russian market entry strategy1. Way of doing business has to be adjusted to the Russian market.2. Cannot hesitate to ask questions.3. To do business in Russia you need to be present in Russia.4. Must be transparent and try to develop contacts with local authorities as they can provide access to a wide range of public healthcare institutions.5. Cooperate with local companies while carrying out registration and certification procedures.
Development of Russian market entry strategy6. Must develop own contact network.7. Find reliable partners/distributors.8. Consult with a legal company you can trust regarding signing contracts in Russian.9. Must be aggressive of entering the emerging market as it will provide Acon with new opportunities.
Strategy to choose: Key aspects Domestic distribution partner Export products Focus on glucose Cost leadership
Implement strategyDefinition of expectations activity Implementation strategy Partnership structure Find the partner
Russian market entry Study the marketExhibition visits Competitor & Implement strategy assessment Partner Certification search & licenses
How to perform effectively in Russia Use “authoritative leadership” for management. Use advisors aware of local law system and business specifics. Implement control system (financial, quality, operational control, etc.). Be firm and consistent in strategy and flexible in tactics. Build relationships with government bodies at all levels. Locally adapt the business model. Respect local rules, but follow company strategy.
Negotiations1. Win-Lose vs. Win-Win2. Russians always negotiate from a position of power.3. It is often about short-term objectives.4. Understand our own position.5. Psychology and emotions play a big role.6. Intent is more important than written agreements.7. Russian businessmen can be imposing.8. Russia businessmen think, speak and act fast.9. Only the smartest and toughest have succeeded.
Russian tender procedure The tender decision is taken by a commission of a minimum of five persons who should have no personal interest in the outcome of the tender. Commission typically includes representatives from the Federal or Regional Healthcare Ministry/Committee, the Ministry/Committee for Economic Development and Trade, the Mandatory Medical Insurance Fun and the special Public Procurement Department. Important: Most of the time government officials are more concerned about the price rather than the quality. Influence of academics, professors and their attitudes towards the products is rather high.
Russian tender procedure The contract will be awarded to the bidder that has offered the best terms and conditions for implementation of the pertinent contract, including, but not limited to, the contract price. Each criterion shall be listed in tender documentation and its weighting shall be determined. The contract is usually signed for 1 year. The success of the participation in a tender highly depends on the knowledge of the system. The volume of documents which should be presented in a rather short period of time to the state organizations in Russian is very big.
The Public Procurement Law This law differentiates between placing an order by way of holding a sale (in the form of a tender or an auction) and placing an order without holding a sale in cases explicitly stipulated by law. At present, auctions are encouraged as the most effective and transparent form of public procurement. Around 70 percent of all public procurement procedures are conducted in the form of an auction.
List of documents for registrationof medical devices and equipment
Median year 1 distribution build Russia vs. Europe Comparing with Europe, in Russia it‟s more difficult to build distribution of new product, during first periods are launch distribution grow rate in Russia is much lower.
What and when influences Russian consumer decisionsSource: Shopper Modality Customized research (Russia 2008)
Practicalities of business in Russia Taxation: Tax @ 13% flat rate Corporate tax @ 24% Employment laws are strong Trade literature is in Russian Customs regulations Product certification Intellectual property
Russia is one of the most attractive markets in the world