Country Risk Analysis -Russia_nopics

8/3/2019 Country Risk Analysis -Russia_nopics

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Rajashri/Partha/Sunil


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Promising Market With over 140 million consumers, a growing middle class, and almost unlimitedinfrastructure needs, Russia remains one of the most promising markets

Worlds 11th largest economy Highest per capita GDP ($15,900) of the BRIC countries.

Upper middle income country, ; highly educated workforce and sophisticated,discerning consumers

GDP Forecast of 4.3% in 2011 GDP growth at 4.0% for 2010. Slightly less than anticipated due to drought and

wildfires, which disrupted agriculture, commerce and industry.

Anticipates joining the WTO in 2011, which would liberalize trade with the restof the world

Challenges Geographically vast market, spanning nine time zones

Underdeveloped infrastructure poses logistical challenges, especially accessingmarkets outside of major cities

Incomplete transition from central planning

burdensome regulatory regimes; inadequate IPR protection; extensive corruptionand lack of rule of law, inconsistent application of laws and regulations; lack oftransparency; and excessive government interference in business matters

Eng Language; Long Visa Process


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Socio-Political-Geographical Situation

Economic Indicators

Geographic Allocation Population Social Environment Preferences in Tastes and

Consumption Social Unrest Peace and Protection Political Environment Role of Opposition Work Ethics Hofstede's Cultural

Dimensions Availability of labor Labor Law Trade Union Practices

Purchasing Power of Population -GDP

Rate of Inflation Balance of Payment Position Balance of Trade Position Strength of Local Currency

Controls on Exchange Rates Foreign Exchange Reserves Debt Burden Fiscal Policy of the Government Trade Cycles Investment Trends Risks to Investments

Taxation Policies and Dual Taxations Commitment to Multilateral Trade Ability to attract Foreign capital Status of Infrastructure IT Industry


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Covering more than 17 million square kilometers in Europe and Asia.Europe which occupies about one-quarter of the country's territory. Vasttracts of land in Asian Russia are virtually unoccupied.

11 time zones.

Capital: Moscow.

Shares border with 14 countries majorly with China, Finland, Korea,

Mongolia, Norway, Poland and other countries of former USSR And, at the far northeastern extremity, eighty-six kilometers of the

Bering Strait separate Russia from a fifteenth neighbor--the United States

Much of Russia covered by snow six months of year.

Weather usually harsh and unpredictable. Average annual temperature ofEuropean Russia 0C, lower in Siberia.

Coastline makes up 37,653 kilometers of border. Arctic, Atlantic, and

Pacific oceans touch shores Land Use: 10(7.17) percent arable, 45 percent forest, 5 percent

meadows and pasture, and 40 percent other, including tundra.

Administrative Divisions: Twenty-one autonomous republics, forty-nineoblasts (provinces), six territories (kraya; sing., kray), ten autonomousregions (okruga; sing., okrug), one autono-mous oblast. Cities of Moscowand St. Petersburg with separate status at oblast level.


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Size:142,905,200

Population Growth Rate: -0.47% (2011 est.)

Major Cities: MOSCOW (capital) 10.523 million; Saint Petersburg4.575 million

Russias population is forecast to continue to decline

Ethnic Groups: Russian 81.5 percent, Tatar 3.8 percent,Ukrainian 3.0 percent Religion: 75 percent of believers in Russia considered themselves

Russian Orthodox, 19 percent Muslim, and 7 percent other

Education: 98% of population over age 15 literate. Privateschools and universities emerging in mid-1990s

Health: Health care free of charge in principle, but adequatetreatment increasingly depends upon wealth. Urban areas vsrural areas have great disparity

Labor Force: 57% of population working age. Work forcerelatively well-educated but ill-suited for challenges of post-Soviet economy


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20 %of the Russian population lives below the povertyline -- defined as a monthly income of 1,000 rubles(less than 30 Euros, or $38)

160 Different ethnic Groups Russians are proud of their country.

. Patriotic songs and poems extol the virtues of theirhomeland. Accept that their lives are difficult and pridethemselves on being able to flourish in conditionsthat others could not. Take great pride in their cultural heritage and

expect the rest of the world to admire it Communal Mentality Russian Ballet, Literature, Theater, Martial Arts, Art

and Handicrafts


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Majority of Russians still fit the traditional mould, characterized by simplelifestyles and spending patterns

Lately a shift towards greater affluence and sophistication is seen

Largest concentration of higher income consumers today in Moscow and StPetersburg

Strong middle class has been emerging since 1990s. Makes 35% of population Mobile, flexible, well-educated, and careerist

No expense is spared, particularly when it comes to restaurants, clothes, cosmetics andmobile phones. Technology and media is also catching up

Nevertheless: a strong urban-rural gap exists

Growth of private consumption (which accounts for half of GDP) is presaged bya number of factors Consumers are regaining confidence is also reflected in a slight improvement in

household lending which could continue because of the low level of householdindebtedness

The rise in real wages is projected to continue apace and the government is expectedto adhere to its plan to keep pensions on an upward path almost on a par with wages

Propensity to save is not expected to increase beyond the relatively lofty level alreadyreached during the recession


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Ethnic Conflicts

Conflict with Georgia

Georgia's strategic position has ensured it is of vital military and economic significance to Russia.

Georgian territory also contains vital Black Sea ports and sits astride potential routes for Russian controlled oil and gaspipelines.

Russian military bases in Georgia. Russia wants a stable Georgia . So helped its settle its internal 3 ethinc strife.

Lately Russia's recognition of Abkhazia and South Ossetia Caused concern to Georgia; Russia is upset about Georgiarebuilding military

North Caucasus-based terrorism

Occupation of the North Caucasus has been a cause of conflict for three centuries.

2 wars with Chechnya from the mid-1990s on, attempting to repress local independence movements, stem a pan-Islamicmovement from taking hold there, and maintain access to the oil wealth of the Caspian sea.

Roots of this conflict lie in a long history of violent repression and impoverishment in Chechnya

Installed Pro-Moscow regime

Siberia

Conflicts over resources are heated in parts of Siberia and the Far East. The Sakha (Yahut) are trying to claim rights tosome economic benefits from the vast diamond, oil, gold, and other mineral wealth in their republic.

Blocked by Russian central control over the resource extraction industries, and by the strategic relocation of tens ofthousands of Russians to Yakutia in the Soviet period.

This battle over resources is associated with a growing nationalist movement.

Environmental issues play a significant role, too, as people fight to prevent or reverse the spoiling of rivers, lakes, andsoils by the oil and mining industries.

Internal migration and displacement has contributed greatly to ethnic tensions and prejudice, as several million Russians havereturned from newly independent states in Central Asia, the Caucasus, and the Baltics, feeling themselves unwanted guests inthose places, or in some cases (Tajikistan, Armenia, and Azerbaijan) escaping civil wars.


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Russia is 147 on Global Peace Index Human traffiking Source and destination. Russia failed to

show evidence of increased efforts to combat trafficking; Terrorism attacks, nationalism, racism exists Russian Mafia


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Semi-authoritarian state

President wields considerable executive power.

Bicameral legislature consists of the lower house (State Duma) and theupper house (the Federation Council).

President nominates the highest state officials, including the primeminister, who must be approved by the Duma.

President can pass decrees without consent from the Duma. He also ishead of the armed forces and of the Security Council.

Putin and Dmitry Medvedev will remain president at least until May 2012and will continue to exercise tight control over the federal government,most of regional leaders and parliament.

Formidable influence on the judiciary, mass media and much of civil

society. Radicalization of non-systemic opposition is set to continue, with many

opposition figures joining forces to challenge authorities in spite ofpolitical differences. Public disturbances and clashes with police will alsolikely continue

These law agencies are capable of effectively quelling opposition proteststo secure a smooth transfer of power or Medvedevs re-election in 2012


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There are currently a total of seven political parties registered with the Russian Ministry ofJustice: United Russia

The Communist Party of the Russian Federation (KPRF)

The Liberal Democratic Party of the Russian Federation (LDPR)

Patriots of Russia

Yabloko

Just Russia

Right Cause

Russian elections are organized in such a way that no one party can take for granted itsability to overcome the extremely high 7% electoral threshold.

Outspoken criticism of the authorities during an election campaign can irritate them andresult in the organizers removing a percentage of its votes from a party, which then makesit easy to deprive it of its representation.

For this reason the Russian 'system' opposition parties are all extremely ready tocompromise with the authorities.

This manifests itself in an unwillingness to criticize the main government figures or theirpolicies, and also in their choice of candidates.

On the whole the 'system' opposition is made up of niche parties. Each one has a narrowsupport group and induces feelings of antagonism in the main body of voters. This is whythe 'system' opposition suits the Kremlin: voters don't have to vote for 'United Russia'because they like it, but because they like the others even less. The rules of the game inRussia are such that almost no one likes the 'system' opposition.
http://russiaprofile.org/political_parties_and_movements/a3688.htmlhttp://russiaprofile.org/political_parties_and_movements/a4225.htmlhttp://russiaprofile.org/political_parties_and_movements/a1243.htmlhttp://russiaprofile.org/politicalparties/32171.htmlhttp://russiaprofile.org/political_parties_and_movements/a1384.htmlhttp://russiaprofile.org/political_parties_and_movements/a1729.htmlhttp://russiaprofile.org/politicalparties/32162.htmlhttp://russiaprofile.org/politicalparties/32162.htmlhttp://russiaprofile.org/political_parties_and_movements/a1729.htmlhttp://russiaprofile.org/political_parties_and_movements/a1384.htmlhttp://russiaprofile.org/politicalparties/32171.htmlhttp://russiaprofile.org/political_parties_and_movements/a1243.htmlhttp://russiaprofile.org/political_parties_and_movements/a4225.htmlhttp://russiaprofile.org/political_parties_and_movements/a3688.html


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For Russians, under the Soviet system, the government found them a job orthey got a job through personal contacts

Relationships are more important than time

Being late is part of the Russian makeup. Being late was a way of showingcontempt for the system and of asserting self. To Russians, appointments areguidelines. Poor Time management

Personal Benefits and Advantages Patience is the major Russian virtue

Dual Ethics

Respect is everything

Build personal relationship

Using Local Consultants

Business Ethics are different

Emphasize Exclusiveness Russians prefer to deal with those, who occupy important positions

Hope for the best but prepare for the worst

Approach Problem even without solution

Ready to work in dynamic environment

Group mentality Team Building


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Moderate in individualism, masculinity, andpower distance

Fairly high in uncertainty avoidance.


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Russian labor force was nearly 76 million workersin 2009

By the end of 2010, unemployment rate fallingto 7.4% (Unemployment rate is not in top 100 )

Brain-drain is an issue 7,000,000 immigrants working in Russia. Half of

these were from Ukraine, while the remainderwas mostly from Central Asia. Only 3 million orless than half of all the immigrants are legal.Illegal immigrants number 4 million, mostly fromTajikistan, Uzbekistan and Moldova

By 2025, Russian "economically-active"population may decrease by 12,9%, think theexperts


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Key insights on labor law in Russia:

Regulations

Employers should consider opinions of trade unions if such unions exist. Tradeunions in Russia are typically formed at the company level.

Employment conditions

Overtime for employees should not exceed four hours in two successive days and

120 hours per year. Employees are entitled to 12 paid public holidays and an annual leave of at least

28 calendar days.

An employee may terminate their labor contract with a two-week advancenotice.

Employers are to pay salaries to employees at least twice per month and havethe right to notify the employer and stop working if salary payment is delayed bymore than 15 days.

Non-monetary payment may not exceed 20 percent of total salary. Foreign citizens working in Russia

A work permit is mandatory for most foreign citizens and can take more thanfour months to obtain.

A simplified procedure for highly-qualified specialists (HQS) whose salariesexceed RUB 2,000,000 ($68,652.00

Code review record


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Initially economy was based on the state ownership of themeans of production and strict centralised control of wages,prices, employment and production.

Trade unions had been an integral part of the state socialistsystem, not as representatives of the interests of the workersin opposition to their employer, the state

In Capitalist, its a body with not much Trade unions channel conflict into symbolic protests and

bureaucratic and judicial forms of conflict resolution

Weakness of unions is management dominance of primaryorganisations

Numerous trade union complains are registered with ILO

Unions current focus on standardizations, migration policiesetc

Code review record


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GDP(by PPP) : $2.223 trillion (2010 est.)

7th in the world after Europe Union, US, China,Japan, India, Germany

GDP per capita (PPP) : $15,900 (2010 est.)GDP Composition by sector:

agriculture: 4.2%

industry: 33.8%

services: 62% (2010 est.)

Russia is the most prosperous of the BRICcountries (Brazil, Russia, India and China). About73% of the population is urban and makes up 85%of the purchasing power.


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GDP - per capita (PPP) (US$).Russia ranks 69th

GDP - per capita (US$)


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Last reported at 9 percent in July of 2011

The Bank of Russia has clearly specified in this document its principal aimfor 20112013 hold down inflation at 5-7% annual.

Inflation's effects on an economy are positive and negative. Negativeeffects of inflation include a decrease in the real value of money and other monetary items over time,

uncertainty over future inflation may discourage investment and savings,

Shortages of goods if consumers begin hoarding out of concern that prices willincrease in the future.

Positive effects include ensuring central banks can adjust interest rates andencouraging investment in non-monetary capital projects


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Balance of payments will be balanced if the oil price continues torise.If it rises by 2 percent annually in real terms, experts estimatedeficit could rise to 10 percent of GDP by 2020 (from 02 percentcurrently) if todays tax burden and economic growth rate hold andthe government enacts all programs


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Trade surplus equivalent to 15.1 Billion USD in July of2011 Metals and energy make up more than 80 percent of Russia's

exports Worlds largest oil producer and biggest exporter of natural

gas, nickel and palladium Imports vehicles, machinery and equipment, plastics,

medicines, iron and steel, consumer goods, meat, fruits andsemi finished metal products.

Main trading partners are: European Union (Germany, Italy,France), China and Ukraine


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Ruble appreciated 1.50 percent against the US Dollar during the last 12 months

From 1993 until 2011 the USDRUB exchange averaged 22.68 reaching an historicalhigh of 36.37 in February 2009

Rouble hit fresh 16-month highs against the euro dollar currency basket last week

Analysts suggest the government should not spend the reserve fund to cover deficit-and should borrow at home rather than abroad. This would bring the Rouble down.And revenues from oil sales should again be filtered into reserve funds just asbefore the crisis to avoid pumping up the economy.


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Historically, strict currency control regulations had been used toprotect the ruble against devaluation and discourage "capitalflight

Ruble floating exchange rate

Iinflation targeting effectively will require a free-floatingcurrency. But letting the ruble float will not give monetary

authorities full control over the money supply, which will alsodepend on the oil price and capital flows. Moreover, volatile oilprices will lead to a volatile current account balance and almostany fluctuation in oil prices will affect the exchange rate.

In addition, a freely floating currency could more actively subjectRussia to todays heightened currency tensions. So far, Russiaspolitical uncertainty and worsened investment climate has spared

it from the significant capital inflows that have made othercountries worry about currency wars.

Does it make sense to raise interest rates as a means of fightinginflation when oil prices are rising and the ruble is thus growingstronger?
http://www.imf.org/external/ns/search.aspx?NewQuery=inflation+targeting&filter_val=N&col=SITENG&collection=SITENG&lan=eng&f=http://www.imf.org/external/ns/search.aspx?NewQuery=inflation+targeting&filter_val=N&col=SITENG&collection=SITENG&lan=eng&f=http://www.imf.org/external/ns/search.aspx?NewQuery=inflation+targeting&filter_val=N&col=SITENG&collection=SITENG&lan=eng&f=http://www.imf.org/external/ns/search.aspx?NewQuery=inflation+targeting&filter_val=N&col=SITENG&collection=SITENG&lan=eng&f=


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Russias International reserves was $ 532.0billion as of September 16 , 2011

Foreign exchange reserves to expand by tens

of billions of dollars each year due to higherinterest rates on the world's markets


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External Debt of the Russian Federation asat the end of June 2011 (estimate)(millions of US dollars)

467,245463,411457,421476,639

489,043

509,912

532,222

420,000

440,000

460,000

480,000

500,000

520,000

540,000

(estimate)

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

External Debt as of June'11(USD in

millions)

Total


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Fiscal position will continue to benefit from higher oil prices

Plus Recovering corporate profit leaves the government in acomfortable position.

Non-oil deficit will remain high

Progress in the area of minimizing the pro-cyclical nature ofpublic finances is of paramount importance reducing Russiasvulnerability to future downturns/ correction in energy prices

Current cyclical recovery in revenues + higher tax rates in theextractives industry + sale of minority stakes in state assetsHelping plug deficit

More important is the message of openness and receptivenesswhich has implications for long term growth.

"It is absolutely critical that we

maintain our macroeconomic stability.This is currently one of our majorcompetitive advantages, a resource tospur development, attract long-terminvestment and stimulate business. Weneed a highly responsible and stablebudget. We cannot afford to spendmore than we earn. Putin


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The alternating periods ofexpansion and contraction in theeconomic activity has been calledbusiness cycles or trade cycles.

The period of high income, highoutput and high employment iscalled as the Period ofExpansion, Upswing orProsperity.

The period of low income, lowoutput and low employment iscalled as the Period ofContraction, Recession,Downswing or Depression.
http://kalyan-city.blogspot.com/2011/06/4-phases-of-business-cycle-in-economics.htmlhttp://kalyan-city.blogspot.com/2011/06/4-phases-of-business-cycle-in-economics.html


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Demand for automotive products, household goods,financial services, retail products and a medical equipmentand services;

Major construction boom is creating a need for equipmentand materials

Franchise businesses are growing in both the food and non-food sectors

Opportunities for services and equipment for infrastructureupgrades in power generation and telecommunications aregrowing

High energy prices are driving demand for oil and gas field

equipment and services Major investor is Cyprus. that most of this is Russiancapital round tripping

Latest: Representatives of major global investors worth more than $2trillion met with Russian Prime Minister Vladimir Putin, ahead of thelaunch of a $10 billion Russian investment fund


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Main Areas of FDI being: Agriculture, Forestry, Fishing

Mining and Quarrying

Manufacturing

Electricity, Gas Water Supply

Construction

S/W: creation, development and

maintenance activities represent a

total of 15% FDI in Europe but do not r

ank in the top 10 for FDI in Russia.

7,97518,13410,15911,405

25,159

13,7547,406

38,36830,962

16,082

60,511

44,42842,868

142,172

99,304

12,825

55,61942,794

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Net

Inflows

Outflows

Net

Inflows

Outflows

Net

Inflows

Outflows

Net

Inflows

Outflows

Net

Inflows

Outflows

Net

Inflows

Outflows

Q1 2010 Q2 2010 Q3 2010 Q4 2010 2010 Q1 2011

FDI Trends

Total


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Dynamic political risks Russia being 9th in a listof 11 extreme risk countries Heightened activity of militant Islamist separatists in the Northern

Caucasus and their ambition to strike targets elsewhere in the country

Devastating terrorist attacks

Also compounded by its extreme risk ratings for its business environment,corporate governance and the endemic nature of corruption, which isprevalent throughout all tiers of government

Ineffective legal and regulatory system

Scores well for the long term on resourcesecurity, infrastructure readiness and education

Russia has approximately 140m consumers andan expanding economy. IMF figures reveal thatRussias real GDP growth amounted to 4% in 2010and expects it to expand by 4.3% in 2011


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Main profit tax rate at 20% is one

of the lowest amongst the major economies 2%, payable to the Federal budget

18%, payable to the Regional budget

Tax incentives are becoming more common.For example with the expansion of specialeconomic zones

Meanwhile, large capital investment projects

continue to receive VAT and customs dutybreaks.

Oil and Gas Taxation and Mining is separate

Transfer Pricing Law


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After more than 17 years, the WTO saga mayfinally be coming to an end.

Possibility of a member state veto remains;

Jan 2012 is the possible dateGreatly contribute to the opening of new

opportunities to do business with and inRussia and

Strengthen the international competitivenessof the Russian economy by harmonizing itseconomic regime with global trading rules


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A level playing field: State is divesting its shares Ongoing dominance and large marketshare of state-supported companies hurts both Russian and foreign companies

Institutional changes: To attract foreign investment and protect entrepreneurs at home,Russia must create a more friendly business climate by strengthening intellectual propertyrights and increasing transparency

Positive policy direction: Overall economic policy direction. Medvedev has prioritizedmodernization in five sectors: Energy efficiency

Nuclear technology Information technology and telecommunications

Aerospace

Pharmaceuticals

Russia reports good figures for trade balance and inflation and has a small sovereign debt.Of course, there is the factor of high oil prices but still, Russia should objectively be oneof the most attractive countries for investors

Political stability

Frequent changes in Laws Encourage:

Innovation industry - We certainly tell them that Russia is a country of educated people and fundamental science Needmotivation,

Administrative barriers should be removed

A favorable climate for small and midsize business, economic diversification, and especially the development ofinnovation sectors, will be an uphill job. The thing is that innovations are most often proposed by small businesses; bigbusiness only supports and boosts innovative models after small business generates them.

Business in Russia often operates in a very narrow timeframe; in other words, there is no confidence that you will stillhave your business in three, five or ten years.. Fear shoud go to get people invest in fixed assets


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Railway system includes a total of 150,000 kms (93,210 miles) - extensiverailway systems in the world. Of these only 87,000 kms is in "common carrier"service. The remaining 63,000 kms (39,148 miles) serve specific industries

Highway system includes a total of 948,000 kms of road including 416,000 kmsthat serve specific industries or farms and are not maintained bygovernmental highway maintenance departments. Of the total road system,only 336,000 kms are paved

Russia has some 630 improved airport facilities, 50 of which are capable ofaccommodating international flights

Extensive oil and gas pipeline system, with some 48,000 kms of pipelines forcrude petroleum, 15,000 kms designed for shipment of refined petroleumproducts, and 140,000 kilometers designed for shipment of natural gas.

Electricity production need to be improved

Areas of Infrastructure Development Infrastructure associated with the export of commodities (pipelines, ports and

transport infrastructure to support oil and gas output in East Siberia) Investment in ports in northern Russia

Furthermore, the Football World Cup in 2018 and Sochi Winter Olympics in 2014 willdrive substantial infrastructure spending, which in turn should benefit the economy


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Largest IT market in the whole CEE region approx. 10bn in 2010 IT industry has recorded a record year of growth concentrating on high end niches like

algorithm design and microelectronics

Russia is now the world's third biggest destination for outsourcing software behind Indiaand China

Russia's strength is its engineering and scientific talent. 3,500 engineers for every 1 million people, nearly the same ratio as the United States

Technical skills of the Russian workforce go beyond basic programming and extend to complex

engineering tasks To take advantage of this talent, companies such as Sun, LG, Google, Oracle, Siemens, Intel, Boeing,

IBM, Dell, Motorola and Citibank have established a presence there.

It has more personnel working in R&D than any other country in the world and ranks 3rd inthe number of scientists and engineers per capita. According to the World Bank, Russia hasone million specialists waiting in the wings who are capable of quickly joining its IT sector

The domestic outsourcing industry is maturing. Currently, more than 250 Russian-basedcompanies are active in offshore software development.

Major software development centres (Moscow, St.-Petersburg, Novosibirsk) have adequatetelecommunications infrastructures

IT & outsourcing market has been growing at a rate of more than 20% since the past fewyears. The Russian IT hardware market, accounting for more than 50% of total IT spending,continues to dominate the total IT market.

Country's emergence as an IT Outsourcing (ITO) center, thanks to its close proximity withEurope, similar time zone, and availability of high quality workforce at low cost.

Russian government is increasing its IT investments in order to expand and develop the ITinfrastructure in the country
http://en.wikipedia.org/wiki/Algorithm_designhttp://en.wikipedia.org/wiki/Microelectronicshttp://en.wikipedia.org/wiki/Algorithm_designhttp://en.wikipedia.org/wiki/Microelectronicshttp://en.wikipedia.org/wiki/Microelectronicshttp://en.wikipedia.org/wiki/Algorithm_design


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While the economic indicators are healthy,the socio-political situation seems shaky

Law and Order situation is a big concern

Unreasonable means of handling peoplefound to be critics of government is adiscouraging aspect

However with the entry into WTO, Russia willhave to follow internationally acceptable

trade lawsTherefore socio-political factors is a risk but

an upbeat forecast for economic factors.Jump in if you can face the risks!


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Documents

Country Risk Analysis -Russia_nopics