The Russian Evolution: How Can Foreign Businesses Prepare to Prosper? Contents

Marketmap How emerging markets change the global economy

06 12 28 2013 Vast land, varied issues Showing Russia the money When the walls come Issue 3 tumbling down

The Russian evolution: How can foreign businesses prepare to prosper? Contents

2 04 E xecutive summary: A giant at a glance

06 Vast land, varied issues A key? Perhaps Doing business in Russia: Nyet and da, opportunities and challenges There’s an old Russian saying: Trust but verify

12 S howing Russia the money Things are looking up: Foreign direct investment Russia’s industrial identity Russia’s entrepreneurial profile Innovation: Another way of life Breaking through barriers: Venture capital fits and starts Starting a business: Up, but running?

28 When the walls come tumbling down

3 Executive summary: A giant at a glance

4 Between East and West, old and new, evolution. They should seek to unravel traditional and trending, nyet and da, lies Russia’s changing economic landscape, Russia: massive, rich in resources, ripe better understand the dimensions and with potential, and brimming with attributes of the market’s risks, and plan challenges and opportunities. accordingly. Inevitably, this means remaining committed to robust due Emerging from the global market crisis diligence and anti-corruption programs. that punctuated the new millennium’s debut decade with a thud, Russia stands As is the case in other emerging markets, poised on the brink of potential signifi- the financial and reputational risks of cant change. Once focused inward on its economic crime and disputes can be bounty of natural resources, today’s significant in Russia. Investors should be Russia is growing more interested in prepared to respond to law enforcement reaching out—across its own regions, and regulatory actions and poised to across a growing variety of sectors, and defend their company’s interests across the globe. Enabled by technologi- proactively. If questions of integrity arise, cal advances, inspired anew by innova- the C-suite should have a realistic view of tion, and spurred on by an urgency to any potential impropriety—or diversify its economy, Mother Russia is lack thereof. slowly but surely coming of age and increasingly engaging in earnest with While in many ways investment foreign investors. opportunities in Russia have significant upside potential, investors would do well For the last two decades, Russia has been to look out, look around carefully, and developing a set of economic, legal, and look for signs—of business as usual but social institutions in an effort to function also business as unusual. Read on for an more effectively in a market economy. overview of the promise of Russia’s Much effort has been devoted to opportunities as well as an assessment of modernizing its system of governance, factors that can create challenges for the including legislation and courts, country’s ability to evolve. bettering investor protections, developing capital markets, and improving the efficiency of government services. …investors should equip As the country’s governmental themselves to both understand authorities, business leaders, workers, and consumers work together to further the new market opportunities enhance the maturity level of Russia’s that may arise and counter the institutions, infrastructure, and ill effects associated with this safeguards in line with ever-escalating nascent giant’s evolution. global standards and expectations, investors should equip themselves to both understand the new market opportunities that may arise and counter the ill effects associated with this nascent giant’s

5 Vast land, varied issues

6 99%+ of Russians are literate More than half participate in the workforce

A key? Perhaps

Many are familiar with Winston square miles, compared with the United Churchill’s famed and eloquent World States’ 3,794,100), Russia boasts the War II-era quote regarding Russia: “It is a largest land mass of any country in the riddle, wrapped in a mystery, inside an world. With Europe to the west and Asia enigma; but perhaps there is a key. That to the east, it serves as a ground key is Russian national interest.” transportation link among its 14 bordering neighbors,2 despite roadway Today, we might say: Russia is a inadequacies. The other 65% of Russia’s quintessential emerging market riddle, a boundaries front the Arctic and Pacific nation wrapped up in growing coastlines, although most of this globalization while confronting the kinds waterfront is too inaccessible to function of constraints that typify emerging as a major world trade route. market countries. But there is a key. When doing business in Russia, Three quarters3 of Russia’s 143 million companies need to look beyond the people4 reside in cities, towns, and urban obvious growth areas to find specific centers, with 82% living near Russia’s sectors and other avenues of opportunity European region; only 18% have settled formed by Russia’s special place in the east of the Ural Mountains in Siberia or world, literally and figuratively. the Far East.5 The population, the world’s ninth largest,6 reflects its substantial size. Opportunities and challenges in Russia But its people power is on the wane. In reflect the country’s geographic and addition to low birth rates, educated demographic profiles. Spanning nine talent tends to look elsewhere, often to time zones across more than 17 million the West, for career opportunities. square kilometers1 (more than 6.5 million

7 Getting to know Russia

Belonging neither strictly to the East nor Russia’s unemployment rate stood at strictly to the West, Russia stands alone 6.6% in 2011,11 with regional variations. among nations in ways that may be The central and northeast regions have palpable to those who are in the country, experienced relatively low but difficult to articulate to those who unemployment rates, while the southern are not. regions, particularly the North Caucasus, have seen higher jobless rates. Countries and companies seeking to do business in Russia will have to be open The post-Soviet education system, which and tolerant of some of the country’s replicated major components of the long-standing quirks. Entering the Soviet system, is capable of creating market can be a challenge. world-class specialists in exact sciences such as mathematics, physics, chemistry, But you also can turn the country’s biology, engineering, and the like. A inherent vulnerabilities and challenges handful of universities have recently into market strengths and growth introduced high-quality socioeconomic potential by viewing problems as science programs, which can potentially undeveloped resources that build a talent pipeline for fields such as imply potential. economics, management, law, politics, and sociology. It can also spur and In addition to concentrated urban support innovation, which will be crucial populations, other fundamental factors to boosting entrepreneurship, venture bode well for investors: More than 99% of capital, and Russia’s future viability as a the population is literate, and women, more developed, robust market. many of them working mothers, are well represented in the workforce.7

Russia covers a massive amount of real estate and includes multiple regions that are home to disparate peoples who are deeply committed to retaining their distinct languages and cultures. The overall culture tends toward profound pride and resiliency among the populace, which is characterized by a far more communal spirit relative to the individu- alistic ideal embraced by the West.

Taking it literally: Russia hits the books, the road, and the office

More than half the population partici- pates in the workforce;8 some seven million are enrolled in higher education programs.9 More than 700,000 hold a postgraduate degree.10

8 The talent-retention puzzle is just one of Within this context, you’re likely asking: escalating global standards and many questions Russia and investors will How can Russia transcend the challenges expectations, business leaders can equip grapple with as the fledgling market that can try patience and erode margins, themselves to counter the ill effects reaches for the next rung on the global trust, reputation, and allure? Will associated with this nascent giant’s economic ladder. Others stem from a investments be safe? What about evolution. They should know the clash between the emergent and the intellectual property rights, which are landscape; know the risks; plan entrenched, including not only deeply not guaranteed? When will corruption be accordingly; and remain committed to ingrained cultural tendencies and corralled? When will the wall of businesses’ best friends: rock-solid affinities, but also heavy bureaucracy and bureaucratic barriers be torn down? anti-corruption and due diligence a still-developing infrastructure. programs. Approached with smarts and a The Russian government has started to balanced view of risks and opportunities, The stakes these days are high, not only answer these questions in an effort to well-thought-out approaches for entering for Russia, but also for business leaders mitigate concerns and unlock potential, the market, and adequate due diligence, eyeing emerging markets generally. With but much room remains for revision and governance, and controls, these growing the advent of—and intensive universal progression. Over the past decade, Russia pains can launch soaring potential. As focus on—the Foreign Corrupt Practices undertook reform in nine out of ten areas Churchill also said, “Kites rise highest Act (FCPA) in the United States, the covered since 2004 by Doing Business against the wind, not with it.” United Kingdom’s Bribery Act (UKBA), analysts, according to the 2012 report.12 and numerous, similarly spirited efforts Significantly, however, ‘protecting worldwide on behalf of governments and investors’ was the one omission. organizations, such as Transparency International and The World Bank, it’s As Russia works to bring the maturity important that Russia be seen as actively level of its institutions, infrastructure, engaged in the anti-corruption initiative. and safeguards in line with ever-

Compliance challenges and rewards

With Russians increasingly exploring the corporate leaders begins to tackle world through global travel, studies Russia’s long history of ineffective abroad, and access to the Internet and compliance functions within individual foreign publications, people are generally companies and the country itself, those curious and hungry for new ideas, goods, who can demonstrate change agility and and services. And they’re growing more compliance ability tend to be rewarded willing to accept new ways of doing by the markets. business. Still, you can’t assume that every Western concept will be embraced As this duality between past and future in Russia, which remains steeped in continues to evolve, investors should tradition, history, and hierarchy. guard against corrupt influences and keep their sights set on opportunities to A new generation of Russian managers is contribute to the maturation of emerging, and many have Western the market. experience. As this new wave of

9 28 Russia’s Corruption Perception Index score, equaling that of Iran, Kazakhstan, and Honduras.

Doing business in Russia through the eyes of the world— Russia: Nyet and da, and The World Bank opportunities and The World Bank captures an overall 43, China 39, and India 36. Denmark, challenges sense of the quality of governance in Finland, and New Zealand sit atop the list various countries by aggregating the with scores of 90.14 Some of Russia’s regulatory challenges views of a large number of enterprises, are abating as the country finds ways to as well as those of citizen and expert Russia’s 2011 WTO accession recently be more welcoming to businesses, as survey respondents in industrial and broke the record for the longest WTO reflected in its 2011 World Trade developing countries. Country-specific accession negotiations in history. The Organization (WTO) accession. In its percentiles are assigned for various process lasted 18 years,15 three years 2013 report, The World Bank ranked the characteristics, with 0 corresponding longer than it took China,16 which joined country as 112 out of 185 economies for to the lowest ranking and 100 to the in 2001, and Ukraine, which joined in ease of doing business—a better showing highest. 2008. It wouldn’t be an overstatement to than in 2012, when the country was say that the Russia that knocked on the ranked 120 out of 183 countries.13 Even Similarly, Transparency International’s WTO’s door nearly two decades ago and then, however, Russia was cited among (TI) Corruption Perceptions Index Russia today are two different countries. 30 countries where regulation has grown (CPI) surveys representatives from friendlier to businesses. countries around the world to assess Despite an uptick in protectionism amid corruption exposure, with 0 indicating the 2008 global economic crisis, the that a country is perceived as highly Russian market has become significantly corrupt and 100 indicating that the more open. With WTO accession, the country is perceived as very clean. fight for the deep and not-so-deep pockets of Russian consumers is expected TI reports that two-thirds of the to grow fierce. countries in its most recent report failed to rise above the halfway point.

According to TI, Russia recently scored a 28, as did countries such as Iran, Kazakhstan, and Honduras, among others. Brazil and South Africa scored

10 There’s an old Russian saying: Trust but verify

When it comes to doing business in emerging markets to provide the kind of You can’t take for granted that you’ll Russia, time often is not on your side. growth mature markets can’t eke out. know third-party agents’ backgrounds There is a vast gulf between a New York and how they conduct their business, nor minute and a Moscow minute, and it Still, it’s crucial in Russia to know your can customers’ lifestyles and values be transcends the nine-plus hours of air customers and your third-party agents. assumed. By focusing on these issues and travel and eight-hour time difference Characteristically, the degree of building understanding, company leaders between the two cities. development varies by region, economic place themselves in a better position to segment, and institution, so it’s vitally set a strategy for growth in the market Heavy bureaucracy and efficiency important to consider the role that while mitigating risks. It helps to cushion challenges, stemming from limited access location and local traditions and culture project timelines to account for to modern technology in administrative can play in the way business gets done. In unforeseen slowdowns. procedures, can freeze progress to Russia’s Southern region, for example, Siberian winter lows. Regulatory hurdles formal rules might hold less sway than resulting from complicated rules and informal ties such as family relationships, procedures and heavy government group affiliation, and ingrained involvement can be a particular issue for behaviors, attitudes, and assumptions. small- and medium-sized businesses in industries including construction, insurance, and utilities. Many laws and regulations remain ambiguous; courts too often remain ineffective; and intellectual and other property protection rights remain vulnerable.

For the last two decades, Russia has been creating and developing a set of economic, legal, and social institutions in an effort to function effectively in a free market economy. Much work has been devoted to modernizing the legal system, including legislation and courts, bettering investor protections, developing capital markets, and improving the efficiency of government services.

Already, arbitration courts are more evolved than are courts of general jurisdiction. Similarly, the property rights protection system tends to function more effectively for larger economic players, aided by greater access to political and administrative resources. These measures are crucial to enabling Russia to grow and mature, rather than simply grow. And growing it is, as businesses continue to look at

11 Showing Russia the money

12 Things are looking up: Foreign direct investment

So, (to quote another politician of economic development programs;18 another era),* how is Russia doing? cooperative, accessible governments; investors’ rights protection; clear-cut After sliding down on the gravitational policies and regulations; and a pull of the world financial crisis in 2008, commitment to promoting Russia’s inbound foreign direct fair competition.19 investment (FDI) volume started to pick up in 2010, when the country’s economic For example, the Kaluga region has been growth lifted its FDI activity above that of successful thanks to state support, tax India to land in third place among the benefits, efficient development BRICS,** behind China and Brazil.17 institutions, and industrial parks. Business leaders are taking note. CEOs Similarly, Tatarstan, located amid worldwide placed Russia among the top numerous strategic trade routes that ten countries for 2012 growth prospects, connect northern and southern Russia, as with one-third of them indicating that well as Asia and Europe, also benefits they plan to invest there, according to from the regionally supported Tatarstan PwC’s 15th Annual Global CEO Survey. Investment Development Agency and special economic zones for industrial and As the map illustrates, traditional hubs, technology parks. such as Moscow and St. Petersburg, with their more sophisticated business While in many ways things are looking infrastructures and large reserves of up, businesses need to look out, look financial, administrative, and talent around carefully, and look for signs of resources, remain a top draw for business as unusual. Read on for an international investors, as do regions rich overview of this intriguing, sometimes in oil, gas, coal, metals, and energy. beguiling market and a look at the factors that can create challenges for Russia’s Increasingly, heretofore quieter, lesser ability to evolve; these same factors can known regions, blessed with neither hold back your business and open the Moscow’s modern leanings nor Sakha’s entity to legal entanglements and mineral gleanings, are coming into their reputational damage. own, attracting investors with sound

* Edward Irving Koch, New York City Mayor, 1978–1989 ** Brazil, Russia, India, China, South Africa

13 Geographical distribution of FDI in Russia by investment size

On a per capita basis, under Soviet rule, it’s now Also evolving are the oil and international investments in gold-rich Chukotka, deep in home to one of Russia’s gas regions of Siberia’s offshore gas extraction the northeast corner of the highest per capita income Tyumen (including Yamalo- projects known as Sakhalin-1 country, got a significant populations, thanks to a Nenets and Khanty-Mansi and Sakhalin-2. The densely boost around the turn of the small population and autonomous okrugs) and the populated city of Moscow millennium, when its Midas-touch resources and Far East’s Sakhalin, a sparsely comes in fourth, with per then-governor gave investors despite an environment that’s populated island developed capita income just short of secure property rights and literally chilling. Enterprises mainly because of USD 25,000 per year. access to the rare earth and interested in venturing into its riches. After lean years this land of gold and cold should prepare ahead with cashmere and care.

15 13

42 2 14 21 17

29 10 22

49 45

1 30 9 28 5 44 23 31 40 3 26 50 35 4 11 51 46 24 32 6 27 20 52 7 38 16 34 8 36

18 41 48 25

43 High FDI (>USD 4bn) Medium FDI (USD 1–4bn) Low FDI (USD 0.4–1bn) 12 1 Moscow 13 Sakha republic (Yakutia) 37 Kaliningrad oblast 2 St. Petersburg 14 Leningrad oblast 38 Khakassia republic 19 3 Moscow oblast 15 Nenets autonomous okrug 39 Chukotka autonomous okrug 33 4 Sakhalin oblast 16 Lipetsk oblast 40 Amur oblast 5 Krasnoyarsk oblast 17 Yamalo-Nenets 41 Voronezh oblast 6 Tatarstan republic autonomous okrug 42 Arkhangelsk oblast 7 Chelyabinsk oblast 18 Belgorod oblast 43 Volgograd oblast 8 Samara oblast 19 Krasnodar krai 44 Smolensk oblast 9 Sverdlovsk oblast 20 Kemerovo oblast 45 Yaroslavl oblast 10 Vologda oblast 21 Komi republic 46 Ryazan oblast 11 Kaluga oblast 22 Khanty-Mansi autonomous 47 Karelia republic 12 Rostov oblast okrug (Yugra) 48 Saratov oblast 23 Vladimir oblast 49 Tver oblast 24 Omsk oblast 50 Tyumen oblast 25 Orenburg oblast 51 Buryatia republic 26 Nizhny Novgorod oblast 52 Ulyanovsk oblast 27 Novosibirsk oblast 28 Tomsk oblast 29 Novgorod oblast 30 Perm oblast 31 Irkutsk oblast 32 Tula oblast 33 Stavropol krai 34 Bashkortostan republic 35 Khabarovsk krai 36 Primorsky krai Source: Russian Federal Service of State Statistics (Rosstat)

14 Most manufacturing companies are privately owned, while about one-third remain under federal, state, or municipal ownership.

Russia’s industrial identity

We see evidence of the old and the new in materials. Construction also is on the The country’s food and beverage the contrast between Russia’s traditional rise, fueled by infrastructure industry primarily serves the domestic industries, which remain very much tied development needs, demand for quality market. Numerous large international to the land and its resources, and the housing, and plans for Russia to host food companies have already established country’s embrace of innovation. Russia major international events such as the a solid footprint in Russia, amid high is home to numerous industries that turn Sochi 2014 Winter Olympic Games and demand and a good base of input out a wide variety of goods for domestic the 2018 Football World Cup. resources. After Pepsi acquired Wimm- consumption and export. Most manufac- Bill-Dann in 2010, it became the largest turing companies are privately owned, A major exporter of oil and natural food company in Russia. However, the while about one-third remain under gas, Russia’s economic growth over the overall food market is not yet saturated federal, state, or municipal ownership. past decade has been based largely on with quality products. energy exports, boosted by increased oil Government plans for additional production and high oil prices globally. The aviation industry, quite active in privatization of remaining state-owned Transneft, the state-owned pipeline Soviet times, is reawakening, drawing on enterprises can create attractive targets monopoly, handles most of Russia’s oil Russia’s rich technological heritage, new for local and foreign investors. Pivotal exports. Russia has 30-plus oil technologies, and state support. After the enterprises tagged for full or partial refineries,20 with more under consolidation of Russian aviation privatization include Sovkomflot, Russia’s construction and plans for continued companies under the umbrella of wholly largest state-owned ship builder; VTB, a growth that would bring the total state-owned OAK (Obyedniennaya Russian state-owned bank; and Alrosa, a closer to 50.21 Aviastroitelnaya Korporaciya), industry major diamond producer. The country’s sights are set on renovating a national five-year plan further cites privatization Metals also figure prominently in the aviation park and competing in the global in whole or in part, among others, for Russian economy. The country was the market with aircraft such as the Sukhoy Aeroflot (Russian Airlines), Sheremetyevo world’s fifth largest producer of steel in Superjet and the MS-21. airport, RosTeleCom (Russia’s largest 2011, turning out nearly 70 million telecom operator), RZD (Russian tons,22 and the third largest producer of Russia’s automotive industry has Railways), and RosAgroLeasing (the iron, with close to 50 million tons.23 Major opened for major car makers, most of country’s largest agro leasing company). producers Magnitogorsk Iron & Steel which have already placed production Works (MMK) and Severstal are among facilities or created joint ventures (JVs) in Manufacturing is vital to Russia’s the world’s top 30 steel manufacturers.24 Russia. The extent of production economy, with petroleum products, The majority of the country’s metals localization ranges from large aggregate metals, and food and beverages leading production is exported; in 2012, metals assembly to completely knocked down the way. The government is also backing accounted for more than 10% of total (CKD) manufacturing, the latter of which increased efforts to reinvigorate the exports.25 the government tends to prefer. However, aviation and automotive industries and to component supplier quality often fails to boost the production of new composite meet high enough standards to suit

15 Infrastructure: Push and pull, progression and challenges

Infrastructure is central to reminder that amenities investors. In 2012, the burg, and Murmansk, located Russia’s economic and social mature markets take for government issued an order to in the northwest, as well as development. Despite some granted can be burdensome in expedite privatization of 25% Vanino, Nakhodka, and persistent challenges, the emerging regions. of RZD ownership through Vladivostok in the Far East. country seems to be making private placements among slow but steady progress in Railroads are far reaching and multiple bidders.30 Russian roadways present some regards. well developed, offering cost significant traffic challenges savings and reduced carbon Major companies have been stemming from the rapidly Russia’s sizeable population benefits. Rail travel stands out striking deals with RZD. growing number of vehicles in and area demand an extensive as Russia’s most important Germany’s Siemens, France’s large cities. Cars became more infrastructure network of means of transportation Alstom, and Spain’s Talgo, for accessible in recent decades transportation, energy grids, between the Western, example, are involved in due to available financing and telecommunications, and Siberian, and Far East regions, renovating and restocking growing personal incomes. urbanized territories. But carrying a significant Russia’s train fleet, including Moscow’s roadways alone these facilities and functions proportion of domestic new high-speed and double- carry more than four million are not always up to the task passengers and most bulk decker trains. registered cars,33 creating of meeting increasing market cargo. The country’s railway substantial traffic congestion. requirements. company, Russian Railways Major international airports Other large and small cities (RZD), is focused on can be found in most large often experience similar The majority of infrastructure enhancing the potential cities, especially in western problems for the same reasons. components was inherited benefits of Russia’s Russia, with construction Both federal and municipal from the Soviet Union and geographical position. One of under way to convert some of authorities seek to find currently remains in rather its prime tasks is thorough these, such as Moscow’s solutions to this challenge, poor condition. As in many integration of the Russian Sheremetyevo, to substantial drawing on international as other emerging markets, the railway system into the international transport hubs. well as local experience. Russian economy requires Eurasian transport network, Although only about half of significant investment to specifically expanding the country’s 1,200-plus While establishing an indus- advance its infrastructure in east-west and north-south airports are paved and trial foundation can be trying, many sectors. The government Eurasian transport corridors conducive to international air investors might be intrigued has demonstrated a to increase revenue and travel,31 cities of regional by the potential presented by commitment to maturing in integrate Russia into the importance and most major brownfield investment this regard, undertaking a global economy. cities offer airports. Russian opportunities, through which number of strategic programs air carriers are dominated by they can take advantage of and initiatives and allocating Significant investment goes a few large companies existing enterprises via budgetary funding. toward network expansion, covering most international acquisition. Numerous including the addition of new and domestic routes, with abandoned, under-capacity, Communication can be high-speed railways for major some smaller companies also and poorly managed indus- disrupted by unevenly routes in the West and the operating in the region. trial entities can be found distributed resources. Despite development of new rail lines throughout Russia. its more than 40 million throughout the country. By Russian seaports serve as Internet users,26 more than 2030, RZD plans to invest export outlets, channeling 225 million cellular more than 10 trillion rubles coal and other products to subscribers,27 and about 45 (approximately USD 380bn) in various markets, including million land lines,28 this pursuit.29 Europe, North and South communication can still be America, and Asia. Novoros- vexing in some distant Despite its history of state siysk at the Black Sea is the locations, where at least one of ownership, Russian Railways largest, with a capacity of the three largest telecoms is a state privatization prior- nearly 157 million tons of does not provide sufficient ity—and an attractive bidding cargo per year.32 Others coverage and bandwidth, a target for international include Primorsk, St. Peters-

16 The government has demonstrated a commitment to maturing in this regard, undertaking a number of strategic programs and initiatives and allocating budgetary funding.

today’s car makers, thereby limiting incumbents, a larger pool of investors by city and region, with Moscow and localization. At the same time, a few might find opportunities in St. Petersburg the largest and priciest domestic automakers such as VAZ (cars), subcontracting, construction services, markets. Moscow, as the capital and GAZ (trucks and buses), and KAMAZ and construction materials production. major financial center, saw property (trucks) are finding their way to Russian prices soar from 2002 to 2008, with customers on the basis of favorable The Russian service sector, particularly average price per square meter increasing pricing and services, along with improved in the retail, wholesale, and real estate nearly sevenfold for residential and quality achieved in partnership with markets, also has shown growth, fueled commercial properties.35 The market is international manufacturers. by per capita income growth. poised for continued growth on the strength of an expanding economy, The new materials industry illustrates Russia’s retail market is actively increasing demand for housing in Russia’s efforts to render traditional growing and not yet saturated with mineral- and oil-rich regions, and a rising industries more competitive. For quality retail services. With Moscow and abundance of home loans. example, new composite materials such St. Petersburg relatively well covered as carbon fiber in the aircraft and auto through global and local retail networks, industries enable better fuel economy, expansion into other regions is gathering lighter-weight vehicles, and improved momentum. Some of global retail’s service periods. Still, the current level of largest companies remain absent from production (less than 1% of the global the Russian market, awaiting promising market34) remains low compared with entry opportunities. that of mature economies. To stimulate internal demand, the government has The wholesale market is often introduced regulatory measures for characterized by a few dominant players standardization and classification of in each product segment, including food composites so that engineers can include products, beverages, tobacco, and the materials in their designs for non-food products. However, that doesn’t manufacturing and construction projects. mean the market is closed to new entrants who are willing to put in some Construction has landed in the spotlight extra effort, time, and monetary thanks to modernization and expansion investment to get to play in one of the of the transportation infrastructure, established wholesale market segments. demand for quality housing, and the upcoming Olympics and World Cup The country’s real estate market has events. Investment has come from the developed over the course of the last state and the private sectors. Although decade, spurred by 2001 legislation that competition for general contracts is enabled private owners to snap up land in intense and often dominated by Russian Russia. Property prices vary dramatically

17 Russia’s entrepreneurial profile

The recent global economic crisis has • Establishment of adequate intellectual • Simplifying workflow and reducing cast an air of urgency over many world property (IP) protection laws and bureaucracy, for example, with the economic challenges, and Russia is no capital insurance mechanisms introduction of e-government services exception. The fragile nature of Russia’s to allow for electronic filing of tax • Creation of tax stimuli economic growth, tied as it has been to returns and accounts, and other exploiting natural resources rather than • Simplified immigration rules business automation and special on developing vibrant entrepreneurial software use • Improved business climate among industries, may not carry the country the regions • Providing a more favorable business into a leading or sustainable role on the environment through efforts such as world economic stage. To set itself on a • Corrections to infrastructure the creation of 25 Special Economic more strategic, stable growth path, the shortcomings Zones, which are responsible for country needs to shift its focus while Russia’s leaders have demonstrated that infrastructure, free customs areas, overcoming some long-standing, deeply they understand the need to facilitate tax benefits, and other advantages36 entrenched obstacles. the transition to self-sustaining invest- Officials also recognize the importance of ment and innovation-led growth. The Years of unpredictable legislative changes positioning small businesses to build government has embraced the race to and concerns as to whether public momentum and reach their potential by reduce economic dependence on raw officials will wield power and law fairly quickly getting them the funds they need materials and to invest instead in and appropriately have laid down deep to launch their operations. Continued innovation, improve the country’s legal seeds of doubt. Some experts also backing by Russian leadership will be framework, and fight corruption. Steps question the adequacy of mechanisms for crucial to enabling the country to success- toward improving the overall business defending entrepreneurs in disputes with fully complete the transformation to a environment and supporting entrepre- the state, although the recent sustainable, innovation-based economy. neurial activity include the following: appointment of an independent investor ombudsman (commissioner for the rights • Developing SME lending through of entrepreneurs) is a positive step. measures such as the establishment of Nevertheless, despite such positive a dedicated SME bank. moves, a residual lack of optimism continues to permeate the culture, disproportionately impeding growth of small businesses.

Despite these long-standing challenges, Russia has started on a path toward The government has embraced the race to reduce diversifying its economy and stimulating economic dependence on raw materials and to invest the growth of the small and medium enterprise (SME) sector. Look for these instead in innovation, improve the country’s legal signs to chart progress and identify framework, and fight corruption. emerging opportunities:

• Removal of bureaucratic barriers • Loosened legislative restrictions on pension funds, mutual funds, and incorporated investment funds

18 Making the most of Russia’s demographics

Immigration numbers reflect a net in 2011 population increase, with more than 356,500 356,500 immigrants moving to immigrants Russia in 2011 and only about 36,800 36,800 emigrants striking out in search of emigrants new vistas and opportunities abroad.37 But the country looks to be losing valuable talent, skill, and knowledge; those who are leaving tend to be well educated and highly skilled, while the incoming population hails predominantly from poorer neighboring countries with limited access to adequate education.

Intra-regional migration remains low (only about 1.3%) in comparison with other countries, with Russia’s Central and Siberian regions the most popular destinations.38 By contrast, migration to more prestigious cities, such as Moscow, St. Petersburg, Yekaterinburg, and Novosibirsk, comes with a higher cost of living, which tends to dampen enthusiasm for relocating to these cities in search of career growth.

Today, inbound investors might see an opportunity to benefit from the insights that often can be tapped through local talent, which also can be a relative bargain in terms of compensation compared with human capital in more mature markets. Working under sophisticated management in an environment that emphasizes the value of teamwork and workplace ethics can be a win-win-win for Russian employees, foreign investors, and Russia itself. Indeed, companies can vie for the best and brightest by offering competitive compensation, training, growth, and professional recognition.

19 share of local search traffic of Yandex, Russia’s leading search engine 60% Innovation: Another way of life

Innovation is not a new notion for Russia. The number of small and micro- Soviet times saw the development of enterprises engaged in scientific research numerous scientific towns, which were is on the rise. Although historically created to house enterprises and applied Russia had been strong in areas such as research institutions for the aerospace, space, nuclear, and defense, the focus defense, and nuclear industries. Research changed post-perestroika and the country and development (R&D) flourished, started to build a new technology profile. supported by well-staffed institutions. The late 1990s and early 2000s witnessed Inventors garnered tens of thousands of the gradual rise of IT as one of the patents and licenses. country’s core industries to accommodate an engineering talent pool. But economic challenges in the 1990s severely undermined these institutions, IT and the Internet became the fastest- as many of them struggled to replace growing tech industry in Russia, showing previously government-provided signs of early success, with some resources to sustain their operations. companies successfully making their way Many top scientists, engineers, and into international markets and local academicians left the country in search of players copying Western business models opportunity elsewhere, causing and making fortunes on the booming significant brain drain. Russian Internet. Amid rapid growth, some have outpaced their global Still, the country’s valuable innovation competitors, dominating the local The country’s major social heritage and academic focus have not language-specific market. network, vKontakte, has evaporated. Russia remains among the recently been deemed by the foremost countries in the world in Russia’s leading search engine, Yandex, a terms of higher and scientific education, multibillion-dollar Nasdaq-listed US government as one of the with many academic institutions, such company, was able to maintain its more five most frequently visited as the Moscow Institute of Physics than 60% share of local search traffic as sites in Russia and one of the and Technology, retaining of 2012,39 even after a US giant in the top 40 globally. worldwide prestige. field made numerous attempts to make inroads into local search, as it had in After years of stagnation, innovation is other territories around the world. starting to make a comeback as the country looks to diversify and sustain The country’s major social network, VK economic expansion. Related policies, (vKontakte), has maintained its while early in their development, are a popularity, recently being deemed by the significant component of an agenda US government as one of the five most focused on spurring technological frequently visited sites in Russia40 and one dynamism, increasing productivity, and of the top 40 globally.41 But this distinction enabling Russia to regain its ground as a is a double-edged sword, as the site has producer of highly sophisticated products also raised concerns that it’s associated and services, poised to advance on the with providing users access to pirated strength of venture capital. content, a significant Internet IP issue.

20 Anything but ‘nyet’ for the Internet

Where infrastructure and cultural Mobility plays a role, with an estimated The blog site LiveJournal, which uses disconnects create fissures and impede 43-plus million Russian citizens tapping social media features to promote member growth, the Internet is drawing Russia’s and typing into Internet-enabled content creation, has emerged as the nine time zones together and drawing its smartphones, laptops, and tablets.47 favored platform for Russian journalists people from far-reaching corners toward Continued ability to reach beyond major and intellectuals seeking free expression, a cyber-center like never before, pointing markets will depend in part on the so much so that Russian media company toward potential for serious online retail development of wireless access; without SUP bought it in 2007. LiveJournal’s opportunities going forward. it, expansion will be determined by Russian segment has five million Cyrillic regional operators’ abilities and interest. accounts and 250 million posts.49 With domain names available in Cyrillic Although it’s a dotcom site as opposed to and other non-Latin alphabets since Making the most of Russia’s cyber-buzz a dotru site, many of its more than 30 2009, cyber-life and the world it million monthly users50 fondly refer to represents have become far more Social networking, bolstered by an the site by its Russian initials, жж. In accessible to Russians, some of whom, estimated 60 million or more Internet other recent deals: primarily those who are middle-aged and users, continues to dominate the Russian older, have never learned English. Internet experience, placing Russia • AOL sold the world’s largest instant among the top countries for social messaging service, ICQ, in 2010 to Russians have rushed like a flash mob network usage. Russian Internet holding Digital Sky onto the Web. The new millennium saw Technologies for USD 187m, a fraction Internet use among the world’s Russian- Although social networking currently of its original cost.51 It remains the speaking community grow by more than eclipses online news and shopping, online most popular instant messaging service 1,800%,42 an indication that Russia’s marketing can develop into a significant in Russian-speaking countries, with Internet could support the sales of goods opportunity in the vast stretches of more than 11 million users in Russia and services, given a viable regional Russia. Most of the Russian alone,52 where sought-after six-digit entrepreneurial market. public appears to be open to the concept, identification numbers can fetch but to date, online sales have languished, hundreds of dollars. The number of Russian domain names with a dearth of secure, convenient • Groupon acquired a majority stake in surpassed 500,000 just one week after payment options and pick-up sites, Darberry.ru, an online group-shopping the Russian domain (.рф) opened for obscure or non-existent return policies, portal operating in seven Russian general registration.43 Two years later, and backordering quashing potential. cities.52 The site went live in March more than 60 million Russian Internet 2010. Darberry, which boasts some users composed Europe’s most substantial The 35 to 44 age group is the most active 180,000 regular users and more than cyber-population.44 Their language ranks among Russia’s Internet buyers, 26,000 unique visitors per day,53 has among the Web’s top ten.45 purchasing mostly movie, theater, and grown into a multimillion-dollar concert tickets. company. The Internet has also penetrated beyond major cities, notably into the country’s VKontakte dominates Russia’s market, • Search engine Yandex and Internet central region. Dominated by Moscow, despite spam and hacking complaints group Mail.ru recently went public to the area now represents more than 30% among its 35 million users.48 It’s followed raise nearly USD 2.5bn in New York of Russia’s online population,46 indicating in popularity by Odnoklassniki.ru and London to capitalize and reinvest potential for further Web-based (“classmates”). Facebook yields a leading in social networking and Web interaction in more remote parts of market share to both VKontakte and searching popularity and potential.54 Russia. Already, despite limited Odnoklassniki. Similarly, Google’s • Amazon’s Russian prototype, ozon.ru, competition and pricey activation and market share is second to Russia’s which launched in 1998 as an online access, a significant number of new Yandex.ru, while PE firm ru-Net bookstore, has grown significantly Internet users is reaching into cyberspace dominates Russia’s domestic companies through acquisition in size and from regional centers and small towns. despite the presence of international offerings. Internet giants; LinkedIn: Moikrug (“my circle”) is Russia’s answer to LinkedIn. Continued on the next page

21 Continued from previous page

Despite much progress, the lack of language fluidity evident in Russia’s early online explorations indicates that it will be a while before the full potential of the country’s Internet use will be reached. Businesses looking to use the Web to gain growth in this market will need to hit the books and learn their way around Cyrillic, at least for the foreseeable future.

The government’s ability to keep collusion at bay will also be critical. On a promising note, the Federal Antimonopoly Service in 2011 penalized Russia’s three largest mobile operators for excessive roaming charges. Additional crackdowns in response to any future allegations will indicate a momentum boost for additional regional penetration.

Russian officials say the country doesn’t plan to introduce Internet censorship measures, maintaining that any rules for Internet use should be adopted at the international level, so that no one country can close down websites unilaterally. In fact, Russia’s political leaders are using the Web to get their messages out; a lot of politicians at various levels tweet or blog, with hundreds of thousands of followers around the world.

Former President Medvedev, who has referred to the Internet as a democratizing engine, is behind the development of e-Government, a special-purpose federal program intended to establish an electronic infrastructure for the multitude of agencies at the federal, state, and municipal levels. If such efforts can revitalize outdated bureaucratic processes and eradicate red tape, it might signal an improved business environment in which online business opportunities can flourish.

22 $2 billion total estimated venture capital in 2011, with 85 venture funds

Breaking through barriers: Venture capital fits and starts

To date, the perception of Russia among specialists and IT venture capitalists, to the global private equity community boost skills among academically inclined covers the spectrum, from extremely IT experts, engineers, and developers. cautious to highly enthusiastic and rapidly evolving. Individual viewpoints The total number of venture funds in also run the gamut, depending on Russia increased in recent years, from 40 whether the vantage point is from within in 2001 to 85 in 2011, with total venture Russia or from the outside and what kind capital estimated at USD 2bn.56 At least of experience the person in question may 15 private equity and venture capital have had, if any; those who have spent funds were established in 2011 alone.57 time in the country and have done And although the number of Russian business there tend to be more optimistic. banks and public companies in the The number of global private equity venture investment market remains low, players physically present in Russia, several large Russian finance institutions however, remains low. and credit corporations maintain their own venture funds. Still, a growing number of foreign companies are showing interest in the In a bid to attract more private Russian Russian innovation market, with high- and foreign investors, the government is The positive trends in the profile companies such as Microsoft, establishing state institutions such as the innovation sector and the IBM, Cisco Systems, and Intel Skolkovo Foundation, Russian Venture venture capital industry that committing funds to R&D and venture Company, and RUSNANO. Tax incentives capital investments. aimed at building venture capital supports it place Russia high on investment include access to a simplified the list of many multinationals Microsoft has pledged to distribute, over taxation system, investment tax credit, as a destination for innovative a ten-year period, USD 100m among potential income tax breaks, and the industrial R&D outsourcing. Russian high-tech start-ups,55 including benefits of double-taxation treaties with those in Skolkovo Innovation Park, a multiple countries. Medvedev-era initiative intended to attract local and foreign up-and-comers Several large Russia-based finance through tax incentives, foreign worker institutions and credit corporations visa privileges, and other government maintain their own venture funds, perks. The US software giant also including Gazprom, Bank for launched technological entrepreneurial Development and Foreign Economic training, led by Russian Microsoft Affairs, SME Bank (formerly Russian

23 Bank for Development), and Finam, to achieve, as some fundamental Skolkovo innovation among others. But the number of Russian hurdles remain. banks and public companies on the venture investment market remains low. The volume of the venture capital market Russia’s own version of Silicon suggests that Russia’s high-tech Valley, the tech hub is slated to Financing for start-ups comes predomi- businesses are primed to compete on the include IT, as well as biotech nantly from foreign firms such as Runa global scene; its venture capital market in nology, energy, space, and nuclear Capital, a technology-focused venture the last decade has shown a growing technology. capital fund, investing in computing, number of ambitious high-tech start-ups virtualization, and mobile applications. challenging established industries and The Skolkovo Fund has provided However, since the latter half of 2010, even creating new ones. USD 185m in grants to 70 smaller Russian venture funds such as innovation companies,58 a record Fast Lane Ventures, Bricolage, Techdrive, The earliest players in the industry came high for a single venture fund in and Almaz Capital Partners have been up against a dearth of capital, an the history of venture investments looking for opportunities to bring undeveloped finance market, and a lack in Russia. promising start-ups to investment of skilled, forward-looking managers maturity by providing management who could lead venture capital funds in a The country is also reaching out to expertise to business incubators, accelera- removed but supportive manner. innovation leaders around the tors, and to project factories. Some world in an effort to draw on the Russian VCs are looking to participate in Today, venture capital firms still bemoan knowledge and expertise of late-stage deals in the West, primarily to a shortage of viable projects. This doesn’t countries and companies that gain experience. But the majority remain necessarily reflect a shortage of ideas. At might invest in or buy the focused on Russian opportunities. issue is a gulf between inventors’ ability technologies. Numerous foreign to innovate and their ability to pitch and sponsors and companies are Several signs bode well for the future of sell their innovations. One potential getting onboard. Russia’s venture capital market, including solution and opportunity: Bring together the creation of appropriate legislative leaders from science and industry to MIT’s president in 2011 signed an guidance, the development of technology generate attractive goods and services agreement to collaborate in parks, successful efforts to attract and capture market share. A greater focus education, research, and competent management, and greater on encouraging entrepreneurship among entrepreneurship programs at availability of capital, thanks to Russian high-tech specialists, combined SkTech, the new graduate research improvements in the banking system. with the establishment of exceptional university in Skolkovo. Continued maturation will likely inspire corporate governance standards among large businesses to devote more venture small businesses, can help attract capital. IBM and the Skolkovo Foundation capital to start-ups in high-tech industries, have signed two agreements: one media companies, niche retail businesses, To bring to fruition the increasing foreign to establish a Science and IT, software, and the service sector. investment in Russian research and Technology Center within the development and to reach its potential as future Skolkovo Innovation Center The positive trends in the innovation a serious source of scientific innovation, in Moscow, the other to enable IBM sector and the venture capital industry the country will have to raise awareness to license to the foundation that supports it place Russia high on the of venture capital opportunities among intellectual property management list of many multinationals as a Russian companies. It will also have to information, including methods for destination for innovative industrial R&D override some common misperceptions of identifying and evaluating outsourcing. Many multinationals have the venture capital concept by actively technologies that have significant taken note and have already penetrated engaging the media, launching potential for commercial value. this growing market. Increased private advertising campaigns, conducting public and government spending will likely talks, and delivering other presentations continue to raise high-tech production on the topic of the venture capital market potential and attract foreign investment; and its emerging role in supporting but that is not all the Russian state needs growth and innovation.

24 A look at RUSNANO

Rusnano is a state-owned The state-owned fund will Russian Venture Company investment fund with $6 bn also invest up to USD 26m (RVC) is a government fund assets under management, over four years to develop and Russia’s development which invests primarily in Panacela Labs Inc., a institute, one of the country’s nanotechnology projects with subsidiary of the Buffalo primary tools for building its a high potential for growth. Company (NASDAQ: CBLI), own national innovation Rusnano’s mission is to which focuses on developing system. In all, RVC has support a competitive treatments for cancer and backed 12 funds, including nanotechnology industry acute radiation syndrome.60 two funds in foreign through implementing The partnership followed a jurisdictions, with a total advances made by Russian USD 5m investment by the capitalization of nearly USD high-tech firms and through Russian government in 1bn.62 As of January 2013, incorporating cutting-edge another CBLI subsidiary RVC-backed funds ran a technologies developed company, Incuron LLC.61 portfolio of 139 companies, abroad.59 invested capital totaling more than RUB 12.1 bn, or about US$ 400m.63

25 Starting a business: Up, but running?

Depending on the nature and scale of banking, insurance, mass media, Getting your hands on land. Foreign their operations, foreign companies can diamond mining, and civil aviation is individuals and companies can buy and establish new representative offices, subject to a 50% limit in foreign lease land in Russia with certain branches, or legal entities in Russia ownership.64 Companies that want to restrictions; agricultural land can be without prior approval. They will have to control more than 50% need to secure a leased by foreigners, but not purchased, submit specific documents to open a special permit from the committee, while non-agricultural land can be representative office or to receive branch which is headed by the prime minister. purchased, leased, or attained via joint accreditation. Typically, the opening of a Industries such as banks and insurance venture. Land also can be used as representative office or branch of a companies must obtain licenses from collateral for loans and mortgages. foreign entity requires submission of regulators, as well. numerous application documents and Most companies are granted temporary related red tape. M&A deals in which the acquirer stands land-use rights under short-term or to gain a stake exceeding 25% of the long-term leases, with the maximum Registration procedures for local legal target must have an anti-monopoly green lease period often restricted to 49 years.66 entities and Russian businesses are the light from the Federal Anti-Monopoly Land rights can be claimed only after same. While a bit slower than top- Service (FAS).65 Share purchases must be they are registered with the state in the performing Doing Business countries, registered with the Federal Service on Unified Register of Rights; plots are processes such as opening a simple LLC Financial Markets, which oversees subject to state cadastral registration, so can be relatively streamlined compared Russia’s financial markets. This includes boundaries must be officially recorded with others described here. regulation and supervision of insurance before any transactions can take place. providers, credit cooperation and Economically strategic businesses and microfinance, commodity markets, Land can be used only for its designated large M&As will have to endure some exchange intermediaries, and brokers purpose; if the intended purpose differs, more rigorous paper-chasing. (but excludes banking and audit the plot must be transferred to the activities); it’s also the government appropriate category. When land is leased Entities that fall among the 42 economic agency charged with controlling for a designated use, that designation will strategic industries as set by law require compliance with Russian insider trading be specified in the lease agreement. federal government approval; investment and market manipulation laws. in industries such as power and gas, Companies that use land for natural resources must observe environment protection regulations that set standards, limitations, and rules for mining activities. Compliance has become increasingly important in recent years as more companies strive to attain ISO 14000 certification from the Internation- al Organization for Standardization to demonstrate environmentally sound business practices.

The process for registering property, which is the same for domestic and foreign companies, was expedited in recent years with the introduction of new documentation requirements, for

26 limit in foreign ownership in industries such as power and gas, banking, insurance, mass media, diamond mining, and civil aviation 50%

example, the use of cadastral passports Accessing the electrical grid. For large poor infrastructure render inland rather than inventory documents and new consumers, gaining access to the transportation and handling the costliest cadastral maps. Still, the number of steps electrical grid is not as easy as turning import/export component, representing and time frame remain relatively on a light. Although the government up to half of related expense. Similarly, attenuated and bottled up in bureaucracy. recently privatized and deregulated its document preparation can take a electricity market, connecting to the significant amount of time and energy, Obtaining licenses and permits. Lining grid remains a slow, inefficient, representing as much as 70% of import/ up licenses and permits can be managed serpentine, and expensive process export activities.71 effectively and with integrity, but reflective of the country’s overall business leaders should prime themselves infrastructure challenges. Russia eased cross-border trade in 2011 to cope with a process that often can be by reducing the number of documents complex, time-consuming, and Getting credit. Lacking a public credit needed for each transaction to 10 and vulnerable to corrupt influences. registry and with private credit registries lowering associated costs. With its recent covering only 36% of the population,68 admission to the WTO, more changes The cumbersome permitting process, credit is tight. The problem is exacerbated should be on the way.72 which requires a multitude of approvals because credit history information is hard and state inspections, can be especially to come by, as are legal protections, Customs clearance can be a challenge, daunting for those new to the market. increasing risk in the credit market and involving as it does complicated Requirements vary widely by city, pushing rates higher amid heightened regulations that are frequently subject to compounding complexities. Businesses risk premiums. Along with limited credit change; slow-moving, technology-poor seeking to build a warehouse and connect availability, higher costs and fewer processes; excessive paperwork scrutiny; to utilities in Moscow face a 47-step investment projects are additional requirements for translation of foreign process, while in Murmansk, regulations hurdles businesses face. language documents; goods inspection; call for 16 steps.67 measurement routines; and inconsistent Paying taxes. Having cut its corporate operating methods, efficiency, and Delays, however, are routine across the income tax rate in 2009 from 24% to transparency from post to post. Wherever board. Agencies often handle the work 20%,69 Russia has been able to remain tax there is excess bureaucracy, there is also slowly and inefficiently, fueling competitive despite the recent increase of an opportunity for corruption and the expectations that facilitation payments employers’ social security contribution need for a watchful eye. can clear the clogs in the system. rate from 26% to 34%.70 The tax code is quite advanced and under constant Russia’s construction-related rules and revision to keep pace with changing regulations, established in the interest of business requirements. Numerous safety, security, quality, and position papers and other official environmental protection, can be documents, such as official explanations complicated and challenging for and letters, complement tax regulation. incoming businesses to understand. Advance knowledge, preparation, and Trading across borders. The vast planning can help them allocate geographical spread of consumers, appropriate time and resources to ease remoteness of manufacturers, state the way forward. railroad monopoly, high fuel prices, and

27 When the walls come tumbling down

28 To be among those who will succeed, you’ll need to enter business in Russia with a strong and unwavering focus on corruption-related challenges.

Those who seek to grow with Russia will Understand where you’re working, and likely experience growing pains, just as what its particular and singular vistas, others in the international community customs, and cultures imply; know with have already done, including navigating whom you’re doing business; and know corrupting influences; bureaucratic and the market in which you’re playing. It’s regulatory complexities; slow-moving, crucial to remember that St. Petersburg, outmoded systems; inadequate Russia can be as removed from distant infrastructure; and the sheer size of the Siberia as it is from St. Petersburg, land and complexity of cultural variance Florida. Business strategies and practices among the people. should reflect those numerous local distinctions. They also should take into If you’re among the many business account the potential to tap local talent, leaders contemplating a foray into this which can bring tremendous skill, land of duality—between yesterday and know-how, and on-the-ground tomorrow, open doors and back-door perspective to your operations. dealings, maturing and established, innovative and retrograde—you certainly Solid due diligence, a learned approach are not alone. To be among those who to third-party dealings, and a good dose will succeed, you’ll need to enter business of patience are in order. Da. Explore in Russia with a strong and unwavering whether Russia makes sense for you and focus on corruption-related challenges, your business goals. Fly a kite. Who and an understanding that additional wouldn’t be energized by this notion: You efforts and frustrations will join you were there when this massive vessel along the way. Establishing an effective, successfully turned this pivotal, integrated, vigorous anti-corruption precarious, and promising corner. campaign is a must if you’re to safeguard your enterprise, growth prospects, and brand and emerge as a solid corporate citizen. Despite all the challenges, companies that successfully fight corrupt tendencies tend to be rewarded, and may just leave the others behind.

29 Notes

1. The World Factbook by CIA: https://www.cia.gov/library/ the Foreign Investment Go in Russia?” Eurasian Geography and publications/the-world-factbook/fields/2103.html Economics, Vol 11, No.2 2. Azerbaijan, Belarus, China, Estonia, Finland, Georgia, 20. Ministry of Energy Presentation (December 2, 2009)/ Listing of Kazakhstan, Latvia, Lithuania, Mongolia, North Korea, Norway, projected, in construction and put into operation oil refineries in Poland, and Ukraine. The World Factbook by CIA: https://www. Russian Federation: http://minenergo.gov.ru/activity/oilgas/ cia.gov/library/publications/the-world-factbook/geos/rs.html reestr_npz/index.php?sphrase_id=306739 3. The World Factbook by CIA: https://www.cia.gov/library/ 21. http://minenergo.gov.ru/upload/iblock/333/33363d868cf937 publications/the-world-factbook/geos/rs.html 01591957ccd67583b1.pdf 4. http://data.worldbank.org/country/russian-federation http://minenergo.gov.ru/activity/oilgas/reestr_npz/index. php?sphrase_id=306739 5. http://en.rian.ru/infographics/20111222/170405728.html 22. http://www.worldsteel.org/dms/internetDocumentList/ 6. https://www.cia.gov/library/publications/the-world-factbook/ statistics-archive/production-archive/steel-archive/steel- geos/rs.html annually/Annual-steel-2010-/document/Annual%20steel%20 7. https://www.cia.gov/library/publications/the-world-factbook/ 2010-.pdf fields/2103.html 23. http://www.worldsteel.org/dms/internetDocumentList/ 8. https://www.cia.gov/library/publications/the-world-factbook/ statistics-archive/production-archive/iron-archive/iron- geos/rs.html annually/BFI-annual-2010-/document/BFI%20annual%20 2010-.pdf 9. http://www.moeobrazovanie.ru/stat_stud_vuz.html 24. http://www.worldsteel.org/dms/internetDocumentList/ 10. http://www.gks.ru/free_doc/new_site/perepis2010/croc/ downloads/statistics/Topsteelproducers/document/ Documents/Vol3/pub-03-01.pdf Topsteelproducers.pdf 11. https://www.cia.gov/library/publications/the-world-factbook/ 25. http://www.customs.ru/index2.php?option=com_content&vie geos/rs.html w=article&id=17055&Itemid=1981 12. Doing Business 2012: Doing Business in a More 26. http://www.internetworldstats.com/stats4.htm#europe Transparent World, The World Bank and the http://www.newmediatrendwatch.com/markets-by- International Finance Corporation country/10-europe/81-russia 13. DOING BUSINESS 2013, Smarter Regulations for Small and 27. http://www.acm-consulting.com/news-and-data/85-russia- Medium-Size Enterprises, The World Bank and IFC, and-ukraine-mobile-subscribers-2011.html http://www.doingbusiness.org/~/media/GIAWB/Doing%20 Business/Documents/Annual-Reports/English/DB13-full- 28. http://www.gks.ru/bgd/regl/B12_5563/Main.htm report.pdf 29. http://www.vesti.ru/doc.html?id=95846 14. Transparency International Corruption Perception Index 2012: 30. http://www.gazeta.ru/business/2013/04/04/5243925.shtml http://cpi.transparency.org/cpi2012/results/ 31. https://www.cia.gov/library/publications/the-world-factbook/ 15. http://www.wto.org/english/thewto_e/acc_e/a1_russie_e.htm geos/rs.html 16. http://www.wto.org/english/thewto_e/acc_e/s7lu_e.pdf 32. http://www.nmtp.info/holding/investors/performance_results/ 17. OECD “FDI in figures” January 2012. 33. http://77.gibdd.ru/news/381/ 18. Russian Federal Service of State Statistics (Rosstat) 34. http://www.minpromtorg.gov.ru/industry/avia/187 19. Harry G. Broadman and Francesca Recanatini, “Where Does All 35. http://www.gdeetotdom.ru/analytics/macro/

30 36. Ministry for Economic Development of the Russian Federation: http://www.crn.ru/numbers/reg-numbers/detail. http://www.economy.gov.ru/wps/wcm/connect/6febcf00444c php?ID=62362 33568765e7af753c8a7e/sez_eng.pdf?MOD=AJPERES&CACHE 59. http://www.rusnano.com/investment/strategy/ ID=6febcf00444c33568765e7af753c8a7e http://articles.marketwatch.com/2012-01-28/ 37. Russian Federation Federal State Statistics Service: markets/31028919_1_names-in-private-equity-sovereign- http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ wealth-private-equity ru/statistics/population/demography/# 60. http://en.rusnano.com/press-centre/news/88580 38. Russian Federation Federal State Statistics Service, Migration 61. http://www.marketwatch.com/story/russian-firm-to-put-up-to- Across Russian Federation 2010 Report 26-mln-in-cleveland-bio-2011-09-26 39. http://global.factiva.com/aa/?ref=DAIBN00020120117e81g00 62. http://www.prnewswire.com/news-releases-test/in-2012- 1p5&pp=1&fcpil=en&napc= rvc-has-implemented-a-program-to-secure-new-investments- 40. http://www.alexa.com/topsites/countries/RU on-venture-market-and-to-support-new-innovation-based- 41. http://www.alexa.com/topsites startups-184417161.html 42. http://www.internetworldstats.com/stats7.htm 63. http://www.rusventure.ru/en/company/brief/ accessed July 2, 2013. 43. http://cctld.ru/ru/press_center/news/news_detail. 64. Federal Antimonopoly Service of the Russian Federation php?ID=1076&sphrase_id=64569 (Federal Law #57 FZ): http://www.fas.gov.ru/legislative-acts/ 44. http://www.newmediatrendwatch.com/markets-by- legislative-acts_20103.html country/10-europe/81-russia 65. Ibid. 45. http://www.internetworldstats.com/stats7.htm 66. Federal Law #178-FZ http://zakonprost.ru/zakony/o- 46. http://statdom.ru, accessed May 1, 2013. privatizacii/ 47. http://mn.ru/business_it/20111123/307564315.html 67. Doing Business in Russia 2012, The World Bank and the 48. http://www.comscore.com/Insights/Presentations_and_ International Finance Corporation Whitepapers/2011/it_is_a_social_world_top_10_need-to- 68. http://data.worldbank.org/indicator/IC.CRD.PRVT.ZS knows_about_social_networking 69. http://base.consultant.ru/cons/cgi/online. 49. http://www.livejournal.ru/themes/id/29599 cgi?req=doc;base=LAW;n=49412 50. http://www.dreamgrow.com/social-media-in-russia http://base.garant.ru/10900200/32/#block_20025 51. http://articles.businessinsider.com/2010-04-28/ 70. http://pravo-express.ru/library/arbitrage-taxes/274.html tech/30052569_1_icq-dst-instant-messaging http://base.consultant.ru/cons/cgi/online. cgi?req=doc;base=LAW;n=131687 52. http://www.wired.co.uk/news/archive/2010-05/03/why-icq- is-so-important-to-russia 71. Doing business in Russia 2012. 53. http://invest-iq.net/2010/08/groupon-acquires-majority-stake- 72. Harry G. Broadman, From Disintegration and Re-Integration: in-darberry-ru/ Eastern Europe and the Former Soviet Union in International Trade The World Bank, Washington DC. 2006. 54. http://www.bloomberg.com/news/2011-05-24/yandex-jumps- after-raising-1-3-billion-in-biggest-technology-ipo-of-year.html http://www.bloomberg.com/news/2010-11-05/facebook- backer-mail-ru-surges-41-after-912-million-offering-in-london. html 55. http://www.reuters.com/article/2010/11/01/us-microsoft- russia-idUSTRE6A01OG20101101 http://www.microsoft.com/en-us/news/press/2010/nov10/11- 01msskolkovofundpr.aspx 56. http://tacissmerus9803.rcsme.ru/rus/access.htm 57. Factiva. 58. http://www.energy-enviro.fi/index.php?PAGE=2&NODE_ ID=4&ID=4296

31 www.pwc.com

Contacts

US Russia

Harry G. Broadman David Gray +1 (202) 312 0807 +7 (495) 967 6311 [email protected] [email protected]

Jennifer Moll Edwin Harland +1 (678) 419 2133 +7 (495) 967 6166 [email protected] [email protected]

Acknowledgments

Managing Editor of Marketmap Contributors and authors Design Harry G. Broadman Elena Allen Tatiana Pechenik, US Studio Irina Fateycheva Mikhail Lastovskiy Photography Jennifer Moll Dmitry Kuzmin Maria Zaparenko Tatiana Pechenik Katie Brady Jason Rogers

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