Guest Column: Russia Trade Environment

Navigating the complex relationship of government and the federal customs service


Moscow — October 4, 2007 — When thinking about Russia and its economy in the late 1980s and approaching the pivotal events of 1991, the mental images many outsiders have usually consist of long bread lines, dour faces, plain clothing, empty shelves and lack of direction. To the outside observer, Russia was a country mired in political and economic upheaval. Not any more.

Since those heady days almost 20 years ago, the Russian market landscape has changed. Fueled by higher capital expenditures, a large budget surplus brought on by higher energy prices, increasing wages and discretionary spending by a growing segment of the population, Russia has become and is expected to remain a significant market for a wide range of consumer and infrastructure building products for the foreseeable future. Recent surveys of corporate executives of major Western companies in Russia reveal that revenues and profits for foreign operators are on the rise, in many cases exceeding expectations, and the ROI for companies willing to invest in this once "off limits" market is well worth the effort.

Russia — An Historical Perspective

When viewing the events that have shaped today's Russian economy, key facts about the events following the 1917 Revolution provide a good perspective. Within three years of the Revolution, the Russian economy was in shambles after a Civil War and the application to economy of a political ideology incompatible with the natural instincts of a predominantly agrarian populace.

In 1921, to jump start the failing economy, Lenin introduced the New Economic Plan (NEP). Over 350 "concessions" were awarded, which once again permitted private ownership in some parts of the economy including agriculture. In the non-agricultural sector, the expertise of the much maligned Western financial and industrial institutions was enlisted to rebuild the State's industrial infrastructure. Such pragmatic actions were readily recognized to be incompatible with the stated ideology of the vociferously "anti-capitalist" State.

By 1929, Stalin abandoned NEP in favor of the forced collectivization of agriculture and the State tried to renegotiate the terms and conditions of Western "concessions." Rather than agreeing to changing conditions and obvious higher operating costs, many Western firms abandoned their support of Russian economic development.

The Yeltsin years (1991-1999) began with the promise of transforming Russia into a free market economy through "privatization" — another effort led by Western technocrats and economists imported by the government. By the mid-1990s and leading up to the 1996 Presidential election, a "loans for shares" program and the granting of export licenses by the State were the vehicles that enabled the largest transfer of national wealth and industrial capacity of the 20th century. The repository of this wealth was a new class of private entrepreneurs, now referred to as the "oligarchs."

Throughout the 1990s and continuing to this day, Western technology, expertise and finance have been invited to participate in the rebuilding and ownership of these newly "privatized" entities, particularly in the lucrative oil and energy sector. Joint venture (J/V) and energy production sharing agreements (PSAs) were negotiated, offering the prospect of sizeable profits for Western partners. Similar to the concessions situation in 1929, significant Western producers operating under such agreements have come under pressure, and in some cases have been forced to accept new operating terms and conditions.

2000 and Beyond — Doing Business in Russia Today

With the change of administration in 2000, businesses are noticing a reverse trend. An aggressive program of wealth confiscation and concentration back into the hands of the State is in progress. This is especially apparent in the energy producing sector — one of 36 sectors declared by the government by summer 2007 to be "strategic" and subject to tighter State control. As a business newly entering the Russian market, political savvy and relationships are important.

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