Page 1

BUSINESS REPORT in association with rossiyskaya gazeta, russia

...Marching towards a common future

WEDNESDAY, NOVEMBER 10, 2010

Gas Diplomacy Gazprom may join in Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline; India signs framework pact

NEWS IN BRIEF

The Trans-Afghan fournation TAPI gas pipeline has gathered momentum, with Russia signalling Gazprom’s participation in $3.3 billion project to focus on the emerging Asian market. OLGA SENINA RIBR

The meeting between Russian President Dmitry Medvedev and his Turkmenistan counterpart Gurbanguly Berdymukhamedov on October 22 in the Turkmen capital Ashgabat led to two dramatic headline-making decisions. First, they agreed to put off construction of the Caspian gas pipeline (Turkmenistan– Kazakhstan–Russia) with an annual capacity of 30 billion cubic metres until the demand for gas starts to revive in the European Union. Second, Gazprom, Russia’s stateowned natural gas behemoth, began discussing possibilities for participation in the 1,680-km TAPI (Turkmenistan–Afghanistan–Pakistan– India) pipeline, which will deliver Turkmen gas to India and Pakistan through Afghanistan. The $3.3 billion project, with an expected annual capacity of 33 billion cubic metres,

DPA/VOSTOCK-PHOTO

TAPI-ing Asian pipeline dreams

Russia'sTroika Dialog investment company has formed a 50.4 million ruble ($1.66 million) open mutual fund to invest in the BRIC countries. "The fund helps our clients invest in the most fast-growing world economies and diversify their investment geographically," said Troika Dialog Managing Director Anton Rakhmanov. "It gives an opportunity to diversify away from raw materials,considering that Russia and Brazil are largely the suppliers of raw materials, while India and China are their consumers." RIA Novosti

Joint S&T programme extended till 2020

was stalled for long due to security fears as the pipeline would pass through areas affected by the Taliban insurgency in Afghanistan and volatile terror-prone areas of Pakistan. The two decisions were announced by Russia’s Deputy Prime Minister Igor Sechin, who is in charge of the energy sector, after the presidential talks. The Russian delegation, however, did not include either Gazprom CEO Alexei Miller, or any of his deputies. Sechin, however, indicated that Gazprom’s participation could take different forms: “possibly as a contractor, designer or full member of the consortium”. While postponing construction of the Caspian pipeline, it is crucial, as Russian energy diplomacy goes, to offer alternative forms of cooperation; and the possible interest in TAPI fits into this logic, according toVitaly Kryukov of IFD Kapital. By reviving discussions about possible participation by Gazprom in TAPI with Turkmenistan, Moscow is attempting to make Asian gas exports more appealing. Reporting on the development, the Kommersant daily suggested that it meant that Gazprom is willing to help

The Indo-Russian Integrated Long-Term Programme (ILTP) of Cooperation in Science andTechnology will be extended to 2020 and will refocus on biotechnology and information technology.The document on extending this crucial programme will be signed during President Dmitry Medvedev's visit to India late December. As part of the programme, a technology transfer centre was set up in Moscow with a database consolidating all commercially valuable technologies developed by Russian scientists. A similar centre will be launched in New Delhi soon. RIA Novosti

The diversification of energy exports is an emerging trend in Russia's energy diplomacy. The share of oil and gas exports to the Asian countries will reach 10-13% by 2015.

fund the high-risk project in order to thwart theWest's efforts to get Turkmen gas for the proposed EU-led Nabucco gas project that would compete with Russian gas exports to Europe. Today, European demand is not enough to drive new exports, says Mikhail Korchemkin, Director for East European Gas Analysis.Agrees Sechin: “Given the current conditions on the gas market – I say it without any sarcasm – Nabucco has no future,”said Sechin. In a significant development, India, along with three other participating countries, on September 20 initialed the Gas Pipeline Framework

Agreement (GPFA) and heads of agreements for the proposed Gas Sales Purchase Agreement for the TAPI, in Ashgabat. This will be followed by signing of Gas Sales and Purchase Agreement, which will outline the terms on which the Central Asian nation will sell gas, and agreements providing state support by the four nations in the project. Turkmenistan is hoping the GSPA may be signed during a proposed TAPI summit in Ashgabat in December. The cross-border TAPI pipeline has its share of critics. “This project is not going to be completed in the foreseeable future because of the in-

stability in Afghanistan. The discussions are too theoretical,”said Aleksey Makarkin, deputy director of the Centre for Political Technologies. This is also why there is no way Gazprom can walk out of the IPI project (Iran–Pakistan–India) with an annual capacity of 30–35 billion cubic metres. Many experts point out that the TAPI was backed by the US as an alternative to the IPI due to Iran's involvement in it. However, India has a chance to start receiving Russian gas much earlier. The ONGC can exchange its share in Sakhalin-1 for Gazprom liquefied gas, said Stanislav Tsygankov, head of the Foreign Trade

Tech Power The idea of Russia's Silicon Valley struck Vladimir Putin when he visited IT powerhouse in 2004

From Bangalore to Skolkovo ITAR-TASS

The Skolkovo project, that seeks to make Russia a tech superpower, has spurred the Russian parliament to reform 113 laws to support an innovation-based economy.

Tax incentives galore

IRINA SEVOSTYANOVA RIBR

In December 2004, when then President Valdimir Putin came on a state visit to India, he stopped off in Bangalore. He was so impressed by ‘technoparks' and special economic zones in India’s IT city that a month later, he exhorted Russians to achieve a breakthrough in information technology in a speech at a scientific township near Novosibirsk. The visit also spurred the process of reforming the Russian legislation to provide a viable framework for an innovation-based economy. Five years ago, the State Duma adopted a law on Special Economic Zones (SEZ). It took only several months to pass the bill. Under the law, residents of Russian SEZs could enjoy privileged taxation. Along with tourist, production and logistic (ports) zones, the law also provided for innovation or technology parks. The latter were modelled after western business incu-

ber 10 Novem

Mutual fund to invest in BRIC economies

bators; the area of an innovation zone cannot be more than three square kilometers and it can host two companies at most. The original focus was on technology development and commercialisation, but about a year ago, SEZ residents were allowed to have production facilities too, says AleksandraVasyukhova, innovation projects team leader at VEGAS LEX law firm. Companies operating in innovation zones are exempted from property, land and transport taxes during the first 5-10 years. The Law on the Skolkovo In-

novation Centre signed by President Dmitry Medvedev in late September has added new tax incentives for the centre’s residents. The Russian government looks to attract smaller businesses, says Vladislav Korablin, a lawyer atYukov, Khrenov and Partners. Thanks to the Skolkovo project, companies resident in technology commercialisation zones retain the reduced 14% rate of the unified social tax (UST) instead of 26% of salary that non-privileged employers have to pay for each employee. From 2011, the UST will be replaced

Microsoft CEO Steve Ballmer signed off on a plan to join the Skolkovo Centre, which could bring "tens of millions of dollars".

At Skolkovo Innovation Centre participants are not required to keep accounting records unless their annual sales proceeds exceed 1 billion rubles ($33 mn); they do not pay profits tax until their annual proceeds exceed 1 million rubles ($33.000), after which they become taxpayers, but pay profits tax at a zero rate until the year in which their profits top 300 million rubles

($1 mn). They do not pay VAT (except on goods imports into Russia) or property tax until their aggregate profits exceed 300 million roubles from the beginning of the year in which their sales proceeds top 1 billion rubles; they pay insurance contributions only to the Pension Fund of the Russian Federation at a 14% rate until the 300 million rubles profits mark is reached.

with insurance contributions totalling 34%. Unlike Silicon Valley in the US, which relies on a vast workforce of highly qualified immigrants, Russia has more in common with Bangalore and takes advantage of local talent. However, Russian lawmakers are also taking important steps to attract foreign specialists and hope the new regime will also bring back those Russians who have worked in the IT sector in the US. From January 1, 2011, the income tax for non-residents will equal the standard 13% rate for Russian citizens instead of the 30% that foreigners have to pay during

the first six months of their stint in Russia. Getting Russian visas will also become less painful. On July 1, 2010, the duration of working visas was extended from 1 to 3 years with multiple renewals, while the issuing process was shortened from 4 months to 14 working days. Currently, the State Duma is mulling another law that would allow families of qualified foreigners obtain visas on similar terms. When the new regulation becomes operational, they will be able to get a working visa for the same period and renew it in the same way as the specialists without having to reregister at the immigration

Department of the Russian company. The problem is that, officially, the ONGC may not carry on negotiations on behalf of the consortium because the project is operated by Exxon Neftegas. It’s important to remember that the Russian authorities expressed their displeasure with Exxon Neftegas in late October because the estimated project budget included in the programme of works upto 2055 nearly doubled from $42.8 billion (in the 2003 programme) to $95.3 billion. Russian Energy Minister Sergei Shmatko has, however, said that no change of operator is on the agenda.

authority every four months. “For Russia, Skolkovo is a testing ground for transition to an innovation economy,” says Evgeny Fyodorov, chairman of the State Duma Committee for Economic Policy and Entrepreneurship. The ambitious project forced his committee to revise existing economic legislation. Members of the Russian parliament have identified 113 laws that need to be updated. “Our job is to transform Russian science into an R&D business, create a technology market and establish a legislative framework for a new kind of industry," says Fyodorov, describing priority items on his agenda. He estimates this transition will take six to eight years. In the short term, initial changes will be introduced in investment-related laws to establish simpler procedures for creating venture funds and start-up companies that rely on their financing, promises Oleg Fomichev, director of Strategic Management and Budgeting Department at the Ministry of Economic Development.The ministry is working together with state corporation Rosnano to draft the necessary amendments to federal laws and the Civil Code that will be submitted for the Russian Cabinet review this month. Medvedev, a cheerleader of innovation, also emphasised “the work to alleviate the regulatory burden on investment funds”and“liberalisation of export rules for innovative products".

TWICE A MONTH IN TWO DAILIES Russia&India Business Report in

The Economic Times

ITAR-TASS

Rosatom, Russia’s state-owned atomic power corporation, is looking for partners in India to set up a joint venture, which will produce equipment for nuclear power plants, Vladimir Kashchenko, CEO of Atomenergomash, a Russian nuclear and power engineering company, said in Mumbai recently. He stressed that his company was also ready to launch joint production of components for non-nuclear power facilities. "We also plan to manufacture equipment for conventional power plants," said Kashchenko. Russia is negotiating with several leading industry players in India for collaboration. He added that an Indian joint venture could provide Atomenergomash with a good local production hub, which will target other Asian and African markets.The company will open its Indian office by December and will finally select partners as early as April next year, said he. Polit.ru

Readmission pact likely to be signed next month ITAR-TASS

Russia and India have agreed to cooperate in combating illegal immigration and will sign a readmission agreement.“The delegation from Russia’s Federal Migration Service and their Indian colleagues have agreed a draft memorandum of understanding on combating illegal immigration. It envisages cooperation in this sphere between the two countries, as well as readiness to sign a readmission agreement later,”reportedValentina Kazakova, deputy head of the Federal Migration Service’s citizenship department. The pact was finalized during negotiations in India between officials of Russia’s Federal Migration Service delegation and consular officials from India’s Foreign Ministry. The MoU is expected to be signed in December. RIA Novosti

Novem ber24

Russia&India Report in www.indrus.in

Rosatom looking for JV with Indian partners

The Times of India


Companies

BUSINESS REPORT IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, NOVEMBER 10, 2010

Resources India's coal consumption may reach 2 billion tonnes by 2030; Russian coking coal a favourite among BRIC countries

With a yawning supplydemand gap, Indian companies are looking afresh at Russian coal assets as a potential gold mine. NATALYA FEDOTOVA RIBR

Two years ago, the world's largest steel producer ArcelorMittal, owned by Lakshmi Mittal, a UK-based Indian, acquired three coal mines and associated assets in the Kuznetsk Basin from Russian steel giant Severstal. In 2009, the Russian mines of ArcelorMittal, which became the first foreign company to enter the Russian coal market through acquisitions, produced 1.9 million tonnes of coal.The $720 million deal and the success of ArcelorMittal has ignited a renewed Indian interest in the Russian coal industry. The relatively high economic growth rate in India despite the global crisis and the expanding demand for infrastructure and power generation has ensured an insatiable demand for coal. But coal output has not kept the pace, creating a supply-demand gap of about 60 million tonnes per annum. Experts believe that in the next five years, there will be an“explosive growth”in Indian coal imports. Due to the

demand from power stations, metallurgical and cement plants, coal consumption in India may reach two billion tonnes by 2030, says India’s Coal Minister Sriprakash Jaiswal. Currently, India extracts 530 million tonnes and imports approximately 67 million tonnes of coal. According to Jaiswal, the national coal reserves are estimated at 277 billion tonnes. Coal accounts for 53% of the energy capacity; and the government believes that coal will remain the country’s main source of energy in the future despite ambitious plans for nuclear power generation in which Russia is also a partner. With such a yawning supply-demand gap, Indian companies are looking afresh at Russia’s seemingly inexhaustible coal deposits. NMDC, India’s largest iron ore producer, is due to make a proposal to acquire Kolmar, a Yakutia-based coal mining company owned by Russian billionaire Mikhail Prokhorov’s Intergeo by December 1, Kommersant newspaper reported. Maxim Finsky, general director of Intergeo, told the newspaper that the company is expecting to receive “at least $400 million”. Interest in the assets was earlier confirmed

by NMDC’s finance director Swaminathan Thiagarajan. Kolmar comprises several operating coal mines and mines under development, including Erel strip mine with an annual capacity of 450,000 tonnes, Dezhnevskaya mine (under development), Yakutskie Ugli – Novye Tekhnologii (licenses for two plots) and Neryungriugol, which owns the Denisovskaya mine (estimated capacity: 750,000

Billionaire Mikhail Prokhorov's Intergeo is expecting at least $400 mn; deal may be finalised by Dec 1 tonnes per annum). In 2005, Evraz Group, along with its Japanese partner Mitsui, attempted to develop Denisovskaya, but the joint venture broke up in 20 07 because of coal accessibility issues. Kolmar’s total reserves amount to 400 million tonnes of coking coals of K, Zh and GZh grades. Intergeo bought Kolmar in April.The estimated value of the deal was $300 million. If the deal with NMDC falls through, Intergeo will continue developing the compa-

SERGEY GAVRILENKO_KOMMERSANT

NMDC angles for Siberia coal deal, blazes a new trail

ny on its own, Finsky said. He added that in this scenario, Kolmar would announce an IPO and use the stock market to attract partners, with whom a preliminary agreement has been struck. The company plans to increase its coal output to 6.5 million tonnes in 2013. Denisovskaya mine will be up and running next year at full capacity.Vostochny will start producing coal, and Inaglinskaya mine will come on line with 2.8m tonnes in capacity. If Intergeo fixed the Kolmar price early this year when coal cost $180–190 per ton, now is the right time to sell, because coal prices have gone up by 23%, says Nikolai Sosnovsky, an Uralsib analyst. Boris Krasnozhenov of Renaissance Capital believes that at $400 million, it would be an easy sell, i.e. $1 per ton of reserves is a reasonable price. The price tag could be even higher, Sosnovsky says, because Indian metallurgists lacking sufficient coal supply might offer a good premium for the mines. Even if Kolmar does not sell, it is unlikely that it will be a deadweight on Intergeo’s balance sheet. Under the best case scenario, coking coal prices will grow by 20–

At the moment, supplying coal for domestic consumption in Russia is even more attractive for producers than exporting it

Coal industry: Fact File Coal accounts for upto 80% of the world’s fossil fuels, while oil and gas make up no more than 17%. In the world’s leading economies, coal generates 60% - 95% of each country’s overall energy usage. Russia is the fifth largest coal producer after China, the United States, India and Australia. Russia has recently

reached an annual output level of 350m tonnes, or 12% of global output. Kuznetsk Basin (Kemerovo Region, Siberia) is the biggest coal supplier. Overall, there are 96 coal mines and 148 strip mines in operation. The industry employs 200,000 people. Russia exports coal to 45 countries around the world.

25% next year compared to the average 2010 price, says Krasnozhenov. Steel producers directly or indirectly control over 60% of coking coal production. Mechel is one of the main players in the segment, with a quarter of the market. Evraz, controlled by Chelsea Football Club owner Roman Abramovich, and steel giant Severstal, owned by Sergei Mordashev share another 10% of the market. There are two segments in

the Russian coal market: coking and power-generating coals. Russian coking coal is a favourite among the BRIC countries, because the markets of three out of four members (Brazil, China and India) have a structural deficit due to a lack of hard coking coal. Coal accounts for only 20% of Russia's energy. In the US, the share of coal in electricity generation is 50%, in China it is more than 70%. More than 50% of Russia’s

energy demands are covered by natural gas. Russia, however, has already set about increasing the share of coal in its energy mix. According to the Russian energy sector development programme, the share of coal in power generation may hit 40% by 2015. Self-sufficiency is the Russian coal market’s idiosyncrasy, setting it apart from the other BRIC economies. Russian coal demand is completely satisfied by domestic production. Moreover, Russia supplies coal to 45 different countries of the world. China and India, for example, import coal mostly from Australia and South Africa under long-term contracts, with the price reviewed on an annual basis, says TKB Capital analyst Evgeny Ry-

abkov.The Russian market is characterised by more flexible pricing and frequent changes that sometimes create tension as consumers believe that coal is overpriced. In past few months, coal prices in Russia are steadily rising: since September, they have gone up by almost 80%. The key factor in the upward trend has been the recent recovery of the global economy and the consequent demand growth in the metallurgical industry in the world, including in Russia.At the moment, supplying coal for domestic consumption is even more attractive for producers than exporting it, because coal has lost almost 20% of its value in the global market over the past few months.

Trade With support from government agencies, Indian leather manufacturers are upbeat, export 387,000 pairs of shoes to Russia in first half of 2010

Polishing a comeback strategy in familiar turf SVETLANA SOROKINA RIBR

In good old Soviet days, Indian leather goods shone brightly in the Russian market. In the late 1980s, the USSR accounted for about 20% of Indian leather and leather goods exports, but over the years, China has emerged as the leading exporter of shoes to Russia. Over the first six months of this year, shoe exports from China to Russia through the Manzhouli border crossing checkpoint hit a record high of 1.23 million pairs of shoes, which is 46.6% up year on year. But Indian leather exporters have not been sitting idle. They are determined to recover their lost position in the Russian market. In the liberalising 21st century, the Indian government is promoting leather exports through a slew of initiatives including the implementation of simplified customs procedures and allocation of funds to manufacturers to help streamline technology. The manufacturers are also being encouraged to modernise industrial facilities to develop the infrastructure and ensure environmental safety of manufacturing.

Indian leather manufacturers are determined to recover their lost positions in Russia.

The Council for Leather Exports, supported by the Indian commerce ministry, has thrown its weight fully behind this mission by providing support to companies, which are seeking partners in the Russian market or looking to organise their own distribution business in Russia. Presently, Germany, Great Britain and Italy are the principal markets for Indian leather manufacturers. Ex-

port of leather and leather goods to Russia accounts for less than 1% of Russian imports or approximately $20 million, a meager amount given that Russia is the 11th biggest importer of leather and leather goods in the world. Russia imported leather goods worth $3,296 million in 2008. The growth rates of leather imports are also impressive - 68% annually before the crisis. The trends in the Russian

market have been encouraging. Russian manufacturers have less than 15% of the shoe market, but the business is changing for the better. Over the first eight months of 2010, leather and shoe manufacturing grew by 10.9% and 23.4%, respectively. India, however, has three interesting offers that will find a ready market in Russia, feels the Russian Union of Leather and Shoe Manufac-

turers. Says Nelli Myakunova, president of the union: “Russian trade firms supply leather to Russia from India. This leather, called yuft (Russian leather), is used to manufacture special and work shoes. Indian leather is much cheaper than Russian and only an eighth of the price of leather imported into Russia from other countries.” According to the union, Russia imported 893 metric tonnes of Indian leather for only $900,000 in the first quarter of 2010. This is not much. Clearly, there is enormous growth potential. Second, there are supplies of shoe uppers. Deliveries of shoe uppers are already under way and can gradually increase.The customs statistics indicate that 387,000 pairs of shoes worth $900,000 were imported from India to Russia during the first six months of 2010. This accounts for 0.2% of total shoe imports. During the same period, 137.7 metric tonnes of shoe uppers, worth $1.6 million, were imported, accounting for 7.8% of Russian imports of shoe uppers. Finally, Russia could collaborate with India in the same way as the European producers. The leather manufacturers’body says that low production costs in India are increasingly more appealing to Russian shoe manufacturers.

'Our products enjoy greater confidence' Nidamarti Mallikarjuna Rao of the Council for Leather Exports in Moscow, is upbeat about the Indian leather exhibition. FROM PERSONAL ARCHIVES

AP PHOTO/BIKAS DAS

Indian leather exporters, who once shone brightly in the Soviet market, are now crafting a strategy to recover their lost position.

Are Indian leather producers planning to expand in the Russian market? Representatives of 33 Indian companies producing leather bags, clothing, footwear and accessories, will be coming to Moscow on November 22.This exhibition is our first experience in Russia. Previously, we used to bring our leather producers to Russia as a part of general exhibitions and fairs. This time we are holding a separate leather exhibition.We sent invita-

tions to 4,500 Russian companies that sell leather items and footwear. We hope they will come. At this point, any effort will be positive. Things will be more certain after the exhibition, when we see who came, what kind of buyers, and whether any contracts are signed. Do you have any idea which Indian products will be in demand in the Russian market? Companies are asking what samples to bring. I don’t know. On the one hand, people here are not very rich. On the other hand, Russians dress very stylishly, preferring to buy one expensive item rather than a lot of cheap ones. As Indian companies make products for almost all the global brands, I am sure they have relevant experience.Take footwear products: the Russians will be closer to Italy in terms of demand.The British model, for instance, won’t work here. British boots can be passed on to your children, whereas, in Italy, fashion changes every six months. Russians, too, love fashion and style.

What are the prospects for Indian producers in Russia? Will there be more competition? The Soviet Union was the Indian leather industry’s biggest partner. After this partnership collapsed, we began to look for other markets. Our companies had to improve the quality of their products. Today, India is an important player in leather export markets. We supply products to the US, which is our main partner now. It appears that breaking up with the USSR was good for our leather industry. Previously, we just delivered our products and collected payment; now we have to improve the quality. Russia has always worn leather and it always will. We don’t have too many rivals. India produces leather for such brands as Pierre Cardin, Tommy Hilfiger, Versace, DKNY, and Hugo Boss. I think Indian products have a small psychological advantage. Russians have more confidence in Indian products and we produce better quality items.

in@rbth.ru www.indrus.in/letters


BUSINESS REPORT

Economy

in association with rossiyskaya gazeta, russia Wednesday, NOVEMBER 10, 2010

Diplomacy Russia tries to break stereotypes by inviting East Asian countries to partner in high-tech, nuclear energy

ASEAN ties go on upswing reuters/vostock-photo

Russia is set to accelerate economic ties with ASEAN as it joins East Asia Summit next year and refurbishes its image to counter US influence in the region. igor tomberg

strategic culture foundation

On October 30, Russian President Dmitry Medvedev attended the second RussiaASEAN summit in Hanoi (the first Russia-ASEAN summit convened in Kuala Lumpur in 2005).The forum was meant to boost cooperation between Russia and East Asian countries which, as a Kremlin official said, are hoping that Russia can balance the growing US influence over the region. Currently, Washington is pouring massive investments into the military sphere of the Asia-Pacific.The US initiatives in the region include the construction of an aircraft carrier dock, the creation of a missile defence system, and an $8 billion upgrade of an aerodrome on the Island of Guam.The Pentagon also invested $126 million in the modernisation of the military infrastructure in Great Britain's Diego Garcia Island, which will serve as a repair base for submarines, every one of which is equipped with 154 cruise missiles and rivals an aircraft carrier group in terms of total firepower. Washington says the efforts are made in response to China's military buildup in Asia-Pacific, but the region's countries are predictably concerned over the emerging confrontation and are therefore interested in maintaining a local balance of superpower interests. Moscow discerned the contours of the situation. Medvedev stated in Hanoi that Russia is open to new regional alliances and

President Dmitry Medvedev at the second Russia-ASEAN summit in Hanoi

Russia open to new regional alliances in Asia-Pacific region where the US influence is growing Moscow has adopted 2010-15 programme of energy cooperation with ASEAN

stressed that the admission of Russia - along with the US - to the East Asian Community was an important decision of the summit.The East Asian Community comprises 10 ASEAN countries plus Australia, India, China, New Zealand, South Korea and Japan. The summit focused on the future of the economic cooperation between Russia and East Asian countries. Combined, the ASEAN GDPs, share of global trade, and investment volumes respectively account for around 60%, 50%, and 40% of the world's total. The populations of ASEAN countries number 580 million. As a group of steadily growing

Trend Emerging market investors willing to bet on stocks

IPO pipeline flows back after dry spell

mikhail fomichyov_ria novosti

After a prolonged dry spell, IPOs have begun to flow back. Will the hopeful trend triumph over low bids and widespread scepticism? Tim Gosling riBr

After slowing down earlier this year, Russia's IPO pipeline is cranking back to life. Investors look keen to get a piece of the most attractive companies, but are dithering over price. At the start of 2010, Russian stock worth $20bn was expected to go public. However, with equities stubbornly refusing to follow bond markets, the market has seen just $3bn or so of this equity. The tap is now turning back on. On one hand, some companies can no longer avoid having to hunt cash to pay down their debt. For most, the bond markets are still too expensive, and the banks are tightening requirements on borrowers. "In short, to some extent it's a natural process as we come out of the economic crisis," says Peter Westin, strategist at investment bank Aton. Yet others sense that emerging market investors are finally ready to cash in the

Dmitry Grishin, CEO, Mail.ru, believes the company will significantly benefit from the growing Internet market

Russian funds attracted highest inflows of any emerging market for first time since May profits they've made in markets such as China, India, South Africa and Turkey to take a punt on Russia's cheap stocks.As ChrisWeafer, chief strategist at Uralsib, wrote on October 29, across the

previous week, Russian funds attracted the highest inflows of any emerging market for the first time since May.Tom Mundy, chief strategist at Otkrite Financial Corporation, suspects "there's already cash on the sidelines that could be tempted by some offers". But scepticism about Russian IPOs continues to persist. IRC, which was first out of the gate in October, found out quickly just how suspi-

praised the Russia-ASEAN cooperation in the electric power, nuclear, renewable energy, and gas sectors, but laid out a bolder vision for the future based on joint efforts in high tech areas such as machine-building, new materials, medicine, earth remote-sensing, aerospace and Russia's recent staple – the satellite navigation sytem to deal with natural disasters. In the global market and Asia, Russia's inferiority complex stemming from its over-reliance on natural resources often creates obstacles in the way of positioning the country in a more realistic fashion, demonstrating its capabilities, and thus advancing its national interests. The Russian nuclear sector, for example, should be able to win for the country more high tech side of the energy business. The stateowned Rosatom secured a contract to build Vietnam's first nuclear power plant with two 1,000 mW facilities. Russia also boasts advanced R&D in renewable energy sources. Till now, Russia's diplomacy in Asia was hindered by a lack of persistence. Customarily prioritising its relations with the West, Russia only occasionally switched to cultivating ties with the AsiaPacific. Hopefully, Moscow's assertiveness in Hanoi and its plan to host the 2012 AsiaPacific summit signal a rising awareness about Asia in the ranks of Russian decision-makers.

economies with GDPs adding upto $1.5 trillion and a cumulative trade turnover of $1.7 trillion, ASEAN ranks among the global heavyweights and plays a key role in the Asia Pacific region. Russia's share of the ASEAN trade turnover in 2009 was a modest $6.8 billion. It’s time to prioritise expansion of the economic cooperation bet we e n R u s s i a a n d t h e ASEAN countries. In the run-up to the summit, Moscow adopted a 2010-2015 programme of energy cooperation with ASEAN, including plans for the oil, gas, and electric power energy sectors as well as for renewables, nuclear energy, and environment-friendly tech-

nologies. Russian Foreign Minister Sergei Lavrov said after the summit that Russia's ASEAN partners are keenly interested in the nuclear energy sector and in jointly evaluating the potential of geo-thermal power. New Zealand's prime minister expressed a typical perception of Russia during the debates over a possible free trade agreement between the two countries when he described Russia as a country with a lucrative market and huge quantities of valuable resources like oil and gas. Hoping to break the stereotype, Russia is inviting ASEAN to work together in the high tech sphere. In his summit address, Medvedev

cious investors remain. The non-precious metals division of Petropavlovsk slashed its proposed $500m offer in Hong Kong by 50% in the face of low bids. Mundy picks out retailer O'key as one sector that people want exposure to. The most bullish of the whole batch is internet group Mail. ru, whose initial pricing range for its debut in London values the company "notably higher than most intern a t i o n a l p e e r s , " s ay s Konstantin Chernyshev of Uralsib. Driven by Mail.ru's positioning as "the only Russian tech stock of such caliber" and offering exposure to both the consumption story and "Russia's human capital", the bid book was quickly filled towards the top of the range in early November. Yet at the same time, others continue to struggle with the persistent gap between expectations and the refusal of investors to pay top dollar. Freight rail operator Transcontainer set the price on its offer 5% below the lower end of guidance, whilst November 3 saw Mostotrest list at the bottom of its pricing range, although the bridge builder did break a trend in early trading when the shares jumped in value. It seems unlikely then that everyone of the companies that have announced plans to list in the near term will actually go through with it. However, with a $50 billion privatisation programme penciled in for 2011-15, it may be the only opportunity for many.

Bill To cover 20% exports by 2011-13

Don't miss our "Photo of the day" on Facebook! www.facebook.com/russia.india.report

Igor Tomberg is Director of Energy and Transit Studies Center of the Institute for Oriental Studies in Moscow and professor at the Moscow State Foreign Relations Institute of the Russian Foreign Ministry.

Hopes high on new export credit agency Pursuing modernisation plan, Russia is set to create an export credit agency in 2011 that is expected to boost exports by 30%. Natalya Fedotova ribr

It's an idea whose time has come. This summer, Russia’s Prime Minister Vladimir Putin announced that a set of regulatory documents had been drafted to establish an export insurance agency.The government is now reviewing a draft law that details the process of providing credit guarantees. The export credit insurance agency will be a public corporation (open joint stock company) and a 100% subsidiary of state-runVnesheconombank, which will initially earmark 30 billion roubles for export credit insurance. It will provide insurance coverage for Russian companies’ big export-import contracts and global investment projects. Export insurance solutions against commercial and political risks will become available in 2011.“It is ex-

pected that 20% of all Russian exports ($13 billion), will have credit insurance coverage provided by the agency in 2011-2013,” says Yekaterina Karasina, a Vneshekonombank spokesman. The bank says that insuring export credits against commercial and political risks will be granted selectively to specific exporters and will depend on an individual assessment of risks and goods or services to be insured. Experts believe that the new agency will help "Made in Russia” label products to gain greater visibility in international markets. Backed by the insurance agency, Russian exporters will be able to offer better financing deals to their foreign partners, primarily those in the fast growing markets of Asia, Africa and Latin America. The agency plans to insure at least 30% of all exported Russian goods: machinery, equipment, construction and engineering services. This will hopefully result in a 30% increase in Russian exports.

Opinion

Wake up, take a closer look at Russia's reform and wealth-creating story Plamen Monovski

Specially for Ribr

T

he proportion of people living on, or below the poverty line in the US exceeded that in Russia in September: the US had a 14.3% poverty rate and rising (as of September 15), according to the US Census Bureau; Russia’s poverty rate was 13.7% and falling, says Rosstat. Wealth in Russia is rising because it has consistently tackled difficult reforms, which have improved its ability to create wealth. Western countries face falling standards of living, as mature political systems are bad at making the changes needed to deal with the current crisis.The consensus politics of mature democracies works well when things are running smoothly, but not when there are big economic dislocations. If anything, the current crisis has only steeled the Kremlin’s resolve to push through the most liberal set of reforms under President Dmitry Medvedev’s banner of “modernization”. Will it work? There is a widespread perception that reforms in Russia have failed. Yet nearly every important indicator – size of the economy, personal income, stock market capitalisation – has expanded 10-fold in the last decade. Reforms have been working, but in most cases, while they have created wealth and opportunity, they remain a 'work in progress'. The retail sector was the first to take off more than a decade ago but its development is essentially apolitical: all the government had to do was to free prices and ensure companies have access to capital. Retail turnover has been running ahead of GDP growth, driven by surging incomes. Reform of the telecommunications sector was the state’s first big top-down reform; starting around

2002, it has been a huge success. The quality of phone lines is beyond any comparison with Soviet-era telephony. There are 141 sim cards for every 100 people in the country, far ahead of any other BRIC country, while the value of the leading companies has soared. The point is that the Russian equity market looks very different depending on where you stand. From afar, it looks unattractive and volatile – fortunes can be made and lost in a financial quarter. But when you take a closer look at specific corporate and reform stories, you see gems. Thanks to its poor investment image, the Russian equity market is the only one of the BRIC countries that has failed to re-rate. Russian stocks are trading at an average price-to-earnings (P/E) ratio (a widely used metric, where the lower the number, the greater the perceived value of a stock) of less than 8, and this is expected to fall to 6.3 next year as corporate earnings recover. This compares to India’s 19, China’s 15 and Brazil’s 13 as of the end of September. In other words, Russia gets no credit from investors for the reforms already carried out. However, look closer at the representative companies in each of the sectors that have been overhauled and the picture is the opposite.Take two examples: independent gas producer Novatek’s stock is currently trading at a P/E ratio of 20.1 and the shares of supermarket chain Magnit are trading at more than 30 – both look expensive, but investment banks still have both marked up as“buy”. It looks like investors focused on Russia’s reforms have realised the benefits and are heavily invested into the best stories in each of these sectors. But the reform story has yet to percolate out to the rest of the world, which is still painting Russia’s image in very dark colours. Plamen Monovski is the Chief Investment Officer of Renaissance Asset Managers based in London

in brief Rise of the middle class: 200 cell phones per 100 households At the end of September, Rosstat, Russia's statistical agency, published the results of its extensive panel study of household income and expenditure. The study was conducted last year and covered some 48,000 households located in diverse Russian regions. The structure of Russian c o n s u m e r b e h av i o u r evolved significantly between 1990 and 2009; today's structure closely resembles other countries with a similar level of economic development. Russia's current level of cons u m p t i o n m a ke s i t a midlevel consumer economy by global standards. In 1990, Russian households spent 41% of their income on food; last year, that share had fallen to 35%. Compared to developed countries, Russian households, however, still spend a sizable chunk of

their income on food. Some 46% of income went to nonfood goods purchases in 1990, compared to 38% in 2009. The share of services doubled from 13% in 1990 to 27% in 2009. The strong growth in services indicates just how underdeveloped the service sector remained during the Soviet era and how rapidly the sector expanded thereafter. The eating habits of Russians are definitely healthier. Russians eat more fruit, vegetables and fish than 20 years ago. Meat consumption has held fairly steady, while the relative share of bread and potatoes has diminished. Many home appliances have become standard in the last two decades. In 2009, there were over 100 refrigerators, 100 washing machines and over 200 mobile phones per 100 households. There were also about 50 cars and 50 computers per 100 households last year. BNE


BUSINESS REPORT

Lifestyle

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA WEDNESDAY, NOVEMBER 10, 2010

Enterprise Russia's spices market, estimated at 110-120 mn, is expected to grow by 20-25%; brands from India, China, Vietnam dominate the market

Indian spices tickle palate, spin money ANISIA BOROZNOVA RIBR

When Jeeva Ponnuchamy came to Moscow from Tamil Nadu to study at People’s Friendship University of Russia (PFUR) in Moscow in the late 1980s, he wanted to become an agriculturalist. He managed to adjust to the Russian winter and the ways of his new habitat, but his Indian palate had a difficult time liking Russian food. Cooking was just as hard, as there were no familiar cereals and spices in Moscow shops. Curry, turmeric, hot pepper, clove, cardamom, basmati, dal, mung beans, rice flour, Indian pickles, coconut and gingili oil – all these items were missing in Russian shops in the 1990s. Spices from Russia’s Caucasus were available, but Indians did not like their quality and composition. “The only popular spices in Moscow were black pepper and bay leaf, and when some of our friends went to India, we always asked them to bring at least 50-100 grams of spices. That was not enough. When we went ourselves, we would bring enough spices to last for a year,” Jeeva recalls. While Russia’s spices market has now been growing 1520% over the last few years, the consumption of food additives in the country remained very low for centuries. And this was not just because spices were expensive: the culture of spice consumption in Russia, whether home-grown or imported, didn’t take root. Why? A study of some 5,000 recipes from almost 100 cook books representing 36 countries showed that the hotter the

country’s climate, the spicier the food, the more flavourings and spices are used in cooking, since hot sauces and spices have some antibacterial properties. In Russia, with its chilly summer and extremely cold winters, there was no such problem. Spices were a matter of personal whim, not a necessity. This was, however, to change at the end of the 20th century. As a result of globalisation and cultural interpenetration, not only did spices become cheaper, but also much more popular.The globalising culinary industry also played its role in whetting Russians’ appetite for spices. Ponnuchamy graduated from PFUR in 1994, but instead of returning to India and continuing the family

Jeeva Ponnuchamy, who came to study in 1990s, now owns three Indian Spices shops in Moscow. business of growing sugarcane and cotton, he stayed in Moscow. Using their student cash savings, he and his friends leased a small area in the hall of one of PFUR’s buildings, where they set up a kiosk and purchased some food products in the wholesale market to start their small business venture. Ponnuchamy used his first earnings to go to London to visit his relatives. Walking through an Indian quarter, Ponnuchamy was surprised to see many shops selling authentic Indian products, mostly spices. There was nothing like this in Russia. Even the import of the most popular spices, such as ginger, coriander, caraway, and cardamom was suspended following the collapse of the Soviet Union.

REUTERS/VOSTOCK-PHOTO FROM PERSONAL ARCHIVES

When an Indian student in Moscow started missing spices from back home, a business idea was born. It is now a big money-spinner.

Foreign brands proliferate

Jeeva Ponnuchamy

He brought several boxes of spices from his next trip to India, which he began to sell through his kiosk. Little by little, Indian products sidelined everything else and the first shop was opened soon after. “Of course, we used advertising. First we distributed leaflets; later we began to hand out our ads on the streets and in the metro.Yet, the most effective advertising was through customers themselves," he recalls.When restaurants began to buy his spices, Ponnuchamy realised that “suitcase” trips could not satisfy the growing demand. The first container came from India by sea in 1995.Yet, it could not leave the customs terminal for a long time due to difficulties with product declaration: it was hard to find customs codes for some spices, especially for those that had not been imported to Russia before. Over the next three years, the shop already had a loyal band of customers.Ten years later, not only foreigners but also Russians became Indian Spices’ regular patrons. This shop still exists, but it has grown in size. Another three outlets have been opened in Moscow, and there are plans for a shop in St Petersburg too. Ponnuchamy had to adjust his business to Russia’s spe-

Indian spices are the new flavour in Moscow. Russians spend $2 mn on spices every month.

Spice market: Vital stats Russia’s spices market, including in the food industry, is estimated at $110-120 million. In 2009, the market value grew 21.8% compared to 2008, MEMRB Retail Tracking Services calculated. It is expected to grow by 20-25% over the next few years. The structure of Russia’s spices market has changed over the past two years, with universal and single-ingredient spices changing its market shares: the universal segment grew by 7.4%

in volume in 2009. Packaged dill, parsley and other singleingredient herbs saw a 13.1% drop in sales. At the same time, special spices edged up 2% by volume. In terms of value, neither segment declined over the last few years. So, universal seasonings and special spices accounted for 27.7% and 20.3%, respectively, while single-ingredient herbs grew 1.3%. Interestingly enough, universal seasonings make up 60.4% in terms of volume.

cific climate: liquid products such as rosewater or coconut oil can't be transported in winter because of low temperatures. Containers could get stuck at interchanging ports, products would freeze,

and packaging might burst in extreme cold. Such goods can only be transported in summer for the whole year. In the winter, oils, sauces and other liquid products come from heated storage facili-

ties. “The biggest problem faced by any foreigner planning to open a business in Russia is the language barrier. Knowing English is not enough to run a business; you have to understand what the locals say. The second major problem is legislation and its hidden pitfalls. It is important to have a good knowledge of customs regulations,” he says. Another problem is Moscow’s high rental, which is so high here that the business does not always pay off. But despite these limitations, Jeeva is optimistic. Russia’s spice market has not slowed down despite the economic crisis. One of the main reasons behind the booming growth is high profit margins, verging on 100%. According to the Business and Marketing company, Muscovites purchase spices

Russia’s spices market is currently dominated by foreign brands, including from China, Vietnam, India, Indonesia, Egypt, Nigeria, Brazil, Peru, Mexico and some European countries such as Holland, Poland and Turkey. According to customs figures, most spices come from Vietnam (25%), followed by China (24%), India (9%), Uzbekistan (8%), Indonesia (7%), and Poland (7%). Over the past two years, the following five companies have kept the lead, retaining their positions, despite slight changes in their market shares: Maggi (Nestle SA, Switzerland); Knorr (Unilever holding company); Vegeta (Croatian company Podravka d.d.); Poland’s Cykoria S.A; Gallina Blanca (Spain’s Gallina Blanca S.A).

worth some $2 million every month.“The culture of spice consumption lost in the early 1990s, is on the rise again, just as people’s interest in a healthy diet,” says Ekaterina Petrova fromVremya & Co.“More and more people have been choosing a healthy lifestyle recently. With this in mind, we can expect the appearance of specialty shops soon that will be promoting spices and flavourings not just as food additives, but also as medications.” For Jeeva, the thriving business in Moscow has spiced up his life. He travels to India twice a year, mostly for business. and is fond of saying he has "two homes now”.Jeeva has come to love some Russian dishes, including borscht (beetroot soup) and pelmeni (boiled dumplings with small portions of

ground meat and onion), which he orders whenever he goes to Russian restaurants. The Indian Spices shop has long outgrown its name, selling products not just from India, but also from China, Japan, Thailand, and Mexico.The product range had to be extended after requests from PFU students. Chinese students wanted to see more noodles of various kinds, and Latin American students asked for their traditional sauces. Students from Arab and African countries are also frequent visitors here, though there are no special offers for them.The customers are growing by the day: some come for tea, some ask for ayurvedic cosmetics and hair dye, and others were taken by the Indian culture, hoping to understand it better through food.

mier race series is a saloon car championship, and there are only two permanent race facilities currently in operation (although others are in the pipeline). Last year, the Russian car manufacturer Lada fielded a team in the World Touring Car Championship. In reality, it was Russian tycoon Viktor Shapovalov who largely funded the team. They also operated out of Belgium to cope with the logistics of racing in a largely Western European series. Even fielding a team of Russian mechanics called for rotation of members to manage their visas. Racing mainly at the back of the grid, they showed a glimmer of promise, but pulled out before it could be realised. The biggest news in Russian motorsport is the country’s first Grand Prix driver,Vitaly Petrov. He has enjoyed a modestly respectable rookie year with Renault, alongside highly respected Polish driver Robert Kubica. Interestingly, his car has started carrying Lada branding, the Russian manufacturer being partly owned by Renault, and the permutations of brands in a marketing drive for the growing Russian market seem limitless.

However, the past experience suggests that Petrov’s F1 drive will do more to spur enthusiasm for motorsport in Russia than the race ever will. It will also do more for the growth of a fledgling domestic industry. Right now, the country has a lot of catching up to do to become a world player. Motorsport is traditionally conducted by wealthy amateurs and large commercial concerns, both of which Russia was short of until two decades ago. With more teams and drivers spending money, there will be more chance for domestic companies to pitch for the business. But it seems unlikely that anyone racing outside Russia will be competitive without drawing on non-Russian expertise. Even local icon Petrov, following two seasons of domestic racing, had to build his career in Western Europe in order to be an F1 contender. The Russian GP will, therefore, be more about promoting Russia than Russian motorsport, but a successful Petrov will inspire a legion of imitators that may well fund a burgeoning domestic motorsport industry.The race is on, and the stakes are going to get bigger in days to come.

Grand Prix dream race speeds up A dream for 28 years, Russia is now set to host F1 Grand Prix, adding another sporting jewel to its crown. CHARLES ARMSTRONG-WILSON SPECIALLY FOR RIBR

It must be the longest-running soap opera in F1, but after 28 years of twists and turns, Russia will host a Grand Prix.The sport’s svengali, Bernie Ecclestone, signed up Prime Minister Vladimir Putin last week. He first met General Secretary Leonid Brezhnev back in 1982 with the idea of staging the Grand Prix of the Soviet Union. But with the venture mired in bureaucracy, Ecclestone persuaded Hungary to become the first Soviet bloc country to host a race in 1986. Since then, the subject of a race in Russia has cropped up again and again, but has remained just a dream. Now

that the ink is dry on a sevenyear contract, we can expect to see the first race in 2014, or perhaps 2015. If there is a slight uncertainty about the precise time, it’s due to the circuit being built next to the newWinter Olympics village at Sochi on the Black Sea coast. They will be sharing some of the same facilities, but if there is a danger of the F1 circuit impeding the Olympic event then, says deputy prime minister Dmitry Kozak, the race could be delayed for a year. This new state-of-the-art cathedral to motorsport is rumoured to be costing $204 mn and the Russian organisers will be charged $41mn per race thereafter, making the total cost $489 million. The million-dollar question is: Will this investment pay off? It seems to be unlikely. Even at Western ticket prices, it would struggle to cover

IMAGO (2)

Motorsport With Putin cheering on, Sochi to host Formula 1 Grand Prix in 2014-15; India readies for 2011 extravaganza

the cost and the deal specifically excludes both television and most of the promotional rights. But the business model for Grand Video on Prix has long since www.indrus.in transcended the normal commercial type, Pulling out all stops for sucess: Renault’s young Russian ace Vitaly Petrov in action; below, and is now closer to a World the man behind the visor Cup or Olympics. In fact, the quently that those events should receive similar state glamorous sports event has THE NUMBERS support in return for the proved a magnet to emerging benefits they bring. But oreconomies.This year saw the ganisers of the British Grand first Korean Grand Prix and Prix have failed to sell the India joins the calendar next idea to any British governseason. Like other global ment. Having a Grand Prix sporting events, they are million – global TV audience can bring enormous benefits perceived to have great for each Grand Prix race to a country’s own motorvalue as a means of showcasing the country and sport industry, of which Britpromoting it in a positive ain’s is a world leader. Can light. The governments Russia expect a similar boost have been willing to pour from its F1 adventure? big money into it, driving Currently, the Russian momillion – the value of Ferthe price of events upto a torsport landscape is rudinando Alonso’s 2010 Ferrari level that established namentary, with mainly sacontract tions struggle to afford. l o o n - b a s e d s e r i e s fo r Ecclestone has argued eloamateur drivers. The pre-

600 $30

www.rusembassy.in To advertise in this report contact Julia Golikova golikova@rg.ru ph. +7 (495) 755 3114

/expert www.indrus.in

Website of the Embassy of the Russian Federation in India

Feb 2011, Russia&India Business Report  

Russia&India Business Report is a monthly publication brought out by Rossiyskaya Gazeta, that is published in association with The Economic...

Read more
Read more
Similar to
Popular now
Just for you