For signs of Russia’s economic advancement, you don’t have to look far in places like Hong Kong and Thailand, where Russian tourists and businessmen are ever more conspicuous.
Given the tensions that have dominated relations with the West in recent years – not just recent weeks – Russia has been shifting its attention and commercial energy towards Asia, the other direction that the two-headed eagle on the country’s coat of arms represents.
This new focus has been exemplified by increasingly close ties with China, underlined in recent months by a spate of deals and high-level visits.
In March, for example, President Hu Jintao and his Russian counterpart Vladimir Putin attended the opening of a trade show in Moscow. That same month, Putin announced plans to boost the portion of Russia’s oil and gas exported to Asia to 30% in the next decade and a half, up from 3% now.
Since 2000, Russia-China trade has multiplied by five, jumping to US$30 billion in 2006.
Small- and medium-sized enterprises (SMEs) have been among the biggest beneficiaries. Chinese entrepreneurs have discovered new markets in Russia’s growing purchasing power, while Hong Kong’s high-tech manufacturers are looking to reverse the trend that has seen cheap and/or fake goods dominate imports.
Some critics have questioned the idea of putting Russia on par with the other BRIC (Brazil, Russia, India, China) emerging markets, citing the country’s weak economic fundamentals.
Russian investment represents only 19% of GDP compared to up to 40% in countries that have undergone similar restructurings, it is over-reliant on energy exports, and its population will drop by seven million to about 135 million by 2016, according to official estimates.
On the other hand, recent economic indicators are good. In 2005, Russia’s current account surplus stood at US$84 billion, its trade surplus at US$118 billion and economic growth for 2006 was estimated to be 6.7-6.9%.
“Russia has huge untapped potential of human capital, a highly intelligent and well-educated population that has had trouble finding business opportunities in their home country due to a lack of manufacturing capability and the small size of the domestic Russian market,” said Peter Gordon, Chairman of the Russian Interest Group of the Hong Kong General Chamber of Commerce.
A burgeoning middle and upper class, with some 88,000 millionaires sitting at the top, translates into healthy consumer demand forecasts.
Commonly published statistics put the number of mobile phone users in Russia at 80 million compared to three million in 2000. Roughly 20% of all households own a computer. Moreover, 70% of Russian income is disposable, compared to 40% for the average Westerner, due to greatly reduced personal income taxes. In addition, demand for overseas-made products is high, with around 500,000 foreign cars sold in 2005.
Throughout, Russia has been gradually building the foundations for an “innovate economy” to go along with its oil and gas exports.
Alexei Kalashnik, the executive director for the Russian-Chinese Business Council, said the country is restructuring its economy and focusing on new technologies and high-tech manufacturing of products like aircraft parts and components. Leading aircraft manufacturers are now forging links with the likes of Boeing and Airbus.
“It involves widening industrial cooperation, and promoting cooperation between manufacturers of high-tech components and high-tech products,” Kalashnik said.
Meanwhile, Russia is already looking to step up its participation in global trade. The country has yet to join the WTO but agreements have been reached in principle and the US has expressed its support.
Russia is one of the few places where Chinese SMEs can do business directly and Chinese multinationals have a sizeable market share, so Beijing is likely to welcome reforms even if significant obstacles remain.
On a macro level, Russia is still not a very large market – its middle class remains a minority and the penny-pinched masses are extremely price sensitive. Furthermore, a polarized society means that consumer spending is not necessarily in tune with the niche advantages of Chinese SMEs. And, even if it is, there is the problem of Russia’s incredibly fragmented retail market. The nascent shopping malls of Moscow and St Petersburg are the exception to the rule.
The financial and legal frameworks remain underdeveloped at best, and distribution systems and mechanisms are inefficient. Huge geographical distances, language barriers and relatively high costs are further impediments to success.
Then there is virtually endemic corruption – Gordon calls it a high “cost of information” – which increases the overheads of doing “small business” in Russia.
“Corruption and bribery tend to be the norm,” said Sergio Men, director of the Eurasia Center.