Unofficial Translation

www.ft.com

The Power Behind Russia's Top 100: Korkunov's Sweet Success

By Rafael Behr
April 2, 2003

Although Russia issustained largely by raw material exports produced by a handful of giant corporations, smaller businesses are starting to help diversify the economy and meet fast-growing demand for consumer goods.

Interactive Research Group (IRG), a Moscow-based market research and brand consultancy, argues in a report released yesterday* that official statistics sharply underestimate the dynamism of the economy. Based on interviews with ordinary Russians - as well as indicators such as sharp rises in retail bank deposits and mobile phone subscriptions (more than 20m) - it suggests the "grey" economy is about 45 per cent of the total, suggesting real gross domestic product is 40 per cent above published levels.

One reason is that many Russians have apartments "privatised" to them for nothing; and heavily subsidised utilities charges. Thus even if salaries are relatively low, the proportion they spend on living costs and other essentials is far smaller than in the west, giving them significant disposable income and ever more discriminating tastes.

IRG estimates that up to half of Muscovites and a quarter of residents of the regions classify as middle class, with a third more having prospects of shifting into this category. With 146m people, and consumer spending last year of $260m, that suggests considerable scope for investment, including by foreign groups.

Russian businesses have been responding to the new demand, which has led to widespread import substitution. IRG highlights 100 up and coming Russian companies with significant turnover, rising profits and a good reputation. These include chocolate producers such as Korkunov (see case study); computer manufacturers such as Aquarius and Formoza; Nefis, a Tatarstan-based house cleaning products company; Nizhpharm, a drugs business; and Karo Film, with 25 cinemas.

Many are investing in western-style branding and even exporting: many to former Soviet satellite states but some to western Europe. Bistroff, a producer of instant kasha (porridge), is in discussions with the space agency to feed cosmonauts.

* Top 100 emerging companies of the Russian consumer market, Interactive Research Group, Moscow. www.intrg.com

Western sweets were a hot commodity in the Soviet playground: there was the thrill of flirting with enemy products and the kudos of having access to them; and, of course, they tasted good, writes Rafael Behr. So when Russia's borders opened to imports in the early 1990s there was an avid market for foreign-branded confectionery. Snickers bars were as essential to the post-Soviet cult of western goods as Levi's and Marlboros.

Andrey Korkunov got in on the act. Like many of his contemporaries, he quit the Soviet army in the pere-stroika days and set up a trading group on the outskirts of Moscow, making or importing whatever was available: jeans, construction materials, chocolate. Especially chocolate.

"At first we sold," says Mr Korkunov, 40 years old and portly but energetic. (Chocolate will do that.) "Then we understood that production in Russia could be much more profitable."

Mr Korkunov decided to take on the foreign brands, concentrating on the luxury gift market. He built a plant from scratch. The equipment came courtesy of Italian business partners, who "took fright" after Russia's 1998 debt default and rouble crisis and pulled out of a joint venture. State-of-the-art hardware allowed the Korkunov plant, employing about 450 people, to meet standards required for export to the European Union and the US. A new facility is being planned, which would triple output to about 25,000 tons a year. Sales last year amounted to $50m.

But importing machinery is a problem, says Mr Korkunov. Tariffs are high and the system is tightly controlled by state agencies. Customs services are corrupt. And that is just the beginning of the problems for medium-sized businesses.

"For a start, there is the bureaucracy; and then the legal flaws - and they're not even flaws but an absence of direction in law to help develop entrepreneurs," he says. "Compare the Chinese model and the Russian one: at least in China there are measures that have been taken to stimulate the small and medium-sized business sector but in Russia it's as if everything was done to throw up additional barriers."

Mr Korkunov has secured about 25 per cent of the market in Moscow and about 75 per cent of the "super premium" gift market. And Korkunov chocolates are benefiting from the gradual demise of the cult of western goods.

"When I see our sweets being handed out on Lufthansa flights, it's nice for me not just because I'm earning more as a result. It's nice because my fellow Russians see it and they'll say 'yes, it can be done'."