Unofficial Translation

Drug From Fear

By Constantine Mikhailets
April 9, 2003

It is no secret to anyone that the Russian market and its 146 million consumers are very attractive to many foreign companies. They really want to invest money. However, many foreign investors rightfully think of Russia as a country with limitless opportunities for experiencing problems and at the same time, suffer losses. Corruption, caused by a clumsy wooly mammoth of a bureaucratic apparatus, is only half of the problem. Foreigners' enthusiasm ends as soon as they see Russian-style business: redistribution of property, "kickbacks" and inarticulate and incompetent management…

It is natural that the emerging adequate and qualified businesses have immediately become the subject of foreigners' attention. This past week Interactive Research Group (IRG) presented a report on its research on the Russian consumer market. The many-paged survey named 100 companies that, in the opinion of the foreign specialists, represent the elite of our domestic businesses, at least in the area of goods and services production. IRG Board Chairman Greg Thain explained, "If you're looking for dynamic Russian companies to invest in, lend to, acquire, merge with or market to, look no further. This research reveals some of the most exciting and potentially rewarding investment and sales opportunities in Russia in the coming decade."

Instead of an introduction

According to Greg Thain, the consumer market in Russia is one of the most dynamic retail segments of the domestic economy. Previous studies conducted by IRG peg the Russian consumer market at USD 260-275 billion in 2002. This is a one year increase of 15 percent.

Companies working in completely different directions made the list of the top 100 Russian companies. Fifteen of the firms named by the presigious western experts are consumer service providers and 12 are retailers. The agriculture production complex was not ignored either; eight "models of capitalist work" made it to this list.

Moreover, among the emerging businessespresented were telecommunications companies, electronics producers, pharmaceutical and furniture manufacturers, restaurants and wholesalers. The major Russian investors, such as Interros, Alfa and Sibneft, have stakes in only 14 of the companies. Approximately 25 percent of the firms have at least some foreign investors.

Signs of breeds

The most important criteria for selecting contenders to be one of the Top 100 companies were high sales volumes, profits and levels of production. For example, the Arbat Prestige chain of stores had a 70 percent increase in sales from 2001 to 2002 and EFKO, an agricultural and food manufacturing and distribution firm, reported a 79 percent growth in sales last year. IRG forecasts that the average sales growth of the Top 100 companies will be 20-25 percent in 2003.

However, not all of the companies on the list had posted positive sales growth in 2002. Tchaikovsky Textile, one of the leaders in its sector, showed declining sales last year. However, according to the specialists, effective marketing and management, and also its consistently innovated production technology, give it good future prospects. Effective corporate management is very important to western investors, as well as ownership structures.

Thain continued, "More than half of the Top 100 companies are in fact holding companies, with an intricate web of operating companies." The study found that few of the companies publish consolidated financial statements; only approximately 40 of the firms regularly publish financial information in official sources. Nevertheless, Greg Thain is certain that this situation will soon change.

Investment focus

Evgeniy Gavrilenkov, Chief Economist of Troika Dialog, appeared to represent potential investors. In his opinion, IRG's expert work is important in and of itself as an independent statistical study. Unfortunately, the numbers provided by domestic government entities conducting similar research frequently don't reflect the truth. For example, according to official Russian figures, the population's income increased by 8.8 percent in 2002, when real income actually increased by .4 percent. To simply find clear meaning, you may think about how accurately this data reflects reality.

IRG's research, said Evgeniy Gavrilenkov, provokes some thought of another kind. Quite recently there was actually a question as to whether the ruble needed to be strong or weak for the domestic economy. IRG's materials bear evidence that the consumer goods and services market is an element of the new economy's strenthening national currency — not an obstacle. At the same time, a little drop in the value of the dollar in relation to the ruble is a problem for traditional export industries, primarily for the raw materials sector. However, despite the significance of the consumer market sector, its portion in the GDP is small. A least in comparison to the developed nations, where production of goods and services makes up 70-80 percent of the GDP, in Russia it is only 50 percent.

Wanted to say

As such, the development of the consumer market is of great importance to the government. And the majority of the 'Top 100' already have made plans to attract investments. So, more than a third of them hope to attract the attention of foreign companies. Twenty-one percent of the firms are expecting domestic financing, and 15 companies plan to conduct Initial Public Offerings (IPOs) on either the Russian or western stock markets. And, according to Greg Thain, IRG's research is a message to investors: in Russia there are qualified businessmen, with whom it is possible to do business.