Rating Russia

With hundreds of millions of people waiting to be served, Russia and the Commonwealth of Independent States (CIS) is a market to penetrate. In an interview with LOG.Middle East, Global Intelligence Alliance’s Alexander Pechersky, Managing Director, ALT Research and Consulting in Russia, offers advice on dealing with long distances, poor infrastructure and prevalent corruption.

LOG: Faced with smaller margins in their existing markets, many
international and Middle Eastern companies are looking to penetrate new geographical areas. Do Russia and the CIS countries hold potential for international logistics and supply chain companies? Is it worth breaking into these markets?

Pechersky: This is not a simple question to answer, but our straightforward reply would be “yes, especially now”. The Russian market for logistics services is under-developed and has great potential. Like many other business processes in Russia, logistics has traditionally not been outsourced. Key Russian exporters of coal, oil, gas and metals etc. maintained their own fleets of wagons, while large international companies such as IKEA, which usually outsource their logistics, have done it in-house.

The main reasons are poor infrastructure, complexity across 11 time zones, administrative barriers and the lack of reliable service providers, plus high growth and affordable credit. Companies invested in wagons, cars, trucks, new warehouses, distribution centres, ice-class panamax vessels and even their own ports.

So many factors present good opportunities for international players to enter the Russian and CIS market.

Since the crisis, businesses have been rethinking their investment strategies and business-models, and this i activities such as logistics for many industrial and FMCG companies. Even before the crisis, the market was very promising for complex services such as 3PL, where the average growth rate was 30 per cent to 40 per cent per year.

Many logistics companies have very high debt-to-equity ratio, and can be bought relatively cheaply.

Much of the market has been left unexplored and not many international logistics companies have been very active in Russia.

Are any particular countries or areas in the region more lucrative than others?

In general, there are 12 countries in the CIS region. All together they represent a population of 300 million people and US$2,500–3,000 billion GDP.

I would divide these countries into several groups. Russia is the biggest and richest. It accounts for half of the region’s population and more than 80 per cent of the regional GDP. This is certainly the most interesting market.

Russia should then be further divided into several sub-regional markets.There is Central Russia with its centre in Moscow, the North-West region with its centre in Saint Petersburg, South Russia and Caucasus, Ural region, Siberia and Far East, which are very different from each other in terms of market development, infrastructure, demand, key industries etc.

Next, are Ukraine and Kazakhstan. They are relatively big and developed countries with a large share of the export and import markets.

Other countries are much poorer and less developed in terms of their infrastructure and business development. It is considered quite risky to do business in these other countries, but with risk comes rich profits if you find the proper market niche.

Are there any particular niches that need to be filled?

Services are usually of low quality and at a premium price in Russia, so generally speaking, I would say that every segment of the logistics market is promising. You must first have an effective business model and demonstrate consistent service quality.

3PL services are very promising, but you need to have a solid reputation, good references and a strong asset base to convince customers to outsource their logistics to you. Trust and long-term relations are very important.

Distribution centres for retail chains could be also very interesting, because most of them have existing logistics assets which they are ready to outsource and maybe sell outright.

Another opportunity is offer logistics services and regional warehousing services in sub regions where the infrastructure is much less developed than leading regional players, in industries like retail, agriculture, production etc.

What are the greatest challenges of starting and growing a business in the region?

I would say that there are two types of challenges.

First are the market factors. One is that the increasing role of government in economy and corruption makes rules and laws very non-transparent, and increases the costs and delays for doing business and establishing new operations. Second is that poor infrastructure, Russia’s 11 time zones and big differences between regions require different strategies in many regions and results in higher costs for logistics and communications. All this requires great flexibility in local business models and more authority for local offices.

The second type of challenge is what I would call psychological, and would require time and resources from potential newcomers to slowly overcome. I am referring to the tradition of doing everything inhouse and the suspicious attitude towards outsourcing.

In what ways can supply chain management in the region be improved?

I think there are two main directions.

First is to cut costs within the supply chain. This requires both world-class business processes and infrastructure development, beginning from simple modern warehousing capabilities to new logistics channels development.

Second is to increase the on-time delivery ratio. This is one of the biggest problems for all types of clients. This would require specific competencies such as good networks of partners as well as relations with state-owned transport companies such as railways, airlines and ports.

How would you rate the level of transport and trade infrastructure? Is developing this infrastructure a priority for governments?

It is certainly one of the biggest problems in Russia. For example, there are no direct flights between Saint Petersburg, Russia’s second largest city and Nizhniy Novgorod, Russia’s fourth largest city - located just 1,200 kilometres from each other! You either travel by train for 15 hours or book two flights via Moscow!

Transportation is very big problem, and fortunately, is one of the highest declared priorities for the government, which has dedicated a huge portion of the National Reserve Fund to infrastructure.

Russia is a vast country with a large population, yet it is also mostly landlocked. What is the best way to ship goods into the country? What are the best ports and airports to use?

Simply speaking, there are three access points to Russia by sea.
First are the Northwestern ports in Saint Petersburg on the Baltic Sea and Murmansk on the Barentsevo Sea.These ports are key gates to Europe.

Second are the Southern ports on the Black Sea in Novorossiysk and Taganrog, these ports handle multi-directional shipments from Europe, Africa, Asia Pacific and the Middle East.

Third are the Far Eastern ports in Vladivosto, Nakhodka, Posiet. They are mainly oriented towards shipments from Japan, South Korea, China and the Asia Pacific.

The ultimate airport hub is Moscow, where there are five airports. The most modern and user-friendly one is Domodedovo.

It can be quite tricky to travel in Russia. Imagine you need to go to Ekaterinburg in Ural from Omsk in Siberia, 1,500 kilometres away. This would be 90 minute direct flight, but in reality, quite often you end up flying to Moscow to take another flight to Ekaterinburg. So you end up travelling about 10 hours in total as a result, if you add the waiting time.

When we think of doing business in Russia and the CIS, many of us think of corruption. Any advice on how to deal with this?

It all depends on the industry you work in.

If it is consumer-oriented industries such as FMCG, fast food and food, the level of corruption is the same as in other countries. You could face more problems just with regulatory entities. It is possible to solve all problems without bribes, but it will take time. Otherwise, you will have to use local partners.

If it is in the business-to-business industry with big corporate or stateowned clients, the level of corruption increases enormously. In this case, you have two choices. One is to find a local partner, which could do this job instead of you or one with corruptionfree, long-term relations due to their long history of operations, but the latter is highly unusual. There is another way, and that is to have amazing competitive advantage by offering the best quality at the lowest price in order to avoid such issues.

Footnote: GIA Middle East is represented GCC Consulting.

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