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Russia offers investors a strong base of human capital and infrastructure, thanks to systems set up during the Soviet era. Over 60% of its population has undergone higher education, and technical research and creative thinking skills were honed during the Cold War period. Qualified personnel are still available at relatively competitive salaries.
In recognition of this, companies such as Google, Intel and Microsoft have established research and development centers in Russia and many are outsourcing their technology-based functions to Russian service providers. In4media predicts that outsourced technology services will increase to US$1.1 billion from US$0.9 million in 2009.
In support of the technology sector, the government has established RosNano, a company charged with the mission to turn Russia into one of the leading countries in nanotechnologies.
The technology sector has also caught the interest of local private investors. In December 2008, ONEXIM, the Russian financial group led by M. Prokhorov, bought OptoGaN, an emerging supplier of high brightness LEDs (Light Emitting Diodes) and signed a contract with Russian Corporation of nanotechnologies to produce new LED lamps that will consume seven times less energy than traditional lamps.
Valued at US$4 to US$5 billion in 2009, Russia’s luxury market is the fourth largest in the world. Russian luxury goods consumers tend to be highly loyal and their numbers continue to rise. There are already over 70 billionaires in Russia, 10 of whom have assets worth about $179 billion.
According to Rosstat, the Russian luxury market can be expected to grow by 5% to 10% this year.
Growth of the property sector will stimulate construction development and offer attractive opportunities for residential goods manufacturers.
Real estate specialist, Knight Frank, believes that the commercial property market has bottomed up and will start to climb to US$115 to US$120 per square meter for grade A commercial space and US$95 to US$100 for grade B commercial space.
According to the State Service Realty Registration, mortgage deals rose by 60% to about 510,000 in the first six months of 2010, compared to the same period in 2009. There were a total of 832,500 deals in 2009.
Retail has been one of the fastest-growing industries both before and after the crisis. According to RBC research, food retail grew by 25% in 2009. Burger King and H&M for instance, opened their first Russian stores in 2010.
While the retail sector is becoming rather well served, there exist niche opportunities.
Firstly, nationwide retail chains are actively seeking private labels to cater to a growing interest in value-for-money products. Before 2008, private labels made up 5% to 7% of the market. This will increase significantly as large retail chains, such as X5 Retail Group and Lenta, raise their share of private labels to 30%.
Secondly, many nationwide distributors will gradually lose their exclusive contracts with big international brands as the market matures. In August for instance, Adidas dissolved their agreement with Sportmaster, Intersport and Sportgrad, the largest sports retailers in Russia, to develop their own retail chain.
Service providers in the logistics, hospitality, tourism and healthcare industry have much potential to tap.
Russia has just over 13,000 hotel rooms compared to 9 million in the US, according to data from Discovery Research Group.
Russia’s Health 2020 plan is designed to increase the life expectancies and provide medical insurance to its 142 million citizens. This will undoubtedly boost the demand for healthcare services.
With rapid growth, affordable credit and the lack of reliable service providers, Russian exporters of coal, oil, gas and metals traditionally managed their logistics inhouse. They have maintained their own fleets of ships, wagons, trucks and cars, warehouses and distribution centers and even their own ports.
Since the crisis, many have been rethinking their investment strategies and business models, in particular in the area of logistics which is complicated by a vast landmass, relative lack of infrastructure, complexity across 11 time zones and administrative barriers.
The 2014 Winter Olympic in Sochi will also be a very powerful catalyst for increased investments in transportation and hospitality. According to the Russian government, it plans to spend an additional $12 billion to the $30 billion that has already been invested.
Russia is a promising market for advanced mineral processing technologies.
Russia extracts more minerals than most countries. It is second in the world for oil explorations and first for natural gas explorations. Yet the level of processing of oil and gas, chemicals, wood, metals and other mineral processing industries is still relatively low.
Engineering and commodities technology companies can take advantage of rising demand for gas-to-liquid or coal-to-liquid technologies and knowhow.
It is a paradox, but Russia lacks energy-saving technologies.
Internal prices for oil and gas are rapidly rising to international levels. Products that help reduce energy consumption or minimize ineffective losses are in increasing demand. President of Russia, Dmitry Medvedev, signed a law in November 2009 that requires all Russians to use energy-saving lamps 2014.
Components, parts and supplies
Many domestic as well as multinational companies operating assembly facilities in Russia suffer a shortage of reliable local suppliers of parts, components and business services. The shortage spans from quality castings to on-time repair services to corporate catering.
As long as the level of localization of production increases, the demand for reliable suppliers will grow.
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