This week we are very honored to have guest author Julie Rasmussen of Newport Board Group. Today she will be talking with us about how to invest in Russia and what to expect. Julie has a breadth of experience doing business in Russia; she started up Mary Kay’s operations in Russia. She grew that market from zero to over $100 Million in revenues with over 75,000 sales representatives in less than five years. Making it the company’s largest and most profitable international subsidiary at that time. She understands many of the ins and outs of doing business in Russia. So, let’s her take it from here:
Invest in Russia?
It’s not for the faint of heart or those without nerves of steel. But often, it’s exactly when the latest spasm of financial, political and economic crises have bottomed out that the time is right to invest in this ever struggling behemoth. For those tasked with any long-term or strategic business development or corporate growth, it should be a priority.
Spanning more than eleven time zones, western Russia borders the EU, southern Russia borders Central Asia and eastern Russia borders China and Japan. It is buffered from Turkey and Iran only by two inland oceans, the Black Sea and the Caspian Sea, and from Afghanistan and Pakistan by the “stans” – Kazakhstan, Uzbekistan, Turkmenistan, and Kyrgyzstan, all of which used to be integral parts of the Soviet Union.
Russia’s Total Economy…
…may be considered small compared to its physical vastness and its geopolitical and strategic importance. In current prices, due to the ongoing recession caused by the low price of oil, the accompanying devaluation of the ruble and its lack of access to global capital markets because of sanctions related to the 2014 invasion of the Crimea, it is ranked about 13 globally, below Italy, Brazil, Canada, Korea and Australia but above Spain and Mexico.
In terms of purchasing power GDP, however, it is ranked 6th of global economies by the IMF; below the US, China, Japan, and Germany but ahead of the UK. With largely debt-free homeownership at more than 80%, Russians’ disposable income is high compared to their overall income.
Although total GDP in nominal terms is less than Italy’s, the comparable purchasing power GDP is around $24,000 per capita. This places Russia at about 50 out of 200 countries ranked by the IMF, the World Bank, and the CIA. Placing it squarely in the top quartile of countries and in the upper mid midrange of per capita purchasing power globally. (the US is ranked at 10 or 12 with per capita purchasing power parity (PPP) GDP of about $54,000. (Purchasing power parity measures compare prices in local currencies for a standard basket of consumer goods. Plus, it allows for better comparison of actual standards of living than a simple dollar-denominated price. External exchange rates distort currency values.)
Still heavily dependent on natural resource extraction, mainly oil and gas, ferrous and nonferrous metals, diamonds and timber, Russia has a highly educated and literate population. Which in cause, lends itself to development in the future of manufacturing and value-added industries and services.
Russia’s greatest natural resource is and always has been its human resources. With a little less than half the population of the US and with about 145 million inhabitants, Russia ranks 9 out of more than 200 countries in terms of total population and is the largest European country by population, far larger than Germany with a population of more than 80 million and more than France with a population of more than 66 million and the UK with a population more than 64 million.
In Recent Years..
…as the oceans have warmed, new sea routes from the north of Russia through the Arctic sea down are opening and staying open longer each year.
Already, Chinese firms are leasing large amounts of land in southeastern Siberia to grow crops and rear livestock. One such deal under discussion in June 2015 to lease more than 285,000 acres for 49 years would employ more than 1,000 Chinese and local workers and was estimated to be worth about $450 million. Putin has met Chinese president Xi Jinping at least five times in the past year and the first pipeline between China and Russia was completed in 2010 with a $400 billion 30 year gas deal getting inked last year.
All of which is to say that despite the current negative outlook on Russia, it’s a very large place with a lot of people situated in a critical geopolitical area spanning European Russia, Central Asia, the Middle East and the Far East, with vast natural resources that aren’t going to go away anytime soon.
I myself have been doing business in Russia since I was a student there in 1986. I worked for Ted Turner during the 1986 Goodwill Games in Moscow. As a business consultant in New York during the 1990s, I advised Fortune 50 companies such as Kodak, Johnson and Johnson, Chevron, Archer Daniels Midland and RJR Nabisco on a series of joint venture projects negotiated directly with the Gorbachev government.
In 1992 I moved to Russia to start up and run corporate operations for Mary Kay Inc. I grew their sales to over $100 M and 75,000 independent sales consultants before the Russian government defaulted on their ruble bonds in August 1998 and the ruble shrank to about one-fifth of its previous value. I also started up and currently am the majority owner of the Hertz Rental Car master franchise for Russia. I’ve been involved in many startups in different industries there over the years. I am also a land and property owner in Moscow and its suburbs. I’ve been through the ups and downs and pretty much seen it all.
The reason why I get bullish on Russia when it’s down is purely practical and good business sense. Hurdle rates to entry are lowered as the economy softens. No longer is there constant upward wage and price pressure; no longer are office and hotel prices sky high; you can get into the best restaurants without face control and for about a half of the price. And, you can have your pick of the best and the brightest, human talent. (When the economy booms is next to impossible to hire without breaking the bank)
In recent years, Russia has become less corrupt and it’s ranking in ease of doing business had also improved. With an experienced country veteran on your business team, the most common pitfalls can be avoided entirely. You and your business will be well positioned to deal with any challenges that arise. With a corporate tax rate of 20% and a 13% flat tax on personal incomes, you might just be surprised at how efficiently you can run an international operation there.
Thank you, Julie, for taking the time to share your experience with all of us here at Velocity Global. If you have any questions for Julie, you can contact her here. If you have any questions about how to hire employees in Russia please reach out to us as well. Our FSaaS or International PEO solutions can help eliminate much of the risk you would normally have to take on.
Thank you for reading!