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Russia: Business opportunities for Western companies

Due to the general economic trend and political stances, the Russian market has slowed down, yet it still appears to have high growth margins and be attractive for the paper sector. Businesses only have to understand how to move to fully grasp the plenty of opportunities available.

A growing market, which in the next few years will continue growing, and a huge territory offering extremely interesting trade possibilities. This is the Russian Federation, which provides the paper industry with a variety of opportunities. First of all, this is a growing market. For some years the Russian market has been growing, especially in the retail sector, and it is expected to become one of the main consumers of paper products. Not only final demand is of great interest for the paper sector, but also Russia’s need to expand its productive sector; as a matter of fact, the country has vast forest areas and a strong push towards technological innovation. The level of internal production of equipment is rather low and the country feels the need to modernise its production technologies and installations to improve their efficiency. To this end, public policies have been envisaged, at both central and regional level, aimed at supporting and giving more room to new projects for the paper sector and the start-up of new paper plants all over the country.

Relations with Italy

«The Russian market offers plenty of opportunities to European companies, but it has to be thoroughly studied within the framework of a well-reasoned medium-to-long-term project» Leonora Barbiani, secretary-general of the Italian-Russian chamber of commerce.

«THE RUSSIAN MARKET OFFERS PLENTY OF OPPORTUNITIES TO EUROPEAN COMPANIES, BUT IT HAS TO BE THOROUGHLY STUDIED WITHIN THE FRAMEWORK OF A WELL-REASONED MEDIUM-TO-LONG-TERM PROJECT» LEONORA BARBIANI, SECRETARY-GENERAL OF THE ITALIAN-RUSSIAN CHAMBER OF COMMERCE.

Russia is a very attractive country for the paper sector international players. Yet, in order to best exploit its opportunities and avoid difficulties it is of fundamental importance to familiarize with its market mechanisms. Trade relations between Italy and the Russian Federation are, for instance, well-established and although a slowing down in trade has been registered over the last few months, also due to political decisions between Europe and Russia, they still remain very important for both countries. In particular, «2008 and 2013 have been the golden years of the trade relations between the Russian Federation and Italy. Though recent years have been fairly complicated for the world economy and trade has registered negative figures since 2014, Italy still maintains “privileged relations” with the Russian Federation» (figure 1). This data was analysed by the Secretary-General of the Italian-Russian Chamber of Commerce Leonora Barbiani on the occasion of the meeting organized at the Milan office of the same chamber to illustrate the opportunities offered by the Russian market to the paper industry.

Figure 1. Italian-Russian trade flows between 2012 and 2015. Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow Office.

Values in billion Euros

Trade flows 2012 2013 2014 2015
Exports 10.45 10.94 9.59 7.51
Imports 25.08 29.59 26.83 20.05
Trade 35.53 40.54 36.42 27,57
Total – 14.63 – 18.65 – 17.24 – 12.54

Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow

«In particular, data on trade between the two countries provided by the Russian Customs show a 21,6% reduction in Italian exports to Russia between 2014 and 2015, for a total value of 20 billion Euros, an additional 25% reduction in imports, which is worth 7.5 billion Euros, as well as a 24,3% fall in trade, i.e. a reduction of 27.5 billion Euros» (figure 2). The slowing down in trade between the two countries is due to a number of factors that have generally affected the trade relations established by the Russian Federation with all its trading partners (figure 3), i.e. the slowing down of growth worldwide, the persistent decrease in oil prices, whereby oil is a major economic resource for Russia, and a strong devaluation of the rouble. These motivations, however, are independent from Russia’s relation to Italy, which is based on a fruitful collaboration. Evidence of this is the fact that in 2015 Italy confirms its position as fourth importing country and fifth exporting trading partner worldwide (figures 4 and 5).

Figure 2. Italian-Russian trade flows between 2014 and 2015. Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow Office.

Trade flows 2014 2015
Value (billion Euros) % variation (2014/2015) Value (billion Euros) % variation (2015/2016)
Exports 9.59 – 12.4 7.51 – 21.60
Imports 26.83 – 8.1 20.05 – 25.20
Trade 36.42 – 9.3 27.57 – 24.30
Total – 17.24 – 12.54

Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow

«The main exporting industries include first the mechanical sector that is particularly important for Russia, especially the gas and oil extractive industry, for which avant-guard technologies are looked for; semi-finished products are the second most important sector, while fashion and accessories rank third. Besides technological innovation, Russia is especially interested in the collaborations with partners capable of customizing solutions, first and for most Italian firms».

Figure 3. Comparison with other countries (data of Russian trade and imports).

Country % variation of trade between Russia and other countries (2014/2015) % variation of Russian imports from: (2014/2015)
World -19.70% -23.70%
Eu-28 -25.10% -29.00%
China -13.90% -17.90%
Germany -21.70% -25.60%
Netherlands -28.10% -29.70%
Italy -24.30% -21.60%
Belarus -11.30% -15.60%
Turkey -11.60% -27.50%
Japan -17.10% -25.00%
Usa -13.60% -25.50%
South korea -20.80% -39.20%
Kazakhstan -14.00% -22.80%
Ukraine -34.90% -36.30%

Source: Russian Customs, data processing: Italian Trade Agency ICE, December 2015

Figure 4. Italy ranks fourth in trade with Russia among the main trading partners of the Russian Federation. Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow Office.

Values in billion Euros

 

Country

Value Country % on total trade % variation Position
2014 2015 2014 2015 14/13 15/14 2014 2015
World 590 244 474 227 100 100 – 6.8 – 19.7
EU-28 283 549 212 475 48.0 44.8 – 9.5 – 25.1
1 China 66 571 57 317 11.3 12.1 – 0.2 – 13.9 1 1
2 Germany 52 797 41 344 8.9 8.7 – 6.4 – 21.7 3 2
3 Netherlands 55 042 39 588 9.3 8.3 – 3.8 – 28.1 2 3
4 Italy 36 416 27 569 6.2 5.8 – 9.3 – 24.3 4 4
5 Belarus 24 268 21 535 4.1 4.5 – 6.9 – 11.3 5 5
6 Turkey 23 824 21 054 4.0 4.4 – 3.2 – 11.6 6 6
7 Japan 23 164 19 203 3.9 4.0 – 7.4 – 17.1 7 7
8 United States 21 892 18 925 3.7 4.0 – 5.2 – 13.6 8 8
9 South Korea 20 559 16 290 3.5 3.4 – 8.6 – 20.8 10 9
10 Ukraine 20 712 13 486 3.5 2.8 – 30.5 – 34.9 9 11

Source: Russian Customs – Data processing: Italian Trade Agency ICE, December 2015

Figure 5. Italy ranks fifth among the suppliers of the Russian Federation. Source: Russian Customs, data processing: Italian Trade Agency ICE, Moscow Office.

Values in billion Euros

 

Country

Value Country % on total imports % variation Position
2014 2015 2014 2015 14/13 15/14 2014 2015
World 215 852 164 617 100 100 – 9.0 – 23.7
EU-28 89 087 63 284 41.3 38.4 – 11.7 – 29.0
1 China 38 374 31 517 17.8 19.1 – 3.9 – 17.9 1 1
2 Germany 24 814 18 463 11.5 11.2 – 13.0 – 25.6 2 2
3 United States 13 882 10 345 6.4 6.3 11.6 – 25.5 3 3
4 Belarus 9 260 7 812 4.3 4.7 – 13.8 – 15.6 5 4
5 Italy 9 590 7 514 4.4 4.6 – 12.4 – 21.6 4 5
6 Japan 8 207 6 157 3.8 3.7 – 19.8 – 25.0 6 6
7 France 8 009 5 343 3.7 3.2 – 18.3 – 33.3 8 7
8 Ukraine 8 042 5 120 3.7 3.1 – 32.4 – 36.3 7 8
9 Kazakhstan 5 570 4 297 2.6 2.6 – 23.7 – 22.8 11 9
10 South Korea 6 764 4 112 3.1 2.5 – 12.7 – 39.2 9 10
11 Poland 5 329 3 695 2.5 2.2 – 15.0 – 30.7 12 11
12 United Kingdom 5 895 3 357 2.7 2.0 – 3.4 – 43.0 10 13

Source: Russian Customs – Data processing: Italian Trade Agency ICE, December 2015

Economy beyond sanctions

The decisive factors leading to a reduction in trade with the rest of Europe have obviously influenced also the general trend of the Russian economy. This may be found in the general trend of the country’s GDP, which has been markedly volatile in recent years. «After the important results of 2007 with a growth of 8.5%, 2009 registered a -7.8%, yet recovery started as early as in 2010 with a growth of 4.5%, which was slight and yet continued until 2014, with the latter year registering a +0.6%. While in 2015 a negative value was again registered, i.e. -3.7%» (figure 6).

The development of trade between the Russian Federation and the rest of Europe has certainly been influenced by political events,  i.e. the European sanctions against Russia that have been repeatedly applied since March 2014 and then confirmed on June 22, 2015, last. «Europe still has to express its opinion on these measures; all sanctions have namely been periodically reviewed, are not automatically renewed and have to be unanimously approved. The decision that will be made over the next few months will thus depend on the development of the current geopolitical situation», says Ms. Barbiani. European sanctions targeted the Russian economy especially in the high-technology, oil & gas and finance sectors. Conversely, Russian counter-sanctions applied as a response to the European measures especially targeted the agrofood sector, although they do not apply on all products, but on produce alone, and were extended to 5th August 2016.

Figure 6. Russian Federation GDP (2007-2015).

  2007 2008 2009 2010 2011 2012 2013 2014 2015
Russia 8.5 5.2 -7.8 4.5 4.3 3.4 1.3 0.6 -3.7

Room to the «Made in Russia with…»

The political context has only but further consolidated another stance of the Russian Government. The Russian Federation has, for some time now, adopted a policy of «import replacement», i.e. it has tried to make itself as independent as possible from the import of materials and products from abroad. Although this implies favouring domestic productions first, this does not mean doing without imports or avoiding trade relations with other countries. «As early as in 2014 the Russian Federation adopted measures to control and reduce imports of foreign products. Furthermore, at the end of the year, it enforced twenty decrees targeted to a corresponding number of product sectors, which went into force in 2015, whose aim was to limit the import of finished products to be specifically acquired by means of public procurement; each decree namely foresees the percentage of imported products that should be replaced with goods directly manufactured in Russia within the next four years. Also federal law Fz 488 of December 31, 2014, “On the Russian Federation’s industrial policy”, which entered into force in the summer of the following year, aims at highlighting national products by favouring them to imported ones.

As says Ms. Barbiani puts it, «the aim of this industrial policy is to increase the competitiveness of the Russian internal production and the market shares covered by Made in Russia products in the various sectors. At the moment, imports account for 60% of mechanical products and between 80 and 90% for machine tools and food and wine products. The twenty decrees and all the other measures that the Russian Federation is adopting on these issues are all targeted to reduce by 50-60% the above percentages of reliance on imports by 2020».

Another objective of these political and economic decisions is to reduce reliance on the extraction and export of natural resources, as well as to save jobs, thereby improving social well-being at the same time. Russia, though, is still partly paying for its obsolete production technologies and backward logistic systems, and it is no coincidence that their modernization is one of the main objectives of the country’s industrial policy, . This opens up new occasions of on-site collaborations in the field of production. If the Russian Government is on the one hand supporting internal production, on the other hand it does not forget the importance of collaborating with the specialized firms of its partner countries, which boast the knowledge and experience that Russian companies do not yet have. Italy has a major role to play here, as a matter of fact the buzz phrase that is very much used in Russia now is Made with Italy.

«The Russian market has be faced with a deep awareness, but it continues offering very good opportunities to Western companies», as stressed by Ms. Barbiani. The important thing is to understand how one can act and find all the necessary information early in advance, because the Russian market can be strategic for many companies.

The Customs Union

«The new Customs Union certification foresees that the company obtains a declaration or a certificate of conformity, it is therefore important to understand the framework, within which the company works» Philippe Maurer, Rustek Managing Director.

foto_philippe-maurer_rustek

In order to establish trade relations with the Russian market, a clear view of the obligations to comply with to place products, equipment and machinery on the Russian market and to start installation is of fundamental importance. In particular, rules have changed with the establishment of the Customs Union between Russia, Belarus and Kazakhstan in 2011, which sets new rules valid for their own respective territories. The Customs Union is currently made up only of these three countries, but it is very likely to be extended to other nations, as well.

With the establishment of the Customs Union all certification measures prior to 2011 no longer apply to leave room to a new phase of certification called Customs union certification. This was the topic of a meeting held at the Italian-Russian Chamber of Commerce and specifically of the talk by Philippe Maurer, General Director of Rustek, which is a Swiss Group providing businesses with import and certification services in the countries of the Customs Union.

As Mr. Maurer explains, the first rule of this approach is the need to resort to a registered company, which should act as a representative of the foreign firm on Russian territory, i.e. the so-calledapplicant company. The applicant company acts as a guarantor together with the producer of the product that is imported and then sold in Russia, in other words it shares with it the responsibility for the product. This means that it must keep the product’s technical documentation for ten years and exhibit it to Russian authorities upon request in case of controls. As regards conformity, two different types of documents can be obtained, i.e. the Declaration of conformity (DoC) and the Certificate of conformity (CoC). Several bodies have issued technical regulations for various products, i.e. guidelines determining if a given product should be accompanied by a declaration or a certificate of conformity.

Declaration or certificate

As Mr. Maurer explains, «the declaration is simpler. This is a sort of self-certification containing the description and name of the certified products, the data of the producer and the documents submitted to obtain and issue the declaration. It is drafted by the applicant, who must then send it to the certifying body. The latter does not consider the technical documents submitted, i.e. he does not carry out a technical analysis on the product or on the content of the declaration, but he only controls the tariff codes of the product and registers and stamp the declaration». The introduction of these new rules has made customs operations faster and safer, with «the Declarations of conformity register simplifying the dossiers, as the importer no longer needs to provide a legalized copy of the declaration, which can be immediately controlled online from the site of the register». The certificate is more complex, instead. «In this case, the certifying body checks the available technical documentation and can request to carry out inspections and witness conformity tests on the product done at the producer’s site». Mr. Maurer stresses that rules have become much stricter on these aspects, «however we notice that the behaviors adopted are much more satisfactory and testify to more seriousness».

What to do in order to be on these markets

If a company decides to be present on these Eastern European markets, it should first decide the field where it is going to operate. Furthermore, some Declaration certificates have been prepared per each category of product. Depending on the product where the product fits in, it is possible to determine if the product has to be accompanied by a declaration, i.e. in the simple phase, or if it needs a certificate that also requires a check to be carried out by the inspector. Mr. Maurer adds that «for serial products it is possible to request a certificate or a declaration for certain models, which must be clearly identified; the documents obtained will be valid in the three countries for a period of five years».

As regards the declaration, it is important to remember that the final user of the product must be indicated in the certificate, i.e. «the document must contain a clear reference to the contract stipulated with the end user or the client on the territory. This aspect becomes more complicated when there are intermediaries, who sometimes come from other countries, too. In these cases it might be difficult to get a copy of the original contract». In any case, the certification is always an obligation for the supplier, who also has to bear the related costs. «The certifications necessary for the product to enter the country and be brought into service are another obligation for the producer. In case of sale of second-hand equipment or installations, the certification obligation remains and the third party will have to demonstrate that s/he is in possession of the necessary documentation to sell the machine». The certification costs are to be born by the producer or the third party that resells the product. Finally, if a company needs to obtain the certification for a whole plant, the best way to proceed is to «choose a lead company out of all the businesses involved that may serve as a reference company, carry out a certification for each product and then a final certification for the entire installation».

Taking into account all these aspects, Rustek clarifies that before starting a business relation it is important to request and obtain all the detailed documentation to clearly understand what costs are going to be incurred and how it is best to operate.

Characteristics that are absolutely necessary
In order for a final product to be granted the Made in Russia certification, its manufacturing process must comply with very precise characteristics. First of all, if the materials that make up the product and the technologies used to produce it come from foreign suppliers, they must not exceed a given percentage that varies depending on the product area concerned. Also, some production phases must be necessarily carried out in Russia. Furthermore, a technical and maintenance service centre must furthermore be located on the Russian territory as a reference centre and the supporting technical documentation accompanying the final product must be necessarily written in Russian language, too. Only if these characteristics are present, can a product be certified as a Made in Russia product and thus enjoy preferential channels when it is assessed for participation in tenders or be contemplated by private projects, even if it is the result of a production carried out within a joint venture between local and foreign firms.

The Russian voice of paper

There are several opportunities offered by the Russian market and several Western companies are already collaborating with local firms. An example of this is the Syktyvkar tissue group whose suppliers also include a number of Italian firms. According to the group’s development director Alexander Kagan, «one needs to consider that the Russian market is currently characterized by a remarkable growth between 5 and 7% every year». Western companies can therefore seize plenty of business opportunities and make good use of what they can offer to the Russian market. «The biggest advantage enjoyed by Italian firms, for example, is the high quality and the experience in the paper sector the boast worldwide. Both in production, and in paper processing they have the capacity of producing high quality instruments and equipment. In particular, there are five interesting areas for development in Russia for Western companies: equipment to be used both on new production and processing lines, and on the modernisation of already existing ones; paper production and processing technologies; training of personnel and service; spare parts and the supply of chemicals and packaging».

There are no obstacles for those companies wishing to enter the Russian market, however it is worth considering certain characteristics of the country which might otherwise create some difficulties, «e.g. logistics and transports, which must be carefully studied and planned in such a vast country», says Mr. Kagan, «as well as customs legislation that must be analyzed with great attention». Another major issue to consider is the training level of Russian employees working in the paper sector, as «in Russia there aren’t yet technicians with a high professional profile. Furthermore, when buying technological equipment, the lack of qualified personnel capable of using and managing it is deeply felt – this is a factor that supplying companies must be aware of».

Western investments in the territory of the Russian Federation also offer an interesting economic opportunity. Although the internal economic possibilities to do them are present, the cost of money can be a discriminatory criterion between the possibility to invest of a Western company and that of a local one. «Russian companies do not normally tend to make huge investments and the payback period of the investment would be too long for them». The difference is basically of economic nature, with longer payback periods and a much higher cost of the rouble. Due to this situation, investments in euros or dollars are more profitable than investments in rubles, leaving foreign companies more room for manoeuvre.

The appointment to mark in your agenda for the paper sector to meet the Russian market is in Saint Petersburg for the next edition of the biennial PAP-FOR Russia exhibition from October 25 to October 28, 2016.

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