Everybody’s so excited about China. My company recently signed a joint venture there, but we’re also thinking of moving into Russia. What do you think about its potential?
Everybody’s so excited about China. My company recently signed a joint venture there, but we’re also thinking of moving into Russia. What do you think about the opportunities there?
Your comfort level with doing business in Russia depends on how much stomach – and capacity -- you have for risk. Russia has huge potential for opportunity, but plenty for disappointment too. You could say the same thing about China, perhaps, but it seems to us that by comparison, Russia has less upside -- and more obvious downside.
To start with, let’s look at what’s promising about Russia. Sure, it’s a fraction of China’s size, with its one billion headcount, but with 140 million people, Russia is bigger than every single-country market in Europe, not to mention Japan.
And without doubt, some sort of economic transformation is occurring in Russia. GDP growth has averaged more than 6 percent per year for the past six years. Compare that to France, Germany! Meanwhile, over the last five years, capital spending has averaged annual gains of greater than 10 percent, and personal income 12 percent.
The driver of all this growth has been Russia’s enormous store of natural resources – timber, minerals, and most of all, oil. In fact, Russia has enough oil to make it not only energy self-sufficient, but a significant exporter as well.
The Russia picture darkens, however, when you look at other facts. Something like a quarter of Russia’s economy is underground, riddled with corruption, and impervious to any kind of regulation that makes business fair and transparent. We have railed against regulation in earlier columns as a hallmark of bureaucracy, but as an outside investor, Russia makes a compelling case for the opposite view. You can really come to love regulation when you try to do business in a country that doesn’t have any.
Russia, of course, doesn’t have a lock on lawlessness. China has a veritable army of pirates, and many foreign companies trying to do business there have been stymied (or worse) by what we would consider blatant violations of intellectual property law. Chinese lawlessness, however, is somewhat surreptitious compared to Russia’s, which we would take as a (small) sign that it is less accepted by officialdom.
Two more points of comparison about Russia and China bear quick mention. The first is manufacturing. China’s is thriving. Russia’s factories remain stuck in a state of grim Communist-era disrepair. There just hasn’t been significant investment in bringing these facilities into the 21st century. Meanwhile in China, new factories are being built with an eye toward the future.
The second is social stratification. Russia is cash rich – that oil! – but its distribution of wealth is a throwback to the days of the czars. A tiny number of people have a ton of money; most people, especially those in the vast countryside, have very little. There is virtually no in-between. China, by contrast, has a growing consumer base of more than a 100 million people – almost as large as Russia’s total population. Their purchasing power will increasingly be able to support a healthy, sustainable economy. Now, we don’t want to sound too pessimistic about Russia and too bullish on China. Both countries are in the midst of grand experiments. Russia is trying to create some mix of capitalism and democracy while using a totalitarian approach to fighting both general lawlessness and the scourge of terrorism. China is trying to create a form of society with no antecedent: a market-driven (i.e. free) economy within a Communist superstructure that limits personal freedom. Who knows where either of these works-in-progress will end up – ten years from now, let alone fifty.
But when you come right down to it, China does have an edge for outside investors. It’s bigger by almost a factor of 10, for starters. Second, its culture is more entrepreneurial; in our experience, there are simply more people in China than in Russia who are energized to win, creative, fierce, and ambitious. Third, China provides a more attractive export base, given its broad manufacturing and technology capabilities. And finally, and perhaps most importantly, China is focused on the industries of the future – electronics, medical devices, and other forms of technology. After oil, Russia’s major industries are machine building and metalworking. Those are more yesterday’s stories.
All in, that’s why for us, it feels hard to get as excited about Russia as about China. Still, your company is not unwise to expand there. It could turn out to be very smart. Time will tell.
Time has already told with China. In today’s global marketplace, you have to be there. That’s not true of Russia, even with its expanding economy. But if you have the resources to absorb the risk of doing business there, why not?
This question and answer originally appeared in Business Week magazine on November 21, 2005.
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