In the Last 10 Years the Russian Market Changed Beyond Recognition

The first-hand account of an American entrepreneur who has witnessed a revolutionary change in the Russian economy and lifestyle

Thu, Sep 29, 2016
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The author is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia


It was the late 1980’s, all 185 nationalities within the Soviet Union were feeling winds of change, at the same time not knowing what this ‘change’ will really bring. History has repeatedly confirmed to these people that change is rarely painless, i.e.; Mongols, Empire, Napoleon, Japan, WW1, Communist revolutionary doctrine, WW2, Cold war, and now the prospect of decentralizing with free market economics. Fear is rooted in not knowing. No country has gone down this particular path in peacetime; it was always a post-war experience. There were no road maps or manuals to guide the process for this clustered social, political and economic change. What ensued was an unstoppable unguided juggernaut of both destruction and creation. Change happened, and is continuing today.

During the détente of mid-1970 and throughout the 80’s I travelled regularly from the US to the Soviet Union to do business. Between meetings, I had many opportunities to observe and immerse myself in cities like Moscow, Novosibirsk, Tashkent, Vladivostok, and others. It was a template of life defined by shortages, opportunism, and finding ways around inertia to get what you needed or wanted. Either you developed survival smarts, or you did not. Society was not defined in monetary terms, but in access, contacts and influence. The vast majority went with the ebbs and flows assuming nothing will change, and that underpinned a fatalistic resignation, a static life.

During the collapse of the Soviet Union and the subsequent rebirth of Russia, “change” was the all-powerful force. In 1992, the first year of economic reform, retail prices in Russia increased by 2,520%, by 1993 the annual rate had declined to 840%, today despite sanctions it is at 6.9%. The collateral damage in human terms was equal to the aftermath of war. Those industries which had already over the years been integrated to one degree or another with the West (Oil, Gas, Energy and Mining) were the easiest and first to adapt in this structural vacuum, the rest adapted or failed in descending order of opportune efficiencies.

At street level, many old systems remained, holdovers so ingrained that only time could work its magic to change. For instance, a visit to a grocery… the goal is to buy potatoes. The process was stand in line to select the potatoes, get a chit for them. Stand in another line to pay the amount on the chit, which is then noted. Then stand in a third line to receive your spuds. Perestroika brought with it the system of selection and payment all at once. This was a noticeable change, and it made a difference in people’s lives. To an outsider this example may seem absurd, but look at it from a user’s point of view, and beyond potatoes… the consumer culture and the services sector were not yet interacting, and were in fact just being born… as recently as 1990! Today the same potato quest will happen as a smiling cashier laser scans, your card reader debits you, and your bank SMS’s to confirming you own potato’s now.

Another “change” was in building and construction. Financing as known in the West was not really a factor for 70 years, speed of completion was not linked to cost of funds. Think about that. An apartment house could and did take many, many years to complete, and work was rarely if ever conducted during the winter months. In the 90’s this began to change as costly private and foreign capital were the sources for financing development. To improve efficiency, construction brigades were imported from countries like Yugoslavia, and Turkey so newer building technologies and practices could be applied. This formed the foundation of the Russian construction industry, which then grew from a technological and systemic foundation well ahead of practices common in much of the world. It is enough to look at the skylines and infrastructures of most cities in Russia to appreciate what has evolved in a mere decade.

One example today is Moscow, selected to be a beta site region for new building information modeling technologies. Russia will also take part in several new standard construction projects with the International Organization for Standardization. What will emerge are innovative technologies and the needed subsidies to animate them coming into Russia from abroad. The Russian construction industry, like few others appreciated early just how much money new technologies could bring into the market. The government also sees that this engagement will afford Russia an appreciable edge in competing within the international construction community in projects undertaken overseas.

Some investors see similarities in the Moscow of 2016 when compared to the Moscow construction market in 2003, which was the start of the last construction boom. In fact, the Russian market has become geometrically more sophisticated and professional today than it was a short ten years ago. Private builders and developers work closely with international regulatory bodies, and the Russian government has become responsibly accountable in efforts to ensure a more stable market where investors can see the long term. Today Russia’s expansion plans are thought through in advance, as opposed to being pressured by immediacy. With building and infrastructure development planning that is projecting dozens of years ahead. This opens a broad range of investment opportunities and advantages for those who have the foresight and courage to be engaging first, taking advantage of this unique time in Russia’s development history.

There is a great deal of information available that is specific to a range of industries and businesses in Russia, the most practical, usable data is in Russian where the internet of things is quite deep. In later articles I hope to cover small and mid-size business and how best to conduct real due diligence and planning for entry into the Russian market without falling into bogs usually encountered through mistaken or spurious assumptions. I strongly suggest a personal visit to this market as essential, if for no other reason but to clarify and set right the many odd myths spinning out in the world which simply don’t stand up to actual eyes-on, hands-on reality.

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