INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2006. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.

This single chapter is excerpted from the FY 2006 Country Commercial Guide for Russia, describing the overall commercial situation in the country. Country Commercial Guides can be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. The complete FY2006 Russia Country Commercial Guide is also available online in the U.S. Government Export Portal. Just click on "Market Research" on the left-hand navigation pane.

Chapter 1: Doing Business In Russia

Market Overview

• In 2005 the Russian economy continued its sustained steady growth. GDP grew by an estimated 6.4% to $765.5 billion. However, this represented a decline from 7.1% growth in 2004.
• As in 2004, high world prices for oil and natural gas continue to be the engine behind much of this impressive growth. The Russian economy still remains very dependent on energy and other extractive sectors, such as timber, precious metals, non-ferrous metals and steel, despite the Russian government’s renewed efforts to build more of a manufacturing base. Extractive industries taken together account for more than 80% of overall exports and provide a significant part of federal budget revenues. Russia’s industrial production grew only 4% in 2005 compared to 7.3% in 2004.
• The overall balance of trade continues to register healthy surpluses, as does the federal budget. In 2005, Russia’s total exports during the first 11 months were $220.6 billion and imports were $111.1 billion. According to importing country statistics, U.S exports to Russia for the first 11 months of 2005 totaled $5.7 billion; while U.S. imports from Russia were $13.9 billion. Federal budget expenditures in 2004 are estimated at $96.3 billion with an estimated surplus of 4.3 % of GDP. Federal budget expenditures in 2005 reached 136.5 billion, with a surplus of 7.5%
• Due to high-energy prices, Russia’s financial situation continues to become stronger and stronger, with a decline in its total external debt to $230 billion as of June 2005 and an increase in its sovereign credit ratings to investment grade. Moreover foreign investors have found the stock of Russian energy firms like Gazprom to be very attractive. During the past year the Ruble has remained relatively steady against the dollar, trading largely within a band of 28.9 to 28.2 Rubles to one U.S. Dollar.
• Adding to overall economic development, the year 2005 continued a multi-year trend of strong consumer spending and a construction boom. This dramatic growth shows more signs of spreading beyond Moscow and St. Petersburg to the regions. Per capita GDP is estimated to have reached $5,300 in 2005 as compared to $4,039 in 2004. With an 8.7% growth rate in 2005, real disposable incomes continue to outpace GDP growth.
• Leading European companies, especially those from Germany, France, Scandinavia and Turkey, are well established in both consumer and industrial markets in Moscow and St. Petersburg and are branching out to the smaller regional cities. Many well-known U.S. consumer brands are also successful and many Asian companies from Japan, South Korea and China are also doing well.
• This past year President Putin and the Russian state apparatus continued to reassert more state control, both direct and indirect, over the economy, especially in strategic sectors such as energy, aluminum, steel, automotive, machine tools and aerospace. At the same time there was the "privatization" of the major oil and gas companies by increasing the state’s controlling share of the stock, while allowing foreign investors more access to energy stocks, like Gazprom. Terrorism remains an issue, but to date it has not been directed at Western interests. At present, it remains primarily connected to the ongoing conflict in the breakaway Republic of Chechnya in southern Russia.

Market Challenges

• Major barriers to the Russian market remain its distance from the U.S. and its erratic transition from a socialist, centrally planned economy to a more open, market-oriented one.
• European and Asian companies remain tough competitors for U.S. firms, due to their proximity to Russian markets and their long-standing relations with Russian organizations and companies.
• Government bureaucracy, poorly established rule of law and corruption affect such areas as establishing a business, tax collection, dispute settlement, property rights, product certification and standards, as well as Russian Customs clearance.
• Finding qualified local partners and employees is a difficult process. The pool of managers who understand Western accounting and business practices remains limited, as well as the pool of qualified, experienced Russians proficient in English.
• Adequate financial resources for Russian buyers still remain a problem, but it is not as acute as it was in years past. There are more foreign banks operating in Russia and more cash circulating within the economy due to the Russian oil and gas boom.
• The Russian government continues to use its oil and gas resources to increase the states’ ownership in certain strategic industries and companies. So it is not completely clear to foreign companies which sectors are open to them for investment without Russian majority partners. The Russian Duma continues its work on defining what are Russia’s strategic sectors.

Market Opportunities

• There are strong growth possibilities in a range of consumer goods and services, which are being fueled by increases in disposable income in Moscow, St. Petersburg and the growing regional centers:

• telecommunications equipment and services, especially wireless
• autos and parts
• computer hardware and software
• cosmetics and toiletries
• building products
• franchising.

• Strong growth in the energy, machinery and healthcare sectors :

• oil and gas equipment and services
• medical equipment
• pharmaceuticals
• agricultural machinery
• construction equipment

Market Entry Strategy

• Perform detailed market research to identify specific sector opportunities.
• Establish a local presence or select a local partner for effective marketing and sales distribution in Russia. Due diligence is a must.
• Maintain a long-term timeframe for plan implementation and achieving positive results.
• Use the experience of other, successful U.S. companies in the market. The local American Chamber of Commerce has over 800 members and is a great resource.
• Be prepared to offer financing to Russian buyers. Both EXIM and OPIC have programs to address these needs.

Russia continues to be a major, fast-moving and growing economy offering opportunity and challenge in equal measure. While the economy is producing increasingly positive results, the country remains a complex place to do business. The best opportunities for experienced U.S. companies lie in developing exports in the sectors noted above. Most major corporations, especially those from Europe, have concluded that the vast potential of the country demands they have a presence in Russia, with its incredible natural resources, impressive human capital and 140 million consumers. A significant number are finding that presence to be profitable, and the majority express growing optimism for continuing profitable business opportunities in the future.

Table of Contents

Chapter 1: Doing Business in Russia
Chapter 2: Political and Economic Environment
Chapter 3: Selling U.S. Products and Services
Chapter 4: Leading Sectors for U.S. Export and Investment
Chapter 5: Trade Regulations and Standards
Chapter 6: Investment Climate
Chapter 7: Trade and Project Finance
Chapter 8: Business Travel
Chapter 9: Contacts, Market Research and Trade Events
Chapter 10: Guide to Our Services

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To the best of our knowledge, the information contained in this report is accurate as of the date published. However, The Department of Commerce does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.