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. Last Updated: 07/27/2016

Russia's Potential Excites Firms




Ulrich Marschner, a German cheese maker, isn't waiting for a new Russian president before he sets up shop in Europe's largest single market.


He's waiting for a lot more.


Marschner, head of Russian operations for Germany's biggest cheese maker, is one of the rare breed of Russia-watchers who look beyond the composition of the government of the month and don't spend much time fretting over the next parliamentary poll.


His employer, Hochland Reich, Summer & Co., is focused on the mundane, like the laws and the roads, rather than personalities.


"We are a medium-size company by German standards, so I don't think it would make sense to rely on somebody high up in the government to show interest in what we are doing. We are just not big enough for that," he said in an interview.


"The best thing is to not feel the need to rely on such help."


Marschner is not alone.


Germany has some 30,000 businesses like Hochland cheese, with annual revenues close to its 1.3 billion Deutsche marks ($678 million), and many could invest in Russia, says German economist Paul Fischer.


He calls them the backbone of the German economy and says they could be the same for Russia f Hochland, for example, has already established factories in Poland and Romania.


Fischer, who wrote a policy handbook on attracting foreign investment aimed at Russian politicians and partly financed by the German government, says foreign firms are the last source of funding Russia can tap. It has borrowed all it can.


"We do not see any other source for Russia. They have all been used up," he said.


He urges the government to focus on improving the business climate rather than a balanced budget, to woo foreigners.


His pessimism is tough to understand at first when you look at Moscow's bustling shops.


Crisis gloom that spread a year ago in August, when the government devalued the ruble, has been replaced by tentative hope as domestic producers' foreign competitors disappeared.


Russian spaghetti and soft drinks have filled the stores and industrial output rose an astonishing 4.5 percent in the first seven months, compared with the same pre-crisis period of 1998, proof that devaluation has done the economy some good.


The cheap ruble has also made investing in Russia look better, since foreigners can buy more while Russians, earning less, are buying fewer foreign goods.


"What we have seen in import-export operations is that with purchasing power going down dramatically, import is not a long-term solution for the Russian market," Marschner said.


Hochland, which in 1997 sent Russia 40 percent of the European Union's exports of processed cheese, said sales slumped to almost zero after August and were down by half for 1998. They are now steady at a very low level.


But Russian investment remains low, with growth chiefly from factories taking old machinery out of mothballs rather than building new plant, a third of the country lives in poverty, and Russia's image as a place to do business is the same.


A poll of nearly 4,000 business executives by the Swiss-based World Economic Forum put Russia last among 59 nations in terms of competitiveness.


Russia and Ukraine, which edged Russia out of last place in 1998, were characterized by "a low extent of rule of law and reliability of property rights, low trust in the government, fear of organized crime, low confidence in the police," it said.


The London-based Merchant International Group, in another survey, called Russia the riskiest business location for British and U.S. companies for both the first and second quarters of this year.


As Marschner said, after examining Russian law, "All that we have found out so far is that it is very, very difficult to see through that haze."


Common wisdom in Russia is that political stability, in the form of a new president to be elected next summer, can settle Russia into a trend of growth.


"Changes can be expected only after the presidential election a year from now," Grigory Yavlinsky, leader of the liberal Yabloko party in parliament, said recently, naming needed improvements such as property rights and fiscal stability.


But Marschner says the solution of electing a new president is too simple.


"Whoever will be elected the new president still can't do away with all these jungles of sometimes conflicting legislation, which are wide open to any interpretation by local authorities," Marschner said. "You can't do away in one day with a taxation code which is obviously still a long way from perfection."


Nor will an election solve the problem of dilapidated equipment and infrastructure, such as roads and water supplies, which have been allowed to deteriorate for years. "There is a remarkable art of improvisation and finding makeshift solutions which still gives you an astonishing finished product," Marschner said of dairies he has toured.


Hochland would begin in Russia, as it did in Poland and Romania, by making processed cheese, a long-lasting product that typically comes in slices and spreads and is made from fresh cheese supplied locally. That fresh cheese is hard to find.


"We want to be sure of quality. So to find a limited pool of Russian suppliers of the raw ingredients is still a problem," Marschner said.


The bottom line is that Hochland will not invest until it considers Russia a sure thing. That time has not come.