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. Last Updated: 07/27/2016

Investors: Russia Worth Work

MTDeripaska said processing industries must be developed.
Russia is still a country in transition with much room for improvement, but for those who dare to do business here, returns on equity investments remain among the highest in the world.

That was a main theme that emerged at the Economist Intelligence Unit's third annual investors' conference, which opened in Moscow on Tuesday.

"In the mid-'90s, people were making a lot of money in Russia for not doing very much. Now, they are making a lot of money, too, but are working damned hard for it," Daniel Thorniley, senior vice president with the Economist Group, told the conference.

Investors already committed to Russia know what the rewards are. According to the EIU's estimates, the average return for pharmaceutical companies in Russia over the past 12 months reached 50 percent to 65 percent. The booming consumer sector also led in terms of earnings with 40 percent to 60 percent returns on equity last year. Returns for chemical companies were lower at 35 percent, while IT companies were at 20 percent to 28 percent.

"Every company that has a representative office in Russia is thinking now about launching distribution. Those who have distribution want to open a subsidiary, while subsidiaries think about starting their own manufacturing," Thorniley said.

Thorniley estimated that Russia is four years behind Poland in terms of the level of competition and two to three years behind Hungary and the Czech Republic. But while business opportunities in those countries are already quite limited, in Russia, with its 89 regions and population of almost 150 million, the potential is still enormous.

"I can double my business if I really take on the Polish market, but I can quadruple it if I really take on the Russian market," Thorniley said, quoting an EIU client.

But those already doing business in Russia say it is not easy to use this potential to its fullest extent because there are many things that must be improved first.

Oleg Deripaska, head of Siberian Aluminum and one of Russia's most influential businessmen, said the long-term development of Russia depends to a large extent on further structural reforms and capital investment into processing industries.

"Economic growth can be sustained only if we attract investments to modernize the production facilities," he said. "In order for that to happen, the Russian government and companies themselves need to make core industries more attractive to investors."

According to Sergei Bayev, head of the investment policy department with the Ministry of Economic Development and Trade, the Russian government estimates that the annual investment needed to finance the infrastructure projects is $100 billion.

"The transport network in Russia cannot be compared to any developed country, the railroads are in a very poor shape and many airports can't accept international planes," Bayev said.

To fill this gap, the government should stimulate the demand for priority industries, such as aviation and machine-building, he said.

"We are now financing many Russian leasing companies to meet these needs," Bayev said.

Among other priorities mentioned by conference participants were the reform of natural monopolies, development of capital markets and pension and insurance reform. Most of the participants agreed there is no need to rush World Trade Organization membership.

"Russia is still a country in transition, and its institutions remain weak," Thorniley said.

Yet the EIU's outlook for Russia in 2002 is quite optimistic. Thorniley expects GDP to reach 4 percent, which is in line with government forecasts. Inflation will reach 15 percent by the end of the year, while the ruble will finish 2002 at 33.8 to one dollar, he said.