From the Community:

Andrey Kovalev, Talks about Business and Economy

In the context of a changing rhetoric of international relations, Russian mass media prioritize politics, although in the daily life of people, the economy plays a dominant role.
Today we publish the opinion of an expert who effectively survived the 2008 crisis and ensured the growth of business during this period, Andrey Kovalev.

Andrey, good afternoon! Your career has begun in Russia; please tell us what peculiarities of doing business in this country are.

This is a very complex topic, worthy of a separate course of lectures. Just the other day, I had a conversation with a banker from Vienna, who expressed his opinion that in Russia you can earn 40% of the invested funds in one year, go to zero next year, and end up with a result minus 50% another year, and as a result to be at a loss in three years. In Austria, as a rule, there is no such volatility, only 4-5% per year, but in euro and a stable plus.

Another colleague who has lived in Germany for more than 15 years, and now has a leading business in Russia in providing outsourcing services for German, Swiss and Austrian companies (accounting and legal support, interaction with government agencies) said: "Be ready to lose all the assets in Russia that you own at any time, and when you are really ready, your business will begin to grow rapidly."

These two bright quotes clearly reflect the peculiarities of doing business in Russia today.

Russia occupies an area of more than 6 million square miles and is rich in natural resources, why is it impossible to make the country richer through this?

I think it is not a secret that the Russian economy is 70% state-owned, and, for example, in the transport industry it is 83%. Such indicator as gross output per employee, say in 2016, in private companies was $ 74,000, whereas in companies with indirect and direct state participation - $ 60,000 and $ 21,000, respectively. With such indicators of labour efficiency, we cannot speak of sustainability.

I also want to note that there is no deep processing of major export products, such as gas, oil, and other natural resources in Russia. Taking into account the labour potential of the country, we could have been able to supply ready-made fuel, not crude oil, or, for example, high-quality processed boards, not round logs.

Do not forget about such important thing as the efficiency of public administration, which affects many social spheres, such as education, medicine, pension provision, etc.

Many decisions made at the state level discourage the population and, above all, youth from entrepreneurship. In my view, the desire of young people to work not in, say, Google, but in the public service is strange.

The lack of stability and, what is also extremely important, the possibility of transferring assets and savings from generation to generation discourages the population from long-term planning of finances, education, etc.

With all of this, Russia has a huge human and resource capital; we can see it by the number of Russians in the world centres of innovation and progress - Silicon Valley and Swiss CERN.
Ask any expert who deeply understands what is happening in Russia, and everyone will give almost the same list of primary objectives to resolve the country's problems:
1. To reallocate the budget from law enforcement and defence tasks to the education and developing human capital;
2. To change the orientation of strategic projects, invest not in a global show, but in fixed assets, in the processing of natural resources;
3. To build not just another pipeline, the need for which in the long term of 30-50 years is questionable, but to develop basic research and research centres;
4. Instead of excessive protection of economic sectors and the actual isolation of the domestic market, to engage in the development of international relations and the attraction of international investments and technologies...

The list of problems can go on and on: corruption, health care reforms, the attitude of the state to private property, and much more.

Are there opportunities for the development of international business in Russia now?

Of course, yes, the question is just what kind of business. The answer, unfortunately, is beyond what is necessary for the development of the Russian economy.

In fact, there are two types of business that can be developed now in Russia, taking into account all the existing political and economic factors: the first is the service of machinery and equipment brought into the country earlier and their modernization, if possible, the second is the supply of low cost goods, ideally these products have to have the labels "made in ..." USA, Germany, Italy, but to be very cheap.

I can't advise you to invest in fixed assets, in basic capital, since taking into account the ongoing waves of redistribution of property in the country you can lose everything in one day.

What are the prospects for the Russian economy in the next couple of years? Will there be a market economy in the country?

I don't see development prospects for the next couple of years, and given the next cycle in the fall in hydrocarbon prices, the economy is likely to face stagnation, and at an increasing rate. The paradox of Russia's development in recent years - the Government cannot ensure stable economic growth even with extremely high prices for the entire range of Russian exports. There can be only one conclusion - global structural changes are needed.

AvtoVAZ has invested $1.35 billion ($0.27 billion annually) in production over the past five years. Tesla invests more than $2 billion every year, Volkswagen AG invests $5 billion a year in the development of electric vehicles only. The entire Russian large manufacturing industry together invests less than one Volkswagen AG. As we all know, in order to make competitive products in the modern world, it is necessary to invest and develop production now, with an eye to the future, rather than relying on the legacy of a previous era, which is hopelessly outdated at the current time.
Small businesses, which are not interesting to the state - cafes, barbershops, ateliers - will remain private; the rest will be threatened with full nationalization.

What advice do you have for foreign investors who have already invested their money in Russian enterprises?

If possible, switch to a business model that does not require relatively high investments in fixed assets in Russia.
To outsource part of the labour functions, to lease assets from local companies to be ready to curtail their activities quickly; and in order to reduce country risk, to diversify resources and assets between countries of the [Eurasian] Customs Union.

Thank you for your time and great insights! Today we had an opportunity to interview one of the Russian financial influencers, Andrey Kovalev.

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