The Russian market is, however, a rich mixture of extremes, with amazing opportunities and high risks. Last year, the percentage growth of foreign direct investment in Russia eclipsed the other so-called BRIC (Brazil, Russia, India, and China) nations, most notably China. Russian companies are investing in Africa, Asia, and Europe, and they are increasingly looking toward the U.S. market. The signing of the U.S.–Russia Bilateral Agreement reduced tensions between the United States and Russia on key market access issues. President Vladimir Putin has prioritized diversification of the economy to attract more SMEs in industry sectors other than natural resources. He has also announced plans for creating tax-free zones for specific industry sectors, including information technology.

Today, American and other foreign companies doing business in Russia benefit from a more stable business climate. Their knowledge is gained from personal experience, business savvy, and often painful lessons. If you are an American company interested in doing business in Russia, take a close look at Russia and follow the recommendations or lessons learned that are listed below from professionals who advise companies on market-entry strategies.

Gather Facts and Figures

Determining if there is demand for your products or services in the Russian market is the most important question to answer at this stage. What is the point of expending extensive financial and human resources on developing and implementing a business strategy if there are not enough interested customers to realize a reasonable return on your investment? The first step is to develop a preliminary information database to build an overall picture of Russia’s political, economic, market, and business conditions. The amount of available information is overwhelming. The U.S. and Foreign Commercial Service and BISNIS within the U.S. Department of Commerce are good places to start. In the private sector, both the U.S.–Russia Business Council (www.usrbc.org) and the American Chamber of Commerce in Russia (www.amcham.ru) are great resources.

Speak with Americans Doing Business in Russia

After you develop a preliminary picture of the Russian marketplace, the next step is to obtain direct feedback about on-the-ground conditions from Americans doing business in Russia. Take a fact-finding trip to Russia to meet with American businesspeople to hear their experiences. Meet with Russian businesspeople to provide a local perspective. The U.S.–Russia Business Council or the American Chamber of Commerce in Russia can assist by connecting you with their Russian-based members. Arrange a briefing with officials from the U.S. and Foreign Commercial Service to gain additional information on doing business in Russia and to learn how they can assist American businesses that are planning to enter the Russian marketplace. The contacts established during the trip will become vital information resources for any U.S. company choosing to go forward with a business venture in Russia.

Evaluate the Data and Decide Whether to Go Forward

If the preliminary findings suggest that pursuing a business venture in Russia is not a good idea for whatever reason, then focus on another foreign market. You have lost nothing; you had a great trip to Russia and met a lot of nice people. But if the data suggest that the potential offered by the Russian marketplace outweighs the challenges, then the time has come to start serious planning. The obvious first step is to prepare a business plan for Russia. A key element of the business plan, or a separate planning document, should be a market-entry strategy and action plan. The plan will help to guide a company’s efforts and is essential for any chance of success.

Corporate staff members are usually responsible for preparing business plans. However, you should consider hiring qualified outside consultants to assist with preparing a market-entry strategy and action plan and its implementation. The added value of having professionals with in-depth experience in the Russian marketplace help companies successfully establish a profitable business in Russia without major problems should justify the consulting fees. Numerous resources are available to choose from, including law firms; business, auditing, and accounting consultancies; and market-entry consultants.

Strategy and Action Plan Contents

The plan should address key political issues that a company should consider when opening a business in Russia. These considerations include not only Russian politics and associated risks, but also legislative and regulatory issues, such as customs, tax, and employer and employee matters; company registration and expatriate residency issues; licensing issues; and intellectual property rights protection. If specific regions are of interest, regional and local legislation and regulations will also need to be analyzed. The plan should have a description of the approval process that foreign businesses must undergo at the federal and regional levels, as well as a list of the key officials in the federal and regional governments who will make or influence decisions about your business. The company will also need to know its foreign and domestic competitors and to have a strategy for managing any attempts by competitors to negatively influence the decision-making process.

The plan should provide an analysis of the domestic and foreign competition and market data figures for the industry sector. If more specific data is required, the company should consider retaining a research company to conduct consumer, economic, and industry sector research. An external affairs plan should be included to announce the opening of the business in Russia and to manage stakeholder communications. The action plan is a working document that list all tasks, timelines, and assignments under each section—political, regulatory, office space and commercial land, tax, audit, and more. Each section should include a contact list of recommended professional resources for services, including auditing and accounting, legal, commercial real estate, strategic communications, public relations, and advertising services.

Find the Right Russian Partner

The right business partner is the single, most important factor to a company’s successful entry into the Russian marketplace. Again, give serious consideration to working with qualified outside consultants to locate potential Russian partners and to conduct comprehensive due diligence investigations. The task of finding the right Russian partner should not be left to a staff member who does not have knowledge of and experience in the Russian market.

The decision to invest in a foreign marketplace is a major commitment involving company staff members and financial resources. Companies that embrace careful planning and take a sober view of Russia are the most likely to make a successful entry into one of the most dynamic markets in the world. But when things go wrong—and they will—the impact on such disciplined companies will be manageable, whereas it could be disastrous for a less prepared company. Developing a good strategy and finding the right team of staff members and external advisers will give you the best chance of success.

Tom Thomson is a partner in RST International LLC (www.rstinternational.com), a Russian–American strategy and business consultancy, and is president of T. Thomson & Associates (www.tthomsonassociates.com), an international strategic communications consultancy. He is in Washington, D.C., and frequently travels to Russia.

Kazakhstan’s real estate market has been growing at breakneck speeds for the past few years. The main drivers for the recent growth are multifold. Positive external macroeconomic conditions have held strong—namely, the high price of oil and other export commodities on which the Kazakhstani economy is primarily based. Double-digit growth in personal income during the past few years has increased consumption (per capita gross domestic product in 2007 is estimated to be nearly double that of 2005). In addition, Kazakhstan’s dynamic and competitive banking sector has provided the necessary infrastructure and liquidity to support high growth in real estate developments. Several top Kazakhstani banks had international initial public offerings (IPOs) last year, and several others have announced their IPO plans for 2007. The Chagala Group, a real estate developer and property manager in western Kazakhstan, conducted an IPO in February on the London Stock Exchange, giving public investors the first opportunity to gain exposure in the Kazakhstani real estate market.

One unique feature of the Kazakhstani real estate market, in strong contrast to other booming real estate markets in Eurasia, is that the major developers are predominantly local companies. By contrast, foreign investors and developers are driving the majority of projects in Moscow. This difference is a reflection of the better-developed financial sector in Kazakhstan compared with that in Russia. In fact, local Kazakhstani banks have provided so much liquidity that there have been concerns about overdevelopment.

Given the fast run-up in prices in Almaty and Astana, as well as the likelihood of a cooling off period, investors are spreading out to the regions, following a pattern already observed in the Russian real estate market. Development in the regions significantly lags behind Almaty and Astana. However, very strong growth is anticipated in the regional cities during the next few years. Second-tier cities, such as Aktau, Ust-Kamenogorsk, Karaganda, and Shymkent, will likely come to the forefront for developers in the next few years.

In addition to this geographical diversification, developers are also expanding into subsectors other than the typical ones of office, retail, and residential. Multicomplexes are making an appearance on the market. Seven mixed-use multicomplexes are currently being developed in Almaty and Astana. They are intended to resemble small cities by offering diverse facilities for those who live and work there. The multicomplexes generally include office, hotel, residential, and retail space and entertainment facilities, and they range from 80,000 to 500,000 square meters. Because of the complexity of the developments, the multicomplexes are primarily being constructed by foreign developers.

Office Real Estate Market

The office sector is the most developed in Kazakhstan and is the closest to international standards in terms of inventory quality. This characteristic is no doubt a result of the role foreign companies play as the primary clients for this segment. With the anticipated accession of Kazakhstan to the World Trade Organization, the development of a regional financial center in Almaty, and the growth of a free economic zone in Astana, the number of foreign companies active in the local market will only increase.

Supply has not kept up with demand. The vast majority of office centers are filled at 95 to 97 percent of capacity, leading to waiting lists for various properties. One developer, TS-Engineering, reports that 40 percent of their business centers’ space is leased before construction is completed. The remaining space is usually leased in a matter of five to nine months upon commissioning of the property. Most of the old administrative buildings from the Soviet era are also undergoing major renovations to move the market up.

Currently, the total amount of office space in Almaty is approximately 1.2 million square meters, of which 210,000 square meters are class A or B premises. This classification refers to quality of the property, with class A being the highest quality. In Astana, the total office space is estimated at 60,000 square meters, of which 30 to 40 percent are class A or B properties. Approximately 40 percent of the occupants of class A and B properties are foreign companies.

Approximately 20 business centers are being built in Almaty, and by 2009, an additional 1 million square meters of office space is expected to be commissioned. In Astana by that same time, 350,000 square meters will become available. It is precisely in this time frame that competition is expected to heat up in the commercial market and prices will likely level off.

Leasing rates have increased approximately 20 percent during the past five months. Monthly rates in Astana are $39 per square meter for class A properties and $33 per square meter for class B properties. In Almaty, average monthly rates are approximately $3 less for each category. However, given the lack of a uniform rating scale for properties, the assigned category is often a reflection of the developer’s ambitions rather than an objective evaluation. Companies looking to purchase office space generally have to pay less in Astana than in Almaty. In Almaty, class A space sells for $3,000 per square meter and up, while class B sells for $2,000 to $2,500 per square meter. In Astana, class A offices sell for $1,700 to $2,200 per square meter, while class B sells for $1,200 to $1,600 per sq. meter.

Despite the continuing rise in rental rates, the majority of office space is leased as opposed to purchased (the ratio is approximately 70:30). But the demand for purchasing office space is expected to rise as more foreign companies enter the market or as those that have already entered decide to expand their presence for the long term. Because of the shortage of quality office space, some companies are resorting to building their own business centers, reducing expenditures by up to 50 percent, and acquiring office space that meets their needs exactly.

Residential Real Estate Market

Although prices for residential property in the major cities have recently skyrocketed, rental rates have followed a steadier and more moderate upward trend. However, rental rates are expected to continue to rise even after sales prices cool in the next few years, because the demand for rental units far exceeds supply. Again, this problem is, in part, driven by the economic growth in the major cities, which attract residents from the regions and increasing numbers of business people from abroad.

Inexpensive one- or two-room apartments in typical Soviet buildings in Almaty rent for approximately $300 to $700 per month. At the high end of the spectrum, detached homes or customized apartments can average $4,000 to $5,000 per month and more. Last year, the most demanded mid- to low-market apartments experienced a 30 percent increase in rental rates. Because most current tenants agree to rate increases so that they can keep their residences, unfulfilled demand continues to rise and is estimated to exceed supply by a factor of 10 for the residential housing market.

As for sales prices of residential property, Almaty prices have nearly tripled during the past four years, and prices are expected to level. Prices for high-end apartments are at levels that were once thought possible only in Moscow. New luxury apartments range from $4,000 per square meter to $10,000 per square meter. Luxury apartments in Astana are $4,000 to $5,000 per square meter. For other regional cities, high-end prices are generally less than $2,000 per square meter. Developers from Israel, South Korea, and the United Arab Emirates have become actively involved in this sector. For example, the Korean developer Highville is constructing a 17-building residential complex on the left bank in Astana.

The Kazakhstani real estate market is likely to attract the attention of foreign investors in the years ahead as the market stabilizes and matures. The amount of investment-grade properties will increase, allowing institutional investors to gain exposure to the market. Rising incomes of the local population will also spur expansion of the residential market and will open new opportunities beyond high-end projects. The continuing macroeconomic growth will necessitate further commercial real estate development to support the increase in business activity.

Svetlana Voronina is the director of KazConsult Company (www.kazconsult.com), a market consulting firm based in Astana, Kazakhstan, that provides strategic planning, market research, and event management service. She can be reached at svetlana.voronina@kazconsult.com.

by Maren Veatch

Eurasian markets are ripe for U.S. investment and exports. Economies are booming across the region, but in many instances, U.S. companies lag behind their competitors in taking advantage of this trend. One challenge U.S. companies face is a perceived scarcity of trade financing and a lack of solid opportunities for investments. To address this perception, BISNIS in partnership with the Council for Trade and Economic Cooperation, is organizing a seminar titled “Financing Deals and Investing in Eurasia” on April 11, 2007. The seminar not only will focus on the commercial opportunities and challenges of doing business in Eurasia, but also will identify financial resources available to companies interested in exporting or investing in the region. The four-hour event will feature three panels with experts representing U.S. government export and project finance programs, prominent U.S. and international venture capital companies, other financing companies with significant experience in the region, and leading European and Eurasian banks seeking to expand their engagement with U.S. firms and banks.

U.S. Government Resources

The U.S. government is an important resource available to companies seeking export and other assistance for business ventures in Eurasia. The government fills an important niche by taking on projects that may entail an elevated amount of risk that private companies are not willing or able to assume. Event panelists include representatives from the U.S. Export–Import Bank, Overseas Private Investment Corporation, U.S. Trade and Development Agency, Advocacy Center of the U.S. Department of Commerce, and U.S. Department of Agriculture.

• Export–Import Bank (www.exim.gov) assists in financing the export of U.S. goods and services to international markets. It does not compete with private-sector lenders but provides export-financing products that fill gaps in trade financing. The bank assumes risks that the private sector is often unwilling or unable to accept. It provides working capital guarantees (pre-export financing), export credit insurance, and loan guarantees and direct loans (buyer financing) for small and large U.S. companies.

• Overseas Private Investment Corporation (www.opic.gov) assists U.S. companies by providing financing (from large-structure finance to small business loans), political risk insurance, and investment funds. It complements the private sector in managing risks associated with foreign direct investment and supports U.S. foreign policy.

• U.S. Trade and Development Agency (www.tda.gov) provides grants for feasibility studies and investment analysis.

• Advocacy Center of the U.S. Department of Commerce (www.export.gov/advocacy) coordinates U.S. government resources and authority to level the playing field on behalf of U.S. businesses as they compete against foreign firms for specific international contracts or other U.S. export opportunities.

• U.S. Department of Agriculture (www.fas.usda.gov/excredits/ecgp.asp) administers export credit guarantee programs for commercial financing of U.S. agricultural exports. Its Commodity Credit Corporation (CCC) programs encourage exports to buyers in countries where credit is necessary to maintain or increase U.S. sales, but where financing may not be available without CCC guarantees.

Venture Capital Firms and Other Financial Services

Many U.S. and Eurasian venture capital firms and funds fill an important financial function—they invest in the developing and booming markets of Eurasia. Those firms provide money for riskier markets and smaller companies. In addition, their hands-on understanding of the markets is unparalleled. The venture capital firms and funds featured at the BISNIS Finance Event include Marchmont Capital Partners, an American-owned business advisory firm focused on Russia’s regions; SigmaBleyzer, a private equity firm focused primarily on Eurasian countries; Ansher Fund Management, a leading investment group in Central Asia; and Firebird Management, a group with funds dedicated to equity investment in emerging markets, especially Eurasia.

Commercial Banking

U.S. companies can access financing from international and local commercial banks that already work in Eurasia. Local banks are important partners in transactions because they understand local markets and can offer financing at competitive rates. In addition, some of those banks may have established relationships with other international and U.S. financial institutions, such as the Export–Import Bank, and can thus facilitate export transactions. The banks featured at the BISNIS Finance Event have successfully facilitated U.S. exports, are currently assisting with projects, or have the potential to assist U.S. companies. The following banks will be represented: International Bank of Azerbaijan, one of the largest banks in Azerbaijan; Société Générale, France, one of the largest commercial and investment banks in Europe; Vnesheconombank Bank for Development, the third-largest state bank in Russia; and Bank TuranAlem, a major commercial bank in Kazakhstan.

The complete agenda for “Financing Deals and Investing in Eurasia” and registration details can be found at www.bisnis.doc.gov/bisnis/bisdoc/070411BISNISCTECFinanceFlyer.pdf.

Maren Veatch is an intern at BISNIS in Washington, D.C.
 

by Maren Veatch

Afghanistan and Central Asia were once a crossroads of global trade. Their proximity to countries and regions with rapidly growing markets, such as China, Europe, India, the Middle East, and Russia, as well as to significant human, natural, and industrial resources, can make them become a crossroads of global trade once again. Integration and development of the region will increase trade opportunities for local and outside companies.

Afghanistan is centrally located between South and Central Asia and is the key to increased trade and investment opportunities in the region. As Afghanistan’s economy opens up, there are opportunities for South and Central Asian countries to find trade patterns again. Afghanistan is the bridge—literally and figuratively—that connects South Asia to Central Asia. To facilitate cross-border exchanges, the U.S. government appropriated $36 million to build a bridge linking Afghanistan to Tajikistan and, thus, South Asia to Central Asia. The bridge is expected to enhance economic and commercial opportunities by allowing goods and people to move more easily between the two countries and throughout the region.

Trade and investment are important aspects to development in that region. For various reasons, the region has been unable to take advantage of its resources and strategic location. Currently, because of the lack of infrastructure and workable policies, little trade exists among the countries of Central Asia and between South and Central Asia. However, as Afghanistan’s economy opens, new opportunities for trade become available. According to S. Frederick Starr, author of A Partnership for Central Asia, trade will help Afghanistan and its neighbors become the center of a new economic region. Regionwide trade will enable Afghan farmers to bring their produce to world markets. Trade will also create jobs and provide revenue to the government. For other Central Asian countries, trade will lead to expanded relations with countries to the south, providing alternative markets to export products, such as hydrocarbons, electricity, and cotton.

In turn, more trade and development increases export and investment opportunities for outside companies willing to spend the time and effort to develop successful relationships. These markets are all about relationships; it is essential to know the local partners, to know the governments and how to deal with them, and to relate to the individual country’s unique culture and history.

Business Opportunities for U.S. Companies

This region is undergoing a transition, and many positive developments are taking place. For example, the international community continues to support reconstruction and rehabilitation in Afghanistan. The community recently pledged $10.5 billion in aid, and the Afghan government is making strides toward securing stability, order, and the economic development of the country. As more development takes place, better infrastructure and trade policies will emerge, which will, in turn, allow U.S. companies to tap into a larger, more integrated market. In addition, there will be increased demand for U.S. goods and services.

Many opportunities for investment and trade in Afghanistan and Central Asia are available. Important business sectors in the region include energy, construction, agribusiness, textiles, logistics and transportation, and mining. Demand for U.S. services and products is high, especially in Central Asian cities where the economy has grown considerably.

Although there are positive developments in the region, there are also political and economic challenges for investing. Political challenges include overcoming past legacies and facing regional uncertainty and political instability. Economic challenges include the need for better policies for transparency, for lower costs of doing business, for insurance, for access to finance, for harmonization of trade and banking procedures, and for a secure investment environment. Those challenges are formidable; however, they are greatly outweighed by the opportunities and rewards available to companies willing to invest time, effort, and money.

Success Story: PMD International Inc.

PMD International Inc., a private investment bank focusing exclusively on private-sector, cross-border transactions and investments in emerging markets, has been active in Afghanistan since 2003. That year, PMD identified potential investors and funding for projects in various sectors in Afghanistan, including agribusiness, textiles and garment manufacturing, construction materials, and warehousing. In 2005, PMD’s directors established a company to transport goods between Afghanistan and its neighbors. PMD is currently investigating in other opportunities, including agribusiness, energy, energy transportation, and mining. PMD believes that viewing South and Central Asia as a single region with Afghanistan as its center and hub offers unique and unexplored commercial and investment opportunities. More information on PMD is available at www.pmdintl.com.

BISNIS Event—Business Opportunities in Central Asia and Afghanistan

BISNIS and the Washington International Trade Association, to highlight the business potential of Afghanistan and Central Asia, are hosting a conference on April 10, 2007, titled “Business Opportunities in Afghanistan and Central Asia.” This event will be a unique opportunity for high-level U.S. government officials, ambassadors from Afghanistan and Central Asia, and private-sector businesses to discuss commercial engagement in the region. Approximately 200 business leaders interested in Afghanistan and Central Asia are expected to attend. More information on this event can be found at http://www.bisnis.doc.gov/bisnis/bisdoc/CA_Afghan_Agenda_Flyer.pdf.

Following that morning event, BISNIS will organize one-on-one consultations for clients with BISNIS representatives from Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, as well as with representatives from the United States Trade and Development Agency, Overseas Private Investment Corporation, Embassy of Afghanistan, Afghan–American Chamber of Commerce, American–Uzbekistan Chamber of Commerce, U.S.–Kazakhstan Business Association, U.S. Department of Commerce Afghanistan Investment and Reconstruction Task Force, and U.S. Commercial Service. More information on how to register is available at www.bisnis.doc.gov/bisnis/bisdoc/One_on_One_Flyer.pdf.

Maren Veatch is an intern at BISNIS in Washington D.C.

Sixth Semi-Annual Biotechnological Russian-American Innovation Technology Week

May 1–9, 2007

Philadelphia, Pennsylvania, on May 1–4
Boston, Massachusetts, on May 6–9

Russian–American Innovation Technology Week brings together entrepreneurs, scientists, venture capitalists, and established corporations within the American and Russian technology industries.

Organizer: Mid-Atlantic–Russia Business Council

www.ma-rbc.org

Fifth Annual Financial Markets Conference
May 3, 2007
Boston, Massachusetts

Organizer: U.S.–Russian Chamber of Commerce of New England

www.usrccne.org

Central Asia Transportation Infrastructure Conference
May 7, 2007
Dushanbe, Tajikistan

 The conference will bring U.S. companies together with public and private sector representatives from Kazakhstan, Kyrgyzstan, and Tajikistan, as well as potentially from Afghanistan, Turkmenistan, and Uzbekistan, to discuss current and proposed railway, road, and airport projects in Central Asia. Issues related to the transport of goods will also be addressed. International financial institutions, such as the Asian Development Bank, are also expected to attend. For more information, contact Tanner Johnson, SABIT, at (202) 482-3807 or email at Tanner_Johnson@ita.doc.gov.

Organizer: Special American Business Internship Training (SABIT) Program, U.S. Department of Commerce

www.mac.doc.gov/sabit

World Russian Forum
May 14–15, 2007
Washington, D.C.

Organizers: American University in Moscow and Media Group Kontinent USA

www.russiahouse.org/wrf/index.html

Invest in Russia Conference
May 15, 2007
Washington, D.C.

The conference will be organized the day after the annual World Russian Forum. It will be oriented toward U.S. small and medium-sized companies and individual businesspeople who are interested in doing business or investing in Russia.

Organizers: American University in Moscow/Russia House

www.russiahouse.org

Trade Winds Forum
May 15–16, 2007
Arlington, Virginia

Trade Winds Forum will feature over 30 U.S. Senior Commercial Service Officers (SCO) arriving from U.S. Embassies across Africa, Europe, and India. Each SCO is in a unique position to deliver the most up-to-date information on developing opportunities for U.S. businesses. Trade Winds Forum will also feature leading experts from the private sector and key U.S. government officials addressing important industry trends and trade topics critical to all successful U.S. exporters.

Organizer: U.S. Commercial Service

www.tradewindsforum.com

Transport Infrastructure in Russia Forum
May 29–31, 2007
St. Petersburg, Russia

Organizer: Adam Smith Conferences

www.asi-conferences.com

2nd Annual Emerging Markets Private Equity Conference
June 4–5, 2007
Moscow, Russia

Organizer: International Council of Institutional Investors

www.empec.org

14th International Caspian Oil and Gas Conference
June 5–8, 2007
Baku, Azerbaijan

Organizers: Iteca Caspian and ITE Group PLC

www.caspianoilgas.az

Ninth Annual Meeting of the Board of Governors: 2007 Black Sea Business Day
June 17–18, 2007
Chisinau, Moldova

Organizer: Black Sea Trade and Development Bank

www.bstdb.org

Kazakhstan Growth Forum
June 27–29, 2007
London, United Kingdom

Organizer: Adam Smith Conferences

www.asi-conferences.com

Oil and Gas Transportation in the Commonwealth of Independent States and Caspian Region Ninth Annual Conference
September 18–20, 2007
Vienna, Austria

Organizer: The Energy Exchange Ltd.

www.theenergyexchange.co.uk

14th Annual Commonwealth of Independent States and Eastern Europe Business Forum
September 21–22, 2007
Wroclaw, Poland

Organizer: University of Arizona

http://russian.arizona.edu/annualbizconf.htm