Russian Investment Review
— 07 июня 2007 —
1. To what extent is the development of your business related to the emergence of the middle class on Russia, as this category of people is regarded as the major consumer audience for frozen convenience products? Are frozen foods popular outside Russia’s major cities such as Moscow and Saint Petersburg, whose markets are nearing saturation?
Any government relies heavily on middle class and it plays an important role in Russia as well. In the last several years the country has achieved political stability, which underpinned the development of middle class. These people are well educated and they enjoy sufficient and regular income. In addition, they are very busy. Usually both spouses work to generate income for middle class families, they buy cars, save money for acquisition of living premises and to support their children in the future, pay off borrowed money etc. At the end of their working day they prefer not to spend time buying fresh groceries and cooking for a long time. This lifestyle is typical for middle class people and it is a major driver for our industry.
It is noteworthy that currently this trend is observed in capital cities of Moscow and Saint Petersburg as well as across Russia. The only factor that underpins possible variations in consumer preferences from region to region is the specific features inherent to each individual region.
2. What is the role of foreign investments in the development of production capacities and in boosting product output? Are Russian manufacturers capable of building capital stock at sufficient rates and in sufficient quantities so as to meet their needs?
The Russian market for frozen convenience foods is facing important challenges. It is developing as new players emerge and competition is growing. Nevertheless, the market is still relatively narrow and undersaturated. Compared to western markets where this sector is estimated in tens of billions of dollars, Russian market has evolved to hundreds of millions of dollars. It means that we are lagging behind by the factor of two or three.
In view of the above we can be sure that foreign investments are inevitable.
However, foreign producers that are looking at Russia today do not see relevant major suppliers of their scale. They will have to bring their international partners to Russian. This is the path that retailers will follow seeking adequate production basis.
It is worth mentioning that fast Greenfield growth is incompatible with high quality standards. Any profit-making organization will take about 3-4 from the moment when the strategic decision is made and until the first product is delivered. This is a long time not to mention that many changes may be pending in the target country.
Our ten years of experience in production and incessant efforts to improve product quality enables us to provide adequate response to the growing market expectations and to face new competitors as a better market player.
3. Upon the break-up of the Soviet Union Kaliningrad region survived an economic collapse and today the region demonstrates fast economic growth at the rate, which is higher than the average growth rate for Russia. Your company is the major investor in Kaliningrad region and you are Head of the region’s Foreign Investors Association. What are the factors underpinning the region’s success?
Kaliningrad region is the only enclave region of Russia. At the same time it is home to about 1 million people. It is a kind of a little country characterized with its specific historical features: for a long time this was a restricted region where a large number of military-oriented production entities were located. At the time when the Soviet Union collapsed, the region had been in a much poorer state than any other region of Russia. Nevertheless at a certain stage of development state authorities turned to the region regarding it as one of Russia’s weakest regions in many respects.
The consequent support came in a variety of forms including legislative privileges, federal support, and building of strong local administration. The combination of these three factors contributed to the improvement of the state of affairs in the region.
Today economic growth of the region exceeds the average figures for other regions and the prospects for its development are more positive compared to many other regions of Russia.
Kaliningrad region is separated from mainland Russia with several international borderlines, which posed the need for the status of a special economic zone (SEZ). Any good transported from this region to mainland Russia has to undergo customs declaration procedures and then customs clearance. This position of an enclave facilitates decision-making that would take much more effort and time in any other region. Thus, on the federal scale, Kaliningrad region performs a very important task as it helps test and further implement correct strategic decisions.
In addition, this region is ideal for dealing with issues related to substitution of imported goods. For instance, the first law adopted in 1996 provided grounds for building production premises in Kaliningrad region, and the most recent law that came into force on April 1, 2006 sets stricter requirements for processing of imported raw materials.
This is a vivid example of successful implementation of the federal program aimed at the development of the region.
4. Is it possible to replicate the successful experience of Kaliningrad region and especially that of the special economic area (SEA) in other regions of Russia?
Certain projects may be tested in Kaliningrad and later replicated in other regions of Russia. Due to its position of an enclave, Kaliningrad is an ideal guinea pig, and projects can be tested in the region in an environment that is insulated from the rest of Russia as well as from other external influences. Local testing does not put the entire country at risk. At the same time the enclave essence of the region determines the unique opportunities in the region that are not available in other regions of the country, which means that in each case we should take special care
For instance, Kaliningrad region may become the source of unique wholesale operations if we talk about administrative reforms related to security or construction, or provide the unique experience of cooperation between state authorities and businesses.
At the same time the special location of Kaliningrad should make the government consider the level of salaries for local residents, which should not be much lower than the salaries in neighboring countries. Otherwise, sooner or later an analog of the Berlin wall will have to be built to keep the outflow of workforce looking for higher living standards abroad within the distance of just 130 kilometers.
5. Kaliningrad region is planning to attract 300,000 immigrants representatives of Russian diasporas residing in neighboring Baltic states to foster further economic growth. What social issues do you expect to arise as new immigrants arrive in the region en masse?
At the time when Kaliningrad region was part of Germany its population in the territory of 150 thousand square kilometers was over 2 million people whereas today the population is 950 thousand people. Of course, Kaliningrad residents of today believe that the inflow of immigrants will generate undesirable competition and negatively affect their living standards and salaries, but this is not true, and, on the contrary, the region may simply collapse unless new blood flows into its body. Even today the region already strongly lacks workforce. If new residents do not come here in the nearest future, certain federal projects targeting the region, such as the development of the gambling sector, may remain unfulfilled. In addition, other industries that have already settled in the region may leave it triggering the downward trend in the real estate, road construction and other sectors. Why would you build restaurants if there were no waters around?
I believe that the region’s economy strives for the influx of people. This would improve the higher education system and raise the quality of medical services.
Undoubtedly, we would have to build new residential property and relevant infrastructure, but that would be a positive step that would also create new workplaces and bring new highly qualified personnel.
Presently Kaliningrad region is not a densely populated region because its population of 950 thousand people is insufficient for reaching the critical mass for the region of this scale. The ideal population of the region should be at least twice as large as it is today.
6. Are you concerned with the fact that Kaliningrad regional economy is highly focused on its ties with the rest of Russia and largely depends on the economic regulations from Moscow rather than on development of relations with neighboring European states? What specific steps have Russia and the EU taken towards further cooperation with Kaliningrad region?
Kaliningrad region is a part of Russia and, of course, it depends on Moscow. This, however, does not hinder the development of businesses in the region. There is another important obstacle: some federal laws are not applicable in Kaliningrad due to its specific features. For instance, this year a new legislation was adopted that prohibits foreign citizens to own land in bear-border territories within the margin of ten kilometers along the state border. This law looks still more strange taking into account that the maximum distance across the region west to east is 205 kilometers and north to south the distance is 108 kilometers. It is clear that the law was adopted in a response to the issues the country is facing in the Caucasus, but in an enclave the law is viewed from a different perspective taking into account that some investors have already acquired near-border real estate properties and launched construction in these territories.
The most important step the state has taken towards improvement of Kaliningrad region's economy was the adoption in 2006 of the Federal Law On the Status of a Special Economic Zone for Kaliningrad Region and on Introducing Amendments to Certain Laws of the Russian Federation. This attitude of the Russian government towards the region along with correct choice of development model for Kaliningrad facilitated the success we see in the way the region addresses existing economic problems and demonstrates rapid development.
The implementation of the Federal Targeted Development Program until 2010 is highly important for Kaliningrad. The Program envisages the formation of mobile economy in the region, i.e. the economy is focused on openness based on foreign trade.
At the same time the region remains a sort of a hostage with Europe. There is little cooperation even though the European Community is taking certain steps towards the development of the region notably as part of TACIS program. The total number of successful projects is around 80 and they were implemented in such areas as environment, education, economy, S&M business development, tourism, healthcare, energy, transport, agriculture and development of infrastructure in near-border territories. IN the fall of 2006 29 project were in progress their funding totaling 18.7 million EURO. We should also mention neighboring program and partner programs that involve subsidies.
On the other hand, however, the need to obtain visas to travel to Europe is a significant drawback in the eyes of local residents. They have to take numerous trips to Moscow and spend their time there standing in lines in order to get back home and after a four hours’ drive reach the state border. Undoubtedly, European countries should develop some special exclusive regulations affecting those who reside in this enclave of Russia.
7. Corporate social responsibility has come to be a fashionable subject for discussion among Russian businessmen. In your opinion, is CSR under the threat of finding its primary use as a marketing tool or as a means of improving personal image of heads of companies?
Any modern company should be socially responsible. We must understand that people spend a lot of time at their workplaces and if employees are dissatisfied they will not be able to deliver high quality products.
On the other hand, we should avoid extremes: our own stores, beauty salons, kindergartens, meeting future souses at work etc. A borderline should be drawn somewhere along the way. I believe that what most importantly we should build sincere and transparent relations between employers and employees. All of us come to work pursuing certain goals such as production of a specific high quality good in an efficient manner. In our case these goods are frozen foods that enjoy demand on the market. This process is supposed to be pleasant and convenient for all of its participants.
Talking about the society as a whole we should mention that businesses are founded for purposes that are far from making everyone around happy. Here social responsibility is regarded as production of high quality goods that enjoy consumer demand and are enjoyable in consumption.
This does not mean that charity is nothing but a nuisance. Charity is important, but it is not the major objective. The main goal is to deliver a demanded product. This is the mission of the company and the reason for its existence. Why would a consumer pay for a kindergarten in Kaliningrad? But it work precisely this way because otherwise there will be no source of funding for charity? The funding is included in the price of products. This support has to be an act of good will on the part of consumer though.
When it comes to openness and integrity, we should always remember that people who make other people solve their problems for them are not professionals. If you pollute the air and do not pay for it, you transfer your problems and costs to your neighbors who have to take the challenge of breathing polluted air. This is incorrect. That is why a business should be socially responsible.