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Backseat Driving: Russian Markets Have Lost Their Appeal to Leading International Corporations

Very few global corporations of high repute are willing to sell or produce their goods in Russia, a new study found. Russia is trailing its BRIC colleagues ­ India, China and Brazil ­ in the sales and production focus for high-performing companies, which could deal a fresh blow to the country's perception as a rapid-growth emerging economy.

"Brazil can be seen as continuously emerging, while Russia's relative importance has declined," said the authors of the study. While Russia still remains a critical market for European companies' sales, it has declined as a priority market for Asia-Pacific investors and fallen out of the top ten for companies based in North America, the report said. The study, conducted by the Economist Intelligence Unit for Ernst&Young in January and February of 2011, interviewed over 400 top-level executives, board directors and marketing professionals at top-performing international corporations. The survey distinguished between top-performing and less successful companies on the basis of revenue, as well as growth in their earnings before interest, taxes, depreciation, and amortization (EBITDA).

From a global perspective, Russia, which gathered 14 percent among industry executives, was some way behind in the sales focus of major corporations, compared to India with 34 percent, China's 33 percent and 19 percent for Brazil, the report said. The study shows that while global companies headquartered in different regions may have their respective preference for emerging markets, India and China have dominated both in terms of sales and production focus for the majority of companies wherever they are based. Roughly 47 percent of high performing global companies consider India as the most important market for sales, while 44 percent of them named China.

Up to 75 percent of product sales are currently being generated from conventional markets, but the situation is set to change as companies continue to dedicate increasing research and development investment to rapid-growth markets, the report said. The study found that the top markets for production for all respondents were China (30 percent) and India (28 percent), followed by Brazil and Mexico with 12 percent each. Russia got 13 percent of the votes of high-performing firms in Western Europe and 13 percent in North America.

The authors are also predicting that within five years, more than 60 percent of the revenue of larger consumer product (CP) companies is set to come from the rapid-growth markets. "With low-volume growth forecast in North America and Western Europe, it is increasingly clear that for consumer product companies both large and small, the rapidly developing economies hold the key to a prosperous future," the report said. India and China, which are the world's fastest growing large economies, are also set to become the major drivers of worldwide product development, the report said. "It appears that the combination of high volume and rapid growth in the India and China markets lifts them outside the normal, more regional focus," the authors of the report said.

Almost half the high-performance companies surveyed named economic growth forecasts as the main factor for their sales and investment strategies, while 40 percent identified demographic profiles. Inflation and purchasing power parity are also rated highly in determining the markets that they would prioritize for investment. While the population of four BRIC countries comprises more than 2.8 billion people or 40 percent of the world's population, Russia has just a tenth of the population of China. Russia's population has also been shrinking while other BRIC peers see their own populations growing, explaining their greater appeal to manufacturers and retailers of cheap goods. On the upside, Russian people are the richest of all the BRIC nations by a wide margin ­ twice as well off as the average Chinese and five times better off than the average Indian, experts say. Premium customers were the most highly targeted segment only in Russia, the Middle East and China, where there are distinct groups with immense personal wealth, the report said.

High-performing companies, however, placed less emphasis on simple quantitative demographics and income-per-head factors ­ regardless of which sector of the economy is involved. In addition to high inflation risks, global corporations are focusing more on political risks. As for political risk, Russia looks like a poor relative even in the family of emerging market states. Political risk coupled with an unfriendly investment climate has spooked investors and boosted Russia's capital outflow to a whopping $13 billion in January. The market expects Russia's gross domestic product to grow 4.4 percent this year compared to eight percent in China, 6.3 percent in Indonesia and 4.5 to 5 percent in Brazil, RIA Novosti reported.

When accessing emerging markets, high performing companies are also paying more attention to how fast they can enter a market, according to the report. Many high performing companies prefer to work with a local sales agent, rather than establishing a joint venture or conducting a merger or acquisition, as such market entry reduces investment risks for companies by minimizing their capital or contractual exposure to the local market, the report said.

The report also highlighted a new post-BRIC trend underpinned by the arrival of a number of countries including Poland, Mexico and Argentina, which are emerging as increasingly attractive investment destinations as a result of many companies' regional expansion strategies. However, while these countries have gained in importance, high performers from Western Europe are expected to maintain a regional loyalty by keeping a greater focus on Middle East, Eastern Europe, Turkey, Ukraine and Russia.

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