rouble

Why a handful of Indian firms are rediscovering Russia

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THIS AUGUST, Russian investment mogul Yuri Milner’s Bengaluru visit popped up in headlines in the Indian business press. That in itself was not surprising. Milner, who has backed Facebook, Twitter, and Airbnb, is a familiar name in India’s startup circuit too, having pumped personal money as well as funds from his venture capital firm DST Global into companies like Flipkart, Ola, and Practo. But this trip had a different agenda: The billionaire was soliciting India’s help for his $100 million (Rs 666 crore) Breakthrough Listen project—through which he hopes to find proof of alien life. In Bengaluru, Milner, a physicist by training, reportedly screened a documentary on aliens before the founders of select startups and senior executives of investment firms, though neither DST Global’s India office nor the invitees would speak to us on the evening’s revelries.

You may find it bizarre, but Milner’s charming little party was a relief from the relentless flow of bad news around all things Russia. In the recent past, Time and Newsweek magazines have put Russia on their covers for completely predictable reasons: President Putin’s tense diplomacy with the West around Russia’s participation in the offensive against the Islamic State (ISIS) in Syria, and the alleged retaliatory bombing of a plane carrying Russian tourists in Egypt by ISIS. Elsewhere too, the leitmotif in stories about Russia has been the West’s crippling economic sanctions against it as punishment for its annexation of Crimea, and the collapse of oil prices that hit the large Russian oil companies hard. The country’s once-promising tech startup scene has disintegrated. Google has shut its Russian engineering ops, and Intel has pulled the plug from its developers’ blog in the country. In a survey by London-based strategic advisory firm Global Counsel, six times as many multinationals viewed the Russian market negatively as those that viewed it positively. Notwithstanding Putin’s hulking claims of restoring national pride, it is clear that Russians could do with some good cheer.

A few friendly extraterrestrials won’t be half bad.

Time was that the country didn’t have to look so far to find friends. India, known to Russians as the land of Bollywood showman Raj Kapoor, had it in a warm embrace. Russia’s role in building India’s defence and manufacturing sectors is well preserved in history. But with the demise of the Soviet era, some say the legendary friendship is an anachronism. “For all our claims of understanding Moscow, we need to remember that the Moscow of today is a very different place,” says Pripuran Singh Haer, who served as India’s ambassador to Iran and is now secretary-general
of the Delhi-based India-Russia Chamber of Commerce. “The Soviets were, by and large, fascinated by India. The challenge for India now is to find relevance among the Russian youth, who are exposed to the best of Europe.”

In a world where commerce is the fastest vehicle for building bridges, those comments are a cue for Indian businesses to court the Russian consumer starved of options. Notwithstanding his aggressive nationalism, Putin knows that the shortage of public goods could dent his popularity among the Russian youth who are used to the good things in life, argues Rajrishi Singhal, geoeconomist with Mumbai-based foreign relations think tank Gateway House. But by all indications, India hasn’t exactly grabbed the opportunity.

According to Department of Commerce data, Russia accounts for an anaemic 0.7% of India’s exports in the last five years. (Its share in Indian imports isn’t much better: a shade less than 1%.) Exports to the U.S., meanwhile, have averaged 11.9% of India’s total kitty. In FY15, India-Russia trade stood at a severely below par $6.3 billion, with $2.1 billion coming from Indian exports. The two countries have set a target of $30 billion in trade by 2025. Compare that with over $64 billion worth of trade India already does with the U.S. “If there was any advantage to be derived by being in the Russian market at a time when the rest of the world has withdrawn from it, Indian firms haven’t been able to exploit it,” says Haer.

Does that signal a monumental lost opportunity, given Russia remains a “strategic market”, as Harkirat Singh, managing director of outdoor-apparel maker Woodland, one of the early Indian companies to have made inroads in the country, describes it? Or does a struggling Russia not matter to an India that is basking in its newfound clout in the West engineered by a savvy Prime Minister? Those are complex questions, but Haer says “there is no way” Indian businesses can ignore Russia. The crisis will pass, and the market is bound to grow. “We simply cannot miss out.”

He finds support in Singhal. Russia is going to increasingly look east due to the sanctions from the West, and there are fewer barriers to doing business with Russia than with mainland Europe, Singhal points out.

Our e-mails to the Russian embassy in Delhi went unanswered, but Global Counsel’s report shows most MNCs are also thinking like Haer. “[Even though] the overwhelming majority of firms have a bleak assessment of Russia … twice as many firms are committed to the Russian market and expanding their presence there as those that are reducing it,” the report says. Food retailer Cargill has announced a new plant in Russia and bought a stake in a Black Sea port, while consumer goods giant Unilever has expanded its product offerings in the country, even though both remain antsy over the direction of the Russian market and public policy. The report calls this strategy “doubling down” and offers multiple explanations: “One is that the firms are holding their options open. Another is that they genuinely see countercyclical opportunities and are seizing them.”

There is a third, far more significant reason. Russia under Putin has made giant strides in business friendliness. In 2011, the country ranked 120 on the World Bank’s Ease of Doing Business Index, when Putin decided to enter the top 50 by 2015 and the top 20 by 2018. Today, Russia ranks 51 on the index. Be it in getting credit or paying taxes, it has shown consistent improvement across categories—some of it miraculous. For instance, in the “getting electricity” indicator, where Russia ranked 143, it now ranks 29. But murky geopolitics has taken the sheen off those achievements: Tellingly, it is placed 170 in the “trading across borders” indicator, below Pakistan and a clutch of sub-Saharan countries.

“SOME PEOPLE SAY you shouldn’t have come now,” Singh of Woodland tells us. The Singhs’ family-owned company and Woodland’s parent, Aero Club, first entered Russia in the Soviet era, selling four million pairs of shoes annually. Singh was then a student in Russia. “Back then you could not sell directly to the consumer. It was a government-to-government relationship. Business was very safe, because when you are working with the government your payments are secure and commitments are kept,” he recalls.

The breakup of the Soviet Union proved disastrous for Woodland. The company lost a lot of money trying to do business with fly-by-night operators that had cropped up amid the chaos. It didn’t suffer alone: inflation, cumbersome customs procedures and tax laws, the rise of a mafia, and an unreliable banking system in the 1990s made it difficult for all foreign companies to do business with post-Soviet Russia, writes Sanjay Deshpande of the University of Mumbai’s Department of Eurasian Studies in the book Significance of Indo-Russian Relations in the 21st
Century. To compound matters, there was the August 1998 financial crisis that sent the rouble into a free fall.

India’s exports to Russia (pharma products, machinery, and apparel are the major export items), in particular, copped a blow when the key port of Odessa became part of Ukraine with the dissolution of the Soviet Union. Exporters had to find alternate routes, through the Suez Canal and via Finland and The Netherlands, resulting in far longer delivery times. Woodland’s shipments, for instance, take 45 days to reach Moscow after setting sail from Mumbai. As a result, the cost of Indian products when they arrive in Russia makes it tough to compete with European goods. “Shipments from Germany reach Russia in four or five days,” says Haer. “Why would the Russians choose Indian products when they take so much longer?”

Singh, the third generation in the family business, is conscious of the historical baggage even as he takes Woodland back to Russia. “I see this as an opportunity, as not too many people are thinking of entering the country at this time,” he says. “It is a big economy, and in the long term it has to become stable. If we can survive now, we will do well later.” The company has a centralised warehouse in Moscow that caters to multiple markets including Moscow, St. Petersburg, Novosibirsk, Yekaterinburg, Perm, Omsk, Vladivostok, Kazan, and Chelyabinsk. Sales happen through multi-brand outlets as well as e-commerce sites, and there are plans to
start exclusive Woodland outlets by the middle of next year.

The ride won’t be easy. For starters, any company going back to Russia now has to shake off the comfortable, state-supported ways of the past. For over four decades, Indian exporters depended on the Soviet foreign trade organisations and Government of India departments and banks to secure contracts, writes Deshpande. “They executed the contracts without knowing the ground realities, like consumer preferences,” and Russian policymakers feel that Indian businesses have not been able to keep up with competition and the changing norms of doing business in the country.

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However, assuming that the state hand has disappeared is naive. Recently, Russia opened up to dairy imports from India, thanks to the embargo on food imports from the West. But only two Indian companies, Parag Milk Foods and Schreiber Dynamix, received clearance from the Russian government, thanks to an archaic regulation that a dairy exporter must own at least a thousand milking animals. India’s parleys to relax this clause have been time consuming. On the Indian side too, progress has been impeded thanks to reported delays in finalising a disease control protocol by the Export Inspection Council. “For trade to flourish, the governments have to recede and let businesses have a free hand. But in the case of India and Russia, the governments are very much in control,” a former diplomat tells us on the condition of anonymity. “This is one of the key reasons for the stagnation in trade.”

Russia’s banking system is another weak link. With economic growth slowing to 4.1% and credit slowing due to steep key interest rates, Russian banks are under stress. Moody’s Investors Service forecast that bad loans in the banking system would jump to 15% by the end of 2015 from 9.5% at the start of this year. The country has over 800 licensed banks, simply too many say experts, forcing the central bank to shut mismanaged and undercapitalised banks. But despite the surfeit of banks and the reforms, Singh of Woodland says opening a corporate bank account in Russia can be an ordeal.

There are other challenges peculiar to the country, notably its daunting  geography. Pharmaceutical major Dr. Reddy’s (No. 84 on the Fortune India 500), which entered Russia in 1992, says it takes about a month to ship its products to Russia, and another month for the products to reach the eastern corners of the vast country due to challenging logistics conditions. Temperatures in several parts of Russia tend to fall way below the freezing point, and it can be extremely frustrating for a patient who ventures out in the cold to not find a medicine in the store. “But it is very difficult to predict what will be needed three or four months from now in some far-flung corner of Russia,” says M.V. Ramana, the company’s executive vice president and head of branded markets, India and emerging countries. The long time taken for shipments to travel from India also adds to the futility of forecasting demand.

Just like in India, a company can sink a lot of money in Russia and not gain any substantial footing, Ramana adds. You need to be clear about the value you are providing, and then be flexible in your strategy to overcome the country’s unique constraints. Dr. Reddy’s, for instance, decided to shift from a forecasting-led model to a consumption-based model. The company collects information from retailers every day and has created buffers in its central warehouse from where new supplies are shipped as soon as stocks get consumed. Orders are placed at the Indian manufacturing facility based on inventory movement.

RAMANA SAYS ONE TRAIT of Russian consumers makes all the trouble worthwhile: their brand loyalty. “Russians are brand conscious and reward you when you keep a long-term view,” he says. “Since entering Russia, we have witnessed two crises—the 1998 rouble crisis and the 2008 global meltdown. Many companies several times our size quit the Russian market, but we stayed on.

Today we are the No. 1 Indian pharmaceutical company in Russia [by volume]. The companies that had left haven’t been able to find a footing again.” Dr. Reddy’s crossed $200 million in sales in Russia in 2011 and claims to be growing at 14% annually. Revenue for the second quarter of FY16 stood at $45 million, down 29% year-on-year. However, it grew 11% year-on-year in constant currency terms. “There was complete chaos when the currency broke the barrier and got devalued,” Abhijit Mukherjee, the company’s chief operating officer, said in an analyst call referring to the fallout of the sanctions. “Retail trade tried to increase prices, so basically on a wallet which was getting leaner, it was a double whammy. I think the turmoil is over,” he added. Dr. Reddy’s now employs 850 people in Russia, out of which 840 are Russians and 80% are women.

Singh’s big learning from Woodland’s two innings in the country is that “the Russians like to become friends first”. The advantage: They stick by you when the going gets tough. There is a view that the harsh climate and turbulent past have made Russians partial to stability and predictability, qualities that a company can demonstrate by not running away at the first sign of trouble. Those are also qualities that endear a company to its employees. “Once they trust you, they stick by you and help you grow,” says Singh.

Given Woodland’s past association with the country, it already had allies there. But this time, the company didn’t employ the same people it had decades ago. “To do business now you have to hire the new generation. This time our sales people are mostly 30-35-year-olds. They understand brands better and know how to do business like the Europeans,” says Singh.

But old loyalties remain handy. Singh tells us of a time he had to leave the Woodland stall at a Russian trade exhibition for an urgent meeting, putting two Indian colleagues in charge. The problem: They couldn’t speak Russian. Coincidentally, Singh got a call from a former Russian associate he hadn’t spoken to in years. Out of desperation, Singh asked him for help in manning the stall till he returned. The meeting lasted much longer than he had anticipated, and the associate ended up spending the whole day at the stall “though he didn’t have to”, says Singh.

WHILE FIRMS LIKE WOODLAND AND DR. REDDY’S are hustling it out in Russia, such examples are too few to make a meaningful dent in the deep-rooted inertia. Business will get a crucial fillip with the launch of the International North South Transport Corridor through Iran, a ship-rail-road route connecting India with Russia and the markets of Central Europe. An intergovernmental panel recently cleared the draft transit and customs agreements to set the corridor in motion.

Haer suggests that so long as Russia-bound businesses get such enabling conditions, they wouldn’t be bothered about Putin’s larger troubles. Trade cannot be equated with politics,” he says. “An apparel manufacturer in Karol Bagh is not interested in foreign policy.” If anything, experts say India’s relationship with Russia hasbeen freed from ideological baggage under the Putin regime.

Writes Deshpande: “In the Soviet era, bilateral ties were cast in the paradigm of Cold War compulsions … but Putin has put partnership with India on the solid base of … ‘the concurrence of long-term national and geopolitical and economic interests of Russia and India’.”

That said, several insiders we spoke to point out that business ought to be a two-way street, and Russian firms need to do more to demonstrate interest and build trust in India. Between April 2000 and September 2015, Russia invested $1.07 billion in India, a measly 0.4% of India’s foreign direct investment receipts. “Many Russian firms find it very difficult to participate in the tendering process in India because all the forms and documents are in English,” says Haer. But it is hard to have empathy for that problem at a time when India has emerged the world’s top FDI destination, attracting tens of billions of dollars from other non-Anglophone countries like Japan and the Netherlands.

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Two recent big-ticket announcements promise to impart new momentum in business partnerships. In July, the Russian government and Anil Ambani’s Pipavav Shipyard tied up to manufacture a naval frigate under the Make in India programme. The deal size is estimated to be upwards of $3 billion, making it the private sector’s biggest-ever warship-building project. There’s also Russian oil major Rosneft’s proposed acquisition of a 49% stake in Essar Oil (No. 14 on the Fortune India 500) for a reported $2.4 billion.

Ultimately, such deals will push both countries to cast aside history and let business refashion the relationship. “The partnerships that will be formed now will not be based on nostalgia but purely on economics,” says Ramana. That, plus our shared hunt for other intelligent life in the universe.

(Additional reporting by Rajiv Bhuva; illustrations by Nilanjan Das; first published in the December 2015 issue of Fortune India; one fact has been corrected since this story was first published.)

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