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Russia and Central Eastern Europe as a market area

20 Feb 2017Economics Essays

Russia and Central Eastern Europe as a market area in 2010:Forecast the future of business in Russia and your position within this context. Forecast the future of business in Russia and your position within this context.

Russia and Central Eastern Europe is certainly one of the most promising market areas of the world. With an impressive legacy from the Soviet era, an educated population and vast natural resources, Russia has a great potential for development. Although beset by severe economic problems and political and governance inefficiencies at the time, the nation has the potential for a spectacular comeback this may happen as soon as 2010. Its revival can have a reinvigorating effect on other countries of the region that have possibility to expand by selling their products in Russia and have many of the same advantages as their larger neighbor. The success of any future business in Russia will depend on one’s ability to find ways to success in this complex context.

To appraise Russia’s future, one should remember first of all that the nation was the main formative part of the Soviet Union, one of the two superpowers that participated in the Cold War. Despite the obvious defeat in this rivalry with the US, the USSR was able to hold ground against the West for several decades, and not in the last due to its developed industry and military complex. As of now, Russian weapons, such as rockets, tanks, rifles and others remain a competitive product on the world arena. The nation is a major supplier of weapons in international markets, and this manufacturing involves many technological issues that are difficult to reproduce in other countries. With a skilful governance, the country can make this a serious advantage, and in 2010 more technologically advanced industries can develop.

One need not remember, however, the Soviet production, defined by the government to meet their special political goals, was aimed at making the country powerful, not at making an individual citizen well-off. The neglect for individual consumption has led to under-development of this sector. This caused permanent deficiency of consumer goods, which is negative for citizens, but opens great possibilities for foreign companies with a well-known, product with world-renowned quality.

The Soviet Union also left behind a quite impressive educational system that, being free for a long time, provided access to talented youths from all over the Soviet Union. This system survived to this day in Russia and Central European countries such as Ukraine, Belarus, and Moldova. With solid educational institutions and a sound school system, these nations can turn out a consistently high quality of educational programs and in consequence qualified specialists that can propel the economy. The post-Soviet states are especially remarkable for their research and education in mathematics and natural sciences, which is highly important for the development of industrial production in these countries. CIA World Factbook (2006) states that the literacy rate in Russia is around 99.6%. Thus, illiteracy is practically non-existent in these nations, which can also help them attain success in business. In five years’ time, Russia will continue to produce well-qualified specialists who will have hit the market and made changes in the economy.

Natural resources are also not an issue to discount easily. This primarily refers to Russia as Central Europe does not contain so many resources. Russia’s development in particular will be seriously affected by the large reserves of oil of 69 billion barrels by 2003 estimates that make is second important oil supplier of the world after Saudi Arabia (CIA 2006). Fortunes made on oil such as those of Mikhail Khodorkovsky and Roman Abramovich testify to the fact the oil reserves are an important source of wealth if distributed equitably. The nationalisation of Abramovich’s company Sibneft and the de-facto nationalisation of Yukos, for all the scandal associated with the event, mean that the Kremlin has regained control over the lucrative industry, and the oil revenues are more likely to stay in the country, delivering economic benefits. Oil earnings are believed to have contributed to an impressive decline in Russia’s foreign debt (dropping from 90% of GDP in 1998 to about 36%) and surge in foreign reserves (from $12 billion to about $180 billion at the end of 2005) (CIA 2006).

Certainly the impact of oil revenues will depend on the ability of the Russian government to harness the constant stream of revenue for modernization and improvement of economy, but at least this cushion can help the nation make a transition from Soviet-era outdated plants and factories to a more modern, advanced economy. With Russia’s current policies aimed at the construction of a stabilisation fund, this may become easier to realise by 2010.

The same cushion for transition is afforded, for instance, to Belarus in the form of lower gas prices deemed proper by the Russian government due to extensive cooperation with Lukashenko’s regime. Ukraine, true, has lost hold of an opportunity to profit from cheaper gas that was previously supplied by Russia after choosing a pro-Western political course, but with the new elections coming the nation can reassess its future direction and once again enter an agreement with Russia for cheap gas prices. These would offer Central Europe surely a dubious advantage in developing their economies, making them dependent upon Russia. However, lower gas prices can also help them to develop their economies to meet Western standards. In any case, the instability of the political situation and dependence on gas prices on politics makes the Central Eastern European economies of the region rather unstable.

The development of the region will surely face many serious problems. The Soviet era left a negative legacy that is difficult to overcome. As a system grounded in corruption, it left an even worse corruption to the new market economy that accelerated in the tumultuous perestroika era and was connected in Russia to the epoch of Boris Yeltsin. Although Vladimir Putin is perceived as a stronger leader, more effective in harnessing this harmful phenomenon, there is no sign that it has ceased to be a factor both in corporate and government decision-making. Speaking of Central Eastern Europe, it is most definitely a factor in Ukraine where its current President gained power after successfully exploiting the topic of corruption in former President Leonid Kuchma’s government. Corrupt officials continue to make biased decisions that affect the efficiency of business since contracts and licenses often go not to those with the greatest capabilities, but to those with the greatest connections. However, the experience of Italy, for instance, demonstrates that corruption is not invincible, and that the nation can make its economy function even with this harmful phenomenon present.

All these factors will affect the development of Russia and Central Eastern Europe in the next few years. Most probably, by 2010 growth of the Russian economy will continue, although the goal proclaimed by Vladimir Putin, doubling the national GDP, will hardly be achieved. Russia will most probably continue to draw its growth from its natural resources as oil prices are likely to soar even further. This can result in the country’s economy growing, while the wealth will remain concentrated in the hands of a rich clique of businessmen and corrupt officials. This will make income distribution skewed continuing the trend of the past, as of 1998 when the top richest 10% of the nation consumed 38.7%, the bottom 10% accounted for only 1.7% of national consumption (CIA 2006). This makes the Russian market a good place for luxury goods that are eagerly consumed by the top rich, while also demonstrating the lag in public consumption. To this date, in the streets of Moscow, one can see luxury cars while the majority of the population cannot afford a vehicle and have to use public transportation.

However, if economy continues to boom which is most likely, personal incomes that have posted increases over 12% in 2005 will continue to grow (CIA 2006). This will add impetus to the development of the Russian market for consumer goods that, as stated above. often remain below world standards – an after-effect of the Soviet era. Thus, the Russian consumers that have recovered after the 1998 financial crisis will in future be better able to pay for goods and services, a fact which opens new possibilities for consumer-driven industries. The same will be observed most probably in Ukraine, Belarus, and Moldova that also exhibit a smaller disproportion (23.2% versus 3.7% in Ukraine) and a slightly more equitable income distribution, so in these nations a smaller rise in income will have greater impact on prosperity of ordinary citizens who are consumers for mass market products (CIA 2006).

The company that wants to succeed in selling consumer goods to Russian, Ukrainian or Belarusian consumers will most probably have to open a business in one of these countries since imports may be seriously affected by duties and quotas. Thus, the two nations are making heavy efforts to protect their domestic automobile industries, slapping imported vehicles, especially used ones, with heavy import duties. A company that will venture into local assembly may soon gain competitive advantage over its rivals that will come later to the same markets.

Besides, partnership with local businessmen can have other serious advantages. For instance, this will allow businessmen to navigate through complex networks of local officials and businessmen, establishing necessary contacts with greater ease. Since corruption is not likely to disappear any time soon, someone willing to start business in Russia will have to use something similar to Chinese guanxi, knowing the right people who will pull the triggers for you. Without this, a company with a world-class business reputation and large financial resources will most probably be successful in any case. For a smaller-size business that already has competitors among local companies, finding the right trustworthy contact may be the starting point for a business venture.

The attraction of the Russian market is confirmed by the fact that many companies choose to do business there. After 2000, “real fixed capital investments have averaged gains greater than 10% over the last five years” (CIA 2006). Many reputable Western companies are ready to overlook instability and governance problems as well as country-specific risk to share in Russia’s growth story. Thus, since the financial blackout of 1998, Russia’s growth has averaged 6.4% per year and somewhat slowed down to 5.9% in 2005 (CIA 2006).

Ukraine demonstrated a growth rate of 4.4%, well below its impressive 2004 growth of 12%, due to adverse external environment (drop in demand for steel, Ukraine’s main product) and inefficient economic policies. The future of the national economy is uncertain because of a sharp rise in gas prices initiated Russia that will adversely impact the fuel-inefficient Ukrainian manufacturing. Belarus, given its stable partnership with Russia, has better prospects for economic development. Ukraine’s plight, however, demonstrates vividly the problems faced by the countries of the region: dependence on Russia and its whimsical changes in policy-making, sharp swings in political course, including foreign policy, and on the export of a few raw materials that may economies subject to fluctuations in global markets.

Long-term stagnation, however, appears unlikely because of the rich industrial and educational potential of Russia and Central Eastern European countries. Their markets will be boosted by industrial development even if their commodity exports fail, although one can envisage a temporary plunge in this case. In any situation, this will give impetus to nations to rethink their development strategies and emphasize production of high-value-added goods rather than raw materials. Thus, a company that has discovered a promising niche in the markets of that region should give serious consideration to the opportunity, beginning search for a reliable partner and connection in the area.

Speaking of my own prospects within this context, I believe that I could be successful working in the Russian or Central European markets. I already have considerable cross-cultural competence developed during my work with the international customer service in Finland-headquartered company and the purchasing department of the US-based pharmaceutical firm. Having worked in Europe, I would most probably find many common points with Russians, Ukrainians, Byelorussians, and Moldavians, although I realize that their culture is vastly different from that of Western Europe. However, I believe that given the vast opportunities opened by this market including over 200 million people, I would find ways to adjust to cultural issues and take time to explore the business opportunities there.

I also find that trading, pharmaceuticals and telecommunications have great potential for development in these countries, and drawing on my expertise in the area, I will be in a good position to profit from this development. Thus, with a relatively low income level by world standards, not all those who want to use wireless communications can do so, and international and inter-city connections are still too expensive for many people. With the above projections of rise in income levels of the mass consumer, this market can deliver more than it does today. The projected surge in upscale markets can cause rise in more advanced and expensive communication services including wireless Internet connections and others. Thus, I believe that the advances of the Russian and Central European markets hold significant implications for someone with my background and experience, as long as I undertake more substantial research into segmentation and niche markets in these countries. Central Intelligence Agency (CIA) think it is NOT regarding my company's position, but refer to my position as a student with below working experience:

  • Four years of successful working experience with telecommunications in international customer service.(Company’s headquarter in Finland)
  • Five years of purchasing experience with pharmaceutical field in an international company.(Company’s headquarter in US)

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