From Winter to Summer: The Advent of a New Season in Russo-Japanese Business

|Russia

Just when I thought that spring had at last arrived in cold Moscow, with green leaves sprouting on the trees lining the city streets, it already feels like midsummer: for the last few days, daytime temperatures have risen to almost 30 degrees Celsius. Furthermore, although we are inland, it is quite humid. If one walks around wearing a suit, one is soon soaked with perspiration. The people one sees on the streets are all wearing light clothing.

The updated version of the graph that I introduced in this column on 1st October last year, tracing the trends in Japanese exports to Russia, is shown below.

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The amount of money shown in this graph is based on customs clearance between the two countries, so it does not include such items as products manufactured by the subsidiary of a Japanese company in China or the UK, for instance, that are then exported to the Russian market. For example, one leading Japanese manufacturer of household electrical appliances stated that only 30% of the products that it supplies to Russia are shipped from Japan. However, the long-term trend indicated by this graph demonstrates that Russo-Japanese trade since 2000 is at the same level as or even higher than it was during the 1970s, when a series of large-scale Siberian development projects was brought to fruition.

According to JETRO’s Survey of Trade in Dollars database, Japanese exports to Russia in 2004 totaled $3.11061 billion, recording huge growth of 76.3%, following on from the increase of 87.2% seen in 2003. In 2004, Russia was in 25th place in the list of countries receiving Japanese exports (up from 31st place in 2003). Incidentally, Vietnam was in 24th place ($3.178 billion) and India was in 26th place ($3.04 billion) in the same year.

However, if we look at growth rates, Russia, with a rise of 76.3%, is far and away the leader in the top 26, significantly outstripping exports to Vietnam (12th place with a 21.6% increase) and India (7th place with a 27.4% increase), which had seemed to be doing well. Thus, as a destination for Japan’s exports, Russia has definitely emerged as a redoubtable country.

On 26th April this year, Toyota officially announced that it is going to set up a knockdown production plant for its Camry model in Saint Petersburg. In tandem with this, a remarkable increase is being seen in the number of Japanese companies establishing new offices in Moscow and even Saint Petersburg. The number of companies that are members of the Japanese Chamber of Commerce and Industry in Moscow will reach 100, if approved at the scheduled meeting this June, and looks likely to increase further. Just two years ago, the number was 65. I understand that interest in Russia on the part of Japan’s automotive component industry is suddenly increasing, in light of Toyota’s expansion there.

Just as it seems that Moscow went straight from a cold winter to the height of summer, we can perhaps say that the business relationship between Japan and Russia has at last emerged from the fluctuations and doldrums of the 1980s and 1990s, entering a qualitatively different phase. In the 1970s, the large-scale Siberian development projects drove expansion, but this time the pattern seems to be growth first of all in exports to Russia of consumer goods, followed by gradual, sustained growth in industrial goods.

Naturally, this does not mean that Russo-Japanese business will continue to expand evenly and monotonously. Although the Russian market is meant to be buoyant, there are actually some Japanese businesses that are finding it impossible to enter it, while others are facing a crisis, having suddenly been tripped up, even though their business there has been doing well for a long time. While acknowledging the underlying trend towards business expansion, quite a few Japanese companies are unable to take the next step, due to fears about the risks. And it is not only Japanese companies that find themselves in this kind of situation.

Today, I happened to take part in a joint presentation by the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), held in Moscow by the European Business Council. Both financial institutions are actively trying to increase equity participation in and loans to Russia, so they are enthusiastic about identifying potential target projects.

However, during the question and answer session, the following comment emerged from a Western European member of the audience. “Even if one wishes to invest in Russia, the development of the legal system here is lagging behind other countries; furthermore, it is extremely difficult to predict how it will operate in practice. It is precisely for this reason that, compared with Central and Eastern Europe and the countries of Asia, foreign investment in Russia is still at a low level. Why, despite this reality, are your institutions painting this rose-tinted picture of the market and calling on foreign businesses to invest here?”

With regard to this, while agreeing that the questioner’s perception was correct, the representatives of the EBRD and the IFC made the following points. 1) Recently, although there have been business disputes, we have begun to see cases in which the Russian courts rule in the favor of foreign companies. Thus, the legal aspects of the business environment are improving. 2) Such court cases are conducted on a regional basis, but a considerable disparity is emerging between regions where the trials are civilized and those where they are relatively uncivilized. 3) When foreign companies do business in Russia, it is necessary for them to make a judgment about the extent of the risk that they are willing to take, after first being thorough in applying due diligence (conducting surveys relating to the legal, physical and economic realities affecting the price of real estate and loans), and this process must not be neglected. 4) It is not a situation in which good business opportunities are just lying around for anyone to grab. Even if one has a project proposal, it is necessary to take great care in brushing it up, in order to increase its feasibility and profitability. 5) The question of whether there are prospects for securing the personnel to support the implementation of that business project in the area where it is to be conducted is a particularly important point.

I think that what these institutions wished to say was that, even though the overall business environment in Russia still has some negative aspects, it is possible to make gradual progress in business by devising various ways forward, based on the premise that the situation as a whole is heading in the general direction of improvement.

This may seem to go without saying, but Russo-Japanese business relations are gradually deepening, through the constant interplay between the vector of reluctance due to fears about risks, and the vector of devising various ways to make gradual progress, based on orientation towards success.

[Translated by ERINA]