December 1, 2003｜Russia
Director, Japan Education Center for Business Management
In this article, I would like to express my thoughts about specific examples of business expansion from Niigata Prefecture to the Russian market. Before doing so, please allow me to make a few introductory remarks.
I currently reside in Moscow. Thanks to this fact, not only can I see and feel movements in Russian politics and the economy almost in real time, but I am also in the position of being able to gain an understanding of the thought processes and reactions of intellectuals and the public through Russia’s daily, weekly and monthly publications. (However, I am not certain to what extent I am able to make the most of this fortunate position.)
In that sense, I would like to act as a hub for disseminating information, as far as this is possible. In particular, apart from analyzing the economy from the macroscopic point of view, I would like to provide Japanese businesses with an accurate understanding of the energetic manner of Russian businesspeople and the true situation experienced on the front line of business. With the exception of those who are or have been actively involved in business in Russia, most people think that it is still too soon to do business in the Russian economy, stubbornly and almost unconsciously adhering to the information about the current state of the country’s economy that filters through the editorial departments of Japanese media organizations, as if it were the gospel truth. Unless there is a significant change in the thinking of such businesspeople, any information to the contrary will be no more than a string of meaningless words.
Furthermore, Russia is the biggest country in the world, with a land area of 17 million square km, and conditions in each region differ so greatly that it is hard to believe they are in the same country. The risk of making the mistake of thinking that one has understood Russia after seeing only part of the country – similar to the Buddhist parable in which a blind man judges an elephant to be like a rope after touching its tail – is considerable.
Let us now move on to the main topic of this article. The Japan Center where I work is located in Moscow. The economy in Moscow is by no means representative of the economies of Russia’s provinces. On the contrary, it is a totally unique region. However, it would be a grave error not to look at the situation in Moscow when attempting to gain a grasp of the state of the Russian economy, because no matter what characteristics a particular region outside Moscow may have, Russia’s economy and trade are influenced by the situation in Moscow, as well as being evened out by it in the majority of cases.
Now, let us briefly survey the current state of the Russian economy and Japanese business activities within it. The Russian economy has remained steady. Looking at the result from the first half of the year (the following figures are comparisons with the same period of the previous year, on a half-yearly total basis), almost all indicators have performed well, with GDP increasing by 7.0%, inflation rising by 7.9% (becoming a single-digit figure for the first time) and disposable income growing by 14.7% (increasing by a double-digit figure for the first time). I do not want to waste the limited space available here by enumerating any more macroeconomic data that have already been published, but I would just like to note that these data remained steady in the latter half of the year and almost all the numerical forecasts for the year were revised upwards. In June 2002, the US followed the EU in announcing that it had acknowledged Russia as a market economy. Moody’s credit-rating agency also recognized Russia as an investment-grade country at the beginning of October 2003, raising its rating by two notches. Regarding the country’s accession to the WTO, there has been overall progress in negotiations, except for the issue of the disparity between domestic and external energy prices, and a summit between Russia and EU resulted in a joint announcement that it would be possible for Russia to accede to the WTO by the end of 2004. What now needs to be done is to continue to make steady progress in negotiations and solve one problem at a time.
However, such positive factors began to be seen a long time ago. In addition, on the front line of business in the Russian market, a cutthroat race to capture markets has been played out, with markets in Western countries and the ROK as the prize. From a different angle, China has steadily gained a stronger footing in the Russian market armed with the advantage afforded by lower prices, which do not compete with Western products. Japan presents a lonely figure, with little presence in the country.
Now, however, something unusual is happening. The situation in which Japan finds itself has altered slightly in the last year; individual companies that have consistently conducted research into Russia over many years are finally starting to move. More companies are expanding into Russia of their own volition, although most of these are big companies based in Tokyo.
An easily understood example that illustrates this situation is the fact that the number of companies registered as members of the Japanese Chamber of Commerce and Industry in Moscow is increasing rapidly. It had only 40 companies as members in 1995 (when it was called the Suiyoukai, or “Wednesday club”), but this figure has increased to 74 now. There has been particularly remarkable growth since the beginning of 2003; membership stood at 65 companies in August, but then another nine companies joined, all at the same time. If things continue in this vein, it will only be a matter of time before the membership figure is a three-digit number. Of course, the number is still far below the 800 US companies with an official presence in Moscow, but for those of us who have witnessed Japan’s ultra-cautious attitude over many years, it truly feels like the advent of a new age.
Thus, the way in which Japan sees Russia has at last begun to change a little; trading companies, which previously functioned as an engine for trade with the Soviet Union and later Russia, have now retreated and have handed over their role to manufacturers.
Although it seems long overdue compared with Europe, the US and the ROK, it appears at any rate that some rays of sunshine have started to fall on Russo-Japanese trade, as more manufacturers have reached a positive verdict and have at last begun to look in earnest toward the Russian market as a result of an “extremely circumspect” analysis of the current situation.
The seven Japan Centers in Russia have continuously implemented projects over many years, aiming to fulfill its primary role of “providing intellectual aid to support Russia as it becomes a market economy”. Our endeavors and achievements have been highly praised by the Russian side. As I mentioned earlier, the Russian market economy has been growing steadily; its success has been highly acclaimed by Western countries and capital investment has begun to accelerate. Given this situation, it is necessary for the Japan Centers to continue to hold seminars regarding the management of Russian companies and provide a higher level of education for managers through holding seminars and training courses in Japan. However, looking at the doldrums that have beset Russo-Japanese trade and the growing disparity in comparison with Sino-Japanese trade (as of 2002, the volume of Russo-Japanese trade is one twenty-fourth that of Sino-Japanese trade), we can no longer remain idle spectators, no matter what the causes of the situation. The Japan Centers should be encouraged to change their strategy. If the original purpose for establishing the centers was to support the development of the market in Russia, as well as to revitalize economic relations between Japan and Russia, then, irrespective of what has gone before, one-way intellectual assistance in the form of seminars and training courses are no longer sufficient. At least, if things continue in this vein, they will neither accomplish their mission nor fully demonstrate the value of their existence.
Anticipating such changes in the background, following a number of meetings led by the Ministry of Foreign Affairs, the Japan Centers have set foot in the new territory of “business matching”, commencing this service on 1st April 2003. The centers have assigned themselves the role of promoting Russo-Japanese trade in collaboration with human resource groups (which conduct activities independently of the alumni association for those who have trained in Japan), including entrepreneurs and middle-managers of Russian companies, whose skills have been built up through business lectures and training courses in Japan.
Incidentally, more than a few pioneering Japanese companies invested in Russia in the past, confident that they would be successful in the Russian market. Unfortunately, however, I must admit that examples of failure came to public attention more often than did examples of success, fueling a strong sense of caution and a certain reluctance in the Japanese business world during an important period when there seemed to be a glimmer of hope for Russo-Japanese trade. Furthermore, it cast a long shadow thereafter. The reasons for this failure are infinite in variety, but in my opinion they can be summed up thus: 80% of the failure was due to the fact that Russia had failed to prepare a suitable environment for receiving investment – in other words, they were premature in receiving investment – and I would attribute the remaining 20% to mistakes made by Japanese investors in choosing their partners, although there will be some who disagree with this. The evaluation by Moody’s goes without saying, but the investment situation itself has now improved considerably (of course, the country’s problems are still too many to enumerate, including the surfeit of corruption that still exists and political risks such as those seen with regard to the Yukos incident).
The Japan Centers have educated many entrepreneurs and sent them on training courses to Japan, helping them to learn not only the fundamentals of business in the market economy, such as marketing and quality control, but also the fact that trust between businesses and customer satisfaction are crucial to the survival and success of a company; in addition, this training has had the effect of making them more pro-Japanese. The list of entrepreneurs that we have trained is an asset that we treasure and I believe that it will play an extremely valuable role in the future. Following their training in Japan, these entrepreneurs become members of the alumni association of the Russian management training committee, as well as the alumni association of each Japan Center. There are no disreputable partners in this list of companies.
Recently, I had the chance to visit Niigata for the first time in many years. I had the opportunity to have meetings with Mayor Shinoda, Mr. Suzuki, Director of the International Culture Division, Mr. Notoya, Manager of the International Affairs Department and Mr. Ozaki, Director of the Commerce and Labor Division. In addition, I met and talked with representatives of relevant divisions of Niigata Prefectural Office, groups such as ERINA and individual companies such as JSN. Unfortunately, I was unable to see Mr. Yoshida, Chairman of the Board of Trustees of ERINA, because he was away on a business trip, but I received valuable information from many people, including Mr. Sasagawa, CEO of ERINA, as well as discussing prospects for the future.
The purpose of these meetings was to introduce various Niigata industries to the Russian market, as well as to explore areas that could act as a bridge between Niigata and Russia, such as the potential for overseas production, and to exchange opinions about areas in which cooperation would be possible. Needless to say, Niigata has many internationally viable industries and has steadily promoted trade with Far Eastern Russia for many years. The Japan Centers in Khabarovsk and Vladivostok have been active as mediators in a not insignificant number of these projects.
I believe that, in parallel with this, Niigata companies should start expanding their business operations into Russia’s western regions (the area west of the Urals, known as European Russia) as soon as possible. One only has to count the population of Moscow and calculate the city’s per capita purchasing power to conjure up an image of the scale of the market and the potential that it offers. In fact, Moscow’s recent economic might and the stability of its external trade are worthy of attention.
Although I was able to ascertain all this from my recent trip to Niigata, Niigata itself is doing little at present in terms of making serious approaches to European Russia. Accordingly, I would like to ask that consideration be given to the dispatch of business missions to Moscow and St. Petersburg to start with.
Naturally, I do not think that business will take off as a result of just one visit to Russia. Market research should be conducted first of all. If there is anything that needs to be checked in advance, such as trends in the Russian market for a specific industry, the Japan Centers, including those in Moscow and St. Petersburg, can conduct a certain amount of research. In addition, it is possible to collaborate with JETRO and the Japan Association for Trade with Russia and Central-Eastern Europe (ROTOBO) as needed. In fact, the foundations for such collaboration are already being constructed.
I will dispense with the details of the specific ideas that I have had or details of the activities that I have initiated since returning to Moscow, but I am convinced that there is potential for the development of various types of business.
Now that Sino-Japan trade has begun to decline to a certain extent, it is time to think seriously about breaking into the Russian market, which has finally stabilized.
I would like to use the remaining space available to me to thank many people, including Mayor Shinoda and Mr. Suzuki for granting me some of their precious time and Ms. Hiroko Suda, who arranged so many appointments for me during my brief stay.
[Translated by ERINA]