TelecityGroup whitepaper:
Expanding into Russia
Why Helsinki is ideally placed
for businesses looking to
expand into Russia.
Contents
1. Executive summary: Helsinki at a digital cross-roads of the EU and Russia
2. The business opportunity in Russia
2a. Growth opportunities
2b. Business challenges and risks associated
with moving into Russia
3. Helsinki as a launchpad into Russia
4. About TelecityGroup
1.
Executive summary
With over 140 million consumers,
a growing middle class, and almost
unlimited infrastructure requirements,
Russia remains one of the most
promising markets for US and
European companies to expand
into. However, there are significant
challenges associated with this –
Russia is ranked 92nd in the World
Bank’s global “Ease of Doing Business”
rankings, behind Zambia, Kyrgyz
Republic and Tonga.
Helsinki, with a unique geographical location –
one foot in Western Europe and one in Russia –
has emerged as an ideal launchpad into Russia.
The city has become a key digital hub in its own
right, ranked as the most favoured European city
for entrepreneurs; second in the “European Cities
and Regions of the Future” index; and boasting one
of the most highly educated workforces in the world.
With legal services companies and consultancies
that are focused on supporting companies doing
business in Russia, a largely Russian speaking
workforce and low-latency connectivity across the
country, Helsinki boasts the infrastructure to make
it an ideal base for Russian expansion.
This paper will look at the business opportunity
provided by Russia and the challenges with doing
business in the country. It will also explore how the
major economic, social and technology trends
which have converged to make Helsinki one of the
launch-pads for business expansion into Russia.
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TelecityGroup whitepaper:
Expanding into Russia
IT spending in Russia will grow at an
annual average of 6 percent, and in
2017 will amount to 46.7 billion dollars.
2.
The business opportunity in Russia?
2a. Growth opportunity
Russia, geographically the largest country in
the world, provides some of the biggest growth
opportunities for Western businesses. The country
enjoys the world’s most significant mineral and
energy reserves and is considered an energy
superpower. It has the world’s largest forest reserves
and its lakes contain approximately one quarter
of the world’s unfrozen fresh water. Russia has the
world’s largest natural gas reserves, second largest
coal reserves, and eighth largest oil reserves.
It is the world’s leading natural gas exporter and
second largest oil exporter.
The Russian Federation’s entry to the WTO in 2012
was a turning point in Russia’s economic relations
with the West. The tremendous economic stress
of moving from a centrally-planned economy to
a free market system was finally paying dividends –
in short, Russia was open for business.
To maintain its growth trajectory, Russia has
significant modernisation requirements across
the country – in particular in terms of transport
and internet infrastructure – as well as a very large
population with increasing spending power. These
factors provide a compelling opportunity for foreign
expertise and consultancy in Russia. Western
businesses have a tremendous scope for growth
in the country, particularly in areas as diverse as
engineering; financial services; ICT; power/energy;
construction; and rail and water.
Lifeblood of the economy
The lifeblood of the Russian economy continues
to be oil and gas – some 52 percent of the state
budget comes from oil and gas exports. The
Russian government has invited Western giants like
Exxonmobil, Shell and Statoil to help to maintain the
current daily flow of 21.8 million barrels of oil and gas
equivalent 1. The opening up of the Arctic and the
enormous Bazhenov shale oil fields present great
opportunities, particularly in much-required capital
investment, but also in drilling- and ancillary services.
Transport Infrastructure
All too aware of the need for infrastructure to match
Russia’s energy ambitions, President Vladimir Putin
has promised to spend some €10 ($14USD) billion
on road and rail upgrades in the next five years. 2
Russia’s population of 142 million is spread over a
vast landmass. More than 10 percent of the country’s
population are living in two cities – Moscow (pop. 11.5
million) and St Petersburg (pop. 4.8 million). Outside
of the major cities many roads are in bad condition,
airports dilapidated and rail freight stuck on a system
little-changed since the Soviet era.
Russia’s road network of 930,000 km and
rail network of 87,000 km are in need of urgent
upgrades. The administration’s revised transport
strategy runs up to 2030 and requires investors,
developers and construction companies.
Similarly social infrastructure, environmental
services and energy infrastructure present
investment opportunities and involvement in
Greenfield projects.
Bringing IT up to speed
Further modernisation of IT infrastructure and
systems will also be required for enterprises and
organisations in Russia to become truly competitive
in the global economy. While the annual double-digit
IT market growth in Russia – fuelled by relatively high
oil prices, preparations for the 2014 Winter Olympics
and widening internet penetration – came to an end
in 2013, opportunities will still be rife for Western IT
services companies in the coming years. Growth
will be particularly noticeable in mobility, software,
and IT services.
According to IDC’s Russia Vertical Markets 20132017 IT Spending Forecast report, IT spending in
Russia will grow at an annual average of 6 percent,
and in 2017 will amount to 46.7 billion dollars. There
is expected to be a particularly high demand for IT
services from retailers, banks, insurance companies
and other financial service providers in Russia.
1
SFE Energy
2
FinancialTimes.com
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TelecityGroup whitepaper:
Expanding into Russia
Russia will become the largest
consumer market in Europe by
2022-24 and by 2015 it is predicted
that 82 percent of households will be
in the middle class or higher sector.
The Russian telecommunications market has
also demonstrated strong development in recent
years and this is expected to continue. Mobile
communications accounts for around 44 percent
of the overall market, gradually replacing fixed-line
communications, and the development of 3G and
4G networks will bring new growth opportunities.
Consumer internet penetration stands at a
relatively low 47.7 percent, but this still represents
nearly 68,000,000 users or 13.1 percent of internet
users in Europe – the highest number of users
from any country in Europe. 3 Online shopping is
low by EU standards (about 50 percent of middle
class families), but growing rapidly with increased
ownership of PCs, laptops and tablets.
Growing spending power
Since the fall of the Soviet Union, the spending
power of the average Russian has increased
dramatically. Amongst BRIC countries Russia’s
middle class (income of €4,340-€10,840/$6,000$15,000) stands at 55 percent of the population,
ahead of Brazil at 30 percent, China 21 percent
and India 11 percent.4 Russia’s high-earners (over
€36,000/$50,000 per annum) make up 15
percent of households.
The demands of a tough working-life are making
Russians increasingly concerned with how they
spend their leisure time, as well as with their
health and wellbeing. Health tourism, especially to
Finland, is a recent and growing trend – stemming
primarily from distrust in Russian service providers,
particularly in health and education. 7 This has also
led to an increase in private schooling and education.
Both present good opportunities for developing
private healthcare – including spas and resorts –
and private education.
2b. Business challenges and risks associated
with moving into Russia.
Despite the wide opportunities that Russia’s
burgeoning economy provides, doing business
in Russia is not without its pitfalls. This has been
compounded in recent times with Russia’s
controversial foreign policy, and the ongoing
threat of economic sanctions.
Russia will become the largest consumer market
in Europe by 2022-24 5 and by 2015 it is predicted
that 82 percent of households will be in the middle
class or higher sector. 6 The Russian middle class
consumer is comparable in many ways with its
Western equivalent. They tend to have third-level
education, work as specialists or department
heads, and their tastes are similar to counterparts
elsewhere. However, the Russian middleclass
tend to work longer hours and will work through
periods of illness.
Beyond the standard consumer goods and
services, there are certain peculiarities to the
Russian market. Nearly 20 percent of the average
Russian middleclass family’s expenses go on
children’s toys, activities, education and babysitters. This is explained in part by the low level of
state support, but also the ‘child-centeredness’ of
middle class families.
3
internetworldstats.com
4
CEEMEA Business group
5
Ernst & Young
6
CEEMEA Business group
7
Sberbank
Moscow, population 11.5 million.
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TelecityGroup whitepaper:
Expanding into Russia
Russia is Finland’s largest trading
partner, with imports to Finland of
€10.52 ($14.2USD) billion and exports
to Russia of €5.35 ($7.22USD) billion
in 2012.
Unpredictable and complex
The key challenge for business in Russia is the
complexity and unpredictability of the business
environment. For one, Russia is a geographically
vast market, spanning nine time zones and
encompassing over 17 million square miles.
Allied with the country’s seriously underdeveloped
infrastructure, this poses significant logistical
challenges, particularly in accessing markets
outside of the major cities such as Moscow
and St Petersburg.
The country also suffers from an unpredictable tax
environment, onerous bureaucracy, and the everpresent threat of corruption. This corruption can
range from local competitors not paying taxes
to counterfeit products flooding the marketplace.
Limited talent pool
HR and talent management is one of the biggest
challenges for Western companies expanding into
Russia. Indeed, the Economist Intelligence Unit ranks
HR as the number one critical business issue for
multinationals operating in Russia, and predicts
that it will only get tougher.
Staff turnover remains high and it’s challenging for
businesses to recruit talented employees. This is
largely due to limited numbers of the right kind of
staff. With limited investment in its educational
system since 1991, the Russian economy – along
with Western businesses operating in it - are
paying the cost.
Difficulty of doing business
While the Russian administration is making huge
efforts to ensure the country is more attractive
to foreign investors, it is still ranked in 92nd place
(out of 189 economies) in the World Bank’s 2014
Ease of Doing Business report. While it continues
to rise in these rankings - due to a concerted reform
effort and widespread improvements in access
to electricity – the report also highlights areas
for concern, including dealing with construction
permits; getting credit; protecting investors;
and trading across borders.
8
Statistics Finland, 2013
3.
Helsinki as a launchpad into Russia
Tapping into Russia’s €1.4 ($2USD) trillion economy,
therefore, is not without its challenges. With the
uncertainly that continues to surround Russia’s
foreign policy, Western firms should be careful
about how they go about setting up business
operations within the country. There are, however,
other opportunities for businesses to take
advantage of this massive market, whilst minimising
their exposure to risk.
Business hubs such as Helsinki in Finland provide
an ideal launchpad for organisation’s first forays in
to the Russian market. The city is in an ideal location,
provides a stable economy with a strong talent pool,
and boasts the transport and internet infrastructure
and Russian expertise needed to maximise the
opportunities that Russia presents.
Close ties
Russia is Finland’s largest trading partner, with
imports to Finland of €10.52 ($14.2USD) billion
and exports to Russia of €5.35 ($7.22USD) billion in
2012.8 This special relationship – backed by unilateral
agreements – stems from a 1,340 km shared
border and close cultural and historical ties.
Finnish businesses are well-established in Russia,
with one fifth of foreign companies in St Petersburg
being Finnish-owned. Finnish household names, like
the department store Stockmann, are well-known
to Russian consumers. Stockmann has four stores
in Moscow – where it has been trading since 1989 –
and one each in St Petersburg and Ekaterinburg.
Local Russian consultancy and expertise
There are many legal and financial advisory
companies based in both Helsinki and Russia and
dedicated to cross-border business. The FinnishRussian Chamber of Commerce (with offices in
Helsinki, Moscow, St Petersburg and Ekaterinburg)
helps with examining market opportunities and
searching for potential customers and business
partners. The American Chamber of Commerce
in Finland (AmCham Finland) has over 300
corporate members and provides a useful
access point to Russia.
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TelecityGroup whitepaper:
Expanding into Russia
Finland is a politically and socially stable
country, and has maintained its AAA
rating – one of only three eurozone
countries to do so.
The Russian community in Finland is also well
established. Around 30,000 people living in Finland
hold Russian citizenship and about 70,000 people in
Finland state Russian as their mother tongue. There
are Russian-language newspapers, radio stations
and Finland’s state television broadcaster, YLE, has
a news round-up in Russian. In Russia, the Finnish
presence is less obvious – hardly surprising since
Russia has 26 times the population and 50 times
the landmass of Finland. However in St Petersburg,
with its close proximity to Finland, Finns are a
sizeable and important community.
A stable and thriving business hub
Finland is a politically and socially stable country,
and has maintained its AAA rating – one of only three
eurozone countries to do so. The fall of Nokia has
been a tough blow for the economy, but Finland has
turned this to an advantage and many of those who
lost their jobs have become part of the lively startup
scene in Finland. Finland’s workforce is also amongst
the best-educated in the world – topping OECD
ratings in reading literacy, maths and science
for the past decade.
Finland’s Baltic climate also makes it the ideal
location for supporting enterprise IT infrastructure
such as data centres that require a lot of cooling,
meaning companies can locate mission-critical IT
infrastructure to serve the Russian market in a stable
and secure environment.
The key to the Russian business question
With the business climate in Russia undergoing rapid
change and transformation, there will continue to
be strong opportunities for expansion for Western
firms. At the same time, doing business in the
country can still be challenging, with cultural and
logistical impediments still in place.
With this in mind, Helsinki has emerged as one of
the main gateways to Russia. Boasting the transport
infrastructure, skill base, economic stability and
connectivity required, the city should now be seen
as an ideal launchpad to capitalise on the Russian
business opportunity.
Transport Infrastructure
Finland’s transport infrastructure is of the highest
class, making it an ideal base to do business across
Russia as well as with the rest of Europe. Stockholm,
Tallinn and St Petersburg are less than one hour flight
from Helsinki, and Copenhagen and Oslo are around
one hour and thirty minutes.
The Allegro high-speed train will get you from
Helsinki to St Petersburg in just under three-anda-half hours, with customs and border control
completed en route, while there are also strong
ferry and road connections.
Enterprise-grande IT infrastructure
Internet services are intrinsic in the Finnish business
environment, and many of its best known companies
– such as Nokia, F-Secure, TeliaSonera, and Rovio
- have the internet at their core. As such, Finland
is seen as one of the most data-friendly countries
in Europe, providing a nodal-point of connectivity
between East and West, a reliable power grid and
infrastructure, and a world-class IT sector.
Allegro high-speed train.
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4.
About Telecitygroup
TelecityGroup is Europe’s leading provider of
premium carrier-neutral data centres, operating
facilities in city locations across Europe, including
those well-placed to serve Russia, such as Helsinki
and Stockholm.
TelecityGroup’s data centres provide secure
and highly-connected environments for the
IT and telecoms equipment that powers the
digital economy. Its data centres are enabling
environments in which the separate networks
that make up the internet meet and where
bandwidth intensive applications, content
and information are hosted.
TelecityGroup’s customers are the networks
and providers of content, applications and
data that make up the internet. Customers
choose TelecityGroup because of its highquality infrastructure and service standards,
connectivity options and capacity to support
their future growth.
Outstanding data centres.
Expertise you can trust.
Europe’s leading provider
of premium carrier-neutral
data centres.
www.telecitygroup.com
TelecityGroup whitepaper:
Expanding into Russia