India Inc gets into bear hug with Russians

Russians may still be humming their all-time favourite song - Mera Joota Hai Japani - but they are now choosing to buy Hindustani in big numbers.

The Year of India in Russia - as 2009 is officially known - has helped India Inc get into a long bear hug with the Russian consumer. They are lapping up everything - from Ratan Tata's marquee cars to Vijay Mallya's whisky.

For Indian companies that's great news, since the annual disposable household income in Russia was over $6,500 in 2008 - the highest among all emerging economies. It's about 10 times that of the $634 for Indians, according to Euromonitor data.

No wonder the Tata Group is, among many others, trying to tap Russia in a big way. Tata Motors, owner of marquee brands Jaguar and Land Rover (JLR) acquired from Ford last year, is planning to launch new models of these luxury brands in Russia soon. That country is already one of the major markets for JLR.

"We are planning to aggressively expand base in the Russian market, which showed a growth of 12 per cent for JLR sales last year, while the UK, US and other European countries were showing declining sales," said a Tata Motors executive.

Tata Motors already sells small, medium and heavy trucks and buses in Russia, which is the largest commercial vehicle market in Eurasia.

Tata Tea, another group company, plans to build a multi-million dollar business over the next three years through a combination of acquisitions and brand introductions. In March this year, the company acquired Grand, a packaging and distribution company and the second-largest tea importer in Russia.

 "The Russian market is strategically important for Tata Tea's growth," Peter Unsworth, chief executive of Tata Tea's subsidiary Tetley, says. The reasons are obvious: Russia is the world's largest tea market by volume after the UK and India. While the tea market is growing at 12 or 13 per cent, beverages are showing a 20 per cent growth at a time when other export markets are growing in single digits.

In May, another Tata company, Tata Communications, partnered with RTComm, one of Russia's leading telecom players, to provide joint data services between carriers in Russia and the rest of the world.

India's largest private sector company, Reliance Industries Limited (RIL), is also eying Russia in a big way. It helps that RIL Chairman Mukesh Ambani co-chairs the India-Russia CEO's Council, along with Vladimir Yevtushenkov, chief executive of Russian telecom major Systema, which is investing many billions of dollars in India in a joint venture with Shyam Telecom.

The CEO council to increase private sector cooperation between the two countries was set up in February last year.

Although an email sent to RIL on Ambani's involvement in the council did not elicit a response, sources familiar with the developments say RIL is looking to buy petrochemical assets in Russia, a country with over 40 oil refineries with a processing capacity of close to 5.5 million barrels a day.

So far, RIL has not invested much in Russia, barring an unsuccessful attempt in 2004 via a consortium of Oil and Natural Gas Corporation (ONGC), RIL and Indian Oil Corporation (IOC) to acquire Sibneft, the country's fifth largest oil company for about $15 billion.

The land of vodka is also becoming a happy hunting ground for spirit makers. United Spirits, part of India's largest liquor company, UB Group, is expanding its presence in Russia through a marketing alliance with the country's leading vodka manufacturer, Russian Standard.

The Russian company, which has a broad distribution network in Russia and other CIS markets, is marketing the premium whisky brands of United Spirits in Russia.

"While Russia is a virgin market for our whisky brands, the genuine Russian vodka manufactured and supplied by our partner is a real value addition to our Indian portfolio," UB Group Chairman Vijay Mallya says.

Indian pharma companies are also eyeing Russia, which is a big market for anti-depressants, cough and cold products and lifestyle disorder drugs.

"In 2008-09, India exported drugs worth Rs 1,244 crore (Rs 12.44 billion) to Russia and that market is growing at about 18.5 per cent, one of the fastest growth rates among all drug exporting destinations," says K Appaji, executive director of Pharmaceutical Exports Promotion Council (Pharmexcil).

In Russia, the current per capita expenditure for drugs is much lower than most west European countries. "Going forward as the economy improves, pharma expenditure is expected to increase because of increase in government re-reimbursement and increased disposable income of people leading to increasing self-purchase," says M V Ramana, Head-Russia and CIS Operations of Dr Reddy's Laboratories, in an e-mail from Moscow.

Dr Reddy's Lab, currently the13th largest pharmaceutical company in Russia, saw its sales in that country grow 43 per cent to Rs 580 crore (Rs 5.8 billion) in 2008-09.

Ramana says until now investment from the pharmaceutical industry has been only through marketing and distribution offices. "Going forward, the industry might look at investments like setting up local production units," he adds.

Meanwhile, ONGC's overseas operations company, ONGC Videsh Ltd (OVL), and the Indian government are involved in intense negotiations with the Russian government and Gazprom Neft, one of the largest refiners in Russia, to participate in the development of Sakhalin-3, one of the largest oil and gas development projects in the world.

OVL has a 20 per cent stake in Sakhalin-1, a large oil and gas field in Far East offshore in Russia. During 2008-09, OVL's share of production was 1.853 metric million tonnes (mmt) of oil and 0.372  billion cubic metres (bcm) of gas.

Last year, OVL acquired the UK- listed company Imperial Energy Corporation, an upstream oil exploration and production company that has its main activities in the Tomsk region of Western Siberia in Russia, for $2.1 billion.  ONGC's investment in the hydrocarbon sector in Russia so far amounts to over $1.7 billion, say sources.

All this means things are moving again after a long gap. For the past two decades, Indo-Russian trade and investment has declined. In 1990, USSR used to be India's second-biggest trade partner, next to EU, with a 16 per cent share in trade. By 1996, this fell sharply to 2 per cent. Since then, both the countries have struggled to get their bilateral economic act together, and failed.

Observers say the renewed activity on the part of Indian companies shows that the initiative to reach $10 billion trade between the two countries by 2010, from close to $6.9 billion in 2008, may succeed.

But it's certainly not roses all the way. The extreme cold weather, red tape and cumbersome bureaucracy, rampant corruption in various provinces, loose banking systems and visa issues are the main hurdles that Indian companies face.

Ramana, who has been living in Moscow for many years now, says language is also a prime hurdle at work and life in Russia. So finding talent is that much more difficult.