The Hindu : How Russia was lost

Online edition of India's National Newspaper
Monday, Nov 10, 2003

Opinion

Opinion - Leader Page Articles

How Russia was lost

By Vladimir Radyuhin

Paradoxical as it may sound, Indian businessmen have become victims of the privileged position they enjoyed on the Russian market before the Soviet Union collapsed in 1991.

RUSSIA'S INCREDIBLE consumption boom, spurred by domestic growth and swelling oil revenues, thrills exporters all over the world. With local industry still recovering from a decade of economic dislocation, Russians readily go for foreign-made goods. Russian imports have been growing at double-digit rates over the past couple of years, making Russia a bright spot in the otherwise gloomy picture of a global consumption glut. Businessmen from as far as Peru and the Philippines are rushing to cash in on the Russian boom, but there are few Indians among them. While most countries, big and small, have dramatically increased their exports to Russia, Indian business has largely remained indifferent.

Taiwan, which does not even have diplomatic relations with Russia, nearly tripled its exports to this country in the past three years, while India, Russia's most trusted strategic partner and a major buyer of its weapons, has seen its exports decline, with overall trade turnover between the two countries hovering around a meagre $1.4 billion. It is to be hoped that the problem will be given top priority during the official visit here of the Prime Minister, Atal Bihari Vajpayee, this week.

Paradoxical as it may sound, Indian businessmen have become victims of the privileged position they enjoyed on the Russian market before the Soviet Union collapsed in 1991. The former Soviet Union was India's largest trade partner, and most Indian exports to Russia were under rupee debt repayment. This arrangement shielded Indian exporters from competition in the Russian market.

"Indian big business was spoilt by easy money it made in the Soviet Union," says Rajesh Sharma, President of the Indian Business Alliance in Russia. "They did not have to compete for quality or prices, all they needed was to know the right people in the Russian establishment to land huge contracts."

When the Soviet state-controlled economy fell apart and government monopoly on foreign trade was abolished in the early 1990s, major Indian exporters just packed up and left, rather than try to adapt to the chaotic rise of a market economy in new Russia. As a result, India has surrendered its positions on the Russian market to rivals from other countries. The collapse of Indian tea sales in Russia illustrates Indian business exodus from the country.

From around 100,000 tonnes a year in Soviet times Indian tea exports have plummeted to 45,000-50,000 tonnes. Instead of bracing to compete with other tea exporters as the Russian market opened to private trade, Indian companies continued to rely on inter-government protocols specifying target levels of Russian purchases, which were never met. Meanwhile, Sri Lanka mounted an aggressive sales campaign in Russia, offering long-term credit facilities to Russian tea importers and launching heavy advertising of Ceylon tea brands. As a result, Sri Lankan tea exports to Russia have shot up from 2,000 tonnes in the 1980s to 55,000 tonnes today. The image of Indian tea, once extremely high here (even if because it enjoyed a near-monopoly position in the erstwhile Soviet Union) has been sullied by bad importers selling sawdust under the name of Indian tea.

"It will take a long time and major effort to rebuild the good name of Indian tea in Russia," says R. Bhaskaran of J.V.Gokal, about the only major Indian tea company that has stuck it through the hard times in Russia.

The rupee debt repayment scheme has also done a disservice to Indian business in Russia. Up to 90 per cent of India's exports to Russia over the past 10 years have taken place through the debt route. A heavy discount at which rupees were auctioned off to Russian importers created artificial subsidies to Indian goods in Russia. The two countries are now discussing plans to phase out the rupee-rouble trade before the original deadline of 2005 and use the balance of about $3 billion for investment in joint ventures. The switch from rupee to dollar trade may result in short-term slump in turnover but will have a long-term healthy effect on bilateral trade, says the Indian Embassy's Counsellor (Commercial), S. Kohli.

"Indian exporters do not need crutches to compete in the Russian market," Mr. Kohli said. "We have done well in other developed and developing markets, so there is nothing to stop us from doing well in Russia too, provided we realise that Russia today is a demanding and quality-conscious market."

Many Moscow-based Indian businessmen are convinced that investment in local industry is the key to success in Russia.

"The only way to increase India's share in the Russian tea market is to set up production facilities here and promote Indian brandnames in a big way," says Mr. Bhaskaran. A year ago, J.V.Gokal & Co. went into a joint venture with a Russian partner to build a 12,000-tonne tea packing facility in the town of Serpukhov near Moscow, which plans eventually to expand to 24,000 tonnes a year. The factory has allowed J.V.Gokal to avoid paying an 11.25-per cent extra import duty in Russia on packaged tea and promote branded teas. "The more Indian big tea brands come to the Russian market, the easier it will be for all of us to uphold the good reputation of Indian teas," says Mr. Bhaskaran.

The idea of investing in Russian industry is beginning to catch on among Indian businessmen here. The Sun Capital group has invested hundreds of millions of dollars into Russian beer and food industry. The Amtel group has acquired a major stake in the Russian tire industry. Indian pharmaceutical giants are expanding business in Russia and setting up packing and production facilities here. A second Indian diamond-cutting factory opened earlier this year in Vladivostok, in the Russian Far East. However, such examples are yet few and far between. Hopefully, the blaze-trailing ONGC-Videsh Ltd. investment of $1.7 billion into Sakhalin oil and gas fields in the Russian Far East will encourage Indian industrial majors to tap the growing Russian market.

Indian businessmen are put off by fears of the high-risk, mafia-plagued market environment in Russia. Such fears were justified six-seven years ago, but are misplaced today," says Mr. Sharma. "Russian economy is growing more vibrant and stable, mafia is no longer a problem and buraucratic red tape is manageable," he says. Three years ago, he gave up a job in a leading Indian pharma company in Russia to start his own business and today has built an annual turnover of some $10 million selling dyes and pharmaceuticals. "Russia is a tough market, but if the Turks are doing multi-billion business here, why can the Indians not?"

A general perception here is that there is an information gap that hampers trade growth and business-to-business contacts. The opening of a CII office at the Russian Chamber of Commerce and Industry last month, the coming opening of an SBI-Canara Bank in Moscow, and a growing flow of Indian business delegations to Russia (85 businessmen accompany Mr. Vajpayee this week) should help remedy the situation. The problem of long and costly transportation of goods from India to Russia is also being solved with the construction of a North-South transport corridor which cuts shipping time between Mumbai and St. Petersburg by 10-12 days and transport costs by 15-20 per cent.

Analysts say that a well-institutionalised and extensive interaction between the defence industries of India and Russia should act as a driving force for civil sector cooperation. "The experience our two countries have accumulated in such technologically sophisticated projects as the building of the Su-30MKI fighter planes, the T-90 Main Battle Tanks and the Talwar-class destroyers is a valuable asset for joint ventures in high-tech civilian industries," says Alex Vaskin, publisher of the just registered Indo-Russian Trade and Industry Bulletin. "If coming talks between Mr. Vajpayee and [the Russian President] Vladimir Putin, generate a much-needed political impulse, we may well see bilateral trade jump to $5 billion by the year 2006-2007."

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