There can be few people who foretold, less than 20 years ago, that the Soviet Union was within mere years of total collapse and that the collapse would herald freedom for the countries of central and Eastern Europe and end the rule of their masters in Moscow. Max Pemberton, of Autelligence, looks at the new Russia and long-term potential this vast country has to become a powerful manufacturing and retail market.
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But collapse it did, and the Russian Federation was born with the opportunity to become a free nation as well. The omens were good and the political climate transformed, as a despotic regime was changed for an open one, and having the goodwill of the world at its disposal.
With this, he outlook for Russia has been transformed in the last decade of and a half, but there are conflicting views as to how the country will progress over the years to come.
Now fifteen years on, the nation is at a crossroads, with difficulty in separating perception from reality. There is no doubt that the Russian Federation has the potential to become a major player on the world stage again, with the desire to become a member of the World Trade Organisation a prime indicator. But at the same time, investment in the country is held back, as attempts to install a free economy seem to stumble, and with high levels of corruption seemingly still in place, it is taking a long time to turn the nation around.
Russia has had a long and chequered history and the Russian Federation has had a difficult birth. For many years, Russia itself was the dominant partner in what was the old Soviet Union, which controlled a large number of disparate countries and held Central and Eastern Europe under its thrall. The wide range of ethnic populations, cultures and languages always made for an uneasy alliance that was effectively held in place by force. The Soviet Union was solidly under communist control and was a one-party state, with opposition essentially banned. The ruling communist party operated a command economy in which all activities were planned centrally. The cost of maintaining the military efforts during the Cold War – with its related massive government spending – eventually became such a drain on the Soviet economy, that it led to glasnost (openness) and perestroika (restructuring) under Mikhail Gorbachev, in an attempt to modernise the state. The result was the end of the Soviet Union and the creation of a much smaller entity, the Russian Federation, which now comprises of 21 republics, and the fall of communism throughout Europe, including the tearing down of the Berlin Wall.
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By GlobalDataAlthough the Russian Federation covers a much smaller area than the Former Soviet Union, it is still massive and straddles the northern hemisphere, encompassing Europe and Asia, for a distance of 10,000 kilometres (6,300 miles) from east to west. It covers a total of 17 million square kilometres, making it by far the country with the largest landmass in the world, and spreading across no less than 11 time zones.
Despite its awe-inspiring size, it has a relatively modest population of 145 million, or about half that of the USA. But population size compared with landmass can be deceptive – much of the vastness of Russia is uninhabitable as it is icebound for much of the year.
As a result, some 80% of the population live in the temperate climate area to the west of the Ural Mountains, or “European Russia”, even though this region accounts for only 20% of the total landmass.
The Former Soviet Union did not manage to create a dynamic economy, least of all in the motor industry. Its products were decades behind those of the west, poorly made and polluting. Spare parts supply and servicing scarcely existed, compared to most of the rest of the world, outside of communist spheres of influence. Improvements are occurring in the motor industry within the Russian Federation, but change is slow.
The Russian Federation is has been beset by problems since its genesis. These problems have included terrorism, social unrest, economic difficulties and corruption. A critical point was reached in 1998 with the financial crisis that resulted in the downfall of President Boris Yeltsin, and the subsequent accession of President Vladimir Putin in 1999. Russia has stabilised over more recent years, in spite of horrendous terrorist tragedies, with rapid economic expansion being achieved, foreign debt declining and foreign reserves increasing. Oil, natural gas, timber and metals accounted for 80% of Russian exports in 2003, and with current oil prices being so high, foreign reserves should do well in the immediate future. However, much of the industrial infrastructure – including the road network – is decaying and needs to be rebuilt.
Russia has valuable natural resources and reserves, including 6% of proven world-wide oil reserves and 27% of proven world-wide natural gas reserves, although these are mainly located in the hostile permafrost environment of Siberia and the east of the country. There is also an expectation that total reserves of oil could be up to three times the proven reserves, although access to them remains problematic. Even so, the oil majors are investing heavily in the Russian oil and gas industries and are working to modernise the extraction and delivery facilities in anticipation of better times to come. There is little doubt that Russia has remarkable potential if the government is able steer a course towards a free market, resist terrorism and corruption and avoid returning to a state controlled ethos. The potential is particularly good for the 80% of the population that live in the 20% of the landmass to the west of the Ural Mountains, known as “European” Russia.
In motor industry terms, and on the basis of global comparisons, the Russian industry and market is currently in the middle rank, but much below what would have been expected from a country that was for so long one of the mightiest nations on earth. One of the main indicators of this is the relative level of motorisation compared to the developed world, and measured as vehicle ownership per 1,000 population, which in 2003 was 183 per 1,000 in Russia, 798 per 1,000 in the USA and 565 per 1,000 in W Europe. Equally, the sales to population ratio, currently around 1%, is far below major competitors, with the USA 6%, W Europe 4.5% and Japan 5%.
In fact, the sales to population ratio has never exceeded the level of 1% over the entire period from 1960 to 2002, but is assessed as having done so in 2003. Provided the government can achieve its objectives to better the lot of its people and become a force on the international stage, the prospects are bright, although many may well argue that at the moment it is difficult to see the future. With the aid of the international community, potential membership of the WTO (World Trade Organisation) and successful exploitation of its reserves and natural resources, as well as its people, there is every reason to expect the sales to population ratio in Russia to climb to almost 4% by 2020, or even higher.
Crucially, such growth will need to be supplied by domestically produced vehicles, in modern factories, with all of the attendant infrastructure of utilities such as roads, electricity, gas, sewage disposal, as well as component producers, supply chains and distribution systems, computer hardware and software and the trained workforce that goes with it. All of this, of course, requires investment, and the outlook for the country, although clear, will need to be matched by the resolve of the government to see the potential realised.
Virtually all the conditions are in place to allow the level of motorisation in Russia to change dramatically. The mass of its population is well located strategically to take advantage of its position adjacent to the rest of the European continent. In theory, Russia has an export market of some 500 million people on its western borders, who will be happy to buy from Russia if the product, price and quality are right. Several Western manufacturers are well aware of the potential offered in Russia as a market in itself and as a base of operations for producing vehicles for Europe and Asia. The Ukraine, which has just undergone a protracted and mould-breaking election process has made it clear that it would like to join the European Union, has a history of connection with Russia. Other nations, now considered to be in Asia, were also once part of the Soviet Union and add to the size of the market pace that Russia could exploit.
So the opportunity available to Russia could equally well pose a threat. The new member countries of the European Union will see Russia as a market place as well as a source nation. The future of Russia therefore depends on just how the country plays its formidable hand of cards and how well President Putin manages to control some of his more unruly citizens. It is hard to see how Russia can fail to make substantial progress, given all the assets it possesses. But if the nation is forced back to the days of a command economy through internal dissent, its achievements will only be a shadow of the potential possible as a free player on the international stage.
Even so, our forecast is that Russia will be the fifth largest market in the world by 2020, easily accessible to all manufacturers, and a major operator in the mainstream motor industry, particularly in European Russia.
Only time will tell if Russia can exceed the substantial growth forecast for it here. The potential exists, but the will needs to be there as well.
The forecasts used in this article are taken from Max Pemberton’s recently published Russia Strategic Market Profile, which is available here
