Table of Contents:

Russia Investing in Russia FDI in Russia: Russia and Private Equity: Internet in Russia:  growing Fast But a word of caution about investing in Russia... Places in Russia: St Petersburg Moscow Novgorod Oblast Nizhny Novgorod Russia - Macroeconomic situation 2008 News about VC's in Russia

 

 

Russia

Russia's conversion of former military enterprises to civilian production offers an opportunity to invest in concerns with a highly qualified workforce and access to modern technology and equipment. Russia leads the world in many areas of fundamental research and development, from eye microsurgery to space technology and this resource is now available to foreign partners.

 

Oil, gas and petrochemicals, scientific and technical areas, defence and conversion industries, machinery, transport, pharmaceuticals, telecommunications, agriculture, food processing and distribution all offer tremendous potential for investment. Other priority sectors are consumer goods manufacturing, general infrastructure, medical services and health.

 

Russia is important politically, and cant be pushed.  Why?  They sit on 50% of the worlds nuclear warheads, they are the worlds largest exporter of gas, and on of the top exporters of oil.  

 

 

Investing in Russia

 

FDI in Russia:

Investment Promotion Agency: 

Mr Sergey Tsakunov

General Director

Russian Federation -- Ministry of Economic Development and Trade, State Investment Promotion Agency

Ovchinnikovskaya nab., 18/1

Moscow

113324

Russia

tel: +7 (095) 950-95-88

fax: +7 (095) 230-20-18

 

 

Russia and Private Equity:

 

Advice:  stay away from certain sectors that are particularly vulnerable to political or oligarchic influence, and just stay beneath the radar screen. The Russian economy as a whole will do fine so long as we keep using oil and gas, and some investors will continue to make money there, but it’s a very difficult situation. Russia has a clear goal of expanding its regional sphere of influence, and is winning that fight while the U.S. and the West is losing it. That means that there could be major pressures on Western investors.

 

 

Internet in Russia:  growing Fast

 

For Web companies looking to expand abroad, Russia needs to be at the top of their list of markets to enter. Russia has the fastest growing Internet population in Europe, followed by France and Spain. In a comparison of 16 European Internet populations by country, comScore reports that Russia's Internet audience for the month of June grew 27 percent year over year, compared to 21 percent growth in France and 15 percent growth in Spain. 

 

If you look at the total size of the Internet populations in each country, however, Russia ranks fifth with 17.5 million monthly Internet visitors. But by Internet penetration, Russia ranks last, with only 14 percent of the total population online. So there is still lots of room for growth there.

 

According to Comscore:  "The total number of European Internet users grew 8 percent during the past year to 241.8 million visitors in June 2008. Russia ranked as the fastest-growing Internet audience in Europe, up 27 percent to 17.5 million visitors, followed by France (up 21 percent to 31.5 million visitors), Spain (up 15 percent to 16.2 million visitors), and Ireland (up 15 percent to 1.6 million visitors).

 

Russia has Europe’s fastest-growing population of internet users – The number of users in the country grew 23 percent, from nearly 12 million last September to more than 14.5 million this past September, according to Comscore. More stats on the Russian internet ad business here. Russia has been seeing rapid economic growth largely through developing and selling its generous oil and natural gas resources to other countries. The average Russian is seeing some of this money in their pockets, which no doubt ends up in more people demanding internet access.

 

 

Growth of European internet Audiences Ranked by Year on Year Growth Rate* Total Unique Visitors (000)** Age 15+  Home & Work locations June 2008 vs. June 2007 Source: comScore World Metrix
Country	Jun-2007	Jun-2008	% Change
Europe	223,922	241,847	8%
Russian Federation	13,791	17,490	27%
France	26,106	31,463	21%
Spain	14,074	16,245	15%
Ireland	1,400	1,606	15%
Switzerland	3,743	4,183	12%
Denmark	3,109	3,437	11%
United Kingdom	31,669	34,860	10%
Belgium	4,807	5,237	9%
Italy	17,905	19,455	9%
Sweden	5,351	5,766	8%
Austria	3,767	4,056	8%
Norway	2,654	2,835	7%
Germany	32,857	34,986	6%
Finland	2,848	3,015	6%
Netherlands	11,287	11,227	-1%
Portugal	N/A	3,618	N/A

*Rankings based on the 16 individually reportable European countries in comScore World Metrix. European Internet audience figures are comprehensive and include visitation from countries that are not individually reportable.

**Excludes traffic from public computers such as Internet cafes or access from mobile phones or PDAs. 

 

 

 

 

But a word of caution about investing in Russia...

1. How free of censorship the internet will remain in Russia is a big issue; the Russian government has chosen to crack down on media outlets that criticize it.
2. Potential political conflict with West over crisis in Georgia highlighed the influence that politics can and sometimes does have on business.  When dealing with Russia, you should first be aware of the political risk (is it currently high? low?  find out!)

 

 

 

See more in our discussion of internet trends in Europe

 

 

Places in Russia:

 

St Petersburg

St. Petersburg is referred to as the "Northern capital" of Russia. It was the country’s official capital until the early 1900’s, but still retains its place as a center of culture, science and industry. Geographically located on the Baltic, the city serves as "a window to the West" for Russia. There is an international airport (Pulkovo International) and a passenger terminal for sea-faring travellers.

 

St. Petersburg is one of Russia's major hubs of business and industry and the city is home to a large number of business centers which provide various services to visiting businessmen.

 

The best business centers offer all types of communications (often by satellite), fax, computers, photocopying, secretarial support, translators and interpreters, temporary office space, conference rooms, audio visual equipment, reference materials, and, sometimes, guides and transportation. An ideal way to launch into the Western or East European markets.

 

 

Moscow

Russia is an emerging market and within Russia its capital city Moscow leads the way with its vibrant general trading and service sectors. Leading sectors are in trade, food and drink, clothing and footwear, office equipment and construction supplies

 

 

Novgorod Oblast

Velikiy Novgorod is located in the North west of Russia on the Moscow – St Petersburg traffic route. Situated 500 kilometres from Moscow and 180 from St Petersburg, with a rail network provoding links to the Baltic, European and Scandinavian countries, it is well known for its favorable investment climate. This has attracted such companies as AMCOR, Cadbury Schweppes and Mercedes Benz.

 

Major sectors in the region are chemicals, food, electronics and machinery construction. The region is one of the most wired in Russia and is third after Moscow and St Petersburg in its level and volume of telecom services. The region is able to offer tax incentives for foreign investment projects, a positive attitude from the sub-federal and local governments towards foreign investors and overall support of projects.

 

 

Nizhny Novgorod

Nizhni Novgorod is Russia's third largest city and lies south east of Moscow.

 

In previous centuries, Nizhni Novgorod was a commercial hub of Russia, located at the strategic confluence of the Oka and Volga rivers. Today it is the "test site" for democratic reform and free market initiatives.

 

With the Nizhni Novgorod State University, the SANDY scientific agency and the State Technical University, the area has an abundance of skilled workers, especially in the fields of microelectronics, software and radio physics.

 

The city was chosen recently by Intel as the location for its new software development center.

 

 

Russia - Macroeconomic situation 2008

 

Russia's inflation is too high at 15 percent, and its macroeconomic policy is unbalanced. It relies too much on fiscal policy and too little on monetary and exchange rate policy. The country's inflation is driven by the large current account surplus, and the Finance Ministry has wisely balanced this surplus with a sound fiscal surplus to hold back inflation, but currently public expenditures are rising sharply.

 

For years, the Russian central bank has stated its intention to move to inflation targeting within three years, but it never does. It still pegs its currency to a basket of euros and dollars, although it should be floating the ruble, and the central bank maintains a negative real interest rate of 4 percent a year, which guarantees an excessive monetary expansion. The bank should follow the good Central European example and move to inflation targeting immediately to escape the dangers of rising inflation.

 

As in 1998, fixed exchange rates today are wrong, but then the problem was overvaluation. Now it is undervaluation leading to excessive inflation.

 

Floating exchange rates, balanced budgets, and inflation targeting are the current victors, while any fixed exchange rate is detrimental—worst of all any fixation to the sinking dollar. The lesson for Russia is to let the ruble float freely and to tighten its monetary expansion to control inflation.

 

 

 

 

News about VC's in Russia

 

Venture firm Draper Fisher Jurvetson goes to Russia

 

Draper Fisher Jurvetson has become the first major Silicon Valley venture capital firm to invest in Russia, a high-risk venture given the chaotic political and economic state of that country. The firm will help manage a $150 million fund to invest in technology companies from Russia and parts of Eastern Europe, it said yesterday.

 

The move is notable because Russia has been harshly criticized for suppressing opposition political parties, independent media outlets and private companies, such as former oil giant Yukos, that have openly threatened the Kremlin’s power. Under the terms, DFJ will actually co-manage the fund with the Kremlin-controlled bank, the VTB.

 

The Economist’s August 25th issue (subscription required) describes how the Russian government’s secret service officers have gained behind-the-scenes control of the country’s most powerful institutions, such Gazprom, the country’s dominant energy firm.

 

However, DFJ says it doesn’t see its investments as helping support the Kremlin’s control of the Russian economy. Rather, beyond the chance to make money, DFJ says its expertise and finance can help support development of a free market economy there. DFJ’s leader, Tim Draper, has long said contributing to such change motivates his international investments.  Dilemmas about dealing with repressive governments are hardly new in Silicon Valley. For example, Google, Yahoo and other web companies have decided to self-censor their search results in China; Google justified its decision by saying limited information through Google is better than no information.  Besides Russia, the fund, called DFJ-VTB Aurora, will invest in the neighboring Commonwealth of Independent States, including Belarus, Georgia, Ukraine (where DFJ also has business connections), and others. The fund plans to invest between $2 million and $16 million per company.

Initially, DFJ is not contributing directly to the fund. But, by helping pick companies, it will have the opportunity to co-invest in them down the line. Half of the money will come from the Russian government and twenty percent from the European Bank of Reconstruction and Development.

 

Thousands of highly-educated engineers and scientists in the region have the skill, talent and motivation to build big companies, said a DFJ managing director who focuses on emerging markets, Don Wood, in an interview with VentureBeat — they just haven’t had the resources or role models to do so, he says.

 

DFJ’s move also continues its strategy of partnering with other investors to make early-stage investments in developing countries. The Draper network, comprised of DFJ and 22 other funds around the world, typically entails DFJ forming partnerships with other investors to set up a fund in a region. Typically, at least one of DFJ’s own partners will site on a fund’s executive board. It’s a system of ordered chaos, with the occasional break between DFJ, partners and local managers, as typified by its break with ePlanet Ventures in 2005 (our coverage), a firm which helped DFJ land early investments in European calling service Skype and Chinese search engine Baidu.

 

Most recently, DFJ has partnered with Esprit Capital Partners, creating DFJ Esprit, based in London, with $560 million in backing. It is DFJ’s exclusive European investment partner.

DFJ and VTB are planning a second fund for investing in companies that rely on regional resources, but may be headquartered in other parts of the world.

 

More generally, the Russian government is looking to the Israeli model of developing a venture industry, which in essence entails the government helping to fund VC’s, then letting them keep a large portion of any returns. See this contributor piece by Yuri Ammosov, a senior policy officer of the Russian government in charge of high and tech venture capital development programs.

Other venture firms have also begun investing in Russia. One example is Luxembourg-based Mangrove Capital Partners, which in May announced a partnership with Russia-based ABRT Venture Fund (link is to cached page as ABRT site is currently down).

 

Ammosov has also provided us with a number of downloadable materials about investing in Russia:

- A Powerpoint presentation about the Russian Venture Company, a government fund, and its efforts to develop the economy’s technology sector (here)

- The tech sectors the Russian government wants to support the most (here)

- A sample terms sheet for a fund that RVC would invest in (here)

 

 

 

 

U.S. venture capital goes to eastern Europe, Russia

 

Cisco, the giant networking company, has expanded its venture capital investments to central and eastern Europe, taking a majority stake in a 30 million Euro ($40 million) fund there.   It comes at a time of a flurry of investment activity in the eastern European and Russia region, an area that has so far been starved of venture capital. The region has a plentiful supply of well educated engineers, and so could be promising. Cisco started a venture investing in Russia earlier this year. The Russian government has just doubled its own commitment to support venture activities there, ... » Continue reading

 

 

 

 

Foreign investors leave Russia after bizarre interview — may return

 

A group of international investors has pulled out of a planned joint venture fund to invest in Russian companies. The move is significant, because the fund would have been one of the earliest efforts by private foreign investors to put money into young Russian start-ups.

 

However, one the fund’s members, Eldad Tamir of Israeli financial group Tamir Fishman, tells us in a Q&A (text and picture, below) that he and others in the group may return.

 

The cause for abandonment? A Russian partner in the fund named Oleg Shvartsman (pictured, left) was featured in a sensational interview published in Russian business newspaper Kommersant.

 

Shvartsman describes how he and others in Russia use ties to government security officers to force private business owners in Russia to sell at a low price to companies connected to the Kremlin and its allies.

 

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