The Russian Consumer is the key!

 

In all that’s been written and said about Russian politics in recent weeks, I think we’re forgetting about the significance and importance of the Russian consumer. 

Whilst Russia is still regarded by many as an economy dominated by the oil and gas sector, it is actually domestic consumption which contributes 63% of their economic output and is the main driver of growth. Investors and businesses looking to gain from Russia’s rising influence on global markets would do well to consider the following:

1. Russia is a “middle income” country

The World Bank defines “middle class” as relating to a person who earns US$6,000 per annum on a purchasing power parity (PPP) basis. On this measure, over 68% of Russians are defined as “middle class”, by far the largest of the BRICs which include Brazil (31%), China (13%) and India (3%).

The other measurement widely used to measure the relative wealth of countries is “GDP per capita”. Once again, according to Goldman Sachs projections, Russia will maintain the highest GDP per capita of all of the BRICs in the coming decade, exceeding China and India by some distance between now and 2050.

2. Russian consumers have no significant debt

With the collapse of the Soviet Union in 1991, and the re-distribution of assets, all Russian citizens were gifted their home by the State. As a result, the average mortgage debt in Russia is negligible (€130 per person) compared with €12,370 in the Eurozone and €26,040 in the USA.

Whilst there has been a reluctance amongst Russians to borrow over the past two decades, with interest rates at 16% p.a. or over, this is changing with interest rates declining to more affordable levels. For example, SberBank, Russia’s largest retail bank, now offers a “888” mortgage loan package which is becoming very popular (8% p.a. fixed home loan rate for 8 years with approval within 8 days) and is likely to trigger more domestic spending on a wide range of luxury goods and other domestic items.

3. Russian incomes have risen significantly

The average monthly income, which was less than US$200 per month in 2003, is now more than $1,000 per month, and with the highest rate of income tax at only 13% and very little debt to service, Russians have very high levels of disposable income. Not surprisingly, Russia now leads the whole of Europe in the sale of key consumables (eg pharmaceuticals, mobile phones, broadband and even beer - catching up with Vodka as the beverage of choice amongst Russians!) and retail sales in Moscow now exceed Paris and London. By 2025 the consumer market in Russia, which is now approx. 142 million, is expected to be larger than Germany’s, Europe’s largest market.

4. Russians are travelling and spending money overseas

20 years ago in the days of the Soviet Union, Russians were banned from travelling overseas. Soviet citizens would holiday inside the eastern bloc eg Crimea’s beaches, the Baltics, sanatoriums in Poland and Czechoslovakia.

In 1995 only 2.6 million Russians went on holiday outside the former Soviet Union; by 2006 this figure had trebled to 7.7 million and 2008 was by far the best year ever for Russia’s tourism industry with 11.3 million Russians taking vacations abroad. After a short dip caused by the global financial crisis, this figure is expected to triple again this year.

Apart from the sheer volume of Russians travelling overseas, they are also amongst the world’s largest spenders. Travel operators report that Russians spend on average US$1,000 per head on their holidays and, most important of all, 72% of tourists pay for their holidays in cash!

Conclusion

Don’t be misled by the media’s obsession with the re-election of Putin as President and write off Russia as a market that should be considered for business and investment. Look beyond the headlines into what’s really happening on the ground, particularly in domestic consumption, and act accordingly. There has never been a better time to invest in Russia and the time to do it is when everyone else is negative!

Reinventing Rio

Rio de Janeiro is, without doubt, one of the most picturesque, exotic and exciting places to visit and, for good reason, is high on most people’s ‘bucket list’. With its 90 kms of white sandy beaches, its unique pristine coastline, green forests and iconic rock formations, and its picture postcard views from the Christ the Redeemer statue at Corcovado, it rarely disappoints, whatever time of year you pass through.

Rio is one of the few cities in the world (along with Sydney, Cape Town and LA) where you can live by a beach within short commuting distance of your office, and the locals certainly seem to enjoy themselves, with the beaches, bars, nightclubs and restaurants almost always full on a 24/7 basis. With local prices already high and rising, you sometimes wonder how they pay for it all!

However, whilst not losing Rio’s special appeal as a tourist attraction, the city now needs to reinvent itself as it prepares for the influx of investment, business and trade that is expected to flow into the region between now and the Rio Olympics 2016. This is a challenge occupying the minds of local Government agencies and businesses who are keen to offer a serious alternative to neighbouring Sao Paulo which appears to be almost bursting at the seams (with a population of 20 million people, an urban sprawl covering over 1,525 sq. kms, and 6 million cars on the road, the city is almost in a permanent state of gridlock!)

As a regular visitor to the major cities in all of the BRIC countries, I have to say that Rio has quite a bit to do to be taken seriously by international business people. As you wander the city streets of Rio, observing the dilapidated streets, crumbling buildings and office workers wearing T-shirts, shorts and thongs, you can’t help wondering how this will all be viewed by serious Chinese, Japanese and American investors. Wearing a tie and suit, I felt totally out of place, and in fact ducked back into my hotel during the day to change into a more casual outfit! This is all in sharp contrast to Sao Paulo which looks and feels every bit a modern, thriving, bustling and prosperous first world city, albeit one where you spend more time than seems reasonable in a traffic jam (unless you are amongst the mega-rich who navigate the traffic by private helicopter!)

Having said all of the above, Rio can and undoubtedly will transform itself in the coming years, and is in fact already in a strong position, as evidenced by the following facts and figures:

• With a population of 6 million, Rio is the second largest city in Brazil and the third largest in Latin America.
• Rio is the headquarters of major companies in Brazil and the capital of major industries like Oil & Gas, Information Technology and Communication, Research and Development and Tourism.
• 56% of Brazilian GDP is within a radius of 500 km of the city.
• The City accounts for 50% of State GDP (US$60bn) and absorbs a quarter of Brazil’s total foreign direct investment
• Rio de Janeiro has the lowest unemployment rate and highest rate of investment in Brazil.

(the above are just some of the surprising statistics and information available from Rio Negocios, the local Government agency responsible for investment attraction from overseas who we met during our visit)

Over the next few years, working with my business partner, Andrew Gilkes (who ran the Olympic business legacy programs for Sydney 2000 and Beijing 2008) and collaborating with the Olympic Sponsors and local Government agencies, I plan to organise and co-lead a number of international business delegations to Brazil under the banner of Brazil Access 2016. These business visit programs, which will be promoted all over the world, will visit Sao Paulo and Rio, meet and network with local businesses and entrepreneurs, and learn about the unique opportunities and challenges for doing business with the world’s 6^th largest economy (see previous blog). This will be a private sector initiative designed to deliver spectacular outcomes for all stakeholders and will ensure that Rio maximizes its “time in the sun” when the Olympic flame is extinguished in London later this year.

The success of the Olympic movement in recent times has largely been attributed to the lessons, experiences and know-how which has been passed on, along with the Olympic flame, from one city to another. For example, Australian, Chinese and British firms will be amongst the most active bidders for design and construction projects at the Rio Olympics site at Barra. And, as mentioned above, local Olympics sponsors will benefit from the networks, relationships and interest generated from past Olympic business legacy programs via our initiative, Brazil Access 2016. 

The Rio Government has already committed to spend $14.4 billion on infrastructure, construction and urban regeneration over the next 4 years and, if past Olympic programs are anything to go by, this may well be an under-estimate. Without doubt, Rio will reinvent itself during this period and position itself as more than just an attractive tourist destination. Sydney had a similar image issue to overcome in the lead up to the Olympics in 2000 and, in 2008, China wanted to promote its significant capabilities in science and technology to counter the international perception that it was just a low cost manufacturing hub. How Rio goes about this transformation, and how quickly, will be fascinating to watch.

Rio was once the capital city of Brazil and one of the world’s most prosperous cities. You can see evidence of this everywhere. The locals, and even some of those who have left the city to start new lives in Sao Paulo and elsewhere (but still regard themselves as “Cariocas”), are very proud of their city and won’t hear a bad word said about it. The energy, vibrancy and creativity of Rio can be felt throughout. We heard many stories of hedge fund managers, IT start ups and other service providers moving their HQ to Rio for business, location and lifestyle reasons.

The signs are promising. The ambition and ideas are in place. The strategic plan is coming together. How Rio executes on all of this will define its position as Brazil’s second major city. Why not come with us and take a look?

Back in Brazil

It’s great to be back in Rio de Janeiro, despite some unwelcome rain today, and to witness the continuing transformation of Brazil, now the 6^th largest economy in the world, a move from 7^th place which took place as recently as March this year when they overtook my original home country, the United Kingdom. Brazil’s economy grew by 2.7% last year compared to the UK's 0.8% growth, taking it to a total of US$2.51 trillion, compared to the UK, which now stands at US$2.48 tr.

But hang on, how can this be possible? I so vividly recall the Mexico World Cup in 1970 when the two captains, Bobby Moore and Pele, embraced at the end of England’s defeat by 0-1 to Brazil in the qualifying rounds (see photo right) when Brazil was regarded as a very poor country indeed compared to the UK which, whilst in decline from its peak in 1929, was still one of the world’s super-powers in political, economic and fiscal terms.

In 1970, the UK’s GDP was $1.24 trillion and the 5^th largest economy in the world (after US, West Germany, Japan and France) a fall from 2^nd place only 10 years earlier (behind the US). Brazil’s GDP was $0.42 trillion and the 10^th largest in the world (after the top 5 above, plus Italy, China, Canada and India).

Can it really be true that, in only 40 years, not even one lifetime, Brazil could have come from being only one-third of the size of Britain to actually overtaking them?!

It makes me wonder how much more can change in just the next 10 years? Brazil is poised to overtake France ($2.8 tr) in the next few years, with only Germany ($3.6 tr) and Japan ($5.8 tr) between them and the top 2 economies in the world (currently USA and China). India (now in 11^th place at $1.67 tr) will almost certainly outflank them (despite their growth slowing to 7.5% this year) and Russia (now in 9^th place at $1.85 tr) will also climb into the top league.

Can you find a way to ride this wave, before others do?

Adios Buenos Aires!

I thoroughly enjoyed my visit to Buenos Aires this week, a city I normally fly past on my way to Brazil. I was here to run two BRIC workshops at AMP's Offshore Conference and, with the announcement of the nationalisation of YPF this week (see previous blog post below), it turned out to be an even bigger and more momentous week than expected.

Here are some of my observations and thoughts after spending a week on the ground in Buenos Aries:

• This is a country full of energy, vibrancy and creativity. Argentinians have lived through tough times since their financial crisis of 2001, and they take nothing for granted. If anything, this has created a nation of entrepreneurs, leaders and risk-takers who live in the present, expect nothing and work hard.
• The IT sector is a great example of this with annual revenues growing at an annual rate of 18% between 2002 and 2010, and exports expanding by 24% per year (foreign sales represent 22% of total revenue). Employment also increased substantially, registering an annual growth of 21% on average during the same period. The industry employs almost 65,000 people, more than half of which are professionals with tertiary or university education.
• Argentinians are pragmatic and don't take themselves too seriously. What we call "corruption" they call "a lack of transparency". What we regard as an "evil expropriation of foreign owned resources", they regard as the "glorious re-nationalisation of state assets"!
• Argentinians are very aware, and actively supportive of, the tremendous growth taking place in neighbouring Brazil, and many of them are seeking to tap into that growth by developing new businesses, opportunities and relationships in what has always been their closest rival. I asked a number of locals why they preferred to live in Argentina rather than crossing the border to pursue a new life. Whilst many acknowledged that this might be a smart thing to do, they all agreed that they couldn't leave Argentina. For all its faults, imperfections and craziness, they remained passionate about its future prospects. And they loved living in Buenos Aires, a wonderful city of colour, flavour, creativity and energy.

Today I fly to Rio de Janeiro in Brazil, one of my favourite cities. Adios Buenos Aires, I hope to come back again one day.....

Argentina in turmoil

Well, I didn't expect to fly in to a local firestorm! No sooner had I arrived in Buenos Aires last night, than Argentina was dominating the world news headlines as a result of the decision by their Government to seize a majority share in YPF, its biggest oil company, from Repsol, the Spanish energy group.

YPF, Argentina’s largest oil company, was privatised in 1993 and purchased by Spain’s Repsol which owned 57% of the company.  Claiming Repsol had reneged on an agreement to invest in local infrastructure, Argentina’s President, Christina Fernandez, announced her intention to reclaim the energy company. The new ownership structure will give the federal government a 51% controlling interest in YPF which, apart from solving some of Argentina's energy problems, countered a possible threat from a takeover by China's Sinopec.

The pros and cons of this decision were nicely summed up in today's FT: "Argentina's oil raid can only end badly" (click here for the article) but the view on the ground appears to be that the timing of this move was all wrong. Argentina is not a "BRIC", is not enjoying the benefits of foreign direct investment which is flowing into neighbouring Brazil, already has deep fiscal challenges and a looming energy crisis. Repsol’s chairman, Antonio Brufau, has warned that “these acts will not go unpunished”, and Felipe Calderón, Mexico’s president, said that “no one in their right mind is going to invest in a country that expropriates investments”.

As if on cue, N2S, a small Spanish supplier of software to the energy sector, announced today that it was abondoning its plans to open an office in Argentina. According to their MD, Francisco de la Peña, "Argentina really looked like a very attractive market for us and we believed it was serious in its commitment to foreign investment - until Monday’s decision. I’m sure that a lot of other Spanish companies are as disappointed and worried about what has just happened as we are."

It remains to be seen whether the timing of this week's decision will represent a significant turning point in Argentina's long term economic decline, but its certainly a talking point on the streets of Buenos Aires!