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Times Online Analysis: Russia loses its shine

Julian Evans, Moscow
June 20, 2007

DSG International’s decision not to go ahead with its $1.9 billion (£953 million) option to buy Russian electronics retailer Eldorado could be seen as evidence of Tony Blair’s claim that foreign investors will withdraw if the new “cold war” between Russia and the West continues.

After all, John Clare, chief executive of DSG, did blame “corporate, economic and political risks” in the Russian market for the company’s decision not to go ahead with the deal.

But the decision may have less to do with the worsening war of words between Putin and the West, and more to do with the peculiarities of the Russian electronics market.

The market is certainly booming. Russian incomes are up by 13 per cent year on year in the first quarter, and consumer credit up 46 per cent. Eldorado has a strong position in the market, with Morgan Stanley estimating last month that it could be worth more than $5 billion.

However, the market is held back from even faster growth by the inefficiency and corruption of the tax and customs regulation. Local managers complain that the current tax and customs regulation is unclear, leading to the necessity of using “grey schemes” to import electronics, which channel billions of dollars to corrupt customs officials.

Yevgeny Chichvarkin, the chief executive of Evroset, the market leader in mobile phone sales, told a conference in Moscow this week that 80 per cent of the market for video games and MP3 players used “grey” tax schemes. “To work legally in this market is impossible,” he said. “If we lifted the regulations, we would see $5 billion tp $7 billion in investment into the market.”

The difficulties of dealing with Russian bureaucracy has put off British multinationals in other sectors. HSBC, supposedly the world’s local bank, has yet to make a serious investment in Russia. A senior manager of its Russian business told me the company prefers eastern markets like China. “At least you get a consistent line from the bureaucracy there,” he said.

There is a danger that British businesses will miss the bus on the Russian market. It is far from perfect, as BP and Shell will confirm. Yet it is the most dynamic and fast-growing consumer market in Europe. American, German, Austrian, French and Belgian companies are making billion-dollar investments into the consumer and financial sectors here, and achieving record profits as a result. Where are the British firms?

http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article1962203.ece

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