U.S. and Russia                  

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Monday – March 10, 2008

Dramatic Growth in Massachusetts Exports to Russia

              An examination of the export statistics from Massachusetts to Russia in the period between 2005 and 2007 shows a dramatic increase in volume. In 2005, the total annual value of export sales was approximately sixty-five million dollars. In 2006, this increased by seventy-eight percent to a total of one hundred and seventeen million dollars. Then in 2007, there was another forty-four percent increase to a total of one hundred and sixty-eight million dollars. Overall Russia was in twenty-fourth place on the list of foreign export destinations for Massachusetts. Looking at the list of U.S. states exporting to Russia, Massachusetts stood in fourteenth place.

 

              While the increase in export trade is dramatic from the point of view of the rate of growth, there is clearly room for much more vigorous trade in those industries that compose the core of the Massachusetts high tech, innovation economy. The types of goods currently making up a large amount of Massachusetts exports to Russia are not from these core sectors. While first place in the overall list was industrial machinery including computers, second place was motor vehicles and tractor trailer cabs, sixth place was frozen chicken and eleventh place was aircraft, spacecraft and parts. Most likely the exports in categories two through four represent resale of goods produced elsewhere, but with the deal carried out by a Massachusetts company.

 

Eighty percent of Massachusetts exports to Russia come from the top four categories of commodities – industrial machinery, including computers; vehicles and parts; electric machinery, sound equipment, TV equipment; and optic, photo, medical or surgical instruments.

 

              Given the relatively low total of exports to Russia, the volume can be dramatically impacted by several large individual sales of goods that may or may not continue into the years to come.  For instance there was a sale of over seven million in frozen chicken in 2007, but no sales of chicken in 2005 and only sixty thousand dollars of sales of chicken in 2006. Similarly, there were large sales of semiconductor material for solid-state non-volatile storage, road tractors for semi-trailers, aircraft parts and electronic circuit boards that appear for the first time in 2007.

             

              In the core areas of the Massachusetts high tech economy, the strongest representation, after industrial machinery was medical equipment in fourth place and pharmaceutical products in fifteenth place.

 

              A review of the trend of accelerating volumes of exports and the weak representation of the core sectors of the economy in this export trade can lead to a number of conclusions. It could be that the increase in export volumes is ephemeral and built on a series of one-time sales that will not repeat. It could also be that there remains a large up-side for the export trade to increase if companies in the core sectors begin to focus on competing in the Russian market.

 

Sunday – January 27, 2008

U.S. Policy re Russia Post-Presidential Election?

              As the Presidential primaries have moved forward the war in Iraq and foreign policy in general have received diminishing attention from the candidates. Relations with Russia, as a subset of U.S. foreign policy, have received almost no official attention from candidates in either party, except for the occasional gratuitous deprecating comments about Vladimir Putin. Nonetheless the next President will have to take account of Russia and decide to keep the current policies or adjust U.S. policy.

             So far all we seen little to indicate what their policy will be after taking office. From Mitt Romney we have seen complaints regarding Vladimir Putin as Time magazine’s “Man of the Year.” Then there were the comments of Hillary Clinton and John McCain, who stated respectively that they had looked into Vladimir Putin’s eyes and saw “nothing” for Clinton and “K.G.B.” for McCain. Aside for some references to needing to work with Russia on nuclear disarmament on the Obama and Clinton websites, there has been little of substance regarding Russia.

              While the candidates are ignoring Russia, leading analyst are exchanging competing views of future policy. The last two issues of Foreign Affairs have presented two contrasting views of how U.S. policy towards Russia should develop. At issue is whether U.S. policy should focus on internal Russian politics or on a more restrained focus on managing areas of common geopolitical interest and areas of disagreement between the two countries. After the dissolution of the Soviet Union and during the Yeltsin presidency, U.S. policy was primarily aimed at shaping Russian internal economic and political developments. Some would argue that this paternalistic approach has continued to be the touchstone of U.S. policy towards Russia to date. This contrasting axis around which the Foreign Affairs articles spin.

              In the November/December 2007 issue, Dimitri Simes, president of the Nixon Center, argues for a change in U.S. policy in an article entitled “Losing Russia – The Costs of Renewed Confrontation.” Simes begins by stating that the fundamental flaw in the U.S. approach to Russia is the treatment of Russia as a defeated enemy. In characterizing post-Soviet Russia, Simes states that “since the fall of the Iron Curtain, Russia has not acted like a client state, a reliable ally, or a true friend—but nor has it behaved like an enemy, much less an enemy with global ambitions and a hostile and messianic ideology.”  His main point is that despite substantive disagreements with the U.S. on a number of geopolitical issues, Russia is not an enemy of the U.S. However if the relationship continues to be mismanaged there is a danger of a downward spiral in that direction.

             Simes argues that “what Washington must do is work with Russia to advance essential U.S. interests in the same way that the United States works with other important nondemocratic states, such as China, Kazakhstan and Saudi Arabia. This means avoiding both misplaced affection and the unrealistic sense that the United States can take other countries for granted without consequences.” Leaving aside the question of whether Russia is “nondemocratic,” Simes' approach argues for a more even-handed approach to diplomatic relations between Russia and the U.S. than what has taken place over the past period, particularly the Yeltsin years.

              In contrast, the January/February 2008 issue of Foreign Affairs contains an article by Michael McFaul and Kathryn Stoner-Weiss, both of Stanford University, entitled “The Myth of the Authoritarian Model – Howe Putin’s Crackdown Holds Russia Back.” This article begins with the statement that “whatever the apparent gains of Russia under Putin, the gains would have been greater if democracy survived.” The article argues that the basis for economic growth was developed during the Yeltsin period and then blossomed with the rise in world oil prices. McFaul and Stoner-Weiss take as a starting point that Russia has become an autocratic state that is looking towards the Chinese model of economic development. Their conclusion is that “sustained autocratic rule will not contribute to this growth and, because of continued poor governance, is likely to serve as a drag on economic development in the long term. Russians are indeed getting richer, but they could be getting even richer much faster.”

             This article makes an argument that is probably impossible to either prove or disprove on a factual basis. However it does represent the collected conventional wisdom of the majority of current academic Russia experts. While not ostensibly dealing with political and economic relations between the U.S. and Russia, this article implies a much different approach to Russia than that promoted by Simes.

              The fundamental difference between the two articles lies in the focus of policy. Should the focus of policy be on balancing cooperation and competition in the national interests of two sovereign countries or should the focus of policy be U.S. promotion of an agenda of reform of internal Russian society in accord with our own standards as the determining factor for overall relations between the two countries?

              The Simes article argues that the U.S. should stop trying to dictate Russian domestic policy because it is producing a counter-productive result. This point of view has been validated by my own experience in discussions with Russians at all levels of society. First of all, Russians are enjoying the fruits of the current economic boom and link that boom with President Putin. Second, they resent U.S. intrusions into their internal debates that are often uninformed and ideological. Russians now view most U.S. criticism of their society has a hypocritical exercise in promoting U.S. self-interest. Modern Russia wants to be left to its own to determine its own path forward, including defining the meaning of democracy and the proper role of civil society for itself and by its own criteria. They express a mixture of national pride and self-confidence that does not claim that Russia is a “wonderland,” but argues for Russian solutions to Russian problems.

              The McFaul and Stoner-Weiss article is an argument for the type of self-satisfied interventionary policy towards Russia that is leading towards the downward spiral that Simes fears. It is an extension of the judgemental "conventional wisdom" that dominates public perception of Russia and a "conventional wisdom" that is increasingly out-of-date and harmful to relations between the two countries.

              It is my hope that as the question of Russia gets sorted out in the new presidential administration that the Simes position becomes the dominant one and the often unwise "conventional wisdom" of the past is shelved as we move into the future.

 

Friday – December 28, 2007

Thoughts on the End of the Year - Gap between Political and Business Realities

As the 2007 draws to a close the gap between Russia-U.S. and Russia-E.U. relations and the growing opportunities for foreign business in the Russian market continues to widen. The gap between the perception of Russia by business people who have actual experience in Russia and those who only know about Russia through the media also continues to widen.

              As an example of this gap, yesterday (December 27), the Financial Times published an article about attitudes of German investors to business in Russia. The article quoted the fourth annual poll of German investors in Russia conducted by the BDI (federation of German industry), which revealed that 79% of respondents expected business conditions in Russia to improve next year and more than 25% of those expected strong improvement. Another 64% of respondents reported that business conditions in Russia had improved over the past year. German companies are forecast to invest more than a billion euros in Russia in 2008.

              This business optimism takes place against the background of heavy criticism of the recent Russian elections by German political leaders, led by German Chancellor, Angela Merkel. If you take into account the ongoing political problems between Britain and Russia and the tussle between the U.S. and Russia over the proposed U.S. missile installations in Poland and the Czech Republic, it is clear that political relations with a resurgent Russia are testy and becoming testier.

              Unfortunately, for those of us in the business of promoting economic ties between Russia and the U.S., many U.S. business people who are not currently active in Russia form their opinions based on the hypersensitive political commentary in the mass media. Only last week, I was speaking with an experienced business person now engaged in developing graduate level management programs for students from developing market economies. His level of understanding of Russia was based on what he had read about Yukos and Khordokovsky in the mass media. His perception of Russia was so far from the dynamic and rapidly developing economy actually taking place there that it was almost impossible to know where to start in explaining the irrelevance of Yukos to today’s Russia. At the same time, it is difficult to begin to try to dispel these out-dated perceptions without appearing to be an apologist who refuses to see difficulties or problems in Russia. The truth about Russia lies somewhere in between the resurgent evil empire conjured up by the media and some problem-less land of boundless opportunity.

              The lack of an accurate understanding of this dynamic and rapidly changing country does not hurt an increasingly independent Russian economy, which is charging ahead on the back of historically high commodity prices, a growing middle class and expected huge investments in modernizing infrastructure. It also does not hurt those foreign businesses already established in Russia who are actively expanding, with profit levels often much higher than their operations in more established markets.

              It is my hope for the New Year that we can make a small contribution to breaking down the stereotypes and misunderstanding of Russia so that more U.S. companies can look objectively at the opportunities in Russia and so that the door is opened more graciously and actively to partnership with Russian companies in our market.

               

Monday – October 1, 2007

Boston Commemorates 200th Anniversary of US-Russia Diplomatic relations.

      Almost a year ago, I began pulling together a series of events to commemorate this anniversary in Boston. In the process I found a number of organizations and people who were interested in this anniversary, not for historical reasons, but in connection with their current projects. Even more interesting was the fact that many of the people active in Russia did not know each other. So the celebration of this historical event has led to current connections. My role was as the principal initiator and coordinator of this daylong series of events, including arranging for the US Ambassador to Russia and the Senior Counselor from the Russian Embassy in DC to come to Boston as the guests of honor. Most of this work was done under the umbrella of the U.S.-Russia Chamber of Commerce of New England, of which I am the president. Below is the summary of the anniversary events in Boston that I prepared for the Chamber.

“United States & Russia Diplomatic Relations Day” in Boston, MA

September 26, 2007

               On Wednesday, September 26, Boston observed the 200th anniversary of diplomatic relations between the U.S. and Russia through a series of events that were coordinated or organized by the U.S.-Russia Chamber of Commerce of New England. The guests of honor for all of these events were the U.S. Ambassador to Russia, William Burns and the Senior Russian Counselor, Oleg Stepanoff.

               The day began with an informal meeting with the Governor of Massachusetts, Deval Patrick; the Massachusetts Senate President, Therese Murray; Speaker of the House, Salvatore DiMasi; USRCCNE President Daniel Satinsky and USRCCNE Board Member and President of the UN Association of Greater Boston Richard Golob. After a lively discussion of possible economic, educational and cultural benefits of improving relations between Massachusetts business and institutions and Russian counterparts, the group moved to the Senate Chamber for a formal ceremony marking the anniversary that was hosted by President Murray. As part of this observance, Governor Patrick issued an official proclamation designating September 26, 2007 “United States & Russia Diplomatic Relations Day” in the Commonwealth of Massachusetts. Afterwards President Murray welcomed Ambassador Burns and Counselor Stepanoff for further informal discussion in her Senate offices.

               The next event on the schedule was a luncheon at the downtown Harvard Club, co-organized by the USRCCNE and the UN Association of Greater Boston. This luncheon was enriched by a special companion exhibit of historic Russian icons presented by the Museum of Russian Icons (www.museumofrussianicons.org). The over 100 participants in the luncheon had an opportunity to view the exhibit and network before hearing presentations from both Ambassador Burns and Counselor Stepanoff, followed by a short question and answer period.

               The luncheon was notable for bringing together a number of companies and individuals who are active in Russia, but who previously did not know each other. The principal sponsor for the luncheon was the Museum of Russian Icons.  The co-sponsor was GGA Software Services, LLC. Table sponsors were Grand Circle Travel, McDermott, Will & Emery, New Horizons, Pioneer Investments and State Senator Stan Rosenberg.

               The luncheon was also notable as the first collaborative event between the USRCCNE and the UN Association of Greater Boston (UNAGB). This collaboration was the brainchild of Richard Golob, who is both a Board member of the USRCCNE and President of the UNAGB. Incidentally, he is also CEO of GGA Software Services. The luncheon was co-moderated by Daniel Satinsky representing the USRCCNE and Richard Golob representing UNAGB. Thanks go out to UNAGB staff Lena Granberg and Erica Sanger and to USRCCNE Board member Kathleen O’Donnell, President of Market Access International for their organizational work that made the luncheon a great success.

               The day’s events continued with a gala opening ceremony for a special exhibit at the Massachusetts Historical Society (MHS) entitled “Moments of Destiny: Two Centuries of Russian-American Diplomatic Relations.” The exhibit begins with papers from John Quincy Adams’ two terms of service in St. Petersburg, continuing with artifacts and photos from the visit of the Russian fleet to Boston in 1864 in support of the Union cause and moving into the 20th century with photos and artifacts from Henry Cabot Lodge, Jr.’s role in Nikita Khrushchev’s visit to the U.S. in 1959 and the signing of the Limited Nucleur Test Ban Treaty in 1963 as witnessed by Senator Leverett Saltonstall.

               The MHS had an overwhelming response to their invitation to attend this opening ceremony, with over 220 people registered to attend.

               The program was opened by MHS Board President Amalie Kass. After remarks by MHS President Dennis Fiori, both Ambassador Burns and Counselor Stepanoff made presentations. The program included further historical background and insight provided by the MHS staff and concluded with a special presentation to Amanda George, a high school student at Buckingham Brown & Nichols who was the winner of an essay contest initiated by the US Embassy in Moscow and co-sponsored by the MHS.

               The guests at the ceremony enjoyed catered Russian food from the Beriozka food store and a decorative scheme created by Margaret Coleman of the Russian American Cultural Center.

               The exhibit is open to the public at the Massachusetts Historical Society until October 31, 2007.

              The events of the day concluded with Ambassador Burns delivering the opening lecture in the Charles Francis Adams lecture series at the Fletcher School of Law & Diplomacy. After an introduction by the Fletcher Academic Dean, Peter Uvin, Ambassador Burns delivered an expanded view on the themes of U.S. – Russia relations that had been introduced in his presentations during the earlier events. Then he took questions from an audience of approximately 100 students and professors until his voice virtually gave out.

               Attending all of the day’s events was a special group of Russian academics who are the first group chosen as the John Quincy Adams scholars under the Fulbright scholarship program. The group included Liubov Bugaeva, St. Petersburg State University; Natalia Suchugova, Russian State University for the Humanities (Dr. Suchugova recently published the first book in Russian on John Quincy Adams and will be affiliated with the MHS); Mikhail Rykhtik, Nizhny Novgorod State University;  Alexander Petrov, Russian Academy of Sciences; and  Vassilina Babina, Amur State University. Escorting the group was Deborah Guido-O'Grady, Public Diplomacy Officer,Russia, Ukraine, Moldova and Belarus Desks of the U.S. Department of State. While stationed in Moscow, Ms. Guido-O’Grady was instrumental in arranging for Ambassador Burns to come to Boston to celebrate this anniversary and participate in the events arranged for September 26.

               The Boston Herald wrote an article on the anniversary that appeared on September 25 that quoted Daniel Satinsky as President of the USRCCNE. The Boston Globe wrote an article that appeared on September 27 that focused on the ceremony at the State legislature and on the exhibit at the Massachusetts Historical Society. Photographs from all of the events of the day will be posted on the website of the USRCCNE (www.usrccne.org) as soon as they become available. 

             

 

Sunday – September 9, 2007

Daniel Satinsky affiliates with The York Group

              Daniel Satinsky and his Russian in-country partner, Mikhail Elashkin, have affiliated with The York Group (www.theyorkgroup.com) as Country Managers for the Russian Federation.

              The York Group helps information and communications technology (ICT) companies establish and grow sales in international markets. With local representative offices in 24 countries, York has the local on-the-ground resources to take technology solutions from anywhere to anywhere by developing and managing local country distribution networks. York has a proven methodology that can generate more revenue and greater profits at a faster rate and with lower risk than ICT companies can generate on their own.

               Russia is a rapidly growing market for all types of ICT products, but may appear to be a bit of a reach for companies not ready to incur the expense and risk of opening their own offices there. The York Group approach offers an alternative path to the Russian market with far less risk and expense than opening a direct marketing presence in Russia.

              York’s menu of market research and channel distribution development services can be tailored to the needs of companies at various stages of development of international sales, including companies new to international sales or unfamiliar with a particular country market; companies ready to utilize channel distribution but needing help to expand into new regions; and companies already engaged with channel partners, but not satisfied with the results from their current channel program and partners.

              After careful consideration, Satinsky and Elashkin have decided to expand the services they provide clients through their respective consulting businesses through associating with The York Group. The combination of The York Group’s experienced international network and structured methodology for development of distribution networks combined with Satinsky and Elashkin’s knowledge and experience in the Russian ICT market makes for a cost-effective service offering for entry into the Russian market.

              Any Massachusetts or New England company interested in further investigating the growing ICT market in Russia or entry into any other foreign market served by The York Group is invited to contact Daniel Satinsky. The York Group can also provide market entry services for any Russian ICT company interested in world markets, including the U.S. market. For further information, please contact Daniel Satinsky at dsatinsky@theyorkgroup.com.

 

Sunday – August 26, 2007

Software Sales in Russia – A Market Too Far?

              Is Russia a market that domestic U.S. software companies should consider? Russia for most mid-size software companies is uncharted waters with uncertainties about real demand, language and business culture. Recent news articles and surveys clearly show that Russia has become an important growth market for multi-national software companies. Given the large size of the country and the rapid development of business there, it is a market worth investigating for mid-size companies willing to adopt the proper strategy.

              While not nearly as large as the U.S. market, the growth of sales in the emerging markets and particularly in the BRIC countries (Brazil, Russia, India, China), is far outstripping domestic market growth. According to a Business Week article on August 6 emerging market sales boosted the quarterly earning for industry giants like Microsoft, IBM, SAP and Research in Motion. The article states that an IDC report projects overall tech sales growth in the U.S. of 6% in 2007; while predicting growth in India of 25%, Russia 17% and China 16%. IBM’s sales in Russia grew by 52% over the past year.

              The Russian IT web news service CNews (www.cnews.ru) published a report on July 23 that focused specifically on the sales revenue of top twenty foreign IT companies in Russia. The top eight foreign companies in the Russian market on this list were all equipment and hardware manufacturers. The ninth, tenth and eleventh spots were held by Microsoft, Oracle and SAP in that order. Between 2005 and 2006, the overall sales revenues of Microsoft grew by 63%; Oracle by 28%; and SAP by 43%. Other software vendors in the top twenty included Symantec, Check Point, TrendMicro and Eset.

              What is clear is that the major international software companies have made a substantial commitment to the emerging markets in general and in Russia, based on establishing working representation offices that carry out sales and marketing to build their presence. They do not seem to doubt the existence of real demand and they have moved to overcome barriers of language and business culture through their physical presence in the national market.

              The question for mid-size software companies is whether they can access this rapidly developing market without committing the same level of expense and management time as the larger companies have invested. There is no question that some level of investment of time and management resources will be required to enter a market like Russia, But it is not necessarily the case that a mid-size company has to duplicate the strategy of the giants.

              The alternative is to develop distribution channels based on partnership with existing distributors in Russia. Obviously any software company entering the Russian market must be ready to engage in localization of its product to take account of Russian language and business culture. But it is not necessarily true that a new sales and marketing operation must also be developed. In fact, this may be the exact wrong approach. The alternative is to engage in adequate market research and due diligence to locate an experienced and reliable Russian company already engaged in sales and marketing and having a depth of knowledge of the local market and clients that no outsider could possibly duplicate.

              By using distribution channels the distance to the rapidly growing market in Russia can be significantly reduced and mid-size software companies can share in growth that is now enjoyed by the industry giants.