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Business news, 22.06.2004 12:14

Swedish Businesses Find Russia an Attractive But Still Restricted Market

sweden_ikea Swedish trade with Russia went up by 33 percent between 2000 and 2002, as compared to only 6.7 percent trade growth with Poland, the Swedish Trade Council reported earlier this year. However, Poland has 8.4 percent of Sweden's total foreign direct investments, seven times as much as vast Russia has with 1.4 percent, according to 2002 figures.

Besides such common reasons as the additional time needed for Russia to earn the trust of western businessmen, it is still mainly the failings of bureaucratic policies that hamper commercial interaction between the two countries, Swedish experts said.

"The dynamics of our trade with Russia have been positive over the past years, although the growth rate has lowered somewhat during last year," said May Andersson, consul general of Sweden in St. Petersburg. "According to the 2004 first quarter trade figures, Swedish exports to Russia increased by 6 percent and its Russian imports went up by 5 percent.

"In absolute terms, however, total Swedish trade with the three small Baltic states is more than that with Russia," Andersson said. "The figures we possess are calculated per country of origin, so they are not connected with transit trade with Russia."

Nore Kamoun, trade commissioner specializing in Russia at the Swedish Trade Council, said that Russia has a lower amount of foreign direct investments than all other transitional economies.

"Overall foreign direct investment during 1992-2002 is roughly 20 times lower than those in China," he said. "The Czech Republic and Slovakia received approximately 10 times more foreign direct investments per capita than Russia."


Andersson said that there are several factors explaining why the development of investment has been less intensive in Russia than, for instance, in Poland.

"Since investors usually make rational decisions, I would think that Poland's success in attracting investors - not only from Sweden - is largely due to its investment policies," Andersson said.

Sweden is one of the largest investors in Russia. It ranks 7th after the United States, Cyprus, the Netherlands, Britain, Germany and Japan in accumulated direct investments, according to a recent Swedish Trade Council report.

Sweden's $525 million accumulated direct investments up to 2002 ranks highly, especially considering that the quite substantial IKEA investments are not included in the figures. IKEA Russia is a branch of IKEA Germany, Kamoun said.

"Investment statistics in today's world of globalization are not always accurate, as companies invest through subsidiaries and it is at times difficult to determine which companies are Swedish," Andersson said. "Some of our largest investments in this region in the 90s - Tetra Pak, Assi-Doman - were later sold to other foreign companies."

However, there is room for Swedish investments. Electrolux, which recently announced plans to build a washing machine plant in St. Petersburg, regardless of subsidiary ownership, can still be considered a Swedish company, Andersson said.


Lennart Dahlgren, general director of IKEA Russia, said all countries could invest much more in Russia, but more cooperation is needed from Russia.

"The biggest problem is that regional authorities can influence and sabotage investments that are agreed upon at a higher level," Dahlgren said in an interview from Moscow.

In Dahlgren's opinion, the solution partly lies in increasing regional authorities' awareness about the country's long-term plans for investment growth. The power the regional authorities possess to create obstacles to foreign investments should be reduced, he said.

However, Dahlgren added, IKEA had had very good experience of cooperation with the Leningrad Oblast.

When asked to comment on an Interfax report quoting the Karelian leader Sergey Katanandov as saying that IKEA was going to cancel its plans to build a factory in Karelia because the Swedes were displeased with their Karelian partners, Dahlgren said the information was incorrect.

"The relations with Karelian partners are good and the negotiations are ongoing," he said.


According to a survey of challenges faced by Swedish companies doing business in Russia, compiled by the Swedish Trade Council, unclear legislation and unclear tax laws were named by 95 percent of respondents.

Half of the respondents saw Russian customs procedures as a severe obstacle. Payments discipline and corruption were viewed as serious challenges by 25 percent and 20 percent of Swedish respondents respectively. Only 5 percent of the respondents had problems with access to qualified staff. Even fewer Swedes, only 3 percent, considered crime to be a major problem.

"I would say that the main problem today is not with the investment or the tax legislation itself," Andersson said, adding that Russian taxes are lower than those Swedes are used to. In Andersson's opinion, it is the mechanisms by which the laws are implemented that are confusing.

"Swedes are used to follow the existing regulations to the last letter, and I am convinced that most of them want to do the same in Russia," she said. "To do so can be very difficult when implementation mechanisms are arbitrary and bureaucratic red-tape is abundant, while law-abiding behavior is not always rewarded."


Meanwhile, Clas Bostrom, director of Swedwood Tikhvin said that it takes enormous effort to establish a company in Russia.

"It takes a lot of time and juridical expertise. And the larger the company, the more money is involved, the more difficult it is," he said.

However, he added, it is essential to pursue exclusively the legal ways, no matter how long it takes.

Bostrom says the legislation that provides such low salaries for the "common bureaucrats" can also be blamed for complicating the process.

"There are positive dynamics in the air, but the changes are slow," he said. "Customs regulations have also become slightly better over the past years, but they are still the worst ones I know in the world."

Swedwood wants three main things, Bostrom said.

"We want customs procedures simplified, which would facilitate business making. Secondly, we want fair and not so bureaucratic reimbursement of value-added tax for companies like ours that do a lot of construction. At present, we have to literally fight to get VAT back - it is a confusing and an enormously time-consuming procedure," Bostrom said.

Thirdly, Swedwood wants to help extinguish illegal logging, widespread in Russia's Northwest. Unfortunately, deliverers' documentation today can be falsified, he said, so monitoring systems need to be strengthened.


"The most important thing is to make sure there is information available on rules and legislation concerning investment, customs, taxes, visas, work permits, and the like," Andersson said. "Too often foreign companies have to spend a lot of time and resources to understand their rights and obligations in those spheres.

"Availability and transparency of information are the key words. One way to achieve this is to establish some kind of 'investment window' within the regional administrations - this was successfully tried in some of the Northwest regions," she said.

"This agency should not only be able to give information, but also have the authority to act and solve problems when foreign investors are being hindered by various administrative bodies," Andersson said.


Trade commissioner Kamoun said visa administration is a problem area that clearly sticks out.

"It is just baffling and completely incomprehensible to hear Russian politicians roaring about the need for attracting foreign business, while at the same time they do nothing to facilitate the procedure for foreigners to enter the country and live here," he said.

"When you compare the number of tourists from Sweden going to a city like Tallinn by ferry to the minute number going to St. Petersburg, it does not take a scientist to calculate that St. Petersburg is at the losing end because of the visa issue," Kamoun said.

Meanwhile, Andersson said "it does not help propagating the image of Russia as a country welcoming trade and investments when foreign businessmen have to spend days and weeks in order to get necessary documents." A tourist is a potential investor, she added.

Andersson said the lack of convenient flight connections is another drawback. "Today, there are flights every day between Stockholm and St. Petersburg. SAS has been asking for permission to increase the number of flights between St. Petersburg and Copenhagen for a long time. For reasons beyond my comprehension, they have constantly been refused," Andersson said.

Lastly, Andersson named the growing crime rates against foreigners as a factor having a very negative impact on the image of St. Petersburg in the eyes of potential tourists and businessmen.

"My impression is that petty crime against foreigners has been inherent in the system, and that a lot more could be done by the police and other city authorities to combat this problem," she said.

"Trust needs to be earned," Kamoun said.

Developing the trust of locals and of the western world is an absolute must for Russia to be fully accepted as a regular market place, he said.

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