Is Russia an Attractive Market for Manufacturing Technology?

Aug. 12, 2009
Along with India, China, and Brazil, Russia is considered by many to be an attractive growth market. After all, it is the “R” in the famous “BRIC” construct developed by Goldman Sachs to describe the attractive markets for Western ...

Along with India, China, and Brazil, Russia is considered by many to be an attractive growth market. After all, it is the “R” in the famous “BRIC” construct developed by Goldman Sachs to describe the attractive markets for Western exports in the coming years. Is this true? And, if so, what role will U.S. government policy play in making Russia an attractive market for manufactured products and manufacturing technology?

In the years immediately after the fall of the Soviet Union, Russia did not look very much like an attractive export market. From 1990 to 1995, GDP dropped 50 percent as a result of the falling prices for metal exports and petroleum products. During that same period, corruption and cronyism characterized both public and private life. Commercial law was non-existent, and the government seized foreign investments or allowed extortion of foreign investors. The major Western oil companies either sold their interests or sold major portions of them to Russian investors.

By contrast, Russia has benefitted handsomely from the economic boom years of the past decade. Russia now supplies 25 percent of Europe’s natural gas. The petroleum giant Lukoil now owns the former Getty Oil and controls over 2,000 gas stations in the United States. Russian companies now own 10 percent of U.S. steelmaking and plan to expand into refining and mining enterprises.

The boom years of the 2000s have also been good for economic growth. Under Vladimir Putin, the economy has been growing at 7 percent. Of course, it helped that oil prices are up 500 percent in recent years.

What does this mean for United States policy toward Russia and for the attractiveness of the Russian market? In order to encourage capitalism in Russia, the U.S. government and the European Union have given Russia open access to Western markets. By contrast, Russia – which is not yet a member of the World Trade Organization – has maintained high tariffs and non-tariff barriers to imports. Even today, Russia has anything but a healthy investment climate, and if Western companies are invited into it, they enter the market at their own peril.

That does not mean, however, that Russia is an unattractive export market. With all the newfound wealth, there are many plans to expand industry. That means that manufacturing technology will be in demand. Moreover, unlike the bad old days of the Cold War, the U.S. government is encouraging and approving technology sales, as long as it is not to the military or to industries that could be used for military end-uses, like the space or satellite programs. Even there, exports are not prohibited, but they are carefully scrutinized and licensed.

Judging by the early signals of the Obama administration, I would not expect export licensing to become more rigorous or restrictive, which should mean that the market for items such as advanced machine tools and other manufacturing technology should continue to grow – assuming, of course, that world oil prices remain high and the Russian government remains stable (and relatively peaceful in its foreign policy).

At some point in the nottoo- distant future, I expect the Russian government will seriously apply for membership in the WTO. But, whether or not that happens, there will be pressure on Russia to remove its more onerous non-tariff barriers to trade and investment and to impose the rule of law on its dealings with Western companies. The Russian government recognizes that it needs increased Western investment and technology, and that the rule of law is a prerequisite to that increase.

With regard to their economic development, the Russians are their own worst enemy. But, at least they are not ours anymore. While Russia poses many impediments (on which I did not dwell in this short essay), it is likely to be a growing and attractive market in the coming years, one of which U.S. manufacturing technology companies would be foolish not to take note.

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