What is Holding Back the Consolidation of Russian Business Positions in the Gulf States?
Saudi Arabia's King Abdullah meets Russia's
President Vladimir Putin upon Putin's arrival at
the Royal Palace in Riyadh February 11, 2007
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Lately, the failures of Russian companies in the Gulf states have most frequently been explained by political factors. At the same time, the activities of our business community in these countries are hindered by other problems, which Russian companies are capable of resolving entirely on their own.
Lately, the failures of Russian companies in the Gulf states have most frequently been explained by political factors. At the same time, the activities of our business community in these countries are hindered by other problems, which Russian companies are capable of resolving entirely on their own.
Economic Importance of the Gulf States to Russia
The development of political, trade and economic relations with Saudi Arabia, United Arab Emirates, Qatar, Kuwait and Bahrain (which in 1981 established the Cooperation Council for the Arab States of the Gulf (CCASG)) is of vital potential importance to Russia. The monarchies of the CCASG possess 36% of the world oil reserves, which ensures their important role in the Organization of Petroleum Exporting Countries (OPEC) and through the capacities of this cartel, influence over the development of the global oil industry. The financial institutions of the Arab monarchies in the Gulf are huge sources of capital. As an example, as of February 2013, seven financial institutions from the CCASG were among the world’s top 20 national sovereign funds. The total amount of assets managed by these institutions amounts to nearly 1.8 trillion USD. Part of the money available in the region can be invested into Russian economy.
The CCASG is a dynamically developing market with an amalgamated customs union within its framework currently under construction. The aggregate economy of the CCASG makes it the equivalent of the 14th largest country in the world in terms of GDP. Though hydrocarbons make up about 43% of GDP, the CCASG is actively developing industry, innovative economies and social infrastructure.
Iraqi Market Potential for Russian Companies
The CCASG is a dynamically developing market with an amalgamated customs union within its framework currently under construction. The aggregate economy of the CCASG makes it the equivalent of the 14th largest country in the world in terms of GDP. Though hydrocarbons make up about 43% of GDP, the CCASG is actively developing industry, innovative economies and social infrastructure. In private discussions, Russian businessmen working in the Gulf states point out that the Arab world is far ahead of our country, primarily in the development of petrochemicals and manufacturing, as well as in construction and the generation of alternative energy.
The prospects of mutually beneficial trade, economic and investment cooperation between Russia and the Gulf states remain high. Priority fields include the energy sector, including matters pertaining to energy efficiency, peaceful nuclear power industry, renewable sources of energy, as well as mechanical engineering, telecommunications, construction, infrastructural development, agriculture, water resources, and other.
Over the past several years, the Russian business community has been actively exploring the CCASG market. One particularly illustrative example is the impressive composition of the Russian delegation accompanying Russian President V. Putin during his visit to Saudi Arabia, Qatar and Jordan in February 2007. The delegation included LUKOIL President V.Yu. Alekperov, Chairman of the Board of Directors of RUSAL Company O.V. Deripaska, Chairman of the Gazprom Management Committee A.B. Miller, Chairman of the Board of Directors of AFK Sistema V.P. Yevtushenkov, and President of Russian Railways Company V.I. Yakunin. During this visit, the sides reached an agreement in principle about the entry of these Russian companies into the Saudi market. Furthermore, V.I. Yakunin emphasized having had constructive negotiations with the Saudi transport minister. Vnesheconombank, Roseximbank, and the Saudi Fund for Development signed a memorandum of mutual understanding and cooperation to develop the export of industrial products.
The UAE Market and its Prospects for Russian
Companies
Negotiations with the Saudi side continued well after the official visit of V.V. Putin. In 2008, RUSAL conducted talks about the construction of an energy and metallurgical complex together with the Maadin Saudi state company.
Despite certain agreements, the current level of Russian trade turnover with the Gulf states is relatively low: in 2012, it was less than 3 billion USD. By way of comparison, US trade turnover with the countries of the region is approximately 100 billion USD.
Achievements of Russian Companies
Russian business in the Gulf states is primarily represented by major companies. Among the most significant achievements of the Russians are the following:
- In 2004, upon signing a contract with the Saudi Aramco national oil company for a period of 40 years, LUKOIL started exploration and development of hydrocarbon fields in the Rub Al-Khali desert in Block A, located next to the world’s largest oil field, Ghawar;
- Early in 2010, Russian Metalloinvest Holding Company launched a rolling mill in the UAE ;
- In December 2012 the Pipe Metallurgical Company CJSC acquired a 55% share of the pipe plant in Oman, Gulf International Pipe Industry L.L.C. .
a 55% share of the pipe plant in Oman, Gulf
International Pipe Industry L.L.C.
Small and medium-size Russian companies are finding it difficult to operate in the Gulf states’ market because of limited commodity stocks and financial resources, as well as expensive loans offered by Russian banks. In this vein, one hopeful endeavor is the newly established Russian Agency for Insurance of Export Credit and Investment. The Agency’s mission is to support domestic exporters of non-resource sectors.
Causes of Russian Business Failures
Despite examples of the successful operation of Russian companies in the CCASG market, one has to acknowledge that these achievements are exceptions, rather than systematic results. The problems faced by the Russian companies are vast. Let us name some of them.
They companies are unprepared to implement projects independently. In the CCASG, Russian companies are mainly interested in major projects. In particular, the Russian Railways Company is attracted by projects in infrastructural development in the UAE, Saudi Arabia and Kuwait.
Their interest in major projects is explained by the vast expenses of Russian companies as compared to their overseas competitors. As a rule, Russians are unprepared to work independently in implementing a major infrastructure project. For instance, during the construction of the Taweelah-Fujairah gas pipeline, the Stroitransgas company had to invite third-party organizations in to compensate for delays in progress.
Russian businessmen must do their prep-work before entering the markets of the Gulf states: ordering in-depth marketing research, studying the mentalities, traditions, and business customs of the locals, and working out development strategies for local markets.
Having won a tender, Russian companies engage foreign subcontractors and buy expensive equipment manufactured abroad, which often are much costlier than domestic machinery. The engagement of foreign subcontractors should not be regarded as an exclusively negative phenomenon. In the global economic environment, this mode of business operations is a justified format, in its own way. However, the prospects of greater dependence of national companies on foreign services cannot but cause concerns.
Mistakes made by company management. Russian companies often lose tenders to their competitors. The reasons for these failures include inadequate management as well as a lack of skills or know how of the business environment in the Gulf states. For instance, certain Russian companies continue to try to enter the Gulf market with the Russian analogues of international certificates requested by the Arab customers. One should also recall the shortage of skills in formalizing documents and making commercial offers. Non-transparent recording procedures within Russian companies do not facilitate the development of confidential relations with the Arab side either.
Delayed completion and the unsatisfactory quality of work by Russian companies, as well as any other foreign company, harms business reputation in the Arab world. There are no grounds to expect new contracts in an Arab country if a company previously failed to properly comply with its commitments in another country of the region.
In this regard, Russian businessmen must do their prep-work before entering the markets of the Gulf states: ordering in-depth marketing research, studying the mentalities, traditions, and business customs of the locals, and working out development strategies for local markets.
Political factors. The impressive business community delegation accompanying V.V. Putin during his visit to Saudi Arabia and other regional countries is some evidence of the idea that in the Persian Gulf, a company is unlikely to gain access to a major project without high-level backing. One has to remember that the US has traditionally had a strong foothold in the Gulf, and, most likely, the Arab side holds preliminary consultations therewith.
One should also emphasize that signing of a contract between a Russian company and Arab state officials does not guarantee the implementation of the project by the Russian side. An example is the experience of the Russian Railways Company.
Early in 2008, this Russian company won the tender for the construction of a railway line from the city of Az Zabira to the King Khalid International Airport in Al Riyadh . However, by May of that year, the Saudi side cancelled the results of the tender. President of the Russian Railways JSC V.I. Yakunin gave the followng comments: “This is not a problem of technology or Russian Railways. This is a problem of international relations”.
One cannot rule out that the participation of Zarubezhstroitekhnologia JSC, a Russian Railways’ subsidiary, in the Libyan railway project of the Sirte-Benghazi line was the pretext for the cancellation of the contract in Saudi Arabia. As is well known, relations between the Saudi Kingdom and the Libyan Jamahiriya during the time of Muammar Guaddafi were far from a partnership.
The following lesson could be learnt from the above situation: the management of Russian companies must take into account both specific country risks, as well as reflect on the nature of contracting country’s relations with other states.
What Is to Be Done?
Russian Business Week in the UAE
In the CCASG, Russian companies are mainly interested in major projects. Their interest in major projects is explained by the vast expenses of Russian companies as compared to their overseas competitors. As a rule, Russians are unprepared to work independently in implementing a major infrastructure project.
We are guided by the idea that the aforementioned problems are unlikely to be properly resolved in the short run. Stepping up the development of the domestic economy and more widely utilizing innovative technologies are of paramount importance. This will bolster the competitiveness of Russian products and accelerate their export, including to the Gulf states.
Apart from a visible need to sustain a political dialogue at the top level, the justified tactics can be a “synchronization” of Russian and Arab commercial interests in Russia and the CCASG. In particular, the case in question is the Saudi proposal to establish a joint venture for the production of cereals in our country for export to Saudi Arabia. Theoretically, having admitted Arab investors into Russian agriculture, the Russian side could count on certain preferences in obtaining contracts for Russian companies in Saudi Arabia.
Apparently, closer interaction with regional and national development banks (such as the Islamic Development Bank, Arab Fund for Economic and Social Development, etc.), which grant funds for the implementation of infrastructure projects including in the Gulf states, could facilitate the wider participation of Russian companies in these markets.
At the same time, it is advisable to speed up the process of notifying Russian companies by Russian foreign representative offices about the tenders to be held in the region.
Arab customers in the CCASG states traditionally buy American and European products. New potential suppliers have to be patient and wait until the Arab side pays attention to their products. Russian business promo events seem to be instrumental in the Gulf states, as was the Russian Business Week in the UAE.
The participation of Russian companies in international exhibitions held in the Arab countries can be also productive. For example, as a result of the Arab Health 2013 exhibition held in January 2013 in Dubai, the Urals Optical and Mechanical Plant reached agreements over the supply of medical equipment to Qatar, Bahrain and Saudi Arabia .
There is a possibility that the realization of these proposed measures and the prevention of the above-mentioned mistakes could make Russian companies more flexible and competitive, and then bolster their positions in the CCASG market.
The entry of Russian companies into the Gulf market can be viewed not only from the perspective of increasing the volume of marketed export products, but also as an opportunity to broaden the spectrum of foreign consumers of Russian commodities and services.
The expansion of trade, economic and investment cooperation with the CCASG is beneficial to our country as it facilitates the upgrading of Russian economy, as well as materializes Russian foreign political potential.
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