INTERNATIONAL FINANCIAL

MANAGEMENT REPORT

DOING BUSINESS IN RUSSIA ON

WEARABLE ELECTRONICS

SUBMITTED TO- SUBMITTED BY-

DR. L. RAMANI ADITYA MITRA

PROFESSOR, PGDM-IB

BIMTECH 17IB304
 RUSSIA FEDERATION
 Russia is the largest country in the world. Its area is 17 098.242 thousand square km.
The state is located in eastern Europe and northern Asia
 The Russian Federation is composed of 85 constituent regions, which are grouped
into nine federal districts under the administration of presidential envoys.
 Russia borders on 16 countries. In the south-east - with North Korea (DPRK), in the
south with China, Mongolia, Kazakhstan, Azerbaijan and Georgia; in the south-west -
with Ukraine, in the west with Belarus, Latvia, Estonia, Finland and Norway; the
Kaliningrad Region borders on Lithuania and Poland.

 The population was 46% male and 54% female in 2016.

 Political System: Federal Republic

 Head of State: The President

 Head of Government: The Prime Minister

 Legislature: Bicameral Parliament (State Duma and Federation Council)

 Capital: Moscow

 Population: About 143.800 million people.

 Official language: Russian

 Religion: Christianity (Orthodox)

 Monetary Unit: Ruble

 ECONOMY OF RUSSIA
 Low oil prices and Western sanctions have led to an economic decline in Russia. In
2015 GDP decreased to -2.8%. However, in 2016 a relatively more positive GDP
trend was observed, -0.2%. In 2017, an even better economic outlook is expected,
featuring 0.6% growth.
 For many years, oil prices have been a key driver of the Russian economy, which
explains why the oil price decline had a significant impact on the Russian economy in
2014-2015. Since mid-2014 oil prices have dropped significantly. Against a
macroeconomic background of low commodity prices, the Russian government has
been making a concerted effort to shift the economy away from an overly resource-
based orientation toward more innovation-driven model.
 The inflation rate was 12.9% in 2015, 1.5% above the level recorded in 2014
(11.4%)6. In 2016, the inflation rate reached 5.4%, or roughly half the 2015 level.
According to the MED’s forecast, in 2017-2019 the inflation rate will be at the level
of 4%, or even lower than the pre-crisis level of 6.5% in 2013.
 Although real estate and retail have been the hardest hit sectors in the current
downturn, in 2016 they enjoyed the largest shares of gross value added (GVA) broken
down by sector with 17.7% and 15.9%, respectively

 In 2015 the volume of FDI decreased by 70.6% (from USD 22 billion in 2014 to USD
6.47 billion). However, the weak Rouble has had a positive effect on the dynamics of
certain export-oriented industries, as evidenced by a substantial inflow of FDI to these
 sectors (16.3% of total FDI). Overall, such sectors as retail and manufacturing have
attracted the largest volume of FDI (52% of the total).

EASE OF DOING BUSINESS

Source: http://www.doingbusiness.org/data/exploreeconomies/russia

BUSINESS DYNAMICS

Russia’s business landscape has been marred by international sanctions. Consequently,

the Russian state has enacted numerous reforms designed to facilitate business operations.
Nevertheless, widespread corruption and excessive state influence are major deterrents
for investors, whilst a shrinking population is aggravating skills shortages. However, the
 state hopes to raise the appeal of Russia’s higher education sector. Substantial
infrastructure spending on roads is planned in the near term.

SWOT ANALYSIS

Although Russia’s business environment has benefited from several reforms, its economic
freedom ranking is depressed

 In the Index of Economic Freedom, Russia ranked the third lowest in Eastern Europe
in 2018. Although its ranking improved since 2012, it is held back by excessive state
control and inefficiencies in its public sector, whilst its judiciary also lacks
transparency

 Although legislation exists that treats both foreign and domestic companies equally, in
practice a large number of restrictions are imposed on the grounds of national interest
that result in foreign investors being treated differently. Agricultural land ownership is
restricted to foreign entities, whilst they can own no more than 20.0% of media outlets

 In the World Bank’s Ease of Doing Business (Doing Business) 2018 report, Russia’s
ranking improved markedly since 2012, owing to the large number of reforms enacted
 to enhance the business environment in that period. The latest reforms include
facilitating trading across borders with the inauguration of a deep-water port and
improvements at the St Petersburg port that have led to lower costs. ‘Dealing with
Construction Permits’ is its worst-performing category, as the time involved is
substantially greater than the Europe and Central Asia average

 According to Doing Business 2018, the total tax and contribution rate was higher than
the regional average, suggesting a burdensome tax regime. Russia also has a relatively
large informal sector, accounting for over a fifth of total workers (according to
government sources), although other sources place this figure at around 40.0% of the
economically active population. This implies that the state could be losing significant
revenue in unpaid taxes

OPERATING RISK

Corruption is a major issue

 The regulatory landscape is heavily influenced by the Russian state:

 In the Corruption Perceptions Index, Russia achieved the worst ranking in Eastern
Europe in 2017, indicating the large prevalence of corruption particularly in the
public sector;
 In the Regulatory Quality Index 2016 (latest data available), Russia achieved a
ranking of 128th out of 202 countries, the third worst in Eastern Europe, owing to
the opacity of the regulatory landscape and its labour market rigidity;
 Achieved the second highest score in the Global Terrorism Index in Eastern
Europe in 2017. The country suffers from acts of terrorism from separatist group s
and Islamist militants, such as the attack on the St Petersburg metro in April
2017. Six terrorist incidents had been foiled by the authorities by March 2018.
Source: Euromonitor International from Transparency International/Institute for Economics and Peace/UNDOC/World Bank

ACCESS TO FINANCE

Second highest annual lending rates regionally

 Although lower interest rates have facilitated lending, their still high levels have
increased nonperforming loans (NPLs):

 The Bank of Russia reduced the benchmark interest rate significantly over 2015-
2017, as high inflation began to subside. It lowered the benchmark interest rate
from 17.0% to 7.25% between December 2014 and March 2018, at which level it
stood in April 2018, with the aim of triggering economic activity;
 In Doing Business 2018, Russia’s ‘Getting Credit’ ranking was the third best in
Eastern Europe, illustrative of relatively sanguine access to finance conditions for
consumers and companies. Its ranking improved significantly since 2013, as it
took steps in establishing a collateral archive with detailed information regarding
the type of assets that can be held as a guarantee;
 Owing to relatively high interest rates, annual lending rates were also elevated,
the second highest in Eastern Europe in 2017, but fell since 2015, as interest rates
were lowered. Given comparatively high borrowing costs over 2012-2017, NPLs
as a percentage of total gross loans increased over the timeframe, as consumer
and companies struggled to service their debts.

WEARABLE ELECTRONICS IN RUSSIA

 Volume sales of smart wearables grow by 75% to reach 408,000 units in 2018
A growing offering in various price bands boosts smart wearables
 Activity bands rises by 120% in retail volume terms to reach 1.1 million units in
2018.
 Greater affordability and active lifestyles help sales of activity bands to boom.
Activity watch (analogue) posts moderate 2% volume growth in 2018, reaching 8,000
Units.
 Activity watch (analogue) has not received as much attention from consumers as its
digital counterpart
 Activity watch (digital) decreases by 9% in retail volume terms in 2018, totaling
30,000 units
 Potential consumers of activity watch (digital) opt for smart wearables in 2018
 Wearable electronics is set to register a 21% CAGR in volume terms over the forecast
period to reach 3.9 million units in 2023.
 Activity bands manage to reach out to the final consumer

Although present in Russia for quite a long time, activity bands registered strong volume
growth in 2018. The growing selection and affordability aligned with the rising
popularity of active lifestyles explained this good performance Activity bands are widely
present among the major electronics and appliance specialist
retailers, which offer the devices at various prices. Also, activity bands are considered
as another step into portable connectivity after smartphones. In addition, prices for
activity bands are decreasing, making them much more affordable to the wider
spectrum of consumers. In the forecast period, sales are expected to be less dynamic, leaving
space for the growth of smart wearables, which are considered as being more sophisticated
and having added value.

Smart wearables are the next step towards digital mobility

Smart wearables posted a very impressive growth rate in 2018. The category is considered as the
ultimate step into portable digital connectivity, providing additional functions mainly by syncing with
smartphones. If activity bands are less-complex devices, smart wearables are already providing
additional value, such as allowing the user to check their online correspondence, detailed reporting of
their activity status and other demanded services. Also, smart wearables are taking sales from activity
watches. Although some activity watches are quite sophisticated, they lack the possibility of installing
third party apps, which limits the general usage of these devices.
 COMPETATIVE LANDSCAPE
 Revenue in the wearable segment amounts to USD $121m in 2018.
 Revenue is expected to show an annual growth rate of (CAGR 2018-22) of 6.4%
resulting in market volume of USD $155m by 2022.
 Penetration rate is 3.8% in 2018 and expected to hit 4.4% by 2022.
 Average revenue per user amounts to USD $22.10.
 In global comparison, most revenue is generated in China USD $5,775m inn 2018.

Apple Inc. leads sales

Apple Inc. was the leading player in the strongly developing smart wearables category in
2018. Although carrying a much higher average unit price than the majority of its
competitors, its Apple Watch brand is benefiting from the strong Apple brand name and its
user eco-system. In addition, Apple Watch is one of the longest-present names in smart
wearables, together with Samsung and Sony. It has managed to outperform its competitors
via strong advertising support and technological development.

Xiaomi is the most active among the active

Xiaomi was the undisputable leader in the booming activity wearables category in Russia in
2018. The brand managed to outperform its major rival Fitbit during the review period and
enjoys its leadership due to its wide product range in various price segments and comparably
good quality. In general, numerous small brands of activity bands are also present; however,
the average unit price for activity bands is just above RUB2,000, with a number Xiaomi
models retailing at this level or even less. Therefore, strong fluctuations in rank among the
leaders are not anticipated in the forecast period.

Garmin moves from the active to the smart

Garmin activity bands and watches were among the highest-priced in Russia during the
review period. However, the brand is concentrating on more-sophisticated devices and
the majority of its product sales are expected to be generated by smart wearables in
the forecast period. Its new models, such as those in the Fenix 5 series, are already
considered as smart wearables. Although activity tracking is their main function, they
have the capability to run third party apps and therefore take the brand further into the
smart wearable environment.

SCALE OF OPERATIONS

It tells us about the major players in this industry and the number of shares they each hold.
 DISTRIBUTION CHANNEL

This is the distribution adopted by many companies operating in Nigeria and for my company
also the sales and distribution network would be same.

Though the initial Marketing budget would be relatively high due to high investment in
developing our own sales and distribution network as well as we will also focus heavily on
print, ad and brochures, billboards etc. to create awareness about our product in the minds of
consumers.
 SALES GROWTH

The forecast of the market for wearable electronics products as seen in the above graph
shows that it is constantly growing and in the coming years will show boosting growth
potential thanks to its huge population.
The year on sales performance is also forecasted to grow at a rate of 99.1%

SOURCING OF CAPITAL

Company can fund its business by taking debt from Banks, local investment firms, by raising
equity in the market or company’s own funds. Corporate Bank loans are not specific for all
the companies as it depends upon the amount of loan as well as the credit rating of the
company. In our case we have to assume the interest rates as we don’t have the exact amount
which my company has to borrow from the bank
 TAX ASPECTS

 Companies shall file accounting and tax reports with the tax authorities on a quarterly
basis.
 Reports on VAT should be filed every month.
 RO is a subdivision of a foreign legal entity that represents the company’s interests in
Russia. ROs officially are not allowed to undertake commercial activity, in Russia.
 There is almost no distinction between a Branch (or taxable RO) and Russian legal
entity in terms of tax compliance.
 RO which carry out auxiliary and marketing activity also should submit reports on
their activities and possible income and all reports related to payroll and social tax.

EXCHANGE RATE RISK

Source: https://in.finance.yahoo.com

There is a high currency exchange risk as we see so much fluctuations, the governments
revenue is heavily dependent on sale of crude oil and on exports of it. Which can prove to be a
blessing when crude oil prices are high but a real problem when prices fell dramatically.
However due to government efforts by opening up FDI in most sectors and various reforms
undertaken in policies, it has increased its GDP and ease of doing business rankings as well as
the forecast also shows a positive growth.
 CONCLUSION

Though Russia presents real problem in terms of corruption but due to government recent steps
in reforming its policies as well as the improving rank in Ease of Doing Business, GDP is also
showing a positive growth of 3% year-on-year. The most important aspect is to keep in mind
the culture of Russia and understand its customs before entering into the market.
The place I have chosen to setup my business in Russia is Rostov-On-Don. It is one of the most
developed cities in Russia, housing most of the major commercial activities in there. The fact
that it is positioned along the ocean and is the first port of entry by the sea even makes it more
suitable for businesses involving importation and exportation. It is also the hub of
administrative and economic center in there.
 It is densely populated and thus offers a larger customer or clientele base.
 It is a major transport hub.
 The cost of living is relatively low as well as the crime rate is minimum.
 The city is flexible and has the ability to adapt to changes without giving in.
 REFERENCES

 www.euromonitor.com
 https://www.worldbusinessculture.com/country-profiles/russia/
 http://www.doingbusiness.org/data/exploreeconomies/russia
 https://www.focus-economics.com/country-indicator/russia/exchange-rate
 https://www.statista.com/statistics/382360/gross-domestic-product-gdp-growth-rate-
in-russia/
 https://in.finance.yahoo.com/quote/NGN%3DX/chart?p=NGN%3DX#eyJpbnRlcnZh
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hhaXIiOnRydWUsIm
 https://tradingeconomics.com/nigeria/ease-of-doing-business
 https://www.dfa.ie/irish-embassy/nigeria/our-role/doing-business-in-russia/
 http://www.expatarrivals.com/africa/nigeria/doing-business-russia
 https://www.entrepreneurn.com/advice/cities-to-set-up-a-business-in-russia/#ixzz5OkdiWtm1
 https://waytorussia.net/business/startingup.html