Smaller Indo-Russian business ventures face challenges. Source: Alexey Kudenko / RIA Novosti
Recent examples show that having the Russian Government as a stakeholder does not guarantee a smooth entry into India for an investing company. Titanium Products Pvt Ltd, an Indo-Russian joint venture was supposed to build a chemical and metallurgical complex in Orissa worth $260 million to produce titanium dioxide and other titanium products. Russia's State Property Management Agency holds 51 percent in the company while the Russian company Tekhnokhim Holding controls 4 percent and the rest belongs to Kolkata-based Saraf Agencies Private Ltd.
The financing was to come out of India’s Soviet-era rupee debt to Russia. The company was promised land for a factory on lease for 90 years. In 2009, a year after the project got off the ground the partners have drifted apart arguing over the land issues that lead to a case in the Arbitration Tribunal and thus a long delay in the implementation of the project that had already received over $60 million Russian investments. The issue has still not been resolved till date.
Another land issue was the reason of European Bearing Company (EPK), Russian manufacturer and distributor of bearings, parts and assemblies, quitting Indian market in 2010. The company had to stop constructing a bearing plant after the land it had been allotted near Hyderabad suddenly got converted to farm land. By that time Russian investor had already prepared the project of the plant and imported some equipment. Alexander Moskalenko, EPK shareholder and the head of the Association of Russian Bearing Manufacturers says the company could not get back investments of about $5 million and could not even bring back the equipment.
Y.S. Shashidhar, Managing Director, South Asia, Middle East and North Africa, Frost & Sullivan, cites the example of Russian steel major Severstal’s project with India’s largest iron-ore producer NMDC worth $2 billion. The project was frozen as parties are in a dispute over equal stakes in the joint venture.
Another Russian-Indian venture, adds Shashidhar, had been facing labour issues from the very beginning. Kamaz Vectra Motors Ltd, a joint venture between Russia’s major truck manufacturer Kamaz and Indian Vectra Group started productions of heavy trucks in Hosur, Tamil Nadu, in 2010. One of the conditions of the partnership between Kamaz and Vectra was that a number of employees would be transferred to another group company Vectra Advanced Engineering Private Ltd in the neighbouring state. However, the employees came back to the Kamaz plant demanding jobs. After negotiating with a trade union, Kamaz Vectra hired 32 formerly dismissed workers. Later another group of workers objecting to the transfer demanded that Kamaz hire them back. After plant management refused to absorb them, they started a sit-in strike that paralyzed the plant for over a month, a Kamaz Vectra spokesperson told RIR.
Difficulties may alert but do not stop investors. Recently Russian state-owned gas company Gazprom was reported to be in talks with Indian Oil Corp for a stake in a in a planned $793 million LNG terminal near Chennai. Earlier Gazprom signed a 20-year contract for the supply of LNG with GAIL (India) Limited. Under the terms of the agreement, GAIL will receive 2.5 million tons of LNG per annum over a period of 20 years expected to start from year 2018-19. LNG will be delivered from Gazprom’s Shtokman production facilities to Dahej, Dabhol and Kochi terminals in India. The MOU for the long-term supply of LNG was signed by Gazprom with to three Indian state-owned companies, GAIL India Limited, Gujarat State Petroleum Company (GSPC) and Petronet LNG Limited in 2011.
More projects in different areas were announced after several areas of Indian economy had been opened for foreign investments, such as multi-brand retail, insurance and pension-funds, agriculture, aviation and energy sectors.
“Telecom and financial markets are going to be the most promising areas for investments in India. Russian Sberbank carries aggressive expansion plans here”, Yaroslav Kabakov, chancellor of Finam Learning Centre, a part of the Finam investment holding told RIR.
“Infrastructure project such as road construction, developing of airports, power plants, including nuclear plants, also have potential interest. However, the access to these areas is still complicated. Russian investors may be interested in infrastructure projects where Indian government would act as an owner. This would decrease the risks of project fail due to bureaucratic reasons,” Kabakov added.
VTB, Russian state-controlled foreign trade bank and one of the largest banks in Russia, opened an operating branch in New Delhi in February 2008. Later the largest Russian state-run savings bank Sberbank also opened its branch in India. Both banks currently support trade deals between countries rather than develop retail services though. “Telecom and financial markets are going to be the most perspective areas for investments in India. Russian Sberbank carries aggressive expansion plans here”, Finam’s Kabakov told RIR.
“Infrastructure projects such as road construction, developing of airports, power plants, including nuclear plants, also have potential interest. However, the access to these areas is still complicated. Russian investors may be interested in infrastructure projects where Indian government would act as an owner. This would decrease the risks of project fail due to bureaucratic reasons”, Kabakov added.
Experts say the area of construction and engineering services has most of significant opportunities for Russian companies in India considering that India is going to allocate about $ 1.7 trillion for infrastructure development over next ten years.
“Russia with its giant players and experience will be welcomed by India. Russian business can explore power sector, for example power plant equipment, gas and steam turbines as India is investing in this sector big time. Coming through consortiums may be more beneficial than acting alone”, agrees Y.S. Shashidhar from Frost & Sullivan.
He adds that in spite of most of Russian investor across industries face problems starting or continuing business in India, there are few more positive examples of Russian private companies investing in India. “Russian Company Ru-Net invested $17 million in two e-commerce website Freecultr and BeStylish. I think this is the first Russian investment in India’s Internet / E-Commerce space. Russian company Sibur Holdings has recently partnered with RIL to build a $450 Million butyl rubber plant in Jamnagar. I feel these are the investment projects that may work better in future than those big projects traditionally closely related to government,” Shashidhar said.
Russian investors say with one voice that overcoming of many barriers starting from legal registration procedures, obtaining permissions, paired with India’s complicated taxations policies that differ from state to state and at last corruption thriving on all levels should be not only business but government task.
In spite of many diplomatic agreement including Bilateral Investment Promotion and Protection Agreement (BIPA) signed back in 1994, in spite of multiple meeting of Russia and Indian diplomats of various levels, the protection of investments just does not happen in practice so far.
“Both Russia and India have a plenty examples of foreign investors being badgered. There are few examples of the same related to Russian companies doing business in India. This obviously increases the risks of potential investors aiming at long-term investment in permanent assets. As a result, today the most developing field of Indo-Russian business relationship is trade. Direct investments in some areas such as energy, transport and infrastructure, are possible but yet unique. It is often a question of proper PR as well. All developments in the area of emerging business relations between India and Russia were not covered by media enough within last few years”, says Vladimir Kornushin, Director of M.I.R. analytical centre.
Experts point out though it’s obvious that corruption exists in India it’s not only corruption that foreign investors should be concerned about. “Investors should learn who is responsible for taking decisions and giving approvals related to their business,” Carnegie Moscow Centre’s Topychkanov says. “They should know on which doors to knock. It is very common for Russian business to set the deal on top government level and think that after that the process will go smoothly on its own. In India it does not happen like that. A company should ensure it has relations with the right people at the right places at every level from central government to state government and even panchayats (local government) in rural areas.”
Recently India was ranked 94th out of 176 countries in Transparency International's 2012 Corruption Perception Index (CPI), just one point up from last year study. Russia was ranked 133rd alongside Iran and Honduras.
It’s obvious that the investment climate in both countries has both similarities and differences. The similarities include ambiguous consequences of economic liberalisation, dependence on foreign capital and protecting the local economy at the same time and a nexus between big businesses and the government.
The countries differ in their business mentality, the understanding of business and diplomatic relations, value for time and reputation. The latter is yet to be understood by many Russian investors planning expansion in alluring India.
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