Spanning nine time zones and over 17 million square miles, Russia is not only the largest country in the world, geographically, but also the richest on a per capita basis of the so-called "BRIC" countries (Brazil, Russia, India and China). Its $1.465 trillion economy is forecast to grow at 4.5 percent this year, and industrial production and manufacturing continue to increase. (Last year industrial production grew 8.3 percent, and through the first four months of 2011 year-over-year growth has run 5.6 percent.) With economic indicators like these, what's not to like about the Russian market?

These statistics become especially compelling when you consider that the Russian economy is underserved by the motion control industry, with comparatively few companies with a major presence in this market. But this may soon change. Russia's top leaders, including President Dmitry Medvedev and Prime Minister Putin, have acknowledged the need for economic modernization. If Russia is to compete globally and insure a level of national income largely independent of oil Real GDP % Change - Russiaexports, it must deploy automation technologies such as motion control that enable the necessary cost efficiencies, productivity and product quality.

The size of the Russian economy, its performance, and the fact that it is generally underserved by automation companies suggest that it is an attractive target for motion control sales. But is it?

In a recent study entitled "Market Opportunities for Automation Companies in Russia", (available free to MCA members here and for sale to non-members in MCA's online bookstore, MCA addressed this issue. For its analysis of the motion control market, the study considered not just the economy but also the ins and outs of doing business in Russia. The picture that emerged from the study is of a country in great need of motion control technology, but lacking in the basic underpinnings and protections of businesses that are taken for granted elsewhere. In short, while the Russian economy has made great strides in its transition from a centralized, publicly-owned economy, it still has a ways to go in creating fertile ground for businesses to flourish. 

There are several reasons why the legal/regulatory framework in Russia is not yet conducive to business. Corruption is rampant and legal protections of business are generally weak. Intellectual property is poorly safeguarded. Approval processes in customs for the importing of goods and the establishment of businesses are cumbersome. Legal resolution of disputes is often lengthy and complex, as the consequence of overlapping jurisdictions, unclear laws and regulations and overwhelmed judges.

Additionally, the lack of a business culture, monopolization of some sectors by "oligarchs" and insufficient transportation between different points in this vast country can also hinder commerce. Contributing to the unfavorable climate for business are also high custom duties and the fact that certain strategic segments of the economy are off limits to foreign direct investment (FDI). In this regard it is telling that, FDI, which is viewed as a barometer of business trust in the Russian federation, fell off sharply in 2010, despite the recovery in the economy.

The Russian bureaucracy is a major cause of some of these problems. Too many contradicting regulations are creating a lot of opportunities for local and mid-level bureaucrats to intervene.

Other causes are the underdeveloped infrastructure in Russia (with a few exceptions like Moscow and St. Petersburg) and the lack of investment in their own country by Russian businesses, which lessens the confidence of foreign investors

President Medvedev and Prime Minister Putin have repeatedly emphasized the importance of improving Russia's business climate and attracting foreign capital, but despite bureaucratic interference, infrastructure problems and low domestic rates of investment, structural reforms have been slow and past government actions, such as politically motivated investigations into business, have made foreign businesses increasingly risk adverse.

To minimize their exposure to risk, most motion control companies have limited their physical presence in Russia. Of the 27 motion control companies that were found to be addressing the Russian market, 12 had either a sales or service office (mainly in Moscow and St. Petersburg), 13 used distributors and 2 used other means such as a Russian language website. Of the 12 with a sales or service office, only one appeared to be a wholly-owned Russian subsidiary.

But the fact that no less than 27 motion control companies are addressing the Russian market (even minimally) suggests a broad perception that Russia will eventually represent a large market opportunity.

In addition to benefiting from robotic shipments to Russia, motion control sales involving motors, drives, actuators, controllers, other components, subsystems and entire systems should figure prominently in all Russian industries, where production and distribution require conveyors and linear and rotational operations in place of manual movements. These industries include aerospace, automotive, disposable products, military, packaging, pharmaceuticals, plastics, printing, semiconductor, woodworking and factory automation in general.

When the comparatively large economy and underserved motion control market of Russia are considered, it is clear that this vast country represents a sizeable market opportunity, but one that is contingent upon the establishment of a conducive business climate. Until Russia's political elites take concrete actions to create this climate, motion control companies should limit their exposure to risk, while remaining well-positioned to expand their market presence, once improvements occur. In short, companies should proceed with caution by limiting the size of their operations in Russia and by restricting their physical presence to large cities, such as Moscow and St. Petersburg, before sinking more permanent and extensive roots in this great country.

By Paul Kellett, Motion Control Assoc. Director - Market Analysis