Russia a land of opportunity for Singapore entrepreneurs & enterprises
Foreword: I would like to extend thanks to my collaborators, Ms. Daria Luzina, Program Manager, Sistema Asia (Singapore) and Mr Yogeindran Thiayagarajah, , Regional Group Director, Russia CIS, C&E Europe & Central Asia, Enterprise Singapore. They contributed extensively to the research underpinning this article.
Singapore entrepreneurial ventures should explore the wealth of opportunities that Russia and the post-Soviet states of the Commonwealth of Independent States (CIS) offer. With deep pools of technology talent and vibrant, modern consumer markets, there are abundant opportunities in a major Eurasian market that is often overlooked.
Home to more than 140 million people, Russia’s GDP in purchasing power parity (PPP) terms estimated at US$4.315 trillion by the World Bank Group means Russia ranks among the 20 largest global economies. Russia-Singapore bilateral trade amounted to $7.38 billion in 2017, which grew at a compounded annual growth rate (CAGR) in excess of 10% between 2007 and 2016. Currency, more than 500 Russian companies operate in Singapore.
Tapping the technology and innovation ecosystems of cities like Moscow or Saint Petersburg, startups can scale-up while augmenting their products and talent, with parallels to expanding into other challenging markets like China, India, and Indonesia.
Yogeindran Thiayagarajah, Regional Group Director, Russia CIS, C&E Europe & Central Asia, Enterprise Singapore, observes: “Russia has an established research and innovation culture with strong science and technology capabilities.
In recent years, beyond the more traditional areas of partnership in agri-commodities and consumer sectors, we have seen Singapore companies venturing into Russia to seek opportunities in tech and innovation collaboration. This is to provide their tech solutions or partner with Russian companies to jointly develop such solutions.”
“In the past year [2020], we have worked with partners to run market access programmes in Russia and currently, over 10 Singapore companies are in discussions with potential partners. Many Russian companies in the tech space see Singapore as a gateway to Southeast Asia given our networks and familiarity with the region. Some Russian technology companies have set up in Singapore to co-develop and test-bed solutions and are collaborating with Singapore companies to expand into the region.”
Since 2018, Russia-Singapore public-private partnerships have been growing stronger, aimed at enhancing connectivity. For instance, Enterprise Singapore has partnered the Skolkovo Foundation, Sistema Asia and MTS to facilitates the expansion of companies across Russia and Southeast Asia through the business development platform Sales Jet.
Areas of Opportunity
Two sectors where opportunities exist for Singapore entrepreneurs and enterprises are in Russia’s agriculture and consumer sectors. Russia is set to see substantial benefits from climate change, which will reshape the country across a number of areas and comes with both benefits and downsides. In fact, it has the potential to re-emerge as a superpower.
For instance, the Centre for Strategic & International Studies (CSIS) notes: “Permafrost, which covers nearly two-thirds of Russian territory, is rapidly thawing. More dramatic freeze-thaw cycles in the subsoil are eroding urban infrastructure in Russia’s Arctic cities, home to over 2 million people, and pose a mounting risk to Russia’s 200,000 kilometers of oil and gas pipelines, not to mention thousands of miles of roads and rail lines bridging some of Russia’s widest rivers.”
The agriculture sector has been a key focus for the country’s economy and developing steadily over the years. Globally, Russia is a major exporter of wheat and amongst the top ten exporters of other crops. Singapore trading companies such as Olam and Delta-Wilmar, a subsidiary of Wilmar International, have successfully operated in the market for many years.
The Financial Times noted how Russia’s emergence as the world’s largest wheat producer is “partly due to climate change”, with milder winters enabling higher yields. Consistently producing more than 60 million tonnes of wheat per annum since 2015, Russia has become the number one grower and exporter, driven by warming temperatures. Russian agricultural companies are also showing increasing interest to establish its base in Singapore for expansion into Southeast Asia.
One such example is Don Agro, the first Russian company in the agricultural sector to be listed on SGX in February 2020. This enhances Singapore’s capital market offering and facilitates access to Russian wheat. Singapore companies are also offering tech solutions to enable trade. For example, VCargo Cloud worked with Russia’s RSTradehouse to integrate their respective e-trade platforms to facilitate trade between southeast asia and the Eurasian Economic Union countries.
The other area of opportunity lies in consumer-related areas, with the large Russian market of 145 million people offering substantial opportunities for Singapore companies in consumer-related areas such as food services and retail.
Russian consumers are increasingly seeking value for money and open to different offerings. Recognising the market potential, Singapore companies have been seeking opportunities to provide niche offerings. For instance, food wise, there are companies looking to distribute reasonably priced quality tea or healthy chips. There are also opportunities for Asian food products given the diversifying palate of the Russian consumer.
In addition, the e-commerce trend is changing Russian consumer behaviour and creating new business opportunities. The value of the Russian e-commerce market is estimated to nearly triple in value between 2020 and 2024, amounting to US$98.2 billion, with e-commerce penetration rate projected to hit 60% by 2023.
Thus, there is room for Singapore companies to leverage online platforms to market and service Russian consumers, who are taking to the digital sphere to fulfil their shopping needs. This also translates to opportunities for Singapore companies specialising in the e-commerce value chain, such as warehousing services, fulfilment services and customer relationship management (CRM) systems.
Notably, Singapore companies should be aware of that it takes time to build the business in Russia given the differences in culture and common working language. Concerted efforts to understand the market, consumer behaviour and regulatory framework are necessary. Importantly, they need to identify good local partners who can help navigate the business landscape, support in setting up the business and develop connections.
Enterprise Singapore, for instance, leverages on-ground connections and offers insights on the key market and sector developments; advises companies on setup and regulations; and introduces them to in-market partners. It also engages local governments closely to discuss potential projects where collaboration is possible.
Risks vs Opportunities
Typically, political risk periodically makes it difficult for foreign investors to operate. This is compounded by cultural and language barriers, as the country is spread across 11 time zones and is home to 120 ethnic groups with their own territories and languages. But this vastness is unified through the Russian language.
But research by the World Bank and World Economic Forum notes the 2010s have seen Russia improve substantially in areas like innovation, trade freedom. From being ranked around 130 in the World Bank index of ‘the ease of doing business’, it ranked 28th in 2019.
Additionally, the economy has proven resilient to shocks following marginalisation by Western economies since 2014. Today, the Russian economy is in better shape, with slower but more stable growth following reforms to strengthen its domestic economy, rationalised public spending, and shifts in how proceeds from hydrocarbon exports are invested.
Moscow, Russia’s capital, is ranked among the top five global cities. It stands out for its quality of life, outdoor experiences, clean air and innovation and education infrastructure. This is coupled with compelling tourism and entertainment offerings that underwrite an appealing lifestyle.
In 2019, Singapore signed a free trade agreement (FTA) with the Eurasian Economic Union (EAEU) — a single economic market of over 183 million people with a GDP of over US$5 trillion in purchasing power parity (PPP) terms — that incorporates Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan. With free transit of goods, services, capital and workers, there is also a Russia-Singapore double tax treaty permitting tax relief in specific trade and service areas.
Through the 2010s, it has seen a growing middle class and private sector. The country is also in the midst of reviving its scientific infrastructure. Consumer spending is expected to drive GDP growth in the future, and a consumer market whose growth exceeds most mature markets. Defined by discerning, cost-conscious consumers with brand loyalty, Singaporean enterprises are well-positioned to offer goods and services with consistently high standards at business-friendly costs to meet heightened local demand.
Russia remains a challenging market for both foreign and local entrepreneurs. But this represents a chance to develop resilient business models that can adapt volatile markets from Indonesia to Latin America. But this makes Russia a key step for Singapore startups with global ambitions that want to evolve resilient and scalable business models.
And for enterprises factoring in the risks posed by climate change, in the long run, research suggests Russia’s economic production is also expected to grow. This is due to global warming raising temperatures and providing an overall economic boost for many northern countries.
With unusually hot weather patterns through the latter half of the 2010s linked to lower economic output globally, the connection between hot temperatures and lower productivity has fundamental implications for factoring in the the costs of climate change.
One study of the Indian manufacturing sector found heat stress reduced work productivity and increased the probability of absenteeism. Less productive workers translate to less productive businesses, leading to a less productive economy. Such climatic conditions have profound impacts on how modern societies and their economies function, with climate-fuelled heat stress threatening long-term worker productivity.
Overall economic productivity is non-linear in temperature for all countries, with productivity peaking at an annual average temperature of 13 °C and declining strongly at higher temperatures. With the prospect of global warming reshaping the global economy by “reducing average global incomes roughly 23% by 2100 and widening global income inequality”, Russia is among the few nations that experiences a significant upside from global warming.
Russian Tech Momentum
Extensive opportunities for Singapore entrepreneurs also lie in technology development, commercialisation and internationalisation of existing intellectual property (IP), e-commerce and domains linked to the Fourth Industrial Revolution (4IR).
For instance, Russian technology suffers from an innovation gap and shortfall in commercialisation, which Singapore can bridge.
The city-state can serve as a global gateway to markets in Asia and beyond. 4IR and corresponding Industry 4.0 opportunities in domains like automation, cyber-physical systems, Internet-of-Things (IoT), smart production, Big Data, analytics & AI are other areas where Singapore and Russian entrepreneurial ambitions converge.
For instance, some experts suggest the coronavirus accelerated the digitalisation of the economy 10 times. 5G implementation is also a positive trend. Russia’s largest telco, MTS, gained the first 5G license in July 2020, with plans to launch 5G-based solutions for corporate customers. Additionally, development and testing of different enterprise and consumer use cases are already underway.
In terms of developing a sustainable business, major barriers in Russia include few opportunities to attract external funding. This means Russian companies with robust, scalable business models and competitive technologies will survive and build toward profitability. This serves as a good filter for companies to undergo prior to internationalisation.
This has resulted in the emergence of mature companies that are bootstrapped and finance their business growth and expansion plans via existing revenues. Such an approach builds resilience, as successful company founders must evolve very efficient business models, operational configurations and sales processes. This sets them up for success in turbulent overseas markets.
Singapore entrepreneurs can also tap exceptional tech talent in Russia. It has over 700 universities in 82 regions across the country and is known for its strength in Science, Technology, Engineering and Maths (STEM). Coursera’s Global Skills Index (GSI) 2020 ranked Russia as the leader in technology and data science. Such skill sets can complement Singapore’s own talent pool in domains like deep tech startups.
Leveraging talent and tech developers in cities like Moscow, Saint-Petersburg, Novosibirsk, Ekaterinburg — all home to leading technical universities — high-quality developers and tech talent are also available from Russian regions like Yakutsk (Sakha Republic) and the Russian Far East (Far Eastern Federal District).
Thiayagarajah notes: “The skillsets of their talents [Russian talent] can complement our own talent, such as those required in deep tech startups. Singapore students could also consider exposing themselves to technology programmes in some of these key educational institutions to gain new knowledge and insights.”
The time difference of 5 hours between Moscow, Saint-Petersburg and Singapore is another advantage. It grants sufficient time for teams to synchronise during the Russian morning and Singaporean afternoon. Some eastern districts of Russia and cities like Irkutsk are even in the same time-zone as Singapore.
Another option is outsourcing product development to Russian research & development (R&D) houses for intellectual property (IP), which helps Singapore companies leverage Russian talent and rationalise costs. In this case, IP can be owned by a Singapore firm or shared with a Russian R&D company.
Singapore offers a base to access international markets, the capital pools, consumers and the crucial economies of the Indo-Asia Pacific (Indo-Pacific) — the Asia Pacific and Indian Ocean Rim — and is a critical node on the Vladivostok-Chennai Maritime Corridor (VCMC).
Meanwhile, Russian metropolises like Moscow offers a base to expand into the relatively untapped Central Asian and Central & Eastern Europe (CEE) economies; offers a large and resilient domestic economy as a buffer for the business operations of any enterprise; and a talent pool that can serve as a foundation for building a global footprint.
Given all these possibilities, a substantial scope of opportunities lies in the future for companies from Russia and Singapore to explore going-to-market together across Russia, post-Soviet republics and Southeast Asia.
