The services sector in Russia is one of the most dynamic sectors of the Russian economy. U.S. companies have an important advantage in entering the Russian services market, as most service sectors are undeveloped and are in dire need of foreign expertise. Russian consumers have a high regard for U.S. quality and are likely to choose a service from a provider with a Western component. An important issue that a foreign provider of services in Russia should consider is the currency control. Under the current laws, it is unclear when services provided by a foreign entity in Russia must be paid for in rubles or in foreign currency. As an imported service does not always qualify as an imported product, the settlement would depend on interpretation of the relevant law. Though some services are still being paid for in foreign currency, the Arthur Andersen Tax Alert of December 30, 1997, points out that there is "a policy shift that is well within the general direction of reducing foreign currency settlements and pushing the businesses into settling in rubles". At the same time, there is a mechanism to convert rubles into hard currency and repatriate profits. U.S. service providers are recommended to clarify the issue in advance with a law firm in order to avoid possible problems connected with ruble conversions and exchange rate fluctuations.
Advertising had no place in the planned Soviet economy but now market reforms have sparked an advertising boom in Russia and turned it into a thriving business. Advertising has evolved from being barely known and not well practiced to the point that, as more and more Western-made commodities appear in the Russian market, Western-style advertising has become more common on television and radio, and billboards. Professional advertising agencies and advertising research centers are now operating in Russia and Western manuals on advertising and marketing have become very popular. Western advertising companies dominate the Russian market and generate the demand for most of the mass media advertising.
If investments in the Russian economy and trade continue to grow, consulting services, including management consulting, legal, accounting, audit, and market research services are likely to grow along with it. These services are already in high demand in major Russian cities.
The educational system has been traditionally a strong part of Russian culture. Demand for U.S. educational and training services in Russia is increasing. Russian students are attending U.S.- and Russia-based American educational institutions at all levels--from secondary schools to universities, from undergraduate and graduate courses to short-term training courses. U.S. education is considered to be of high quality, especially for business and law schools. Various programs - U.S. government-sponsored and private - provide Russian undergraduate and graduate students, as well as scientists and industry professionals, with an opportunity for education and training in the United States. In addition, hundreds of Russians study in the United States, with scholarships and other financial aid at U.S. universities and colleges. Representatives of the emerging upper class prefer to send their children to study abroad, since they can afford to pay for it. Cooperation with Russian institutions is the best strategy for the U.S. universities and colleges to offer their educational/training services in Russia with English language courses for children and adults in great demand.
Opportunities for U.S. service providers in the Russian energy-related industries vary widely depending on the industry. The oil and gas sectors present better opportunities for U.S. services companies due to stable revenues from Russian oil and gas exports. Services for the power generation and mining sectors are limited due to the inability of companies in this sector to pay their bills. This is also somewhat true for oil and gas services as well.
Leasing Services: Leasing of equipment has become an increasingly important area of the Russian economy, due to an undeveloped credit system and the national need to a financially feasible way to upgrade obsolete equipment. As a result, leasing is rapidly growing in Russia as a means to finance exports of capital goods to Russia. A number of U.S. and other foreign leasing companies are operating successfully in Russia, where they are well positioned to provide competitive services because of the high cost of domestic credit. Leasing experts predict a rapid development in leasing arrangements in Russia's major cities over the next few years. In general, leasing in Russia is a significant financial tool and a rapidly growing industry, with prospects of up to 50 percent growth annually.
Insurance: The insurance sector has enormous growth potential. Foreign-licensed companies can be involved in reinsurance and mutual insurance for Russian companies. Foreign firms are allowed to hold 49 percent stakes in joint ventures with Russian insurers.
Catering Services: Catering is a relatively new but rapidly growing service sector in Russia. This service is provided in major Russian cities and is not yet sensitive to intense competition based on price and quality. The wide range of end-users includes all kinds of businesses, scientific institutions, individuals holding receptions, organizing conferences, as well as personal parties and weddings. Stronger competition should encourage better quality.
Food Delivery: Another business option for restaurants, stores and specialized companies is food delivery. Although there exists strong demand for such services, only very few elite and highly expensive stores provide food delivery services in Russia. Main consumers for food delivery services from both stores and restaurants include upper and medium class. Polls taken from middle-class consumers in Moscow have shown that there is a demand for reasonably priced food delivery services, such as pizza delivery. Wealthier consumers are taking advantage of food delivery services provided by a limited number of expensive food stores.
Take-out Services in Restaurants: Demand for take-out services is growing despite the high prices compared to similar services in economically developed countries in Europe and the United States. Nonetheless, the number of restaurants, cafes, and bars in major Russian cities is increasing, along with the quality and competitiveness of these ventures. Restaurants, bars, and cafes are diverse in their cuisine and range of services. However, many restaurants still do not offer food for take-out though the demand for such service exists.
The potential impact of franchising in Russia is enormous since the market for most services is undeveloped. But, given the complicated legal, tax, and regulatory climate, the franchise approach has so far been successfully used only in fast food. Franchising has also been growing in such areas as business centers, entertainment centers, cleaning services, and dry-cleaning services.
Health Care Services
It is difficult to estimate the total size of the health care market in Russia because the statistics collected for local production are in terms of units, not in value. While total imports into Russia of pharmaceuticals and medical equipment in 1997 are estimated at $2.2 billion, the import of medical services is considerably less. The volume of medical services provided by local state facilities is decreasing while the level of services provided by private clinics and doctors is growing. In 1996, the total volume of health care services provided on a fee-for-service basis was about $1 billion. In the health care services area, the most promising subsectors include illness and disease prevention, medical education programs, health care insurance services, and the design of modern out-patient health care facilities.
Telecommunications Services: Russia, with its vast distances, high demand for basic local telecommunications infrastructure and low penetration rate (currently 18 lines per 100 inhabitants), has a high growth potential in both basic telephony and alternative Telecom services. Telecom service providers are expected to expand their services to the Russian regions in the coming year, noting the tough competition in the Moscow and St. Petersburg markets, and the fact that several Russian regions are recovering from the economic crisis and are able to allocate funds for the development of the telecommunications networks in their areas. An important step, such as introduction of per-minute billing, is being planned or will be introduced by several local governments in Russia. The Moscow Government is planning to introduce this potentially unpopular measure in July 1998. This is likely to reduce the volume of local communications, as consumers have been used to low flat monthly bills. The Russian Government's priority for the next five to ten years in the telecom sector is to develop strong local loop infrastructure in both urban and rural areas. The Government has declared an important initiative, the Presidential "People's Telephone" program, which is actually an advance payment scheme. The program has been carried out through mixed financing from the resources of the telecom enterprises, credit and loans, and bonds. By purchasing such a bond, an individual can move up the waiting list to have a telephone line installed in his house/apartment. Under this program, in 1997, one million new telephone numbers were installed.
Internet Providers: Internet services are on the rise in Russia. About 600,000 Russians in all 89 regions are using Internet services and this figure is doubling each year. About 100,000 individual users have IP (Internet Protocol) connections and that number is growing about four times every year. There are about 6,000 Russian Web sites and this figure has increased nine times since August 1996.
Computer Services: A survey of the Russian market indicates that in spite of the general economic decline in Russia, the Russian computer and computer services market is expanding rapidly. Moreover, increased sales of computer hardware have resulted in greater demand for after-sales service and technical support. Computer services are likely to be the most profitable in the financially lucrative sectors of the Russian economy, particularly banking and energy. Consultants on computer networking and security do particularly well in these sectors. As the computer market in Russia will continue to change rapidly, a strong marketing strategy should be developed for any computer services. As with other industry sectors, competition in the computer market is marked by price, credit, promotion and advertising.
Tourism is a rapidly developing industry in Russia. During the last few years Russia has been steadily developing its tourist infrastructure, increasing number of travelers into and from Russia. Moscow's rapid growth as a world business center has caused a boom in the hotel business. Hotels that offer top-flight rooms and service are beginning to also appear in Russia's provinces.
According to the available market research and projections into future, the transport sector will go through a period of explosive growth in the next two decades.
--Road Construction: Russia has signed international agreements to integrate its road system into the European road infrastructure by developing several transport corridors on a high-priority basis. With the prospects for increased traffic on these roads, servicing facilities will be needed along the roads, including customs clearing houses, warehouses, sheds, filling stations and motels.
--Rail: The rail system in Russia is going through a period of decline, though it still represents the cheapest mode of transportation in the country. Existing reconstruction projects are underfinanced. As the regions assume more self-sufficiency and independence, they will exert more control over the regional railways but to date lack the resources needed to modernize them. Any growth in the Russian railway services on the railways in the near future will be moderate at best.
--Road Transport: The fastest growing sector of the economy (after telecommunications) is the automotive industry. The annual production of cars in Russia is expected to jump from less than a million a year in 1997 to almost 10 million in 2015. This will drastically impact the corresponding service sectors, which will need to expand to adjust to the growth in traffic. Cities are gradually waking up to the challenges and opportunities of the growing traffic. The municipal authorities have started awarding contracts for the construction and maintenance of new filling stations, service stations and car washes. The number of local companies dealing in spare parts and accessories, batteries and car care products continues to grow.
--Aerospace: At present, this sector is undergoing a period of reconstruction. The government is struggling to consolidate the industry and keep it competitive on the world market. At the same time, the fleet of commercial planes is aging rapidly and 70 percent of all aircraft will need to be replaced over the next 10-15 years.
--Airports: Russia has adopted a program of modernization of approximately 30 airports, mostly located in the largest cities of Russia. These airports in the main cities around the country will be turned into hubs with the subsequent development of infrastructure and services.
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