Tapping Russia's Industrial Needs: 75 Years of Pent Up Demand

July 7, 2009
As the U.S. and Russia warm relations, companies could take advantage of Russia's plans for industrial modernization.

President Barack Obama's visit to Russia certainly had a heavy focus on reducing nuclear weapon supplies and easing relations between the powers of the East and West, but it also provided substantial tangible benefits to U.S. business.

No sooner had Obama wrapped up his two-day visit than three U.S. corporate giants announced deals worth a combined $1.5 billion, as agricultural machinery manufacturer John Deere agreed to invest $500 million over the next six years in Russia, while soft drink maker PepsiCo said it will boost its Russian investments to $4 billion from $3 billion over the next three years.

Aircraft maker Boeing plans to announce a joint venture with Russian titanium giant VSMPO-Avisma, according to several reports.

Taken as a whole, the announcements represent a swift change in economic climate from a year ago, when Russia's conflict with Georgia turned the political and business dynamic between the two nations highly combustible.

One of the most significant developments from the visit was the agreement to create a bilateral presidential commission, which will coordinate economic relations between U.S. and Russia.

"It has a broad mandate and gives companies a sense that there will be a vehicle to resolve disputes," says Gary Litman, vice president of European Affairs at the U.S. Chamber of Commerce. "There will be a place where common understanding on economic policy can be achieved and there will be an opportunity to meet with credible Russian counterparts and know where they stand with the Russian government."

With warmer relations, many companies, especially in manufacturing, stand to see increased business in Russia.

"They've got cash, which a lot of guys don't have, and they have access to metals and ores," says Patrick McGibbon,vice president, Association for Manufacturing Technology, who compiles economic reports on the global manufacturing technology industry. "They have an enormous need for industrial modernization."

Even with the Russian economy -- which is heavily reliant on the energy industry -- hurting, the government and large companies have built up enormous reserves for investment. That could mean new developments in infrastructure, railway systems and new plants.

"Russia has about 150 million consumers with substantially increased purchasing power and 75 years of pent up demand," says Litman. "They want to be competitive globally and they don't want to spend the next 50 years designing everything themselves. They want to buy expertise and know-how."

Obama's visit might not necessarily lead to the realization of a nuclear-free world, but at least for business it could mean greater opportunities for both nations.

"Philosophically, the way Russia does things might not sit well with a lot of people," says NTMA's McGibbon. "But there's less crime and fewer obstacles to doing commerce than there were four years ago. And that certainly improves the odds."

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