Converting

The Russian packaging market can potentially offer low costs and high margins for the smart investor, but the risks can be as high as the potential dividends for those who rush in.

With packaging markets over-supplied in the West, some emerging markets offer enticing opportunities for robust growth and good margins. These markets are now attracting significant capital and are developing the structures to provide a broader range of higher-quality products.

In Russia, total packaging output for 2006 is projected at more than £10.4bn (US$20bn) by Russian finance and consultancy business Prado Consulting – up 60% since 2002 with further strong growth expected. Many operators report high double-digit margins in a capacity-constrained market.

Many global players, including Alcan, Amcor, Rexam, SCA, Stora Enso and Tetra Pak, have acquired or built facilities in Russia and a small, but growing, number of Russian companies have also become leading operators in their own right.

Whereas in the 1990s many Western companies moved into countries such as Poland and Hungary in search of low-cost materials and labour with a focus on export, there has been a shift in emphasis to serving domestic markets as an attractive end in itself.

This shift in focus is particularly true in post-Soviet Russia owing to strong demand, rising prices, the long distances to transport import and export goods, and tariff barriers.

The Russian market is maturing but it still has a long way to go. Paper bag output rose by 8% from 2004-05, corrugated by 12% and output of paper and board containers for consumer applications by 26%, yet the Russian domestic market remains constrained by supply issues.

Aluminium can production rose by 25% from 2003-05, with considerable room to grow further; the proportion of beer sold in cans against in bottles increased from 0.2% in 2000 to 13% in 2004, well below Western norms.

Key issues for investors
Location Demand is heavily concentrated in the wealthiest regions, notably the Central Federal district (including Moscow), the St. Petersburg metro area, and the Volga District. Siberia and the Russian Far East lag far behind in consumption.

Infrastructure Russia has few motorways and road quality is generally poor quality. Rail access, however, offers a considerable advantage for both inbound and outbound transport.

Attitude of the authorities The Russian government is increasingly active in shaping industrial development. Any prospective investor should first ensure that their strategic plans find favour with the relevant regional authorities.

Availability and cost of personnel Soviet enterprises were routinely over-staffed and this remains a costly legacy with some firms. Reducing the size of the workforce is sensitive but can be done. Existing staff sometimes find it difficult to adapt to Western practices.

A low but rising cost base With labour costs rising and increasing pressure from the World Trade Organisation to lift natural gas price caps, investors must plan ahead with labour- and energy-saving investments; they will pay off in the long-term and provide a significant competitive advantage against local operators, many of whom are under-capitalised.

Condition of brownfield facilities Board, corrugating and glass packaging plants dating to the Soviet era are often inefficiently designed to meet 21st century manufacturing needs. The facilities built since 1992 are typically better.

Marketing Packaging purchasers use trade fairs, journal advertising and direct marketing as their most common means of learning about new materials. The level of technical education is high, and trust in new brands and slogans is low – marketing materials need to include detailed technical specifications and performance metrics that users can objectively validate.

Other factors Organised crime and corruption are a concern, although the perception may be worse than the reality. “Unofficial” payments for bureaucratic procedures are shrinking but are still commonplace. Foreign investors would do well to cultivate strong relations with local authorities, and invest visibly in projects and charities that are good for the local population. This earns respect and goodwill.

In summary, Russia offers special opportunities, but investors must do their homework, and become knowledgeable and comfortable with the local customs and practices.

While the new EU entrants will convert relatively rapidly to Western cost structures and business practices, greater opportunities and attendant risks will last longer further east.


30-second briefing on... assessing the risks and rewards of Russia
- There has been 60% growth in Russia’s packaging market over the past four years and there is huge potential for further growth
- The financial risks are high, but so are the potential rewards. Investors should ensure that they do their homework carefully
- Infrastructure is poor, notably the roads, but rail access is an advantage
- Corruption levels are high - but the perception is worse than the reality
- Current demand for packaging is largely concentrated in the wealthiest geographical pockets in European Russia
- Plan to adopt best operational practices to secure competitive advantage against local operators and to protect against the likelihood of rising local costs
- Spend time ensuring your investment plans are favoured by the regional authorities

Clive Suckling is a director for global forest, paper and packaging industry practice at PricewaterhouseCoopers. Loren Gerlach, a senior manager at the same firm, also contributed to this article. Both are based in London

Note: Russian statistics are not always consistent, partly due to the inconsistencies in terminology used or data collection methods. Key trends, however, are generally reliable.