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    Economic Aspect - RTE Moscow :

    Thai-Russian Bilateral Relations

    Economic Aspect

    In the first quarter of 2008, the Royal Thai Embassy, Moscow, tasked a Moscow-based research agency “Interactive Research Group” to carry out research studies on (1) How to secure payments for deliveries from Thai companies to Russian companies, (2) Logistics system in Russia, and (3) Procedure of opening a Thai restaurant in Moscow and St. Petersburg.

    Following is the summary of the three reports on the above-mentioned subjects. Full reports can be obtained upon request to this e-mail.

    Procedure of opening a Thai restaurant in Moscow and St. Petersburg

    Summary

    Market trends

    • Restaurants represent one of the most dynamic segments of the fast-growing Russian retail market. According to official statistic sources, in 2007 the Russian dining market increased by 29% and reached US$ 19 Billion.
    • In 2007 per capita spending on dining in Russia (US$ 133) was 2 times lower than in Baltic countries and Eastern Europe and 5-10 times lower than that in developed countries such as USA and Germany. The Russian market has a significant room for further growth and should be considered as a very interesting opportunity to invest in.
    • All 3 segments of the Russian dining market (fast foods, casual and fine dining) are developing dynamically representing a potential growth opportunity for investors.
    • The Moscow dining market, valued at US$ 4.1 Billion in 2007, accounted for 22% of the total Russian dining market. It is the largest and most developed regional dining market. Per capita dining spending in Moscow reached US$ 400 in 2007 that is 3 times higher than in the regions.
    • The average size and revenue of a dining venture in Saint Petersburg is 2-3 times lower than in Moscow. The total value of dining market in Saint Petersburg is estimated at US$ 2-2.5 million.
    • The Saint Petersburg dining market is growing dynamically and it is estimated that entry barriers here are not as large as in Moscow. Property prices are 3 times lower.
    • The most important trend that should be considered before opening a Thai restaurant in Moscow covers fast growth of property prices in the retail segment, change of consumer patterns of Russians, rise of shopping malls with food courts, increasing interest to exotic foods (Thai in particular).
    • Japanese cuisine is the largest segment of exotic dining in Russia (500 restaurants, total revenue of US$ 350 million). The peak of popularity of sushi restaurants seems to be over and currently there are many complaints from consumers about the quality of Japanese food in Russia.

    Opportunities and risks.

    • Key opportunities for Thai companies in the Russian dining market include increasing consumer incomes, market growth in all market segments (especially in casual dining and fast foods), increasing interest to Thailand and Thai cuisine as a result of growing popularity of Thailand as a travel destination, an empty niche for high-quality authentic exotic food from Far East and a lack of offerings in the quick service segment.
    • Potential risks and threats for Thai restaurants in Moscow and Saint Petersburg include growing property prices and other costs (personnel, ingredients), worsening reputation of Japanese restaurants, increasing competition from other segments and formats, lack of supply of quality ingredients, authentic food products, and tightening regulations from government authorities.

    Corporate structure

    • Major players in the Russian consumer markets apply the corporate structure using a holding company in Cyprus (or other offshore destinations), offshore special purpose companies for companies owning trademarks/franchise/property, and Russian limited liability companies as legal entities running restaurants. This structure is considered to be the most effective in optimization of taxes and solving various issues related to ownership rights.

    Retail property prices

    • The property markets of Moscow and Saint Petersburg are very buoyant with growth rates of property prices exceeding 30% a year in dollar terms. That represents a major threat for the dining business as uncontrolled growth of rent fees could have a strong adverse effect on its profitability.
    • There are several possibilities of avoiding risks related to property prices. For opening a Thai restaurant, a company should consider an opportunity of buying premises. Another option is to rent a premise in a shopping mall (rent terms and conditions in shopping malls are better and more civilized than that in the case of stand-alone premises in the centre of Moscow or Saint Petersburg).

    Key aspects of opening a restaurant

    • Finding qualified personnel for a restaurant in Moscow and Saint Petersburg is another challenge. The level of unemployment in Moscow is close to zero and salaries are growing 20-30% a year in dollars.
    • All 3 options of a restaurant concept (fast food, casual dining and fine dining) should be considered by Thai companies as each of them has its pluses and minuses.
    • Quick service restaurants is the most interesting option, in our opinion, as this segment is the fastest growing and most unsaturated. Casual dining would be the most predicted choice as there is a wide variety of options here (in terms of location, size, cuisine etc.). Fine dining (or upper segment of casual dining) could also be an interesting opportunity.
    • A newly established dining venture should definitely have an effective marketing plan promoting a restaurant and informing potential customers and partners. We estimate that an average restaurant operating in a segment of casual dining spends up to US$ 10-15 thousand a month on various promotion and marketing activities in the first year of establishment.
    • An average restaurant operating in a casual dining segment in Moscow and Saint Petersburg may have very low profitability, especially in the first years of functioning. The economy of scale may help in rising margins by opening new restaurants.

    Franchising

    • Franchising is developing in the Russian dining industry, mainly in the segment of chain restaurants. Also, many companies use franchise payments as a legal instrument to transfer profits abroad.
    • Advantages of franchising include additional revenues, reducing risks, sharing marketing costs with franchisers and additional possibilities for selling foods, technologies in various regions of Russia
    • From a negative side, franchising is effective only for large chains of restaurants and mainly for low and middle price segments; there are significant costs of tracking franchisees and their payments. Inadequate franchisees may spoil the reputation of a company’s brand.

    Partnership with Russian businesses

    • The Moscow dining market has a very low market concentration. Rosinter is the leading company controlling less than 17% of the total market.
    • An ideal candidate for partnership with a Thai company for opening a Thai restaurant could be a mid-size domestic business operating several restaurants in the middle segment of Moscow or Saint Petersburg market.
    • When choosing a candidate for partnership, a Thai company should look on the following characteristics of potential partners: long period and positive track record in the market, adequate legal and corporate structure (including financial statements), positive reputation in the Russian media and expert community, decent corporate website and positive profile of managers and owners.
    • There are three main options of conducting an agreement with a Russian partner: franchise agreement, majority ownership by Thai company, majority ownership by Russian partner. Choice of a particular scheme and details of transaction depends on particular characteristics of the business established. We recommend using services of professional law and M&A consultancies when conducting a deal with a Russian partner.

    How to secure payments for deliveries from Thai companies to Russian companies

    Summary
    • There are many risks associated with foreign trade transactions between a Thai company and a Russian company importing goods. Those risks include risks of non-payments by a Russian party, risks related to transportation, risks related to violations of the Russian customs legislation and currency control and so on.
    • The major ways to reduce the risks related to Thai supplies to Russia include:
      • a proper development of a contract for foreign trade transactions using a professional legal advice, other documents (such as Proforma invoices, letters of credits etc.).
      • Careful choice and thorough due diligence of Russian partners (including a purchaser of goods, transport company, freight forwarder, customs broker, bank and insurance company).
      • Development of effective payment scheme using banking instruments (letters of credit, promissory notes) to secure timely payments.
      • Using insurance to cover all related risks including non-payments from a Russian purchaser, risks related to transport, currency control, and political risks etc.
    • Currently, most transactions between foreign and Russian companies are structured with an advanced payment (prepayment). Banking instruments and import trade finance is getting of more popularity and is already used by major importers.
    • Insurance is also widespread in foreign trade transactions involving Russian companies. The most popular types of insurance cover risks related to transportation of goods by different means of transport (sea, railway, motor, air etc.).
    • Russian legislation is developed in terms of structuring transactions involving domestic companies. Until recently a special focus was given to foreign currency control limiting and supervising various transactions with foreign and Russian currencies. However, over the last 2 years this area was significantly liberalized.
    • Organizations and companies that are involved in various aspects of Russian foreign trade include Russian federal government bodies (Ministry of Economic Development, Central Bank, State Customs Committee and various profile ministries), industrial associations of foreign and domestic businesses working in Russia (AEB, RSPP), consulting firms (big 4, leading Russian consultancies), legal advice firms (Baker McKenzie etc.). There are several major agencies assessing credit ratings and reputation of Russian corporations and financial institutions (Standard & Poors, Fitch, Moody/Interfax etc.).

    Logistics system in Russia

    Summary

    Customs clearance

    • The procedure of customs clearance of goods in Russia includes entry of goods to the customs territory, unloading of goods, submission of Customs Declaration, submission of other documents (including certificates and licenses), paying customs duties, taxes and other fees.
    • Russian customs regulations establish a comprehensive list of documents required for customs clearance purposes. In practice, the set of documents to be submitted to the customs authorities may vary depending on the character of imported/exported commodities, conditions of the transaction, etc.

    Customs fees

    • The customs fees are usually paid into the bank accounts of the customs authority prior to the time of customs clearance (the day on which the customs declaration for the load is submitted).
    • A company importing goods into Russia should have a deposit in one of banks authorized by the State Customs Committee. A bank provides a guarantee to the customs bodies that an importer will meet all its obligations concerning tax and customs duty payments.

    Customs broker

    • Many foreign companies operating in the Russian market prefer to deal with customs brokers, intermediary companies, that take upon them all or partial functions of customs clearance and products delivery.
    • Russian customs brokers usually are large-scale organizations that provide their clients with the full list of services related to logistics including all aspects of customs clearance, transportation of goods and various consulting services.
    • Advantages of using a customs broker include cooperation with an experienced company that has established relations with regulative authorities; using a complex of services from a single company including consulting, transportation etc.
    • Disadvantages of using a customs broker are increasing costs of imports, risks related to bad quality of services and infringements by domestic customs brokers.
    • Our recommendation is that a Thai company with serious expansion plans in Russia should definitely consider an opportunity of partnership with a reputable Russian customs broker or a large logistics company providing such services. However, we would urge an importer to do a very detailed procedure of choosing its Russian partner.

    Imports and transportation industry in Russia

    • Imports to Russia are rising very fast following an increase in the domestic consumer incomes and spending as well as in the demand for capital goods and equipments from domestic enterprises.
    • In terms of types of products imported into Russia, the structure of the Russian imports is dominated by vehicles, machinery and equipments, which together accounted for over 50% of total imports’ value in 2007. Consumer-related products is another very important line of Russian imports as there is a very high and growing demand for imported products from the Russian population.
    • From geographic prospective, European Union is the largest exporter to Russia controlling 43,5% of total domestic imports in 2007. CIS countries take 15% and China 12,2%. Russian imports from Thailand exceeded US$ 1 Billion in 2007 (0,5% of total amount), according to State Customs Service.
    • The volumes of cargo shipped by Russian transportation companies increased by 24% in 2007 if compared to 2003.
    • Pipelines and railways together control over 95% of the Russian cargo shipments. Combined share of air, waterways and motorcar transports is less than 5% in the total Russian freight turnover.

    Shipments from Thailand

    • The usual type of transportation from Thailand is using sea transport to ship freights to one of Russian major ports and then distribute it to the market using either railways or motorcar transport. Usually the period of transportation exceeds 2.5 weeks.

    Warehousing facilities in Russia

    • The Russian warehouse property market is substantially undeveloped in comparison with Eastern and Western Europe but it is expanding at a very high pace. In per capita terms, Moscow has 6 times less warehouses of international quality than Prague, one of the most illustrative examples in Eastern Europe.
    • During 2004-2007 there was a substantial increase in construction and development of new high-quality warehouses, especially in Moscow. The total stock of prime warehouse premises expanded several times. It is forecasted that the total stock of class A warehouses will grow by another 2 times in 2008-2010 driven mainly by activities in Russian regions.

    Major problems facing imports from China and EU

    • Major problems facing imports from China and EU to Russia include high administrative barriers that increase costs and time of customs procedures.
    • Other problems include underdevelopment of the Russian transportation and logistics systems, low penetration of quality warehouses and increasing costs of imports.



    Source: Royal Thai Embassy, Moscow
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