Archive for November, 2008

Hold Tight, Hillary: Russia Just Got Scarier

Friday, November 21st, 2008

If any proof were needed that the Russian political system operates in its own time-space continuum, it came this morning, when the parliament decided to deal with the country’s economic meltdown by amending its constitution. The Duma fixed the 1993 text by decoupling presidential and parliamentary elections and approving term extensions for the president, from four to six years. The amendment, which President Dmitry Medvedev announced on November 5, was discussed for a scant two weeks and passed overwhelmingly: 392 to 57. (Amazingly, those 57 votes came from the Communists.)

In the West, the amendment was met with a hearty round of “how could they’s.” It was perceived as a cynical play by Putin for another stab at the presidency, and, more fundamentally, as yet another giant crack in the foundation of an anemic democracy.

The debate among Russia’s chattering classes, however, sounds very different–more like specific, sinister prophesies of doom. The amendment, they say, is all Putin’s doing, and now Medvedev will step down within the year, ushering in a new round of elections, the end of the thaw, and, of course, twelve years of President Putin (whose approval ratings, incidentally, are still some 20 percent higher than Medvedev’s, the actual sitting president). Yulia Latynina, a prominent political columnist, sees something even more complex on the horizon: “First, the ruble will collapse in early 2009–or at the latest when the country’s gold and foreign currency reserves run out. … Medvedev’s first reaction will be to blame the West for everything. Then he will explain that he lacks the moral strength to lead the country during a serious crisis.” Then, a new round of elections, twelve years of Putin, yadda yadda yadda.

These fears are not unfounded, of course, but for the regular folks, it’s far more simple. Fully 56 percent of Russians support the amendment because, heck, they like the president. Both of them! Of the people less favorably inclined–this third of the population mostly happens to live, by the way, in Russia’s two big (elitist?) cities–some disapprove because they don’t buy the government’s argument that they need more than four years to get everything done. In a country of red tape, city voters feel, perhaps ironically, that four years is plenty of time to achieve policy goals. More than half of the dissenters, however, defend democracy so fiercely as to render it moribund: Twelve percent of Russians say that a constitution is not for amending. Ever.

What does the Kremlin say in its defense? It invokes the economic crisis and the time needed to deal with it; it points to Russian exceptionalism and the country’s dire need for a strong leader. “To be honest, I do not think that Russia should be a parliamentary republic,” Medvedev said at a press conference on Tuesday. “I think this would be fatal for the country.” And in the saltiest Russian manner, he invoked the “you hypocrite Americans do it all the time” excuse, saying, “Some countries do it less often, like the United States, for example, though they too have passed a fair few amendments over the years.”

Most baffling of all, however, was Medvedev’s harking back to the days of the tsarist ancien regime when the French were to be emulated in all things. When Madeleine Albright asked him at the G20 summit why the Russians were so keen to extend presidential term limits, Medvedev replied like a borscht-belt comedian: “That’s normal for an incumbent administration–trying to enhance your capabilities.” He then added, “But I was guided by other considerations. … Recall the Constitution that France had at the time of De Gaulle. It gave the President a seven-year term in office. I think it played a good part in helping France to develop as a strong nation.”

So there you have it, folks: Russia is moving towards a de Gaullian form of government.

Wal-Mart’s Ruble Trouble

Friday, November 21st, 2008

Wal-Mart unexpectedly replaced its CEO on Friday, but things are looking up for the number 1 retailer as chastened American consumers rethink about those aspirational brands they’ve loved so long. Last week, the company posted a whopping 10 percent jump in profits [1], just as Starbucks [2] saw its same-store sales plummet 8 percent [3].

Besides cashing in on American consumer woes, in recent years much of Wal-Mart’s growth has come from overseas; indeed, incoming CEO Mike Duke has been in charge of Wal-Mart’s international operations. A decade ago, just 5 percent of its earnings came from abroad. Now, more than 40 percent of its stores are overseas. To be exact, they’re in 14 other countries where more than 50 million weekly visitors provide the Arkansas retailer with nearly a quarter of its sales [4]. Wal-Mart has had particular luck in Mexico, China (the source of much of Wal-Mart’s goods), and Latin America. The company is expanding in the larger markets, with more than 300 stores doing brisk business in Brazil and its first store in India early next year [5].

The glaring omission here is, of course, that backward R in BRIC [6]: Russia. For four years now, Wal-Mart has been actively—and secretly—scouting the Russian terrain, trying to find the best bucket to catch a sprinkling of petrodollars. But, after four years of jerking around Russian realtors, there are still no stores in sight. This summer, Wal-Mart announced that it had hired a German retail executive to head up Wal-Mart’s emerging markets division, with a scouting office in Moscow. Aside from that, however, Wal-Mart is keeping mum. “We continue to study the market” was the mysterious comment from Richard Coyle, the company’s senior director of international affairs.

Why the hesitation? Well, as you may have heard, Russia is a strange place, prone to unpredictable government intervention and hefty bribe-taking [7]. And if you want to build in Moscow, where nearly all of Russia’s new wealth is concentrated and spent, you’d better be prepared to pay. A lot. Unlike in California, skyrocketing prices there are no bubble.

So, let’s say you’re Wal-Mart [8], and you’ve managed to get a scrap of land. You’d quickly discover that there are all kinds of permits and papers needed to start building, but they’re hard to get, so, well, you’d have to come to a special-and pricey-understanding with the permit granters. When IKEA set up shop in Moscow in 2004, for instance, it fought with city authorities for months [9] over the building of an expressway ramp to its shopping center. The other way around it is to buy an existing chain-the strategy Wal-Mart pursued, to its resounding profit, in England (ASDA) and Japan (Seiyu). But retail is lucrative in Russia—the food market alone was estimated to be more than $140 billion last year—and it’s less than a decade old, so there aren’t many sellers just yet. An existing chain of 50 stores will now cost about $2 billion. It may seem like a bargain—Wal-Mart lobbied Tony Blair to allow its $14 billion deal [10] to go through, but ASDA was a ready-made, highly developed product. When Wal-Mart purchased it in 1999, the 50-year-old company was already Britain’s No. 2 retailer and had started mimicking Wal-Mart’s methods [11]. By contrast, Russian chains are still less than a decade old based on local, logistically fraught distribution chains.

Russian analysts estimate it will cost about $15 million to $20 million to build and stock each store. Unfortunately, Russian borders aren’t the most permeable. Often, authorities stop goods at the gate—say, goods coming from China—skim a little off the top, or just impound the whole lot without explanation or recourse. In 2006, for example, Russian customs agents seized 167,000 Motorola cell phones [12] and, after changing their reasons for doing so a few times, ground about 50,000 of them to a fine metallic powder. Also, the country is huge; even if those Chinese goods get into the country, the roads and railways spanning its 11 time zones are uneven at best and nonexistent at worst. (Don’t try to fly the goods, though, since Russian domestic flights tend to fall out of the sky with alarming frequency.) This matters a lot for Wal-Mart, since it has built its entire empire on big volumes of cheap goods from China coursing through a speedy, ultraefficient distribution network. Natalya Zagvozdina, a retail analyst with Renaissance Capital, puts Russia’s infrastructural readiness at somewhere near 25 percent. “And that’s probably a generous estimate,” she adds.

Then there’s the question of corporate culture. Wal-Mart has learned the hard way that it doesn’t always translate well. In 2006, it shuttered its operations in South Korea after a decade of incorrectly emphasizing dry goods when Koreans wanted food and beverages. In Germany, where Wal-Mart was already fighting an uphill battle in a very competitive market, it also faced problems of etiquette. Locals balked at other people bagging their groceries or smiling at them when they entered the store. (German men, apparently, thought they were being hit on [13].) It’s also not hard to foresee how a line in Wal-Mart’s employee manual stipulating that employees report rule-breaking would go over in Russia, a place where authority is a terrifying joke, interactions are highly personalized, and where ratting on someone is one of the gravest sins one can commit.

So that’s the bad news for Wal-Mart. The “good” news is the same as at home: The financial crisis has hit Russia, too. The Russian stock market has lost more than 70 percent of its valu [14]e this year and the construction industry is in crisis, as is the local credit market. Indeed, Wal-Mart may have some buying opportunities, because retail chains that have accumulated tremendous debt in the last few years are now finding it impossible to refinance. All of a sudden, properties that weren’t up for sale because they were still young and profitable—or that were going for $2 billion—now cost half what they did three months ago. (A hint from Russian investment bank Troika Dialog’s Anna Matveyeva: Buy a smaller chain that isn’t politically connected enough to fall back on the government for a bailout. There is, for example, Kopeika—or “kopek”—which already has almost 500 stores and about that many millions in debt.)

And remember: The Russian consumer is still itching to spend and is still woefully underserved, crisis and all. Assuming that one hypermarket—a grocery-department store hybrid—serves about 100,000 people, Russia needs 1,400 of them to serve the entire country; it has 150. (A decade ago, there were none at all.) And neither is the market empty: French retailer Auchan has smoothed the way [15] by hacking through some of Russia’s notoriously thick red tape and figuring out how to navigate such a coded place, so Wal-Mart doesn’t have to start from scratch.

For all the talk of nouveau Russians bathing in gold, there were only 33 billionaires before the crash. There are 140 million other Russians, whose per capita income was about $8,000. That’s why the Ford Focus—not the custom-trimmed Maybach—is the country’s most popular car. The average Russian is price-sensitive but also doesn’t save much, spending about 80 percent of their income-and they’re going to be even more cost-conscious now that their economy is on the rocks. “So far, the crisis hasn’t touched the Russian consumer,” says Zagvozdina. “It’s still a huge market with very fast growth, and, in the next five years, I don’t think Wal-Mart will be able to make do without Russia.”

And, she adds, Wal-Mart’s greeters might have a positive effect on Russia’s particular brand of customer service: “Maybe the clerks will have more normal reactions to shoppers instead of looking at them like they’re just random, annoying people milling about and demanding things.”

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[5] Wal-Mart sticks to India plan