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Management Report Concerning Russia as a Potential Market for Direct Investment/export by a Uk Company

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As with most countries Russia has experienced a turbulent economy due to the recent financial crisis. This phenomenon has resulted in a downturn of growth statistics worldwide which makes forecasting all the more difficult. However after studying many different publications and estimates I have compiled this comprehensive description of the market environment for the industry and analyzed the factors relevant so you can consider them at your discretion. I have also included a final summary statement in which I provide my personal opinion and advise on how to proceed should you decide to enter the Russian market.

When analyzing countries as potential markets a commonly used technique is to use a PEST Analysis, that is, the analysis of Political, Economic, Social and Technological factors in a market. While these are just a few of the factors affecting businesses they are usually acknowledged as the key ones and so for the purposes of this report I will focus mainly on these and bring up any other relevant factors on conclusion.

Russia as a country has recently undergone various changes in political environment. Perhaps the most notable being the election of president Dmitry Medvedev on 7th May 2008 and the movement of Vladimir Putin to prime minister. This very basic of procedure is ill-perceived by a significant number of the Russian public who still believe that it is Putin who runs the country. This scepticism of the very leaders of the country illustrates one of the larger problems in Russia which is corruption, particularly in the judiciary system and the police force. With this inherent flaw in Russian authority it is little wonder that its people have little trust in the system which reduces enforceability as people may not always involve the police. The subject has not, however, been ignored entirely. In 2008 Dedvedev initiated the main policy of his anti-corruption initiative which involves freedom of checks on judiciary members by authorities but crucially a greater leniency for the media. The president has also modified procedure laws so as to reduce detention time before trials of people accused of economic crimes to try and prevent them being able to conceal or even hide evidence. While these measures show dedication to the initiative their effectiveness has yet to be seen, mainly due to the early nature of the program. In relation to tax laws; businesses are required to pay profit tax which can vary from 15.5% to 20% ("Doing Business in Russia: 2011 Country Commercial Guide for U.S. Companies" See references : page 10) as well as value added tax of 18% and import duties which can range from 5% to 30%. On a relevant note there can be some exceptions for value added tax such as children's clothes which can sometimes be taxed at only 10%. It is also worth noting that under certain conditions, manufacturing in Russia and exporting can be exempt from VAT, a potential saving of costs of 18%.

The second factor in a PEST analysis is the economic influences of a market. According to a report by Ernst & Young (Growing opportunities Russia FDI report: Page 6) the foreign direct investment into Russia has seen a lot of variance partially due to the economic crisis but has maintained a positive trend. The article stipulates that FDI projects have multiplied by 2.3 between 2006 and 2010 placing Russia as the fourth largest beneficiary of foreign direct investment in Europe, just behind France and Germany. This statistic is a very encouraging indicator that Russia is a good market for potential investment. In regard to your products and the clothing retail sector the general consensus indicates significant and steady growth. According to an article published by PMR (Clothing and footwear market in Russia keeps growing to exceed $75bn) the country can expect to see around 10% average growth year on year in the clothing and footwear market and goes on to specify that two thirds of this market relates to the clothing sector as opposed to footwear. Should this be true it would provide your business with a solid standpoint to establish yourselves. This figure is supported by findings published by the U.S. Commercial Service (Doing Business in Russia: 2011 Country Commercial Guide for U.S. Companies : Page 24) obtained from fashion industry consultants "Esper Group" which argue that the Russian apparel market grew by 57% in the first quarter of 2010 compared to it's 2009 state and that it is an 'untapped and low risk' market which would promote growth. They also go on to predict the total annual market growth rate at around 10%; pushed mainly by women's mid-price apparel as opposed to men's which they speculate will stagnate as a market. However, the growth figure in Russia was critically damaged by the global economic crisis, boasting a gross domestic product of more than 1.5 trillion dollars in 2008 prior to the G.E.C. and less than 1.25 trillion afterwards. While this figure is rising once again it is clear from data about the consumer confidence index provided by Tradingeconomics.com (http://www.tradingeconomics.com/russia/consumer-confidence) that investors are doubtful about the recovery that Russia will make.

The next part of a PEST analysis examines the Social factors which can

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