Procurement Intelligence Unit

Whether the global business world likes it not, Russia, like China and India, is going to one of THE places to do business over the next decade.

Few countries can match Russia’s extraordinary wealth of resources, with its oil and gas supplies making it the envy of the Western world. Its proximity to both Asia and Europe also makes the Russia of today – a country far removed from the one that opened its doors to the world after the collapse of Communism – a likely magnet for foreign business and investors as we move into the post-credit crunch era.

There's also little doubt that Russia represents a vast reservoir of untapped talent. The country's literacy rate is the 11th highest in the world (99.4%) and its ever-increasing graduate numbers indicate that the next generation of Russians could play at least some part in helping to plug the vast talent gap in functions such as supply chain and procurement.

While outsourcing remains Russia's strongest suit, its desirability as a commodity-rich sourcing location could also see a growing number of firms casting covetous glances in its direction.

Before the global economic collapse, which hit the country like a sledgehammer and is likely to contribute to Russia's first negative annual GDP growth in over ten years, the country had invested in a massive overhaul of an infrastructure that had been struggling to keep pace with Russia's economicrise.

The huge surge of investment had been prompted by fears over the country's ability to cope with the soaring demands placed on its ports and major transport routes. Evgeniy Ambrosov, CEO of the Far Eastern Shipping Company (Fesco), for example, predicted that Russia's container imports would grow at a rate of 20% a year after 2010.

A new fast speed rail network – aimed at transporting goods from Asia to Moscow in just 11 days – was also commissioned in an attempt to improve the fastest direct route between the Far East and Europe.

However, while these improvements are likely to have been welcomed by those companies already doing business in country, as well as those looking to work inside its borders in the future, Russia's creaking infrastructure still undoubtedly requires further investment - and other risks abound.

According to a Procurement Intelligence Unit Country Risk profile, foremost among them is the demographic challenge posed by a declining working age population – a population that looks set to decline by as much as 10% (about 11 million people) over the next 20 years. This is symptomatic of another major problem faced by a country that saw a doubling of its population aged 60 and above between 1959 and 1990, namely that of an ageing – and rapidly falling – population, with a World Bank report recently found that the country’s population will decline by 12% (more than 17 million people) between 2000 and 2005.

Russia's problems, however, run far deeper than simple population numbers.

A lax IP protection regime – which the government is taking steps to address as a part of its proposed accession to the World Trade Organisation – coupled with rampant corruption are just two of the other major issues facing the Kremlin, although again there are signs that those in power are taking much-needed and long-awaited action. In Transparency International's 2007 Corruption Perceptions Index, Russia ranked 143 out of 179 countries, which serves to illustrate the size of the task facing those charged with tackling a problem that has dogged the whole of post-Communist Eastern Europe.

That said, the World Bank's 'Doing Business in 2010' report, ranked Russia ahead of both India and Brazil but below China - a ranking measured against a series of metrics, including areas such as trading across borders and enforcing contracts.

It's the volatile situation in and around Russia's borders, though, that continues to pose the biggest headaches for those considering setting up operations in the country. Exacerbated by the country's recent high-profile conflict with Georgia, Russia's strained relations with its near-neighbours hit foreign investor confidence hard. Further actions, such as the government's investigation of steel company Mechel, and the ongoing dispute between BP and its Russian partners, have also served to puncture previously buoyant foreign confidence in the country. The recent explosion on a passenger service travelling between Moscow and St Petersburg will have done little to allay those fears.

Even taking into account these factors, there is unlikely to be a shortage of companies looking towards Russia as it, like the rest of the world, emerges from the global economic crisis.

And although high inflation – Russia's annual rate hit 11% in 2008 – may deter procurement operations from sourcing extensively in the region, at least for now, the country's desirability as an outsourcing location is likely to remain high, despite its recent economic lows.

In short, Russia could be about to experience its second coming as a global economic superpower – and despite the risks, the corporate world is unlikely to be able resist its allure.