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Risking It In Russia

Stories of shadowy government activity are not enough to prevent chemical firms from investing in a growing market

by Alex Scott
April 8, 2013 | A version of this story appeared in Volume 91, Issue 14

Credit: Shutterstock
Chemical firms say strict and overt adherence to their standard ethics policies is the best practice in Russia.
The Kremlin in Russia.
Credit: Shutterstock
Chemical firms say strict and overt adherence to their standard ethics policies is the best practice in Russia.

Many global companies maintain that Russia’s chemical market is like any other and, with an annual growth rate of close to 4%, one that they fully intend to participate in. But doing business in Russia carries risks, as companies such as BP and Solvay have learned in recent years. If foreign companies want to be successful in Russia—Lanxess and Evonik Industries are building factories and Dow Chemical is already there—they must go in with their eyes wide open, experts say.

“One of the riskiest places in the world to be involved in is Russia,” Robert M. Gates, former U.S. secretary of defense and chief of the Central Intelligence Agency, told delegates at last year’s annual meeting of the American Chemistry Council, the U.S. chemical industry’s main trade association.

Solvay’s encounter with the Russian administration dates back to 2009. The company struck an agreement to acquire a majority stake in Berezniki Soda Ash (BSZ), a producer of the glass raw material soda ash, but it had to wait five months for the deal to be approved by Russia’s Federal Antimonopoly Service. By the time FAS approved the deal, Solvay’s option to purchase BSZ had expired.

Days later, FAS approved the acquisition of BSZ by the Russian soda ash maker Bashkhim, even though the move handed Bashkhim 65% of the Russian soda market. Solvay said at the time that it was “deeply disappointed by the administrative process.”

BP also came off second best when its relationship with Alfa Access Renova, its partner in the oil joint venture TNK-BP, soured. AAR reportedly waged a campaign of harassment against BP. In 2008 the Russian government asked TNK-BP’s chief executive officer, American Robert W. Dudley, to leave Russia after his visa was denied renewal. BP finally withdrew from TNK-BP in 2012. “The joint venture was ultimately unsustainable,” BP said.

Corruption in the Russian “government and business world is pervasive, and a growing lack of accountability enables bureaucrats to act with impunity,” concludes Freedom House, an independent watchdog group based in Washington, D.C. “The leadership frequently announces anti­corruption campaigns, but they are typically superficial in nature.”

Investor’s Guide




◾ Population: 143 million

◾ World’s largest country, covering 10.7 million sq miles across nine time zones

◾ World’s ninth-largest economy, growing by 3.7% per year

◾ Chemical market is growing by 3.5 to 4.0% per year

◾ Program under way to build six regional petrochemical clusters

◾ Chemical trade between Russia and the European Union has tripled in the past 10 years to more than $19 billion in 2011

◾ Former military and security service officers occupy 25% of key government positions

SOURCES: CEFIC, Freedom House, IHS, the Embassy of the Russian Federation to the United Kingdom of Great Britain and Northern Ireland

Individuals who challenge the state or stand up to corruption in Russia may be placing themselves in peril. Sergei L. Magnitsky, a Russian anticorruption lawyer, is widely believed to have been tortured and beaten to death in a Russian jail in 2009. Other dissidents have fled the country in the past 10 years, and some later died in unexplained circumstances.

But ominous newspaper headlines do not always mean real dangers for chemical companies, Russia advocates say. “I could easily give you two or three dozen places where risks are greater—where there might be civil war or macroeconomic instability,” says Edward S. Verona, CEO of the U.S.-Russia Business Council, a Washington, D.C.-based organization that represents U.S. companies, including more than a dozen chemical and pharmaceutical firms such as DuPont and Pfizer.

High-profile political decisions made by Russian bureaucrats in the Kremlin—including the recent ruling that prevents U.S. citizens from adopting Russian children—do not necessarily translate into stumbling blocks for the business world, Verona says.

In fact, perceptions about risks in Russia may be overblown, he argues, and could unnecessarily be putting off some multinationals from investing in the country. Verona says executives with U.S. companies operating in Russia have told him that local competition in sectors such as pharmaceuticals and chemicals may be limited. Many multinationals that invested in Russia are generating “a spectacular rate of return,” he says.

Unlike the chemical sectors in many of its European neighbors, Russia’s chemical industry is growing. Sales are expected to increase by 3.5 to 4.0% per year through 2020. Production of the building-block chemical ethylene will more than double to 5 million metric tons, also by 2020, according to the consulting firm IHS.

The country is favorably located between China and Europe and enjoys the world’s largest oil and gas reserves. Its key products are the basic chemicals methanol, ammonia, and fertilizers, but the government is keen to push further down the value chain into more specialized chemicals—and even the development and manufacture of pharmaceuticals.

Russia is one of the fastest-growing markets for Dow, which is generating annual chemical sales in the country in excess of $700 million to a range of industries, including construction and water filtration.

Dow has had a presence in Russia for almost 40 years. “We are comfortable being in this region. But you have to choose your partners carefully,” says Peter de Groot, Dow’s general manager for Russia. There are pitfalls anywhere in the world, and Russia is no exception, he says. “We have never experienced any problems, and take all kinds of safeguards to ensure that we don’t run the risk of pitfalls [such as those experienced by TNK-BP or Solvay].”

Those safeguards include making it clear to all that the company does everything aboveboard. “We wear nonnegotiable corporate policies on our sleeve,” de Groot says. “These policies are integrity in business; acting ethically and legally; and meeting standards for health, safety, and the environment. We make this clear right from the beginning. This makes things a lot easier and helps us to be successful in doing our business in Russia and beyond.”

Despite having to take precautions, Dow says it appreciates the openness to mutually beneficial projects by Russian authorities and business players alike. Openness and cooperation were key to establishing Dow Izolan, a joint venture in Vladimir that produces polyurethane systems for Russia and the neighboring C.I.S. countries. Dow invested $40 million to build the plant, which opened in 2009.

Bayer also has polyurethane activities in Russia and is enjoying strong sales growth across a range of products, the firm says. The German company says it hasn’t experienced any unwelcome brushes with the Russian government or Russian criminal organizations. “If you are making materials for the footwear or the automotive industry, you don’t come up on the radar,” says Patrick Thomas, CEO of Bayer Material­Science. “Helping business-to-business needs in the country is not a problem. It’s similar to Brazil.

“The challenge for Russia is to industrialize. Russia has a Polo mint economy,” Thomas says, referring to a British hard candy with a hole in the center. “It has one of the biggest luxury goods markets and huge natural resources but nothing in the middle.”

Russian authorities are seeking to rapidly fill that hole by creating six regional petrochemical hubs across the country. Among the new projects, Moscow-based Rosneft is building a world-scale refinery and petrochemicals complex in Nakhodka, in Russia’s far east, that is scheduled to open in 2016. The Russian firm Nizhnekamskneftekhim is building a petrochemical complex in Nizhnekamsk, 500 miles east of Moscow, also due to start up by 2016.

Credit: Dow Chemical
Dow Izolan, a joint venture between Dow and the Russian firm Izolan, blends polyurethane at its plant in Vladimir, Russia.
A photo of a plant with three large reaction vessels.
Credit: Dow Chemical
Dow Izolan, a joint venture between Dow and the Russian firm Izolan, blends polyurethane at its plant in Vladimir, Russia.

At the other end of the chemistry spectrum, international pharmaceutical firms are stepping up their presence in Russia. Cross-border mergers and acquisitions have picked up since 2009, when the government introduced incentives for local drug production, says U.K.-based Espicom Business Intelligence.

Recent moves include Takeda Pharmaceutical’s opening of a $96 million drug-manufacturing facility in Yaroslavl, Russia, last September. At the end of 2012, Bayer Pharmaceuticals entered a partnership with the Russian drug company Medsintez to manufacture pharmaceuticals and diagnostic equipment and to jointly undertake R&D in Russia.

Bayer is not the only German firm wanting to build its presence in Russia. The German business world is in the middle of a charm offensive aimed at building trust and strengthening business with the country. This year has been designated “Germany Year in Russia,” which features a series of cultural, political, scientific, and business projects promoting understanding about Germany. The German chemical maker Lanxess has been closely involved and last November hosted a scientific symposium in Moscow with the Russian Academy of Sciences.

Lanxess is attentively observing the economic and political development of Russia, the company says, noting that “our own experiences with the Russian administration are positive.” The firm is building its first-ever facility in Russia: a rubber additives and release agents plant in Lipezk that will serve the auto and tire industries in Russia and neighboring countries. It also plans to build a facility for bladders used in tire production. Total investment amounts to about $6.5 million.

Russia and the C.I.S. “are key growth markets for us,” says Lanxess board member Werner Breuers. The firm recorded sales in Russia last year of about $100 million.

With its headquarters in Munich, Wacker Chemie is another German company seeking to grow quickly in Russia. Its sales there last year were less than $100 million, the firms says, but business in the country is growing at more than 20% per year, with sales predominantly from silicones and polymers for paints, cable insulation, and other products.

Wacker tells C&EN that it has never experienced any problems with Russian authorities. “We are very straight on our company rules. We really can do business in Russia like we do anywhere else in the world,” says Auguste Willems, the Wacker board member with responsibility for Russia.

Evonik, another German chemical heavyweight, has no hesitation when it comes to investing in Russia. It plans to open a 100,000-metric-ton-per-year plant for the feed additive l-lysine in Volgodonsk, next year. Russian authorities have been anything but underhanded, and the project has benefited from the “outstanding support we are receiving from the municipal authorities” in Volgodonsk and the greater Rostov region, says Walter Pfefferle, head of Evonik’s bioproducts business.

Even Solvay, despite its experience with BSZ, hasn’t been put off from investing in Russia. Last October the company formed a 50-50 joint venture with the Russian firm Sibur to produce surfactants and oil-field chemicals at a Sibur chemical plant in Dzerzhinsk, Russia. But if the Belgian company didn’t have its eyes wide open when it tried to buy BSZ in 2009, it certainly will now.


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