What are the challenges Unilever has faced while operating in Russia? How does the company intend to continue it’s expansion efforts? The following is a cross-post from the Modern Russia blog in which MR interviews Irina Bakhtina, board member and communications director at Unilever Group in North Africa, Middle East, Turkey, Israel, Russia, Ukraine and Belarus.
Unilever recently raised some issues with Investment Ombudsman Igor Shuvalov. What were the difficulties Unilever faced and can you describe the process?
The process is more or less the same as with other top government officials, it isn’t formalized as such. First, as a business you need to identify the issue and its potential impact on your activities and provide officials with the evidence of this impact.
In our case, we faced an issue related to the enforcement of the Customs Union last year. On July 1, 2010, a number of raw materials and finished goods in the ‘home and personal care’ (HPC) category became subject to new legislation that made them fall under a procedure of state registration overnight. The key issue was that until the legislation came into effect, there was no indication this would happen, and even professionals in the area of technical regulation representing the entire perfumery and cosmetics industry (i.e. both international and domestic manufacturers) would never have predicted such an outcome, although they had been reading through all the Customs Union rules and directives thoroughly and well in advance.
Generally speaking, such issues can result from new regulatory initiatives everywhere - not only in Russia. That‘s why it’s so crucial that any new legislation in any country is developed with the active participation of those who know the business from inside and understand how it works - professionals who deal with customs issues, people who know the manufacturing processes very well, people who deal with sanitary authorities, for example - so that the real impact of the legislation can be foreseen before it’s enforced.
After raising the issue with the investment ombudsman, how was it resolved?
We have a good workable instrument for establishing a dialogue with the Russian government: the Foreign Investment Advisory Council (FIAC), where Unilever chairs a think tank on eliminating administrative barriers and technical regulation, through which we addressed Mr. Shuvalov as the chairman of the Customs Union Commission. The result was a very positive example of the quickest possible and absolutely transparent decision making.
As we realized what was happening with raw materials and finished goods, we immediately provided the government and Mr. Shuvalov’s office with evidence to show that the entire industry was suffering. A meeting was scheduled, the general managers of all the companies affected were invited and the process was explained to us all. Accordingly, we provided our business impact estimation, and the necessary evidence from industry, associations and our stakeholders.
We then set up meetings with the Economic Development Ministry, the Trade Ministry and the Customers’ Rights Protection Service to work out what we as an industry needed from the ombudsman. This was then drafted, properly prepared, discussed, and agreed both with the businesses and government agencies. I’d say the process was ‘perfectly executed.’ We were grateful that right on the date of the meeting Mr. Shuvalov signed a set of instructions - or let’s say it in Russian, porucheniya (orders) - along with well-envisaged deadlines, clearly identifying all the responsible parties.
This was, to my memory, the fastest and most efficient response from the government with regard to an investor’s problem. All in all, it took us three months: from mid-August when we realized the impact of the new legislation on our business operations to final resolution of the issue in mid-November. My colleagues might have a skeptical view of this, suggesting it was three months of “who knows what” - rather uncertainty - but if you look at European Union regulations and the process required to amend them, for example, you could hardly rely on such an efficient and quick mode of addressing an issue.
Can you give an example?
I’m not in a position to judge, but I can see the situation from the e-mail correspondence I receive from our European colleagues, and it‘s obvious there are also problems there. Of course, the EU regulatory system is much better at preventing such cases, but when a problem occurs, it probably takes longer for all EU members to agree on the way to resolve it.
In Russia, whenever you raise the issue at the government level, the problematic legislation in most cases is put on hold and no longer enforced, even before this is formalized on paper. Rospotrebnadzor [the consumer rights watchdog] provided significant help in resolving the issue and it’s hard to imagine the same thing happening in other countries. In Russia, people understand that a mistake was made and the legislation is suspended until the issue is formally resolved.
Do you have any specific plans for developing and expanding your business in Russia? What makes the market attractive?
Unilever has the very ambitious goal to double the size of our global business by 2020. Of course, Russia is one of the priority markets for our company’s future growth, with around 7,000 people working at seven Unilever production sites across the country, so our plans are to further expand by developing local talent. Before the latest financial crisis, we were growing at an average rate of approximately 20 percent a year in Russia, so now, as the recovery is taking place, we’re aiming to regain or even exceed those rates of growth. This is why we’ve continued to invest proportionally more in Russia than in other markets to further modernize and upgrade our factories and to bring state of the art technologies and global expertise to the market. In Tula, for example, we have recently completed the construction of a brand new factory, which is going to be the biggest Unilever ice cream production site both in Russia and Eastern Europe.
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