Libmonster ID: U.S.-1366
Author(s) of the publication: P. G. GULKIN

NOTES OF THE TRADE ATTACHE

Saudi market Keywords:business expansionoil revenueseconomic boominvestment cooperation

The notes of the former trade Attache of Russia in the Kingdom of Saudi Arabia (KSA) P. G. Gulkin significantly complement the previous publications of the journal on trade and economic cooperation between the Russian Federation and KSA*. They are, in fact, specific recommendations to our businessmen who intend to develop the markets of the Kingdom, as well as the entire Arab world. The notes are valuable because they are based on the personal experience of a Russian diplomat and a specialist in foreign trade.

In 2009-2011. I worked as a trade attache at the Russian Embassy in Saudi Arabia. This was a period of relative activation of our private business in the Kingdom. The global crisis has forced some domestic, mainly medium-sized companies to look for new markets outside their traditional geographical niches, and the rapidly developing and, most importantly, financially secure market of Saudi Arabia seems to be an ideal testing ground for them.

The most active Russian companies began to appear on the KSA market in 2009-2010, but by mid-2011 this flow had almost dried up. A couple of dozen Russian firms that had registered their divisions in one form or another in the KSA before 2011 practically stopped working and recalled their representatives. The attempt of domestic entrepreneurs to gain a foothold on Saudi soil "with a rush" failed.

Why did this happen? What are the features of doing business in Saudi Arabia? What factors should be considered when entering the local market?

An unbiased analysis of the circumstances of Russia's business expansion in Saudi Arabia over the past couple of years and the observations of a direct witness to the events will certainly help those newcomers who, despite everything, will again try to break into the Saudi market.

ISLAND OF STABILITY

In the layman's view, the Kingdom of Saudi Arabia is a place where huge oil reserves are concentrated, power is in the hands of the king, and the country is governed "according to Sharia law". Indeed, the Kingdom is a conservative Islamic state with a rigid governance model and at the same time the largest economy in the Arab world, vying with Russia for the first place in the world in terms of proven oil reserves and sharing the first and second places in its exports. Despite the regional turmoil, the country continues to enjoy an economic boom fueled by huge oil revenues, large-scale infrastructure projects are being implemented, and ambitious economic development plans are being adopted.

Against the backdrop of the escalating situation in neighboring Middle Eastern states, Saudi Arabia is an island of stability, where the stability of the regime is ensured by the massive distribution of "ransom money" by the royal family to reassure its subjects.

The very fragmentary information that our entrepreneurs have about this country forms the image of the Kingdom as a tempting market for Russians, access to which can provide access to investments and huge contracts. Rare Saudi official guests in our country also contribute to the formation of the image of a rich nouveau riche. One of the prominent KSA officials he knew liked to surprise his Russian counterparts with such a maxim, for example: "We intend to spend $400 billion in our Kingdom in the coming years. for various infrastructure projects, and I am interested in how much of these funds are your companies willing to apply for?" It is clear that such openly displayed generosity can not but tempt the businessman and awaken in him expectations of something big and profitable.

Meanwhile, the level and dynamics of trade and economic relations between the Russian Federation and the Kingdom of Saudi Arabia make a strange impression on closer inspection, especially given the economic potential of both countries-leaders in the global fuel and energy sector.

The scale and nature of our mutual trade is not higher than "by three", you will not appreciate... Thus, the trade turnover between the two countries recently did not exceed several hundred thousand dollars a year1. However, the traditional structure of trade turnover, where Russian exports have always prevailed over imports from Saudi Arabia, has recently changed: the share of Russian imports from the Kingdom is actively growing, while the volume of exports to Saudi Arabia from Russia, on the contrary, is falling.2

IF THERE ARE INVESTORS , THERE IS NO INVESTMENT

Our investment cooperation, both private and public, is practically nonexistent. Rare reports in the Russian press about large-scale direct investments of the KSA in Russia actually turn out to be,


* See for example: Dudarev K. P. How to do business in Saudi Arabia / / Asia and Africa Today. 2012, N 12.

page 42

Table

Project type

Number of projects

Investments, total ($ million)

Investment

A Saudi partner

Russian partner

Other foreign countries

partners

Industrial

2

1,9

0

1,4

0,5

Non-industrial

16

6,2

1,5

4,5

0,2

Total

18

8,1

1,5

5,9

0,7



to put it mildly, it is an exaggeration, and there is no reliable information about Russian investments in Saudi Arabia at all. According to the 2011 data of the Riyadh Chamber of Commerce and Industry, the volume of Russian-Saudi investments in joint projects in the territory of Saudi Arabia at the end of 2010 It was just over $8 million 3 (see Table).

In general, as one Saudi researcher noted in May 2011,"...Relations between Russia and Saudi Arabia have not reached the level of strategic cooperation that the leaders of the two countries wanted. There are a number of factors that do not contribute to [this]. Here are the most important ones: 1) The economies of both countries are based on the production and export of energy carriers... Russia does not need to buy our oil and gas, just as we do not need Russian oil products; 2) Russia has not yet been able to develop its economy and diversify its exported goods and products enough to meet the needs of the world market and the Kingdom of Saudi Arabia as one of the important players in this market... Russia has not become a strong country that you can rely on in difficult conditions (emphasis added - PG). Therefore, the volume of trade between our countries is still insignificant. Looking at the modest economic statistics, it is difficult to imagine that there is a group of influential businessmen who can make a significant contribution to the development of relations between the two countries. " 4

IT ALL STARTED SO WELL...

The turn of 2009-2010 was largely a turning point for Russian-Saudi cooperation at the corporate level. If in the period from 2003 to 2009, only two Russian companies were actually present on the Saudi market - Lukoil, which created a joint venture with Saudi Aramco in 1994, and Stroytransgaz, then in just one year 2010, about 10 new Russian companies were registered on the local market, although serious problems were solved. At least 25 to 30 Russian companies attempted to enter the Saudi market almost simultaneously. The Saudis reacted to the emergence of new players in their market with enthusiasm: As soon as the Russians discovered their interest in this market, individual businessmen aimed at working with Russian entrepreneurs, as well as formal and informal local structures, immediately appeared here.

The general business background of the last stage of bilateral Russian-Saudi relations, when private domestic companies ventured to explore a new market for them, was not very favorable. One of the flagships of our business in the KSA - Stroytransgaz OJSC, which had successfully implemented two good projects in this country, suddenly became feverish, and its representatives did not get out of court and out of court proceedings, which did not help to strengthen the reputation of Russian firms working in the KSA. Lukoil, which discovered gas in Rub al-Khali in 2007, is stuck at the stage of commercial field evaluation. The story of the loss of a hypothetically lucrative contract for the construction of a railway section in KSA in 2008 by Russian Railways continues to be actively exaggerated, overgrown with various conjectures and assumptions. Negotiations on military-technical cooperation-always the main driver of Russian economic penetration in the Middle East-have dragged on indefinitely.

Attempts to launch a working mechanism for implementing the decisions of the Russian-Saudi intergovernmental commission held in St. Petersburg in June 2010 failed. In general, by the beginning of the second decade of the new century, the positive momentum towards economic rapprochement between the two countries, set by President Vladimir Putin's visit to Riyadh in 2007, turned out to be emasculated.

All domestic companies entering the Saudi market represented medium-sized Russian businesses. Most of them were construction and engineering firms that expect to receive lucrative contracts and participate in large-scale projects. They made decisions to start working in the UK market independently, in the context of poor awareness and the lack of a system of state support for the foreign economic activity of domestic companies in Russia.

Nevertheless, our entrepreneurs have come to Saudi Arabia. Without understanding the specifics of the local market, without conducting any serious marketing research. Their managers usually did not speak English, let alone Arabic, and relied mainly on the entrepreneurial instinct. As a rule, the main argument that invariably affected inexperienced Russians was the prospect of their patronage from either a member of the royal family or a person with direct access to decision-makers (est.-

page 43

venno, also from the royal family).

Considering that the number of the ruling Al Saud family is estimated to be between 15 and 25 thousand people, and almost all of them, being the establishment of the Saudi state, are engaged in business, the motivation of Russian entrepreneurs was convincing. But of all the Russian players who tried to enter and gain a foothold in the Saudi market over the past few years, only 2 or 3 companies remain today, trying to somehow establish their work.

We are not talking about any real participation of Russians in any major projects in the Kingdom. All that those who continued to cling to the KSA managed to achieve was, at best, passing mandatory registration and licensing procedures in relevant state structures, which gave them the right to directly apply for participation in state contracts, or on a subcontract.

Examples of successful experience in establishing work in the Saudi market today are rare. Most of the companies that tried to start a business in Saudi Arabia left the Saudi market after a year and a half, tired of waiting in vain for their partners to fulfill their obligations. They couldn't stand the Saudis ' insatiable desire to control their every move.

There were various kinds of troubles: bureaucratic delays and delays in processing registration and authorization documents, unfavorable terms of subcontracts, unexpected revisions of previously reached agreements. All this led to a loss of interest in working in an Arab country and forced departure to their homeland. They left, fixing losses, mostly with regret, but with a desire to return, because the reasons that made them decide to start working in Saudi Arabia at the time have not disappeared.

THE COUNTRY IS CLOSED, BUT NOT INACCESSIBLE

Saudi Arabia is still a rather closed and inaccessible country for Russians, a kind of"terra incognita".

From the business point of view, closeness is manifested in the extreme scarcity and fragmentary nature of freely available information for making informed decisions in almost all areas critical for business: registration, licensing, certification, conditions for participation in government projects, but most importantly - operational marketing data for preparing budgets and business plans.

Inaccessibility is primarily due to the lack of direct and convenient air service, the complexity of procedures for obtaining and renewing visas, and the requirement for the mandatory presence of a Saudi "patron". The question is, why should Russians even try to enter the difficult market of such a difficult country?

The main argument is obvious: KSA remains one of the few countries in the world where, thanks to oil revenues and despite global economic shocks, the economic boom continues in almost all sectors of the economy. The priority areas of development are housing construction, education, healthcare, and industrial development (primarily petrochemicals).

Many infrastructure megaprojects are planned, announced and implemented in the KSA. Within 5 years, the government has pledged to invest significant funds - up to $400 billion. - further deployment and modernization of the basic infrastructure. Legislative reforms and privatization programs have been initiated and are still being implemented to support the process of modernizing economic transformations. Announced by King Abdullah in March 2011, the package of additional allocations for the implementation of urgent social programs (overcoming the housing shortage, developing and improving networks of health and education institutions) amounts to about $ 130 billion. This is good money, but you will not be able to take it "on the spur of the moment" : Today's KSA has built and operates a system of multi-level filtering and differentiation of access to the most attractive and financially secure projects and industries.

But this does not mean that it is useless to try. Examples of successful obtaining profitable and large-scale contracts in the electric power industry, oil refining, construction, etc. are shown by South Koreans, Chinese, Americans, and Germans. In general, as usual, anyone, but not the Russians.

Why is this happening? After all, there are much more similarities between Russia and Saudi Arabia than it seems at first glance. In both cases, the development of states is highly dependent on hydrocarbon reserves and production, there is an understanding of the need to overcome it, re-focus on innovation and modernization, significant social pressure on state budgets, an authoritarian management style, and the stalling of many "national projects"... A familiar picture! It would seem that a domestic business that can survive in the conditions of an all-pervading state presence in the economy at home could well feel comfortable and work in a well-recognized Saudi environment.

FIVE MYTHS ABOUT THE KINGDOM

Russians, however, have not yet managed to gain a foothold in the local market. Paradoxically, the main reasons that prevent our entrepreneurs from developing the promising Saudi market effectively and efficiently are humanitarian circumstances, not economic or political ones. These include, first of all, the mythologization of thinking.

Our main misconception is that Saudi Arabia is the "51st state of the United States" with a kind of Arabian flavor, in which the Americans dispose of everything and everything, so you should not try. The United States is undoubtedly the Kingdom's long-standing and main strategic partner, but, especially after September 2001 and King Abdullah came to power in 2005, the country's leadership is completely pragmatic.-

page 44

independent policies based on their own interests.

China's annual crude oil exports have surpassed those to the United States in recent years, and Saudi officials have repeatedly reacted with public irritation to the sometimes peremptory statements of American officials on this or that occasion. Representatives of other nationalities are not discriminated against in business, and the significant American presence in the KSA is explained by the long-standing and extensive contacts, the widespread spread of the not-so-bad American model of business culture, and the ability of Americans to work purposefully and effectively.

Another myth is the naive belief that in Saudi Arabia, Russians are expected to form some kind of alternative to the Kingdom's traditional partners. The Saudis themselves like to talk to the Russians about how their country is tired of its one-sided orientation and would like to make friends with Russia, especially after the United States surrendered its old allies during the Middle East revolutions. But geopolitical declarations do not work when it comes to practical business actions, where nationality is not taken into account if it goes against considerations of practical benefit.

Another myth is that the Saudis are supposedly willing to part with their money just because they need something they don't have, and apart from oil, they supposedly have almost nothing. Having declared a course to overcome oil dependence and diversify the economy, the KSA is indeed actively attracting foreign experience, technology and labor to create and develop the national economic base. However, when it comes to allocating lucrative contracts and projects, there are clearly pragmatic considerations involved.

The next myth, which naturally follows from the previous one , is the notorious Saudi investment. In the Kingdom, there are no traditions and a system of direct investment, not to mention venture capital. Saudi Arabia needs almost all technological solutions and products; however, in most cases it is ready to purchase them only on a turnkey basis from reputable and well-known global manufacturers, and then only if full after-sales service is provided and the declared cash flows are guaranteed.

The myth of insufficient qualification of local personnel is also far from the actual state of affairs. In recent years, significant investment in education in Saudi Arabia has created a fairly large layer of well-educated managers and specialists. In addition to them, there is a significant layer of foreign highly qualified technical and business specialists in the Kingdom, who, unlike Russian-speaking entrepreneurs, feel great mainly in the English-speaking business environment of the KSA. High competition and a strong sense of national community contribute to the fact that foreign communities have monopolized entire industries where access to other foreigners is difficult.

It is known that working in a foreign market and in a different socio-cultural, legislative and entrepreneurial environment implies a significant degree of independence in decision-making. However, Russian companies habitually perceive their divisions in Saudi Arabia as completely controlled by Russian branches and subsidiaries. Therefore, they prefer to manage everything from the center, without delegating a sufficient amount of authority and resources to their representatives, which, given the low speed of the bureaucratic mechanism in Arab countries, leads to a slowdown in the passage of decisions and an increase in costs. The desired result can only be achieved through a full-fledged physical presence in the local market, the competence of local managers, the availability of labor and the mobilization readiness of resources necessary to complete projects in a dynamically changing Saudi business environment.

In addition, the experience of successful anchoring in the Saudi market shows that it cannot be treated "on a residual basis". The peculiarity of the Oriental way of doing business and the local business culture imply a long process of interpersonal communication between Saudi and foreign partners. To build trust between them, you need to jointly "eat a pound of salt" or, translating this expression into Arabic, drink more than one bucket of local Arabian coffee. This, again, implies a deep and constant involvement in local affairs, demonstrating the ability to make and implement responsible decisions and establish the necessary contacts.

In the KSA (however, as elsewhere) they love investors, so it makes sense to enter this market, having a certain investment reserve and following the old saying - "money to money".

* * *

A Saudi man who was sympathetic to Russian entrepreneurs once told me: "You can do anything in this country if you have a good partner." But then, after a pause, he added, " It can be difficult to find him, though."

Saudi Arabia is a special world in which, despite everything, there is still a lot more good than bad. Here you just need to want to learn and be able to work!


1 Russian-Saudi relations (background). Ministry OF Foreign Affairs OF the Russian Federation, 10.10.2011.

2 The main items of Russian exports to the KSA are base metals and products made from them, machinery, equipment, vehicles and tools, as well as small batches of agricultural products. The main import items are chemical industry products, food products and agricultural raw materials.

3 Development of trade and investment relations between the Kingdom of Saudi Arabia and Russia in 2003-2009 / / Center for Analytical Research, CCI. Riyadh, May 2011 (in Arabic).

Abd al-Muhsin al-Faraj Abdallah ibn. 4 Relations with Russia / / Riyadh, 06.05.2011 (in Arabic, yaz) - http://www.alriyadh.com/2011/05/06/article630173.html


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