Transforming Logistics in Russia

Rob Bell from the Transformational Logistics Blog interviews Arseny Yershov – the Head of Marketing with National Customs Broker LLC, Russia, based in Moscow.

The opinions expressed are personal and are all part of a process of opening up the debate on logistics and supply chain thinking and practice relevant to emerging and developing markets. We thank Arseny for taking the time to talk through the Russian Logistics story.

Rob Bell (RJB): Arseny, you work for a major player in the Logistics arena in Russia and have been reading the Transformational Logistics Blog for a while. Before I ask you about your own views on the Russian Logistics scene can you give us some idea of the area that you work in?

Arseny Yershov (AY): I am the Head of Marketing for the National Customs Broker LLC which is a company offering customs clearance and bonded warehousing services in Moscow region, Saint-Petersburg, Nakhodka and Vladivostok (Russia’s Far East). International and domestic freight forwarding is also offered.

We handle road, air, sea and rail cargoes and almost all kinds of goods – pharmaceuticals, beverages, cars and car parts, chemical products, consumer electronics, industrial equipment, foodstuff, etc. Our customers include retail chains (Auchan, Castorama, OBI), electronics and home appliances manufacturers (Samsung, Sony, Electrolux, Toshiba, JVC), pharmaceutical companies (Nycomed, GlaxoSmithKline, Bristol Myers Squibb, Johnson & Johnson), tyre manufacturers (Yokohama, Goodyear), food & beverage manufacturers (Craft Foods, SUN InBev), industrial equipment manufacturers (Nilfisk Advance, Sealed Air) and others.

We own 4 bonded warehouses in Moscow region, and about 80% of our cargo volume comes by road. The rest 20% are more or less evenly distributed between air, sea and rail – we’ve have offices in all the key airports, ports and key railway stations.

We do not deal with express deliveries, postings, private persons’ cargo and some other items (jewelery, weapons, securities) for which specialized brokers are assigned by law.

RJB: In terms of Logistics requirements how do the needs of different customers vary?

AY: Requirements from different customers vary – pharmaceutical companies’ main concern is for the controlled temperature during storage and transportation; retailers and consumer electronics manufacturers require the fastest clearance without any lading-unlading; importers of luxury items (expensive beverages, for example) and other slow-moving goods, on the contrary, require the possibility of prolonged storage (which isn’t easily available due to the high demand for quality warehouse space). Apart from cargo handling services, large international enterprises (with ERP systems rooted deeply into their corporate management) sometimes require from logistic operators an extended reporting (even at additional cost) which, in turn, demands a certain level of IT infrastructure to be present.

RJB: So, how do you see the Russian  Logistics scene in general?

AY: Russia is developing steadily after a couple of tough years – Russia was hit hard by the fall in the oil price and, manufacturing was slow to pick up. However, investments in Logistics facilities is increasing – not as fast as in 2005-2007, but still new logistic facilities (warehouses, roads, ports, air terminals) and enterprises are emerging.

The government tries to use logistics as a boost for regional development and strengthening of international relations, but there needs to be more consistency in the decision making process where long term investments are concerned. For example, transfer of customs clearance closer to the state frontier was announced as a means to assist in developing remote regions; but in reality this did not work out as intended. Recently declared Customs Union with Byelorussia (Belarus) and Kazakhstan is a great step forward; but this is not helped by political tensions covered in the media.

More importantly, there is a real need to improve the logistics offering. 3PL is a buzzword here, and many companies, involved with transportation, warehousing or customs boast being “3PL providers”. This is new wine in very old bottles. Few Russian companies are offering a fully comprehensive service. This is left to the International logistic operators such as DFDS, Kintetsu World Express, etc.

RJB: Retail has been a major catalyst for Logistics in many Emerging markets. How do you see Retail and Logistics in Russia?

AY: Retail is a major factor in Logistics development in Russia. Again, progress is not uniform. There is a modern and a traditional retail trade and several different approaches depending on scale and product specifics.

There are two basic approaches. Some of them, both with Russian roots and foreign (X5 retail group, Kopeyka, Magnit, IKEA) develop their own logistics – they buy lorries, erect (or buy) distribution centres and the like. Others, mainly international (Auchan, Metro ?ash & ?arry) – use some form of logistic outsourcing, and use services of one (very seldom) or several (more often) logistic providers. The recent recession has boosted the former trend – one’s own logistics, being more controlled, is considered as a means to cut expenses.

For some goods – mainly perishables (say, greenery from greenhouses) – retail chains sometimes use manufacturer’s logistics. In fact, Independent shops usually rely on manufacturer’s logistics. Otherwise, individual companies or sectors rely on their own logistics. For example, the Dairy industry uses its own lorries for delivery; the same with meats, bakeries, breweries and so on.

Imported goods, and the goods that are not produced nearby, are bought from a wholesale depot – but not always delivered by the depot’s transport: many shops use their own small lorries, or even cars, for delivering some goods – that’s where TL could come into play. How can we improve performance of these smaller companies? This is not a focus of modern logistics – they seem to see only the high tech model and no other.

Then, there are the markets. These resemble the other Emerging markets covered on the T L Blog. These markets – although not encouraged by the Government still hold a fair share of trade – especially in food and clothing – and here pickup trucks, cars, hand carts and public transport are widely used. These are the hybrid and asymmetrical supply chains that you have identified elsewhere.

RJB: Russia is a very big country – 11 different time zones. How do you see the Regional differences in terms of Logistics?

AY: Many areas in Russia try to promote themselves as logistic hubs – mostly sea ports (Saint Petersburg, Vyborg, Murmansk, Novorossiysk, Nakhodka, Arkhangelsk, Vladivostok, Temryuk, Vanino – even some Caspian sea ports – Olya, for example), but also frontier parts of Pskov, Smolensk, Bryansk, Kursk and Belgorod regions, located along major road and rail links to Western and Southern Europe. However, the reality is that they all struggle to attract FDI (Foreign Direct Investment) and depend on State and domestic investors.

Foreign investors aren’t in a hurry to invest in long-term projects. That is, major international logistic operators (DHL, TNT, UPS, Schenker, Fiege, FM Logistic, Itella and the like) are present in Russia, they’ve got offices, warehouses and their own truck fleets – but as for really large, infrastructural projects – they’re usually not ready for it yet.

RJB: Why do you think Foreign investors have a problem with investing in Russia?

AY: There are several reasons for this.First, in reality Russian investors have enough money themselves (as the failed purchase of Opel/Vauxhall by Sberbank has demonstrated), so the foreigners may expect to take part only in less lucrative projects. The Energy companies have huge resources and this has an impact.

Second, our political system does have an impact on foreign investors. Our Presidential system concentrates power during an 8 year term of office and, however good a President is, large infrastructure projects, like Port construction, may take 10 to 15 years to complete.Third, respect for ownership rights and property protection hasn’t fully taken root in Russia.

And, the last but not least, the government’s economic policy, although in general goes in the right direction, is locally subject to abrupt changes and unexpected U-turns. These concerns are especially acute with customs logistics – it is very vulnerable to arbitrary treatment by state officials and hence could be taken away rather easily.

It’s worth mentioning, that the largest acquisition on Russian logistic market so far – the purchase of NLC – was accomplished by Itella, which is owned by the Finnish government. So, foreign investments may come in substantial quantity only to business areas, which are vital for foreign governments. They are well known – export of oil, gas, ore, timber and so on. No one in Western Europe or China will be bothered if Russia can’t import food or electronics. But if Russia can’t export oil and gas – it’ll be a blow, not life-threatening, of course, but inconvenient and costly (the prices will soar at once). In fact, Russia could use its growth to develop domestic consumer products and thereby reduce overseas investments in logistics projects. So, the export of raw materials is the area which is secured by foreign governments – and that’s where major FDIs are possible. The priority areas are well known – Saint Petersburg and Novorossiysk with their oil terminals to be extended and “Nord Stream” and “South Stream” gas pipelines to be constructed.

Of course, as a byproduct of this the surrounding logistic infrastructure will most likely be improved; although the experience of Novorossiysk port shows, a high volume of export cargoes rather makes importing more difficult, than simplifies it – customs officials aren’t interested in checking, say, an import container with 100 different items of industrial equipment while they may get the same duties (levies) from export of several tons of oil – which needs much less paperwork.

RJB: What about Moscow and St Petersburg?

AY: Moscow region’s population is about 3 times bigger, than Saint Petersburg’s; Moscow is surrounded by densely populated, industrially and agriculturally developed areas of Central Russia while Saint Petersburg is near the border and its neighbour regions have relatively low population; road network in Moscow region is considerably better developed, than in Saint Petersburg – partly for historical reasons (Moscow is almost 600 years older), partly for natural causes – Saint Petersburg is jammed between the sea and Ladoga lake (the largest in Europe) and is surrounded by marshes. Just an example – the construction of Saint Petersburg’s outer ring road was started only in 2001 and isn’t fully completed by now (2010); it has only 4 lanes; while Moscow’s outer ring road was opened in 1962 and now has 10 lanes. And, of course, Moscow is the capital, which means more wealthy people and, hence, more consumption.

Saint Petersburg is Russia’s largest sea port and, as far as the export of raw materials is concerned, it is rather independent; but the most part of the goods, imported to Russia through Saint Petersburg’ port, still comes from there to Moscow region for further distribution – partly because the major rail and road ways from Saint Petersburg to the other parts of Russia go through Moscow. So, the volume of cargoes, going to (and through) Moscow region is considerably higher – it includes most of Saint-Petersburg’s and also those coming by road and rail through Byelorussia and Ukraine, by sea to other Baltic ports, Black and Azov sea ports, from Arkhangelsk etc. – and so is the logistic market size.

As for the new logistic projects concerned, in Saint-Petersburg they are mainly linked to the sea (Ust’-Luga port and the like) while in Moscow region they are mostly road, and sometimes rail, terminals (Moscow is a river port, too; but the volume of river cargoes is relatively small). It means that development of the new logistic projects in Saint-Petersburg region is more difficult and expensive, than in Moscow region – while a warehouse with road connection may be built virtually anywhere, free shoreline suitable for port construction is limited; construction and maintenance of a port is a much more demanding task, than an ordinary warehouse – especially in Saint-Petersburg, where the sea freezes in winter and one requires icebreaking tugs for year-round operation. At the same time, competition from Finnish, Latvian and Lithuanian ports (and, to some extent, non-freezing Russian Murmansk port) doesn’t allow the margin to be too high.

All this, taken together (less market capacity and greater capital investment, needed to enter the market) leads to bigger market monopolization in Saint-Petersburg region. For example, as for customs brokerage concerned – in Moscow region it is more or less evenly distributed between several dozen companies, the largest of which (National Customs Broker, Declarant-T, DHL) hold no more than 5-6% each; while in Saint-Petersburg almost a half of the market is held by one state-owned brokerage company.

Generally, the further from the central, most populated areas of Russia, the more logistics is focussed on the export of raw materials (oil, coal, timber, grain, etc.)  and less on the import and distribution of consumer goods. So, beyond Moscow and St Petersburg, logistics is all about raw materials and local logistic companies pick up the rest. Only the largest Russian and international companies have much chance of  entering provincial logistic markets, and even they may spend several years to make progress there – a difficult decision when you are looking for quick returns.

RJB: All Emerging markets are experiencing massive investment and huge infrastructure projects. However, without the skilled workers to use the equipment effectively and efficiently, an investment could become become a bottleneck. How do you see skills for Logistics in Russia?

AY: There are training courses and educational centres which teach different logistic skills – from forklift operation to warehouse management; there are even logistic sub departments in some universities. But, as far as I know – and this is not my expertise – most logistic companies rely on one form or another of internal training and don’t send employees to external courses.

On the other hand, in some areas (customs, for example) certain instruction and testing is compulsory and is provided by the state institutions (for a fee). Russia has to raise its standards but we must be careful to make sure that we don’t lose practical experience. Raising standards will do a lot to improve Professionalism in all aspects and this could have a direct impact upon inward investment. There is little point in a foreign investor making a commitment to a Region when there is a shortage of skilled labour. Maybe this could be part of a Regions Business Case.

RJB: In the past few years there has been much talk of the BRIC economies – Brazil, Russia, India and China. These are the places that by 2050 will be some of the biggest economies on earth. How do you see the BRIC concept? Is it helpful or, just a an iodea that is not rooted in reality?

AY: BRIC is a terrific concept but, let’s not get carried away – there are significant differences. These countries have some things in common (mostly large size) but, China, India and Brazil have risen to this level while Russia has fallen there. The Soviet Economy back in the 1980-s was approximately the same as the USA – the living standards were lower, although the differences were exaggerated. And, the Soviet Economy was well ahead of China. Brazil was nowhere near.

Russia is heavily dependent on the Energy sector and this means that economic performance across all sectors is subject to the volatility of global oil prices. Other BRIC countries are not in this position and are making significant moves to diversify their economies. Russia needs to do more in this area. Otherwise, other countries like Indonesia, Pakistan, Vietnam, Turkey or Mexico will catch up – or even overtake Russia.

From a purely Logistics point of view there are other significant differences: for China, India and Brazil the most convenient way to the world’s most lucrative markets – West Europe and North America – is by sea, while for Russia the shortest and the fastest way to EU markets is by land (that’s why the comparison of TEUs in Russian and Brazilian ports on the T L Post isn’t perfect). It’s an advantage for Russia, of course, and that gives a big ground for TL ideas here, because for overland transportation the cheapest means may be used – unlike for the maritime one.

RJB: Finally, we have been talking of a number of Global and Local issues. How do you see the way forward for Logistics in Russia. Specifically, do you see a role for Transformational Logistics to become a catalyst for Logistics and Supply Chain thinking and practice in these Emerging economies?

AY: Transformational Logistics can be very important for Russia. When we spoke about BRICs I pointed out that Russia, unlike the others, depends far more on roads than seaports. And, with the low level of 3PL and other specialist Logistics services in the market, there is much to be done for Russia to reach International standards.

In my opinion, TL – or Logistics relevant to these emerging and developing markets – is an important step to raise standards and performance in Russia. We need to build techniques that apply in Russia and not just in Western Europe or the USA. Having said that, more needs to be done to raise the profile of T L in the marketplace. Many Russian Logistics managers look to the West for best practice – even when the same conditions just don’t apply.

RJB – Summary

Many, many thanks Arseny. This has been a very useful discussion and adds to the earlier Post on Transforming Russian Logistics. Taken together, it is clear that Russia is a market with huge potential and, that Logistics can play a major role in delivery. However, there are significant Regional and Sector based differences and these have a significant impact on Logistics and Supply Chain thinking and practice.

You point out that there is a real need to improve Logistics standards and performance and, that Transformational Logistics could be a useful catalyst for techniques that are inspired by ideas from elsewhere but, practical enough to be or local and immediate relevance. We are working on a number of ideas to raise the profile of T L in Russia so, watch this space.

Interview by: Rob Bell, Transformational Logistics Blog

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