Country Risk Analysis

 
 
 
 
 
 
 
 
 

Coursework for

LTP010N Strategic Management in

International Hospitality and Tourism 

2010-2011 
 
 
 
 
 
 
 
 
 
 

Table of contents

1. Introduction
1. Country overview
1. Country profile
2. Region profile
2. Investment in Bashkiria
3. Project overview
4. Customer profile
5. Laboure force
2. Country risk analysis
1. Political situation
1. Russian Federation
2. Republic Bashkortostan
2. Economical Situation
1. Russian Federation
2. Republic Bashkortostan
3. Social Situation
1. Russian Federation
2. Republic Bashkortostan
4. Other Risks and Issues
3. Competition analysis
4. Conclusion and Recommendation
5. References

1. Introduction

 

Ural Mountains chain, situated in a very center of Russian Federation, creates a great business atmosphere for establishing ski-resorts and development all type of supplementary service with the main stress on hotel and restaurant businesses. This report introduces an opportunity to invest into fast food (pizzeria) restaurant in the area of existing and operating Health-resort “Abzakovo”, Republic Bashkortostan, Russian Federation.

 1.1. Country Overview

1. Country profile

Russian Federation (former part of Soviet Union) is one of the largest countries in the world. The surface area, covering over 11 time zones and 17 100 000 sq km, stretches from the Pacific Ocean to the Baltic Sea. (B&D 2008) Russia is sharing the boarders with North Korea, China, Mongolia, Kazakhstan, Azerbaijan, Georgia, Ukraine, Belarus, Poland, Lithuania, Latvia, Estonia, Finland and Norway in the north. Due to the huge territory, the country's climate varies dramatically - from a humid continental and sub arctic to subtropical climate in south (Krasnodar Krai). Russia takes the 9th place in number of inhabitants with more than 142 million people currently holding Russian Federation nationality. Russian capital, Moscow, founded in 1147, is situated in the center of European part and has more than 10,5 million population. (MIP, 2010) The country is currently lead by Vladimir Putin (vice-president) and Dmitriy Medvedev ( the president of RF). (EW, 2010). Official language is Russian, spoken by 96% of population.

Regarding tourism sector, after the end of Soviet Union, Tourism and Hospitality in Russian economy were not seriously taken into account. Most of health resorts and hotels were neglected or very badly managed, caused outflow of tourists. Tourists’ popular destinations, such as Sochi, Gelengic, Krasnodar after privatization suddenly became very expensive in term of accommodation and food. Increase in fares lead to the fact that in order to have domestic holidays, the average family with children might have spent up to 25% or year income.

The government paid attention on tourist market only in November 2004 by foundation the Federal Agency for Tourism (Rosturizm) which key idea is to fix the system, eliminate weaknesses so Travel & Tourism Industry can properly work for Russian economy. (WTTC 2006)

Nowadays the Travel industry revives and the evidence for that is the recent report of World Travel and Tourism Council with the forecast for the industry for years 2010 – 2020, saying that “…the contribution of Travel & Tourism to Gross Domestic Product (GDP) is expected to rise from 6% (US$92.6bn) in 2010 to 6.2% ( US$258.2bn) by 2020. Real GDP growth for the Travel & Tourism Economy is expected to be in average 5.7% per annum over the coming 10 years". The other reliable source on data, Euromonitor International Data Base in the end of the year (2010) published estimation for “The total consumption expenditure made by a visitor or on behalf of a visitor for and during his/her trip and stay at destination”, showing the growth from $15,285.0 million in 2004 to $26,693.8 million in 2009. Customer Expenditure on and on Hotels and Catering rose from $2700 to $4000 million particularly for Uralskij Region (Bashkortostan) (EI 2010).  

2. Region Profile

Ural Mountains Chain, the oldest mountains in the world, divides the continent into European and Asian parts and is stretching out from Caspian Sea in the south to Karskoe Sea on the far north. Ural Mountains in its south part are also a border for Bashkortostan – sovereign republic, being a part of Russian Federation for more than 450 years and stayed with RF after the end of Soviet Union era. The area of Bashkortostan is 143sq meters with total inhabitants of 4 051 000 people, dominate part of which are Russians. Two official languages are in use nowadays – Bushkirian and Russian. The capital of Bashkiria is Ufa with over 1 mln population. The Republic has its own independent system of law, judicial system and prosecutor's office, though quite similar to Russian legal system.

Bashkortostan is very rich with natural recourses such as oil, gas and mining. Having a part of its territory covered by wild forests and mountains, Bashkortostan has extremely beautiful nature sets and at about 27% of national parks and consecrated territory. The average level of precipitations is 300-600 mm, from which snow cover in mountains starts from 40-50 cm and reaches up to 100-120 cm . The snow is usually starts in middle of October and melts towards the end of April, thus makes the cover for over 170 days a year. (Official Portal of RB, 2010)  

2. Investment in Bashkiria

For the last years, Republic Bashkortostan showed stable political and economical situation, which, in turn made the Republic one of the most appealing for investments among other Russian regions. (450 years with Russia, 2010) At VIII Russian region congress “Region Institutes of development and investment attractiveness of regions: opportunities, problems and practice “, holt 17^th December 2010 in Moscow, Republic Bashkortostan took the first place in nomination “The Region of minimum economic investment risks”. (Bakeeva A, 2010). According to statistic and forecast, published in World Travel & Tourism Council in cooperation with Oxford Economics, “…Travel & Tourism investment (Russian Federation) is estimated at US$34.8bn or 11.4% of total investment in 2010.  By 2020, this should reach the figure US$115.9bn or 11.2%”.

The investment opportunities in the Republic seem to be very attractive, especially into leisure and tourism industry, due to the fact that Republic Bashkortostan has incredibly breathtaking nature with wild forest, high mountains, plenty lakes and rives full of different types of fish.  There are a lot of springs, the water from which is distributes all over Russia and abroad. Bashkirian honey of more than 15 different sorts is recognized as one of the best in RF and in the world. Bashkortostan has a lot to offer in tourism’ terms – in summer there can be found high standard hotels and health resorts as well as an opportunity to camp in the middle of forest, by a bank of a river or lake; for winter active sports there are a few world standard ski resorts with all categories of complicity’s slops. Throughout a year Bashkortostan offers many health centers and resorts, specialized on different types of treatment, well known not only by local people, but also by people from foreign countries. Information of healing properties of Bashkiria’s nature is spread by world of mouth.  
 
 

1.3. Project overview

The planning project is intended to take place in a village called “NewAbzakovo” which embraced a very popular health resort “Abzakovo”. The health resort is considered to be one of the best developed resorts in Ural Mountains and consists of a ski resort; recreation complex with accommodation and entertainment facilities, such as giant indoor aqua park “Aquarium”, gym, night clubs, etc. From November to May ski resort is opened for guests and provides 13 trails of all categories of complexity with total length 18 km, with the longest run 2.8 km. Total amount of lifts is 7, with summarized carrying capacity more than 5000 people per hour. On the territory of the ski resort is a small zoo with exotic animals. In summer, the resort is open for horse riding, motorcycling and mounting climbing as well as for tennis, basketball, paint ball and other sports. As supplementary services there are a children skiing school, equipment hire, snowboarding school, 4 après cafes, and 2 restaurants. (www.abzakovo.com) Generally, the lack of eating facilities was taking as a base for the proposed project.

 “NewAbzakovo” village is situated just off the Federal road, on the boarder of Russia and Bashkiria, between two cities – Russian city Magnitogorsk and the capital of Bashkortostan- Ufa. All over the year the road is very busy with traffic and does not provide enough facilities where people passing by can have good quality food or drinks for reasonable money. Apparent need in fast qualitative and fresh food has been an issue for the last decade, since the number or public and privately owned transport mince increased dramatically. Although there are few cafes in the health resort area, all of them have obvious downsides - whether it is a quality issue, time consuming or remoteness from the main traffic.  That is why a fast food restaurant, such as MC Donalds, KFC, Subway or even pizzeria would probably be a good solution for the area.

   1.4. Customer profile

The projected type of eating facility is orientated on domestic market rather than international. This is due to the fact that the closest international airport is 700 km away (Yekaterinburg), thus about 80% health resort’s visitors are Russian citizens from cities located within 2 000 km around.

The proposed customer target market consists from two different customer profiles. The first one, and the major, is travelers who use the road to get to the other cities. In view of the fact that Russian Federation is a huge country with big distances between cities, it takes time to drive from one inhabited locality to the other. For instance, Magnitogorsk and Ufa are in 350 km from each other, but since the road crosses the Ural Mountains, which means about 120 km of serpentine, the whole way may take up to 5 hours in summer time and 7 hours in winter or bad weather conditions. 

In winter, the ski resort is visited by approximately 5000 people daily, who are forming the second customer’s profile (www.abzakovo.com). Just off the slops, people are thought to have at least a hot drink like coffee, tea or moiled wine. Often there is a desire to have a quick hot snack, like a hamburger or a piece of pizza, especially by families with children. The apes ski cafes do not provide this type of food; moreover, in order to have hot food, skiers have to drive to a restaurant situated within the recreation complex, pay for entrance, parking and then walk quite a distance. Therefore, these two types of customers are framing the customer target market. 

2. Labour force.

To start with the statistic, Russia's 642,000 Travel & Tourism Direct Industry jobs accounted for 0.9% of total employment in 2010. The contribution of the Travel & Tourism Economy to employment is expected to rise by 2020 from current 5.1% to 5.3% of total employment, which means 3,584,000 jobs in real figures, or 1 in every 19.0 jobs. (WTTC 2010)

In application to projected business, the fast food restaurant is considered to base on big restaurant chains experience where definite algorithm is set up and do not require special skills (apart from the chef duties), thus as a main work force source can be young people (students and graduates). The main advantage of this category of workers is that they are mobile, easy trained and hungry for money. The downside is lack of responsibility. Apparently, the proper training system needs to be employed and rewarding scheme should be established in order to motivate and monitor the personnel. 

“Abzakovo” village, having 2400 inhabitants, nevertheless can not taken as a source of labour force, due to the fact that major population are pensioners, since young people tend to move to cities in order to get higher education and find a job. For that reason, two nearest cities might be taken into account as providers of work force: Magnitogorsk, (Russian city with 600 000 population, in 55 km away), and Belorezhk (situated in 25 km, with 65 000 inhabitants, part of the Bashkortostan). Both cities are easy to commute; public transport operates every 20 minutes from 8 am till 11pm on day to day basis, journey time takes from 15 to 45 minutes.

 

2. Country risk analysis

  

   2.1. Political Situation 

2.1.1 Russian Federation

Russian Federation is currently represented by the President Dmitriy Medvedev and Prime Minister Vladimir Putin. Important fact that for the last two terms Mr. Putin was elected as a Head of the Country and is expected to win the next President election in 2012, taking over Mr. Medvedev. Mr. Putin and Mr. Medvedev formed the leading political party called “United Russia”, the main aim of which is to make Russia respected and reliable country on the world business arena with high developed economy. As Mr. Medvedev admitted in his interview on 28^th December “.. Investment climate in Russia leaves a lot to be desired, that is why increasing the investment attractiveness of Russia should be in priorities for the coming years” (The Voice of Russia, 2010) In the mean time the political leaders stress on the point that unique Russian culture should be not only preserved, but cultivated and supported on the government level.

Before Mr. Putin’s presidency, the political situation in Russia was quite ambiguous. In spite of the fact that the announced way of Russian ruling parties was democracy, there were suspicions that some politicians have a tendency to make use of the power they are given in their own interests, as there was obvious gap between bunch of people whose financial status is measured by figures with many ‘zeros’ and major population who hardly make ends meet. According to Transparency International Data Base, the Corruption Perception Index of Russia for the last 5 years (2004-2009) has fallen from 2.8 to 2.2 (with 10 – highly clean to 0 – highly corrupted) (GMID, 2010). These figures illustrate that despite apparent positive changes, including reallocation and even dismissal government servants suspected of abuse of power, the reputation of Russian Federation as a decidedly corrupted country is enhancing slowly.

From Russian people’ point of view, the situation became to change from appointment Mr. Putin to the presidency of Russian Federation. Some noticeable improvements were made concerning the most vulnerable social groups, such as medical workers, educational system, the army, etc. Minimum wage’s rate, social benefits and pensions were increased in few times. The social program of support motherhood and youth has been taking place for the last 5 years.

Generally, though ex and current Presidents admit the fact that other regions, even large ones, and entire industries are not yet fully meet the requirements of the time and lot of work needs to be done, the country gradually enters into international legal field and forms favorable conditions for investment and economy growth. (Nazarov A., 2010)

2.1.2. Republic Bashkortostan

From 1993 till 2010 the head of Bashkiria has been Murtaza Rahimov. Mr. Rahimov and members of his family have been the major shareholders of vast majority of enterprises and business on the territory of Republic Bashkortostan. That was making them almost 'the owners' of the Republic.  
 

In July 2010 Mr. Rahimov resigned after 17 years of being the President of Bashkiria. From unofficial sources it was known that the resignation was due to the personal request of Mr. Medvedev after vague situation linked with high involvement the son or Mr. Rahimov, Ural Rahimov, into inaccurate allocation financial resources raised from the selling the Republican oil complex.

On 19 July Pustem Hakimov was appointed as the new President of Republic Bashkortostan by Russian President Dmitriy Medvedev.  The fact that Mr. Rahimov, originally bashkirian, has been graduated at one of the most prestigious universities – University in the name of Bauman in Moscow, then worked and lived in Moscow and Bashkiria, tells that this person has strong links in both government establishments. Moreover, his experience in being a head of EMERCOM (Emergency Control Ministry) is thought to play an important role in his future performance on the post of the head of the Republic, according to Mr. Medvedev. (The Voice of Russia, 2010) 

    2.2. Economical Situation

2.2.1. Russian Federation. 

Russia is the biggest exporter of natural gas and stays on the 2 place (after Saudi Arabia) in oil production and export (the first place is US) (CIA, 2010). According to Russian analytics, “..external events (war in Georgia, financial crisis) have served to consolidate the predominant domestic roles of the government and its Prime Minister, Vladimir Putin, particularly in the economy” (Coface, 2010). Indeed, 2008 and 2009 brought a severe recession, caused significant drop in all assets, including property market in Moscow and St. Petersburg with a fell of 20-25%. Russian stock market demonstrated marginal fall in two-thirds in its value. (RAD, 2008)

Bank system has suffered from outcome of the economy decline as well. State-controlled banks stopped issue loans and mortgagees, some private banks, though struggled to refinance their assets, went bankrupt. And though current economy of Russian Federation shows slight signs of recovery from world financial crisis, banking sector still remains risky.

That situation started reverse in early 2010 with the rise of oil prices and increase in foreign demand. According to Patenko Sergey, the CEO of Economic-Law School “Finance and Accounting Consulting” the crisis has finished, GDP rose to 4% in 2010, reaching the level before crisis. (Rbc 2010) Mr. Medvedev, in his official speech, talks about some reassuring signs of economic recovery. And although the inflation level exceed expected 8,5% in 2010 and reached the 2009 year’s 8,8%, these are still the lowest inflation rates from the Soviet Union times. In spite of these facts, some experts pointed out that the budget deficit stayed high through 2010 and Reserve Fund is “expected to be exhausted by 2011”. (Coface, 2010)

Business environment with slight improvements remains rather unfriendly due to the government involved monopolies, bribery and weak prosecutor system. This situation is a burning issue, especially in capital and major cities (Moscow, St. Petersburg, Sochi).  
 

2.2.2. Republic Bashkortostan.

Bashkortostan, being inseparable part of Russia for more than 450 years, is in the first ten most advanced regions of the country ranked by social-economic development. The economy of Republic Bashkortostan is highly concentrated on production, which includes industrial and agriculture, being in stable demand within other regions of Russia as well as abroad. Among industrial products, all sorts of oil and oil refinery products are distributed to about 90 countries Bashkortostan in cooperation with. The Republic is also well-known for chemical and petrochemical industries, mechanical engineering, electric power industry, metallurgy, light and food industries (meat and diary products), horse breeding and poultry farming. (450 years with Russia, 2010)

In last years Russia has been working upon joining the World Trade Organization, which includes the commitment to “introducing the international standards on production quality, ecology, accounting and its transparency, training of enterprises personnel and state employees”. Within that scheme Bashkortostan declares as fully prepared to the Russia’s accession to the World Trade Organization. (450 years with Russia, 2010)  

2.3. Social and Environmental Factors