[Obama in Moscow] With the ‘Reset’, US Companies ‘Re-Commit’ to Russia

By Brandon Zack, Intern, The PBN Company, Washington, DC

President Obama’s visit to Moscow was billed as a “resetting” of diplomatic relations between the US and Russia, however his visit also provided a shot in the arm to economic relations which have flat-lined in recent years.

Before the trip, Obama highlighted that annual trade between the two countries totals $36 billion - about one percent of US trade with the rest of the world and equivalent to the US’s trade with Thailand, a country with less than half of Russia’s population. “Surely we can do better,” the President said. And back came the familiar refrain “Yes we can” from the CEOs of America companies who accompanied Obama to Moscow.

A number of US companies that are existing investors in Russia reaffirmed their commitment and announced extra funding for significant expansion plans. PepsiCo’s deal was the largest - a $1 billion investment over the next three years as well as the opening of a bottling plant outside Moscow, which will be its largest plant worldwide. Pepsi is a veteran of the Russian market. Soviet Premier Nikita Khrushchev tried Pepsi for the first time in his 1959 Moscow “kitchen debate” with then Vice President Richard Nixon. Later, in 1973, Pepsi was named the official soft drink supplier to the Soviet Union in a détente agreement that enabled the USSR to export Stolichnaya vodka to the US. Pepsi currently has seven plants operating in Russia and has invested some $3 billion over the last ten years, including the acquisition of leading Russian juice maker Lebedyansky in 2008.

Deere & Co, a US manufacturer of agricultural machinery, announced a $500 million investment in Russia over the next five to seven years to meet a surge in demand. Deere has suffered recently in Russia due to tariffs and import restrictions on foreign farming equipment, leading to a 50% decline in sales this year. By expanding its production within Russia, the company will be able to avoid onerous import costs. Deere already has a production facility in Orenburg and is looking to open another facility in Kaluga.

A third major deal worth $900 million between American aircraft producer Boeing and Russian state-owned titanium producer VSMPO-Avisma was concluded at the opening of Ural Boeing Manufacturing. While the joint venture was originally formed in 2007, operations were delayed until recently. With its main production facility located in the city of Sverdlovsk, Ural Boeing Manufacturing will primarily produce titanium components for Boeing’s new 787 Dreamliner aircraft.

All three deals represent an expansion of existing business relationships rather than fresh investment, but given that the US-Russia commercial relationship has languished for so long it is, this re-commitment is significant. These companies know Russia well - they know both the risks and the opportunities and are eager to expand their interests despite the difficult economic environment. The road ahead, however, is far from smooth, as the status of Russia’s WTO accession will have major effects on how the relationship develops. So while these investments are certainly a positive step forward for the US and Russia, the challenge will be to put more flesh on the bones of the positive “yes we can” rhetoric.

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