The Kent-Smirnoff Project

Résumé du document

In his big building of Metropolis, Clark KENT is working on the last reports of his latest foreign investments, when he receives a call from Igor Smirnoff, an old friend from HEC Paris. Igor owns a foodstuff distribution network in Russia, and offers Clark to enter into a new business. He is searching for a partner for his ambitious project for 5 years i.e, create a dried squid producing company in Russia. The dried squid is a traditional snack in Russia, but until now, the quality of the products on the market has not been great. Igor wants to invest in a very modern plant to enter the market with high quality and cheap products. He considers dried squid market as an emerging market, as the potential growth is really interesting. Igor has chosen to buy squids directly from Russia. Igor plans to build his plant in Nijni Novgorod region (Russian Federation), the total investment required reaches $2 million dollars and he wants to keep 51% of the shares.

Extraits

[...] Yet, the Central Bank policy has not succeeded in tackling the inflation rate. Indeed, it does not deal with the production prices increase which grows twice faster than consumption prices since 2004. Moreover, the population is exercising pressure over the government to spend the petrodollars inflows which are held in the Stabilization fund (75 billion dollars in May 2006) even though the economy cannot absorb a great release of money supply. Thus, although the inflation rate has been quite stable for the past 5 years and has tended to decrease, we estimate that there is still a possibility that the inflation rate may suddenly increase and reach a pick of 15% even on a short period. [...]

[...] However, in practice, many barriers (administrative, fiscal, political, juridical and others) still prevail. Russia lacks of reforms in critical domains: the judiciary is not independent and lack of means, in many cases trials are bought. The bureaucracy has not been reformed yet and is over procedural, imposing serious loss of time and money to businesses. The bank system suffers from fragmentation (over 1200 banks), undercapitalization (bank equity represents only of GDP) and does not play its role of financial intermediary (bank credits cover only of total investments). [...]

[...] Igor sends Clark an email with the cash flows projection. Here is an extract from the cash flows projection (in thousand dollars): Year Clark's Investment Igor's Investment Igor buys Clark's shares Total Revenues Total Expenses Net Incomes Clark's dividends Igor's dividends Clark's Total Cash Flows 0 $980 $ $ $ $321 $79 $82 $ $ $ $449 $110 $115 $ $ $ $584 $143 $149 $ $ $ $701 $172 $179 $ $ $ $ $ $285 $297 $ Clark takes a look at the cash flows projection, and analyses it rapidly. [...]

[...] As examples, we could quote the suppression of governors elections in the regions, the tighter control over the media (no free speech in Russia), the harassment of NGOs and non profit organizations and the takeover of the most profitable private companies (Yukos affair and others). Besides, while V. Putin justifies a tighter control of society by the threat of insecurity coming from South Russia (Caucasus), the situation in Chechnya and the neighbor regions has worsened. Nevertheless, the degradation of Russian politics must not discourage investors since it does not seem to have any impact on the population. People are less concerned by politics than economy, and since the economy is performing, global consumption stays high. Moreover, most of Russians support their president appreciate V. [...]

[...] This is due to an improvement in the perception of risk in Russia by foreign creditors. In 2005, the foreign private debt over passed 150 billion dollars and counted for 20% of GDP, which is quite an acceptable level. Despite the relatively good level of foreign private debt, the situation of the private debt is a bit more alarming on the internal plan. If domestic unpaid have fallen from 50% of GDP in 1998 to 10% of GDP in 2006, the level of outstanding payments (impayés) is still high. [...]