Doing business in Russia; a logistics point of view

Doing business in Russia; a logistics point of view

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Efficient logistics is one of the key issues for most business, whether the company produces raw materials or high tech products. Global supply chains have become increasingly complex as companies are sourcing their components and serving their customers all over the world. Every company optimizes its own logistics operations, such as transport and warehousing, but also countries can be assessed from a logistics environment point of view. It has been estimated that global costs of logistics are almost 7 trillion USD every year, and in many countries, companies spend more than ten percent of their turnover on logistics services.

It is fair to say that Russia is no different when it comes to the importance of logistics. As a matter a fact, Russia as a large geographical area with great distances and rich resources, promotes a need of efficient logistics. In a global economy countries are also “competing” with each other in terms of logistics performance, for example by attracting foreign direct investments (FDI) and helping domestic companies to flourish in world markets. It is not easy to compare countries in terms of logistics efficiency, yet at least one practical tool worth of exploring has been developed by the World Bank. In this blog post we are discussing the development of Russia’s logistics performance compared to other countries. An upcoming post will dig deeper into the different aspects of business logistics.

The Logistics Performance Index (LPI), published by the World Bank is basically a benchmarking tool of 160 nations that facilitates countries to identify the challenges and opportunities in their performance on trade logistics. It further helps to identify what can be done to improve the performance. The index is based on a global survey of logistics operators on the ground (global freight forwarders and express carriers), providing their perspective on the logistics “friendliness” of the countries in which they operate and those with which they trade. This information is supplemented with quantitative data and helps build profiles of logistics friendliness for these countries.

LPI measures six key dimensions to benchmark countries’ logistics performance:

1) Efficiency of the clearance process

2) Quality of trade and transport related infrastructure

3) Ease of arranging competitively priced shipments

4) Competence and quality of logistics services

5) Ability to track and trace consignments

6) Timeliness of shipments in reaching destination within expected time

Since the beginning of publishing the index, 2007, Russia has steadily increased its rank and score. In 2007, Russia ranked 99 but in 2014 its ranking was improved to 90. More importantly, the LPI score rose from 2.37 to 2.69 (on a scale of 1 to 5) during the same period of time. Especially the performance of customs and border crossing operations (2007: 1.94; 2014: 2.20), as well as tracking and tracing of shipments (2007: 2.17; 2014: 2.85) experienced major improvements.  More importantly, the logistics performance of Russia was considered to have improved between 2012 and 2014 in all six dimensions as illustrated below.

Full data set can be found at: http://lpi.worldbank.org/

Whether you are in the logistics business or not, and you are (or consider) operating in Russia, there are three main things to take with you:

1. Compared to other CIS countries, Russia has the highest logistics performance together with Kazakhstan (LPI 2014: 2.70). So if you consider where to base your operations or which country’s businesses to partner with, from a logistics perspective Russia has some advantages.
2. One of the backbones of volume intensive business is transport infrastructure (e.g. ports, railroads and roads), in which Russia is improving steadily. This is expected to continue in the future as the federation has initiated several major transport infrastructure projects around the country. So, especially if you are in a volume intensive business (e.g. manufacturing) that needs goods to be transported to markets, this is an encouraging signal.
3. Even in optimistic estimates, it will take many years for Russia’s logistics performance to reach the standard, for example, of western European countries. However, the development is going the right direction and many improvements have already taken place. No company should expect to be successful in Russia by simply implementing similar supply chain processes as in Europe or the US, so it is highly recommended to acquire this competence from local resources.

Our next blog post will discuss more closely the key dimensions of logistics performance in the Russian context.