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Managing Uncertainty in the Russian Medtech Market

Backed by petro-rubles, a government eager to improve the medical care of its ageing population could make Russia one of the world’s most promising medtech markets. But political uncertainty, bureaucracy, and corruption are potential deterrents.

Thomas Klein

The Russian population is in decline. Approximately five-million-fewer people currently inhabit the country than did in 1992. The turmoil during the early transition years after the breakdown of the Soviet Union, the often-unhealthy lifestyle of the Russian people and the subpar healthcare system caused a decline in life expectancy and an increase in mortality and morbidity rates. And these factors, in turn, have affected the medtech market.

Growth Opportunities
In recent years, the Russian government has announced a number of initiatives aimed at improving healthcare for its citizens, thereby providing vast opportunities for medical technology companies. “Russia is projected to be the fifth fastest-growing medical device market in Central and Eastern Europe over the 2013 to 2018 period,” says Ricardo Vicente, head of medical devices markets at Business Monitor International (BMI). 

But it’s not all good news for the Russian market; Vicente expects that the conflict with Ukraine will affect Russian medtech market performance in the near term. In fact, BMI predicts that the market will decrease by 3.4% in 2014. 

After that, though, Vicente forecasts that a rebound in the form of record increases of at least 5.9% from 2015 onwards might be possible. “The 2013 to 2018 compound annual growth rate is projected at 4.2%, ranging from 5.4% for consumables to 3.0% for diagnostic imaging. The market is forecast to increase from US$6.7 billion in 2013 to US$8.2 billion in 2018,” he says.

Russia already spends $807 per capita on healthcare, according to the global health expenditure database of the World Health Organisation (WHO). This number is far more than fellow BRIC countries China ($278) and India ($59), but less than Brazil ($1,121). Vitaliy Lehkyy, senior consultant at market research company Frost & Sullivan, expects both total and private healthcare expenditure in Russia to experience double-digit growth in the next 5 to 7 years.

Currently, the roughly 1,800 Russian medical device manufacturers in this area—mostly small and medium-sized companies—are no match for Western rivals in terms of quality and sophistication of products, especially when it comes to high-tech devices. As such, about 80% of the medical devices in Russia are imported. 

European companies might be the main beneficiaries of this demand. According to BMI, medical device imports to Russia were valued at $4.8 billion in 2013, of which $2.2 billion—45.2% of total imports—came from the EU countries. Germany maintained its top spot as the leading supplier to the Russian medical market in 2013 with shipments worth $1.0 billion, accounting for 21.2% of total imports. Other leading European suppliers include Italy (4.6%), Switzerland (4.2%) and the UK (3.3%).

National Healthcare Strategy 2020
In March 2013, Prime Minister Dmitry Medvedev signed a national healthcare development plan for the 2013 to 2020 period. “The programme consists of 11 initiatives that focus on several areas, including: preventive care, healthy lifestyles, producing and introducing innovative technologies for health and wellbeing of mothers and babies, medical rehabilitation/physiotherapy, and staffing problems,” Vicente says. His advice to European exporters to the Russian market: Focus on these key areas.

However, part of the Russian Strategy 2020 is to become less reliant on foreign companies and to support domestic growth of the medtech industry. The official goal is for 50% of the local demand to be met by Russian suppliers by 2020. To get to this point, the Russian government will support local companies in their R&D activities. 

“The initiative envisages setting up 17 scientific research centres for the development of medical devices and pharmaceuticals,” Vicente notes. The centres will be set up at universities and scientific organizations, and will collaborate with major hospitals.

Challenges for Foreign Manufacturers
The country’s ambition to boost domestic manufacturing might hurt foreign companies when it comes to public procurement, however. Most of Russia’s hospitals are state owned, and approximately 95% of medical devices are sold through a public bidding process. 

Last year, the Russian Ministry of Industry and Trade went so far as to enact a law to exclude foreign companies from public tenders of high-end medical products. “The objective of the initiative, of course, is to coerce foreign manufacturers either to produce in Russia or to join forces with Russian companies,” says Ullrich Umann, representative for the trade agency Germany Trade and Invest in Russia.

 In July 2014, however, this rule was revised; foreign companies now have a chance to win the tender if only one or no company from Russian, Belarus or Kazakhstan bids. Russia has had a customs union with Belarus and Kazakhstan since 2011, which will be transformed into the Eurasian Economic Union in 2015. “The reason for the softening of the tender rule is that no established foreign manufacturer in the area of high-technology has been willing to localize their production in Russia,” Umann explains. Foreign manufacturers are willing to form joint ventures as formal entities with Russian companies, but components and products are still primarily built and assembled outside of the country, he adds. 

Umann speculates that, for low-tech products and consumables, in particular, two or more regional manufacturers can almost always be found and will likely bid, thereby excluding foreign companies from this sector. “These restrictions are possible in spite of Russia’s World Trade Organization membership because the country has not signed the additional agreement dealing with public tenders,” Umann explains.

Some foreign manufacturers are further deterred from the market by the lack of transparency from Russian authorities, which are heavily involved in the domestic market. In the Global Corruption Perception Index of Transparency International, Russia ranks 127th of 177 countries. 

“Despite efforts by the government to purge Russia’s institutions of corrupt officials in recent years, Russia remains a highly corrupt country,” Vicente says. “Even with signs that the Kremlin is committed to fighting corruption, graft is so deeply embedded in Russian institutions that this would take many years—if not decades—to accomplish.” In 2013, for instance, medical device registrations in Russia came to a screeching halt when the government temporarily shut down the regulatory agency Roszdravnadzor because senior officials had been accused of bribery and subsequently dismissed.

Regulatory inconsistency further complicates matters for foreign manufacturers. On 1 January 2013, for example, the Russian government announced that manufacturers would have to list their products in a new registry by 1 January 2014—an ambitious goal, to say the least. Companies that missed the deadline would be in danger of losing their regulatory approval. The Russian Ministry of Health and Roszdravnadzor had second thoughts, luckily, and decided to delay the deadline for reissuance of medical device registration certificates until 1 January 2017.

Impact of the Ukraine Conflict
Despite the regulatory inconsistencies, corruption and potential discrimination of foreign companies, Russia remains an interesting market because of its sheer size and the expected surge in healthcare spending. And, unlike most western countries, Russia still has some financial freedom, thanks to a moderate public debt of around 13% of GDP. 

However, it remains uncertain how the ongoing Ukraine crisis will impact the business outlook for the country. On 29 July 2014, the European Union adopted tighter economic sanctions against Russia. While previous measures targeted only certain individuals, the new sanctions will affect Russia’s banks, oil industry and military. 

The EU has published a list of technologies that are banned from being exported to the country. According to Konrad Walter, an attorney at the law firm CMS Hasche Sigle, the sanctions could affect medtech companies if their products are classified as dual-use goods. Devices can be counted as dual-use goods if they can also be deployed in military applications in addition to their civilian use. According to Walter, this can be the case for certain types of x-ray machines. 

“Companies have to check before every export transaction if the product is possibly covered by the sanctions,” he says. “They should monitor very closely what is happening there.There is not a lot more you can do at the moment.”

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