Andrew Cranston , KPMG
Release Date: 2010-08-06
Andrew Cranston, Senior Partner, Russia and the CIS for KPMG, a big fan of Russia and a true survivor of the professionally challenging Russian market, has been interviewed by Russiaenergy.com for a Russia Special report.ACQ Finance Magazine crowned KPMG as the Financial Firm of the Year in Russia last year. What have been the biggest milestones for the company between establishing a presence in Russia and reaching this dominance in the Russian financial market place?
We are very proud of this award and re also very proud to have been recognized recently as the number one audit firm in Russia by s. Expert rating agency as well as Dengi and Finans magazines Since 1990 the company has grown from one person to 3000 employees today. This growth has resulted from a mixture of two factors: investment in people ahead of the curve, and hard work: meeting client expectations in a demanding, fast growing market.
I consider the dates that KPMG won its major clients in Russia to be its most important milestones. In the early days, Lukoil was one of KPMG Russia’s first major clients, and has been the company’s biggest client since that time. Having Lukoil as a client gave the company the credibility to grow a practice here in Russia. Another large company that became a client in those early days was Severstal, one of the largest steel companies in Russia. Around eight years ago, Basic Element and Russian Aluminium were both huge landmarks. Very recently KPMG gained Norilsk Nickel as a client. I look at the company’s achievements in Russia in terms of those milestones, because ultimately our business is all about those relationships and where they take us.
There must have been some difficult times for KPMG, for example during the 1998 economic crisis, that helped to define the company just as much as these successes.
1998 was a defining moment for a lot of multinational companies in Russia, as it was the time when they had to decide whether or not to leave the country. Our international firm had to support us through that period, which was a ‘hold your nerve’ moment, and one that defined the culture of the company. It was in the years after this moment, when business was beginning to recover, that KPMG really started its drive to accelerate recruit at the graduate level in Russia. This was one of the best things the company ever did here, because it allowed us to take advantage of the growth opportunities that came later. This was also the point when KPMG started to expand within Russia. Today, there are five offices outside of Moscow, with another two set to open this year. As well as providing the company access to a lot of very good staff, it also provided a brand new client base, and allowed KPMG to be closer to its customers in the Russian regions.
When KPMG began its operations in Russia, it was very heavily focused on providing auditing services. Over the last five to seven years, the market has matured to the levels that the company can now also focus on its advisory offering here. By bringing in advisory staff from the UK and other European practices, KPMG Russia was able to meet the demand, that was driven by M&A transactions, and company restructuring in the more challenging times.
How is that split between audit and advisory services today, and what kind of advice are companies coming to you for?
Our audit business accounts for a little more than half of KPMG Russia’s current business, and advisory services form the remainder. Advisory splits into four main areas. The first is tax and legal. The second is transactions and restructuring. Restructuring formed a very large part of the company’s work in Russia last year, particularly in the major cases of international banks lending to Russian companies and needing to find reasonable solutions. Increasingly, however, KPMG is beginning to see more transaction related work. M&A activity is on the rise, and the company is handling a number of IPOs. KPMG were the firm that helped RusAl with their Hong Kong IPO in 2009. There are three or four other IPOs that are live right now, and many more companies looking seriously towards making public offerings, which is very encouraging
The third area of KPMG’s non-audit business is risk and compliance, which is concerned with managing risks, and ensuring compliance with the law. One of the great successes of KPMG’s Russian operation has been its forensic practice: helping companies deal with the huge issues of corruption and fraud that are risks of the Russian market, particularly for foreign companies. Last but not least is what we call performance and technology, which is run along the lines of traditional consulting on how to make a company better, be it through building a shared service centre, or a more effective treasury system. During the crisis there was a decline in demand for this service, but this demand has once again returned. The fact that people are confident enough to spend money on these large business improvement projects is very positive.
One of the key issues for our international readers when they think about the Russian market is transparency. The 2009 Transparency International Corruption Perception Index ranked Russia at 146th out of 180 countries. I imagine that your job is twofold: to help international companies in Russia avoid these issues, and to help Russian companies shed the image that they have. How do you assess the situation today?
At a macro level, there are a huge number of issues related to transparency and corruption in Russia. However, on a micro level, at the company level, there is a whole spectrum of different situations, from companies that are still very opaque to those that have moved a long way in the right direction. Over the last decade, there has been significant movement along that line. There are still many companies at the wrong end of the spectrum, but we expect that this situation will continue to improve.
A lot of these issues will take further time to work out. This is a large issue for foreign companies looking to invest in Russia, because understanding the rules of the game in Russia is crucial, and many companies are caught unprepared. On the other hand, the vast majority of foreign companies operating in Russia will tell you that it has been one of their fastest growing markets, one of their most profitable markets, and the issues that they face in terms of corruption and bureaucracy are annoying, but incidental to the business model.
The largest sector in the Russian economy is oil and gas. How does this reflect the particular strategy that KPMG has taken to the market, and the company’s client base?
As the company’s non-audit work has increased in Russia, so has its advisory work for a number of the oil companies, and today forms a major part of our practice. Although KPMG have a lot of staff in their oil and gas practice, in Russia the client base has shown real diversification as it has grown over the last ten years, into other sectors, in line with what has happened with the Russian economy. The economy has developed into a much more consumer-based market. The growth and development of telecoms companies and the banking sector are prime examples of this. Our practice has grown to reflect this. So whilst oil and gas is hugely important to KPMG in Russia, there is not the same concentration of work in oil and gas that there was when the company started its operations here.
A lot of these larger companies are very loyal to their auditors: Lukoil has worked with KPMG for seventeen years, for example. How much of a challenge has it been for you to gain new clients in oil and gas when these other major Russian oil and gas players seem very loyal to the other Big Four companies?
The situation with the oil and gas players in Russia is no different to the situation anywhere else in the world, where auditor change is really quite rare. Within the auditing company, there will be internal rotation of teams, which professional standards require, but to change the overall relationship is uncommon. In that respect, the Russian market is just as mature as other markets around the world. If these oil and gas companies are satisfied with the quality of services of their auditor, there is little reason for them to change. However, slightly less than 50% of KPMG Russia’s business is non-audit, and there we see great opportunities to work also with companies where we are not the auditor.
What are the advisory trends that you are seeing at the moment in the oil and gas sector?
There is a lot of interest in everything to do with efficiency. Shared service centres and improving the performance of treasury function are two classic examples of work where there is very active demand. Also, companies see real benefits in involving KPMG in management of major projects. The amount of money being expended are huge, and being able to just shave a few percentage points off in terms of the way things are run can be very important.
Is that something that these big firms come to KPMG rather than going to a specialised oil and gas service provider?
Yes, that is something where we believe that KPMG have absolutely got the core skills and the industry expertise to do that, and we are actively involved in those types of projects in Russia.
2009 was a very testing year for the oil and gas industry, but 2010 is here now, and everyone seems a little bit more optimistic. Russian oil and gas companies are beginning to launch IPOs again, Exillon Energy being the latest to launch on the LSE. How will this new optimism in the economy help to grow KPMG’s business here in Russia?
KPMG Russia is really quite bullish about the future. Our view is that Russia is well placed to come out of this crisis strongly. Clearly, natural resources are going to be significant: I expect that the global prices are very important, and their position today is helpful. Growth in Russia will outstrip most other geomarkets by quite some margin. The penetration of huge amounts of the Russian economy is still very low. For example, the amount of mortgages in the economy is very low, the level of consumer spending is very low, and the level of professional services is very low to GDP. We envisage a continuing catch up: that as the economy comes out of recession, that we won’t just see growth of GDP in these sectors, but also accelerated growth, due to the lack of market penetration.
There are factors that could slow this growth down, or speed it up even further. The thing that can slow it down is the functioning of the global financial markets, and how well that corrects. The thing that could really speed it up would be more progress on the investment climate. Anything positive there will encourage people to invest more.
The government have been very public about wanting to improve the investment climate, both for domestic and foreign companies. The RF Government recently published an agenda related to attracting foreign companies, and what needs to be done with regards to everything from immigration issues, to taxes and customs issues. There is no question that the government doesn’t understand these issues, but it is difficult to make the necessary progress rapidly. At least the issues are on the table, Improvements, even relatively small ones, can accelerate growth further.
You spent a significant portion of your career here in Russia with KPMG, and today you are Senior Partner. How would you like to see KPMG Russia develop in the future? What are your key market predictions, and what would you say to our readers in the oil and gas business about the future of Russia?
From the outside looking in, Russia tends to have rather a gloomy image. The reality of doing business here is that it’s significantly better than these perceptions. That’s not to say that there are not significant improvements that can and should be made. My message would be to companies on the outside: don’t underestimate the opportunities in Russia; and take good advice. There will be huge opportunities in the next three to five years.
Clearly, oil and gas is hugely strategic to Russia, but the opportunities are huge. It’s ultimately in everybody’s interests to develop the oil and gas sector further, and it will happen. International oil companies need to establish a presence in Russia. It may be challenging, but will ultimately be extremely rewarding.
| Company: | KPMG |
| Position: | Senior Partner, KPMG in Russia and the CIS |
| Country: | Russian Federation |