There are a number of misconceptions about Russia as a business destination. Some people believe that conducting business in Russia is an all too easy process and that all it takes are some good connections or simply meeting with the right people. On the other hand, others believe that in Russia, it is almost impossible to do business and that enterprises are not governed by the basic principles of economics. While these latter assertions might have some validity in certain respects, it is essential to understand that they do not represent the business climate, market opportunities or entry strategies required to make it in Russia.
Russia as a business destination requires its own set of rules. One needs to be ready to do business in an unconventional way. Additionally, one should be ready for the disparities that occur across various sectors and also across a number of geographical areas. In Russia, some areas are oversupplied while others are undersupplied. The latter could either act as rewarding business opportunities in certain instances or they could signify areas that need to be ignored because if the Russians themselves do not see any potential in it, then what makes a foreigner think that he/she can turn it around. (Fetsenko, 2008)
Business in Russia is not for the feint hearted. It requires a great deal of imagination and resilience. But after exercising all the latter traits, it can then become easy to enjoy the rewards of investing in this country. Consequently, one should be well equipped with all the business environment information, market intelligence, import and export opportunities and market strategies required to succeed in Russia before venturing there. These are all aspects that will be covered in the report below.
Market Intelligence Report (MIR)
The Russian People
There are a number of misconceptions held by westerners about the Russian people. Some of them believe that Russian cities are too susceptible to crime and that one would lose their property at any one time. However, compared to crime levels in the United States, Russian cities are safer.
Other people believe that in Russia, organized crime overrules the basic principles of economics and that one cannot expect to find considerable profits without collaborating with these high profile criminals. However, this is another misconception; one can still conduct business in Russia without having to involve members of organized crime. While the latter issue may exist in certain sectors of the economy, others are not affected by it. Consequently, businessmen interested in doing business there need to familiarize themselves with the sectors that are untouched by such kinds of issues. (Donga, 2008)
It should also be noted that not all Russian people are interested in taking bribes. The case of corruption has been a rising concern among business men from the US because most of them may not understand the dynamics of the Russian business environment. However, this is an issue that has been exaggerated by many individuals. In fact, this could simply be a result of the culture shock which one gets exposed to as soon as they enter a foreign country.
It should however be noted that the Russian people are not as expressive as most other individuals especially when they meet strangers. This kind of attitude emerged out of the communist regime that oppressed its people’s freedoms. Consequently, it would be wise to remember this aspect when dealing with the Russian people. One might not be able to get responses out of them at first hand, it may be necessary for one to earn their trust first before they can think of opening up.
It should be noted that the Russian way of life is slightly different from the American one. Consequently, foreigners need to understand that not everything in Russia will be synonymous to what they are used to in their own countries. This means that one should be ready for the minor inconveniences that come with change. The Russian people eat different food, they enjoy different leisure activities and conduct business a little differently from the Americans. It would therefore be appropriate for one to deal with these cultural differences by embracing them rather than by whining and complaining about them. (Reykavik, 2006)
The Russian people differ from the Americans because their perceptions of contracts are quite peculiar. Most Russians regard contracts as statements which contain mutual intentions. Consequently, if something happens to alter those intentions, then the Russians may not be obliged to meet the terms of the contract. This is a totally different mindset from the American definition because Americans are more concerned with the terms of the contract and the intricate details that govern it. It should be noted that Russians place more emphasis on the relationships that emanate from the contract rather on the particular details of it.
Russians are well cultured persons. They are exposed to a wide range of media platforms and books; they are also good researchers and scientists. Consequently, one should not assume that they cannot get any positive responses from Russian people in terms of business. In fact, most of them are good with foreign languages and can be well motivated to perform. However, care should be taken by western managers especially when work involves a lot of innovation. The Russians were not used to making their own decisions during the communist regime because they would get punished for doing so. Consequently, American investors need to inform their Russian workers about their expectations and whether they would anticipate their workers to exercise innovation.
The Russian economy has quickly emerged from its downturn in the nineteen nineties and in the late nineties. By the time, the country was entering the twenty first century, it was boasting of a growing economy whereas their counterparts were fighting off inflation. The Russian economy is unique in that while other countries are trying to cope with rising oil prices, this country is benefiting from it. Because the country is rich in oil supplies, then it is on the opposite end of the global oil crisis. (Ganske, 2007)
The country’s local imports have strengthened against exports because of the behavior patterns of the Russian Rouble. The following is depiction of this pattern
1998- 9.71 Roubles per US dollar
1999-24.6 Roubles per US dollar
2005-28,3 roubels per US dollar
The overall effect of this week rouble is that the highest percentages of commodities that have been doing well in this country are industrial products and most of them are being produced locally. It is therefore imperative for investors to consider this sector.
Furthermore, Russian business investments have grown tremendously over the past few years. This is as a result of greater utilization of their capacity. Also, the government minimized tax burdens amongst its populace and also expanded their employment opportunities. However, spending power has not reached similar levels owing to increasing prices of commodities. Furthermore, inflation levels have been much lower over the past few years owing to the monetary policies instituted by the respective government regime. The following is summary of some of the major indicators of the Russian economy over the past five years
Source: retrieved from http://info.hktdc.com/emergingmarketguide/
The Russian political scene has witnessed numerous fluctuations over the past decade. During the nineteen nineties, it was controlled by its president Yeltsin and these were not good times for the business environment. However, after the Yeltsin era, there was the emergence of the Putin era. This era is much more successful than the latter because of number of reasons. The following are some of the characteristic of this era;
- Strong tax collection
- Favorable business environment
- Lower personal income tax
- Lower corporate taxes
- Sound economic measures
These are all aspects that encourage greater investment and better performance for entrepreneurs especially in relation to international business. Because of these changes, the Gross Domestic product of the country has undergone numerous changes over the past few years. For instance in 1999, it recorded a six point four percent growth rate, in 2000, it reported a ten percent growth rate, in subsequent years, it has continued to grow at a steady pace. (HKTDC, 2008)
The Russian government has been somewhat criticized for the method of governance. While it is a known fact that Russia’s political environment has not been an exemplary case, one can still proceed with business in this country regardless of good or bad political situations. In fact, one’s frame of mind will largely affect whether they can go about their business without being affected the politics in the country or vice versa.
It should be noted that the Russian government has only allowed free market economics over the past decade. Consequently, most industrialists and business men who operate in this country are highly inexperienced in commercial business ventures and also in international business; areas that require application of basic economic principles.
In the past, the Russian government has not been very keen on the issue of Information technology. However, this trend is slowly changing owing to the fact that the country has recorded high amounts of tax incentives for IT specialty companies. Additionally, most of the local hardware manufacturers are growing in size. In fact, the country has forecast an IT growth rate of fourteen percent by the year 2011. This is also means that the country will grow by nine billion dollars in this sector from the ten billion dollars registered last year. (Tuohy, 2008)
The government has also instituted plans that it will rebate taxes for families by as much as thirty nine percent if those families purchase computers. This also means that IT use among members of the population will rapidly increase. There are also some tax cuts that have been instituted for suppliers in the hardware sector. Consequently, one would have a relatively easier time in this sector presently than in the past. (Kitov, 2007)
The country’s technological has also improved tremendously owing to the institution of an initiative in 2007. The initiative was to encourage greater computer usage in rural parts of the country. This was done by reducing the cost of purchasing PCs in those areas. Consequently, many individuals have been encouraged to participate in IT and this has gone a long way in enhancing this country’s economy.
Business Environment Analysis Report (BEAR)
Russia underwent a series of economic reforms over the past few years. Consequently, the country now boasts of stable currency i.e. the Ruble as now stabilized. This means that any foreign investor who is interested in doing business would have a better bet at succeeding if they concentrated on exports rather than imports. Imports to Russia have been very expensive. Consequently, managers should consider creating goods locally or using locally made supplies so as to minimize their costs of business.
It should also be noted that these economic reforms have now created feasibility in previously low performing sectors. For instance, it is now advisable to consider the retail sector especially with regard to consumer goods. Additionally, it is now also favorable to consider dealing in manufacturing equipment. The financial investment sector is also becoming increasingly lucrative and would be a profitable venture when considered by entrepreneurs.
Before one conducts business in Russia, it is essential for one to look for local partners. There are a number of advantages that can emerge out of finding a good local partner and these could be invaluable to the business. Some of them include;
-They understand bureaucracy in the country
-They know the market dynamics
-Are familiar with staffing arrangements
-Understand overall business costs
-They understand common mistakes made by first time investors
-They know how local rent costs are settled
-Can give information about taxes
All this information can be accessed by foreign companies simply by hiring the services of these local personnel. Consequently, one can save on time and resources. It should be noted that getting local partners in Russia is perhaps one of the biggest challenges of doing business in this country. This is because these partners can save the foreign investor a lot of hustle when trying to look for local consumers, suppliers or other stakeholders that will be involved in the overall business process. (Vista, 2008)
The Russian business environment is different from what most other people are accustomed to. For instance, in Russia, one ought be ready to pay more for certain items and pay less for others. The country’s economy cannot be labeled as a totally liberal one. Consequently, one should not expect that goods will be free flowing there. In other words, it may be necessary for an investor to prepare for lack of competition on basic service provision. For instance, the real estate sector is below the US standards. Consequently, it would be affordable for one to rent their business premises rather than purchase them.
However, even renting western style offices may not be that cheap because their levels are synonymous with charges in London or even Tokyo. Also, if an investor is merely spending a short time in the country and they are in need of hotel services, then one ought to be ready to pay extra for western style hotels. Additionally, international calls are quite costly in comparison to what other persons in the country pay.
The American definition of decent business meals would be more costly in Russia than it would be back home. For instance, it is difficult for one to get meals that cost less than fifty dollars per head if they are looking for western style servings. (Reykavik, 2006)
It is also essential to note that in Russia, transportation costs are relatively fair. It would cost one a mere five hundred dollars to fly to almost all areas of the country. Additionally, if one chooses to use trains, then they can pay less than fifty dollars to go to any part of Russia.
In terms, of labor costs, Russia’s wages are not as typical as they are for other western counterparts. In other words, it depends on what foreign investors are looking for in this country. If one needs bilingual personnel, then it may be necessary to expect high costs there. Also, if one is located in some of the major cities such as Moscow, then wage costs will be much higher than in the rural areas. Also, the latter costs depend on the part of the economy that one is specializing in. If one is situated in an area that is oil rich, then one would have to pay much more for their labor costs than in any other part of the world. However, if one was looking for workers in an industrial city, then they would have to pay their workers much less.
Additionally, it is necessary for one to invest in labor costs when they are dealing with certain forms of goods or services. When one deals with the information technology sector, then prices may vary depending on the savings that one is looking for. For instance, compared to the United States, it is relatively inexpensive to get computer programmers. However, if one compares these labor costs to the Asian computer programmers, then Russian labor cost may be deemed as expensive. This is because in Russia, computer programmers are not in high demand compared to their western counterparts. Consequently, they have little leverage to negotiate their salaries.
When one considers setting up a brand name in Russia, it would not entail extreme labor costs. This is because in Russia, brands are not as competitive as they are in the United States. Consequently, an entrepreneur who has the aim of creating brand recognition may not find it particularly difficult to do so in Russia than in other parts of the world especially in the western world. (HKTDC, 2008)
All in all, business costs in Russia may be regarded as more of an opportunity than a cost. Any extra charges incurred in labor or costs of production may be offset by the returns that emerge out of the business. Consequently, one should be prepared to part with huge sums of money if they are to get the same huge returns in the end.
Report on opportunities for Market Entry (ROME)
Certain sectors have been emerging as strongholds within the Russian economy in comparison to others. Oil related services and products are particularly rewarding especially in terms of imports. This is because Russia is richly endowed with natural resources and these have the potential to earn high rewards for any international business person.
Additionally, Information technology services can be a hub for an international businessman who may be interested in offering those services to locals. Since the government has offered numerous incentives in this case, then one would certainly have high chances of succeeding if they focused on information technology.
Since Russia is one of the most notable countries in Europe when it comes to scientific research, then investing in such a sector could earn an entrepreneur good rewards, more so when the latter individual is working on exporting scientific related products. (Reykavik, 2006)
Spending power has relatively stabilized in Russia. This was as a result of the kind of reform instituted by the current government regime. Consequently, it would be advisable to consider consumer items especially in the food sector. However, in order to reap good rewards, one ought to consider producing those same items within Russia and not outside. This is because it would be too costly to import the commodity. Examples of consumer items that international businesses could focus on include motor vehicles and electronics.
Market Entry Strategy Assignment (MESA)
In order to do well in Russia, it would plausible to link up with a strategic partner that will ease one’s transition into the area. It should be noted that the market entry strategy can either be through partnering with local Russian firms or the use of international firms that have been working in Russia for long periods of time. Since this case deals with consumer products, then it would be advisable to utilize an international firm that has been working in Russia for longer than ten years. On such example is the Business Information Service for the Newly Independent States (BISNIS). The firm boasts of having fifty thousand clients that have instituted international businesses.
Consequently, it has the expertise required to assist an entrepreneur in setting up their business in Russia. The company has been dwelling on the Soviet Union ever since 1992 when it was formed. This means that the company has been responsible for over three billion dollars worth of exports to investors in overseas areas. Also, sixty three percent of investors in Russia were as a direct result of what this strategic company could offer.
The first issue that will need to be tackled prior to entry is getting a market report on the specific business segment. This will be obtained from the strategic partner BISNIS. Thereafter, it will be important to understand the dynamics of Russia’ business leads, these will also be provided by the latter mentioned partner.
It will also be important to understand the financial intricacies of conducting business in Russia. This is because financing can be very tricky there. Consequently, this is an issue that will also be tackled by the strategic partner.
It should also be favorable to use large scale industrial set ups rather than setting up a small or medium scale enterprise during market entry. This is because the largest movers of the economy in Russia come from the former sector, it could therefore be problematic trying to venture into an area that does not have a lot of government support through the small and medium sized enterprises. (Reykavik, 2006)
The products created in Russia will be marketed partly in Russia and also internationally. Consequently, there will be a need to keep track of the intricate details of the world currency rates, consumption patterns for the commodity among other items that may affect the business in the end. It will be essential to offer high quality items, for the product thus exceeding local standards and creating a lucrative area of businesses in Russia.
Russia is an emerging economy and would be a very lucrative investment area. This is because the country is endowed with natural resources. Also, its business environment is quite feasible. Some of the negative assertion made by western media about Russian business men are stereotypical and do not actually represent the average Russian.
Some of the major imports that one can dwell on include motor vehicles and information technology. Exports that can yield returns in Russia include oil related products and services.