Doing Business in Russia

• Dynamic Economic Growth• Since 2000 to 2010, Russia’s GDP growth has averaged

5.3% per year, including the 7.8% fall in 2009• One of the Largest Consumer Markets

• 4th largest market in Europe• Over 140 million consumers with increasing incomes

• World-Renowned Human Capital• One of the most highly skilled workforces in the world• Strong education

• Unique Geographic Position• Excellent access to sea, road, and rail routes as well as

home to several major airports

Pros of Doing Business in Russia

Pros of Doing Business in Russia

• Vast Natural Resources• 35% world gas production

and exports • 47% of world reserves of peat • 23% of world forest resources

• Attractive Taxation System• One of the most generous

non-offshore tax regimes in the world• aimed at promoting

investment• further developing the

economy.

• Extensive Government Support• Russian government works with

business community• Public-private partnership programs• Existing infrastructure, large investment

and development programs

• Stable Social and Political System• Living standards have been steadily

improving • World's 7th largest economy by

purchasing power parity • Russia is a member of G8, the United

Nations, APEC, SCO, and the CIS

Successful Companies in Russia

• Independent Media (publishing)• Baruch (clothing)• AMS (advertising)• Direct Star (telemarketing)• Impress Media (real estate related publishing)• Feadship and other Dutch yacht builders (luxury and super yachts)• Stroymoda (office partitionings and funrniture-Ahrend)• KPV Story (construction)• Juralink (legal services)• Shell• HP• Pepsi cola• Heineken

Successful Companies in Russia

• LR Health & Beauty Systems -the global enterprise for cosmetics, body care and health launched business in its 32nd country – Russia

• Monthly growth of over 20 percent • What the CEO says

• After two years of intensive preparation, our start on the Russian market was outstanding

• It is expected that Russia will rank among LR’s top countries by the end of the year.

• The second subsidiary was opened in St. Petersburg in October. It is envisaged to open additional subsidiaries in Ufa, Rostov, and Yekaterinburg in 2011 as well as in other locations in 2012.

McDonalds• Opened its doors in Soviet Moscow in

1990• 300,000 people visited

• Started talks with the Soviet government as far as back as 1976

• Formed a close relationship with the Soviet/Russian governments and Russian consumers• This is a strategy its competitors

have found hard to replicate• Going to a fast-food joint is almost like

going out to a restaurant.• It’s a celebratory thing• Make restaurants places where

people want to sit down with their families, including making their menus more diverse

•High Barriers to EntryDifficult to obtain real estateAdministrative processes can be lengthyExpenses run highImport taxes are fairly high

•Regional SegmentationLocal legal and tax regulations Duties exist between regional bordersMaintain local brand biasCultures are vastly different between regions

•Commonly Relied upon Business Tactics are UnenforceableNegotiations often occur in place of contractsProtective non-competition covenants cannot be imposed

•Few SuppliersQuality may suffer due to lack of competition, and who you know may be the deciding factor to your success

Cons of Doing Business in Russia

•Internal corruption is prevalent with an estimated 20 % of overall costs going to “extras”

Seemingly unavoidable bribery Overcharged fees for licenses, registrations, and inspectionsPay-offs to organized crime

•Suspicious enforcement of regulations to prevent competition suggest that government is corrupt

Questionable safety, environmental, and customs violations may be claimed

And if you are planning on being a whistleblower in such instances, refrain as you will not be protected!

The Greatest Con of All: Corruption

Companies that Have Dealt with the Difficulty of Doing Business in Russia

• Carrefour and Wal-Mart– Could not achieve necessary acquisition for

competition• IKEA, Daimler, and News Corp– Succumbed to bribery• Nestle, Motorola, and Telenor– Faced suspicious claims of violations of regulations• Google– Hindered by regional segmentation• BP

— Failed to enter and exit smoothly• Louisiana Caviar Company, Bandit Industries, and

Legacy Companies– Suffered from the cost to import• Hermitage Capital Management – Attempted to whistle-blow unsuccessfully

Questions to Ask Yourself Before Doing Business in Russia

1- Are you comfortable possibly seeking a joint venture?

2-Does your firm conduct acquisitions?

3-Is bribery highly prosecuted in your home country, or has your company

signed an anti-bribery clause?

4- What does your company have to offer the Russian people? Is it genuinely

good products or services?

5- Are you going to work with a third party?

6- Is your company a large company? Or if not large, able to invest a substantial

amount of money?

Our Recommendation:

We recommend Russia to invest and do business with precaution. We suggest the following: 1. Find a good middle agency in Russia to help you know and understand the procedures of doing business.

2.Keep a good relationship with the Russian government

3.Bribery still exists in Russia, but it is improving

4.Always keep the quality of your products genuinely good, since Russian people prefer quality over price

5.Do not rush to do business with Russian people, they like to get business done gradually getting to know the people they are working with. They want to know you well before they sign the final contract.

6.Right now, the business policies and procedures of Russia are changing very often. Foreign business people should pay attention to the new Russian business polices, to make sure you won’t violate the new business laws.

Growing Industries

Industry FDI

Energy Protected by the state. Only 50% of shares can be held by foreigners

Metallurgy Protected by the state. Only 50% of shares can be held by foreigners

Construction-13 trillion investment package. World Cup and Winter Olympics coming.-Foreign companies entering

Automotive -Foreign companies investing in production encouraged by government

Defense-Russian government spending more than 20 billion total-Exports raising 13 billion. Export increase to China-Foreign investing allowed, but approval of government needed

Technology and Telecommunications -Foreign invested encouraged by government-Large tax cuts and subsidies for innovative projects

Insurance -25% can be foreign investors in a company

•Foreign Direct Investment in Russia is increasing •However, Russian legislation limits the activities of non-Russian investors in companies that are ‘of strategic value to Russia’

Recommended Industries

•Consumer Goods-Largest consumer market in Central and Eastern Europe-No state-owned consumer good enterprises-Fastest growing market for luxury goods-Disposable income increasing-Middle class rising-Retail growing more than food sector-Largest online population in the world-Pepsi and Coca-Cola making acquisitions

Russia is looking to support innovative companies from the U.S. according to the SBA. However, the government has not shown much support within Russia.

Top 10 Exports and Imports

Exports from the U.S. to Russia Exports from Russia to the U.S.

1. Frozen chicken meat (down 6.8% from 2008)1. Oil & other petroleum products (50.5% of Russia to U.S. exports, up 25.2% from 2005)

2. Aircraft and spacecraft including parts (down 14.3%) 2. Aluminum (9.3%, up 5.9%)

3. Parts for boring or sinking machinery (down 36.1%) 3. Semi-finished iron & steel products (7.7%, up 128.4%)

4. Frozen pork (down 48.2%) 4. Nuclear fuels (4.4%, down 0.6%)

5. Electric generating sets (up 21.5%) 5. Finished metal products other than steel (4.3%, up 78.3%)

6. Parts and attachments for bulldozers and cranes (up 39.4%) 6. Precious metals (3.5%, up 23.1%)

7. Gas turbines (up 111.7%) 7. Nickel (3.3%, up 85.5%)

8. Parts for steam turbines (up 165.4%) 8. Steelmaking materials (3.2%, up 56.5%)

9. Electrical appliances including air humidifiers (up 4.3%) 9. Fertilizers, pesticides & insecticides (2.0%, up 22.9%)

10. Chain saws (down 57%). 10. Fish & shellfish (2.0%, up 18.5%)

How to do business in Russia?

• Starting a business:1. Notarized Application (Government approval and Licenses)2. Proof of 50% of charter capital in Bank (Min. capital req. 10,000 RUB)3. Registration with local and state authorities4. Open company’s bank account (needs notarized signature and company’s seal)5. Notify Federal Tax Service of new account

Takes 31 days to open an LLC in Moscow.

• Investing in Russia:– Government Restrictions (percentage of how much can be owned by foreigners, director must be Russian, some

industries cannot be exploited by foreigners)– Restrictions for foreign companies on buying land for agricultural purposes, mining, or forestry, or land that is

near the continental shelf.– Some disputes are not arbitrable: (immovable property; shareholders’ agreements; bankruptcy disputes)– Some investors have had problems with their decision being respected– Consider U.S. traded mutual funds, exchange-traded funds (ETFs) or American Depository Receipts (ADRs), to

avoid investing directly– Beware of added risk: higher volatility (relying on oil), decreased transparency, potential for social unrest. – Research which region are you investing in? (St. Petersburg one of the safest. Laws passed to ensssure investors

they will get their money back.)

Employment in Russia

• How to work in Russia as a foreigner:1-Application, Passport, and Photo2- Original letter of Invitation from FMS (Issued by Employer)3- Proof of Departure4- Letter of Intent (Issued by Employer)5- HIV Blood Test6- Submit and Pay Application ($200 approx)

People applying as private entrepeneurs canget permanent residence eventually

• How to hire foreigners in Russia:1- Yearly application stating the need to hire

foreigners2- Accreditation in the local department of

federal migratory service (FMS). 3- Placement of vacancy in the administration of

civil service of the employment of population.

4- Obtain Permit to employ foreigners (permission) in FMS.

5- Issue Work visa invitation for foreigner. 6- Pay processing fee of approximately $300

dollars. 7- Notification about beginning of work (and

also about dismissal) of foreigner into the local departments of federal tax service, employment center, FMS.

Cultural Implications within Business

• Individual/Group Focus- Oligarchy controls most industries; not aligning one’s business with another in a joint venture can make business more difficult

• Life/Work Balance- Somewhat high importance of life over work. Leisure time includes shopping, eating, personal care, etc.

• Egalitarianism/Hierarchy- Government controls many industries, yet there remains opportunity for participation from foreign investors (not equal but improving)

• Relationships- Highly important due to unjust system, necessity in joint ventures/acquisitions, and necessity in securing suppliers

• Communication Styles- Indirect communication and implied meaning can lead to confusion in business. Should be accounted for in advertising.

• Time Orientation- Uncertainty and lack of a plan; contracts not followed sometimes.

• Change Tolerance- Change Averse; not welcoming of new things and strong preference for local products

References• Izadi, E. (2012, November 16). Business groups score win with

russia pntr. National Journal, Retrieved from http://www.nationaljournal.com/blogs/influencealley/2012/11/business-groups-score-win-with-russia-pntr-16

• Opora Russia . (n.d.). Medium and small business in russia . Retrieved from http://en.opora.ru/

• U.S. Chamber of Commerce. (n.d.). Faces of trade: Small business success stories-exporting to russia . Retrieved from http://www.uschamber.com/sites/default/files/international/files/17793_FacesofTradeRussia_final7.pdf

• Mendeleyev. (2009, March 23). Can small businesses survive in russia ?. Retrieved from http://russianreport.wordpress.com/2009/03/23/can-small-business-survive-in-russia/