Doing Business in Russia

Initially Russian business culture is indistinguishable from international practices. However, despite an ever increasing number of English speaking employees in Russian companies, it is often necessary to communicate through an interpreter at the first meeting. That said, international branches in I.T. and Telecommunications have an abundance of young staff with good English skills. To maintain a good working relationship and foster further development after the first encounter, it is very important to continue dialogue with personal meetings and preferably establish some local representation. This can be either through your own agent or via cooperation with a local partner.

In most cases it is beneficial to frequently have follow-up meetings with your initial contacts to form an active business discourse. It is difficult to develop a business from scratch whilst talking over the phone or typing e-mails while sitting at your desk. Personal visits are far more effective in reinforcing your business links and galvanising productivity.

Russia is not a single unified market, but is comprised of several different regions, each with its own preconditions. Therefore, it is better to approach them as separate markets. Politically, Russia is divided into 13 different economical regions. Moscow is the most developed region with competition and establishment conditions resembling mature markets. As a result, Moscow dominates financially and estimates attribute 80% of all Russian wealth is tied to Moscow. Production costs are generally the highest in Moscow. In addition, St. Petersburg exhibits strong and robust growth and because of its proximity to Western Europe yields interesting opportunities.

Other regions, such as the big cities surrounding the Volga River, of which, several boast a million or more inhabitants, namely, Nizhniy Novgorod, Kazan and Samara are developing rapidly and demand proliferates. Ekaterinburg is at the centre of prosperous areas in the Urals, which are rich in natural resources. The growth rate here is comparable to St. Petersburg. West Siberia vaunts Omsk, Novosibirsk and Tomsk, which are heavily industrialised and the markets are growing in maturity and creating a class with strong purchase power.

Travel to Russia
International airline connections are primarily situated in St. Petersburg and Moscow. There is a national airline that travels to all large cities. Additionally, there is a fast train that runs to and from St.Petersburg to Moscow in four hours. Visitors to Russia need a visa and it usually takes between 7-14 days to be granted, depending on your country of origin. It is a time consuming process to apply by yourself and consequently it is advisable to use a specialist travel agency to deal with the procurement of a visa. If you intend on traveling to Russia regularly then multi-entry visas are available with a yearlong lifespan. However, such a visa requires an invitation from a Russian organisation that has permission from the national ministry to invite foreign business partners.

Demand and Local Supply
Most companies experience the same level of competition in Russia as they do elsewhere in the world in their specific field. A myriad of international companies have already established themselves on the Russian market with many more about to follow suit. Strong local competition must also be taken into consideration. There is a scarcity of equipment for industrial endeavours, which is undergoing a rapid upturn. Local equipment is generally more robust, but less sophisticated than foreign imports. Yet demand for local equipment is growing. There are excellent export opportunities for a plethora of equipment in the industrial area. The demand for services has also increased considerably, especially in the I.T and Telecommunications sphere. Furthermore, consumer markets continue to grow briskly, in which the retail and food market is prominent.

Distributors
A successful business needs to be affiliated to the best agents, retailers and distributor networks. This requires a high level of acumen to choose the right partners. It is of considerable importance that local representatives need to be well adapted for cooperation on all levels and finding partners is never easy. That is why we endorse an extensive search to trace the most suitable partners. The main point for consideration is the need for a direct, trustworthy and personal relationship with the people you work with. This is essential as good communication and a finely tuned cooperation will be decisive in determining if you succeed or not. For instance, joint handling of the very often complex legal framework or dealing with delays caused by underdeveloped infrastructure in transportation networks or bank procedures require strong relationships with partners with a mutual bond of trust and respect.

Suppliers
The Russian market also provides opportunities for cooperation between suppliers. An example is local production of components and collaborations with Russian service providers create interesting opportunities and business models. The Special Economic Zones, which are spread out in various locations and offer tax relief amongst other things, should be considered when organising local production.

Establishment
When establishing a legal presence in Russia it is important to recruit key persons locally that have previous experience of a foreign business environment. To have worked for a foreign organisation would constitute a substantial advantage. This advantage is revealed by superior communication skills and a better understanding of international standards and expectations, which in turn multiplies the opportunities to develop local business. The choice of business partners for alliances is important and it is critical to choose partners with experience of international business. Otherwise the start-up stage of entering a foreign market without such experience is likely to be long and treacherous.

Marketing
A successful method to develop business contacts in Russia is to give a seminar or presentation showcasing your business ideas and inviting key persons within the target groups. This approach in combination with selected business meetings for continued discussions usually works out well. Other channels for marketing are similar to international trade fairs and advertising to name but a few. Note that fairs and exhibitions usually attract many visitors.

Legal Framework
It can be challenging and at times vexing trying to comply with Russian legal requirements. For instance it is necessary for all foreign products to conform to Russian local standards before they can be certified. GOST; CE certification is not sufficient. There is a certain bureaucratic prolixity when seeking permits in many areas. That is why it is advantageous to cooperate with local native partners to obtain the necessary permits. To set about obtaining these essential permits while in your own country is ill-advised, as it is tantamount to navigating a labyrinthine maze and will be exorbitantly expensive.

Payment Culture and Financing
Payment for goods is generally reliable and punctual on the Russian market. Prepayment and cash on delivery are common models, especially during the initial stages of business cooperation. It is highly recommendable to wait for a period of time with credits until the business cooperation has been established. In general, credit cycles are shorter in Russia than in the West.  International bank services, such as, but not limited to, bank guarantees are also available on the Russian market.

It may be possible to enlist foreign governmental support in certain circumstances to assist with the finance of joint projects with Russian government clients and it is worthwhile to explore such opportunities.

Taxes
Taxes are generally low in Russia and further tax cuts are expected.  Corporate tax is 24% and capital gain tax is 13%.  Income tax is a flat rate of 13% and VAT is currently 18%. Social fees vary between 2-26% depending on the salary level.

Legal Disputes
The Russian legal framework is still in its infancy and as a result it can make it very difficult for a foreign business to settle disputes there. Therefore it is advisable to include a resolution in your agreements, which stipulates that legal disputes will be fought outside Russia, for instance at a Western chamber of commerce. A decision will be legally binding and valid in Russia. If you fail to add such a motion about disputes, then the Russian court will have to be used and it is extremely difficult for a foreign national to triumph in such cases. Please be aware that some agreements, for instance within real estate law, must accord to Russian law. Yet other agreements, such as shareholders agreements and purchase agreements can be written according to foreign law. All agreements should be written very carefully and only written agreements are valid in Russia.

Personal Contacts
There is no doubt that there exists copious opportunities for foreign companies in Russia. One crucial question is how to approach the market and it is here that personal contacts will be decisive. Formal structures have yet to reach the standard in Russia as exist in other countries and for that reason it becomes even more important to build up strong personal relations with local cooperative partners than in other markets. In general, the development of a business in Russia is shorter than in the West and Russians often expect a rapid action after initial contact has been made.