An Investigation Of Russia

Published Date: 02 Nov 2017

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Technology has turned the world into a global village. Business men and investors have ventured not only in their local markets but also in the international market as well. Doing business with Russia may seem overwhelming since it is a big country but approaching it strategically is fundamental to making the process manageable. Russia is the largest country in the world and it provides a market for over 100 million people. The economic growth has been held back by the fact that big parts of Russia remain unoccupied while others are affected by harsh climatic conditions.

Despite this many exporters and investors are attracted to Russia because it presents opportunities and a favorable business climate. However, there is a lot of bureaucracy and corruption; both barriers to business in Russia. They affect the overall GDP in Russia and also the confidence of international investors. The challenges affect both Russia and those companies seeking to invest there but overall, the Russian economy is favorable and Russia’s reputation has not turned off export companies.

Opportunities for international companies in Russia

Russia presents many opportunities as a market for international companies seeking to do business there. The oil and gas sector presents one such opportunity. It accounts for about 25% of the GDP and 80% of the exports (Gavrilenkov 2004: 73-77). This is because Russia is the second largest oil producer in the world. This sector requires manufacturing technology and equipment and this presents an opportunity for international companies to do business with Russia. They can participate by supplying the relevant machinery and mining equipment.

Another sector that presents an opportunity for international companies is the ‘heavy industry.’ The manufacturing equipment is always evolving and is therefore in dire need of constant updating. This sector demands over 50,000 units of metal equipment per annum (Terterov 2004: 117). These are used in the aerospace industry, the automotive industry and the power industry; all which are important to the Russian economy. Countries such as the United States and the United Kingdom have long experience and expertise in manufacturing these equipment and their companies therefore have an opportunity for investment here.

The transport sector is fundamental in the Russian economy and it therefore needs constant updating. The opportunities that come up because of this are supply of transport equipment, IT services, vehicles and also consulting services. Russia is also known to host several sporting events and it is expected to host the FIFA world cup in 2018. This offers many lucrative opportunities especially for the United Kingdom companies in project management, engineering, construction and among other services. There are also opportunities in financial and legal services, health care and the pharmaceutical industry. There is also the telecommunication industry which has developed steadily over the years. The mobile sector has replaced fixed line communications; this has created opportunities for the supply of handsets. The recent development of 3G and 4G networks continue to create new opportunities for local and international companies. The United Kingdom seems to fully exploit these opportunities due to its proximity to Russia.

Possible challenges for foreign companies in the Russian market

Russia has a dynamic and challenging business environment that has caused major problems for some foreign investors. They perceive the Russian market as a risk rather than an opportunity. The first challenge for the investors is that most foreign companies do not understand the business environment in Russia. Many international firms have penetrated the Russian market and succeeded. These include Raffaissen bank, tetra Pak and McDonalds among other big companies. Firms that have not yet ventured into this market however have a challenge in determining how to mitigate the risks associated with the Russian market and turn them into opportunities (Pacey & Thorniley 2007: 28).

Russian’s expectations of foreigners in leadership positions reflect those of their former leaders Georgy Zhukov, Josef Stalin and Peter the great. All these leaders were known to be charismatic and powerful (Pacey & Thorniley 2007: 57-59).Foreign CEOs have however failed to live to these expectations and this which has challenged their company’s survival in Russia. The leadership skills determine the success or the eventual failure of a foreign company. Foreign companies need to practice authoritative rather than authoritarian leadership in order to succeed in the Russian market.

Russia is a distinct market with very specific rules that any foreign investor should be aware of. Unfortunately for most international companies, they have created Russian-specific operating models by copying the local businesses or trying to outsmart them at their own game. This has often resulted in failure for most of these companies. To avoid this, foreign companies with an interest in investing in Russia need to respect the local rules but play their own game.

McKinsey, a consulting firm, entered the Russian market in the early 90s and managed to thrive in just a few years. It consulted for various companies especially at a time when Russia was going through an economic crisis. McKinsey succeeded mainly because it refused to compromise on its target audience, the quality of its work and its prices (Domsch & Lidokhover 2006, p.58). It also considered some of the local aspects in Russia. They noted that a lot of power was vested in the CEOs. They therefore ventured into recruiting local Russian-speaking consultants so as to reach out to more people but they also avoided concentrating on the management positions. Their focus shifted to quality strategy consulting which gave it a competitive edge over the Russian firms. McKinsey realized that they cannot beat the local competition by privatizing assets or acquiring them below market value. They must respect the local customs in order to compete.

Pacek and Thorniley (2007) state that one of the commandments for foreign companies investing in Russia is to recognize that corruption is omnipresent in Russia and it must be managed. Corruption in Russia exists in almost all forms and all levels. It is estimated that Russia’s corruption economy is between 10-15% of the GDP. Some of the forms of corruption range from petty bribes to civil servants, extortion demands from power ministries to bribes in return for necessary approval from various agencies.

Foreign companies do not have to give in to this system but it poses a challenge since their efforts may be frustrated by their bid to maintain their business ethics. A company like Telenor decided to buy into already existing operations instead of engaging in corrupt acts to obtain a license. Unlike Telenor, most companies end up compromising their ethical standards and the Russians hold this over the companies throughout their business ventures. Few companies have succeeded in Russia without compromising their ethical standards. These include BP, Telenor and United Technologies.

Bureaucratic corruption exists in most developing and transition economies (Transparency International 2004). Multinational enterprises contemplating foreign investments have to scrutinize the host countries characteristics. Corruption exists in different forms and Russia is no exception. Bureaucratic corruption describes a form of corruption that is perpetrated by the government. Foreign companies have faced this challenge in Russia since government bureaucrats demand side payments to provide export licenses. This reduces the profits of the international firms and deter. This has a negative impact both on the investor and the host country.

The Russian commercial law and jurisdiction issues are very unfavorable. This usually causes conflict between the Russian and the foreign investors. Most litigators prefer to use the international law to settle disputes since Russian commercial law does not recognize some of the western legal concepts (Transparency International 2004). Unfortunately for foreign companies corruption is highly prevalent in Russian courts and most disputes have to go through this legal system.

Success stories: international companies that have thrived in Russia

Despite the challenges and the business environment in Russia, there have been successful international companies that have dared to venture into the Russian market. (Gavrilenkov 2004: 79).believes investing in Russia is definitely not for the faint hearted.

Ibonhart Company, a UK company based in Norwich, is one of the companies that have ventured in Russia. It manufactures automatic bread slicing and packaging equipment. Ibonhart’s CEO Chris Barfe did extensive research in Moscow by interviewing small bakeries, import-export Company and the bakery press. Comparing the bakery industry in Russia and in the UK, he discovered that Russians conducted their business on a much smaller scale. He took this opportunity with his company and developed smaller machines specifically for the Russian market. The research also helped him in opening Ibonhart branch in Russia which has grown extensively with help from the export marketing research scheme (Zacher 2008, p.113).

Another success story is the Bridgnorth bases Filtermist company. This company manufactures industrial fans that remove oil mists which are as a result of industrial processes. With the continuing industrialization in Russia, Filtermist had an opportunity to venture in Russia and with the help of UK trade and investment; they were able to venture in Russia. So far Filtermist has managed to supply their equipment through SovPlym, a company that creates ventilation systems.

Raiffeisen international bank has been operating in Russia since 1996 and it has managed to greatly expand its operations in Russia. Between 2006 and 2009, it has managed to open more than 10 branches in different parts of Russia. It is ranked third in the consumer deposits sector and fourth in the consumer lending in Russia. Part of Raiffeisen’s success in the Russian scene can be attributed to the purchase of Impexbank in 2006. The merger with Impexbank contributed to the expansion of sales network and it has placed the bank at the leading position in the Russian market. The management of the bank has also been able to uphold the bank’s ethical standards.

There have been cases where a company has failed to invest in Russia but in most cases the international firms succeed. Those who have been successful have however had to overcome numerous hurdles to get where they are. Those who are keen of succeeding have crisis management protocol. It is said that in Russia anything can happen and it pays to always be ready. The external environment keeps changing and problems keep cropping up but with the right crisis management the problems can be turned into opportunities. Cultivating a good relationship with the government also comes in handy since the government holds arbitrary power which can make or break the company. Foreign companies in Russian must build relationships at all levels to facilitate information channels, development, and the granting of authorizations (Terterov 2004 p.25).

Conclusion

Doing business in Russia remains a challenging venture and more challenges may come up in future in both the formal and informal sector. There is a lot of potential in Russia and a lot of opportunities for foreign companies in Russia. The challenges may not necessarily be negative because they have enhanced creativity in foreign companies trying to survive and stay relevant in Russia.

There have been success stories and there are also those that have dared to do business in Russia and failed. All these shed light on Russia as a market for international companies and a strategic global market. Russia is an important market to the international community but the only way to succeed here as a business person is by doing extensive research and learning the market and labor laws of the country before investing. Ibonhart’s CEO took the initiative to carry out research both in the UK and in Russia and this way he was able to determine the exact product to introduce to Russia.