Launching a Business in Russia: Careful Planning is Vital for Success
by Tom Thomson
From the March/April 2007 issue of BISNIS Bulletin
Russia poses a dilemma for large American companies and for small and medium-sized enterprises (SMEs) looking to expand into foreign markets. Through the window to the east is a booming Russian economy with 6 percent gross domestic product increase in 2006 and the same or higher predicted for 2007. Russia’s massive energy reserves and high energy prices have resulted in huge profits and a large budget reserve ($315 billion in 2006) that any country would envy. Russians constitute a sizable percentage of the annual Forbes list of the world’s richest people. Consumer spending is up, and Russians are buying foreign cars, apartments, and modern household goods, as well as taking foreign holidays in record numbers. But there is also a less attractive view.
The well-publicized stories of the perils of doing business in Russia are often the first things that come to mind about Russia. They include the Yukos matter, Ikea’s repeated problems with local bureaucrats, government pressure to renegotiate agreements with foreign companies on major energy projects, and the murders of government officials, businesspeople, and journalists. News coverage of the gas shut-offs to Ukraine and Georgia add to the disquiet and uncertainty many American companies feel about doing business in Russia.
The Russian market is, however, a rich mixture of extremes, with amazing opportunities and high risks. Last year, the percentage growth of foreign direct investment in Russia eclipsed the other so-called BRIC (Brazil, Russia, India, and China) nations, most notably China. Russian companies are investing in Africa, Asia, and Europe, and they are increasingly looking toward the U.S. market. The signing of the U.S.-Russia Bilateral Agreement reduced tensions between the United States and Russia on key market access issues. President Vladimir Putin has prioritized diversification of the economy to attract more SMEs in industry sectors other than natural resources. He has also announced plans for creating tax-free zones for specific industry sectors, including information technology.
Today, American and other foreign companies doing business in Russia benefit from a more stable business climate. Their knowledge is gained from personal experience, business savvy, and often painful lessons. If you are an American company interested in doing business in Russia, take a close look at Russia and follow the recommendations or lessons learned that are listed below from professionals who advise companies on market-entry strategies.
Gather Facts and Figures
Determining if there is demand for your products or services in the Russian market is the most important question to answer at this stage. What is the point of expending extensive financial and human resources on developing and implementing a business strategy if there are not enough interested customers to realize a reasonable return on your investment? The first step is to develop a preliminary information database to build an overall picture of Russia’s political, economic, market, and business conditions. The amount of available information is overwhelming. The U.S. and Foreign Commercial Service and BISNIS within the U.S. Department of Commerce are good places to start. In the private sector, both the U.S.-Russia Business Council (www.usrbc.org) and the American Chamber of Commerce in Russia (www.amcham.ru) are great resources.
Speak with Americans Doing Business in Russia
After you develop a preliminary picture of the Russian marketplace, the next step is to obtain direct feedback about on-the-ground conditions from Americans doing business in Russia. Take a fact-finding trip to Russia to meet with American businesspeople to hear their experiences. Meet with Russian businesspeople to provide a local perspective. The U.S.-Russia Business Council or the American Chamber of Commerce in Russia can assist by connecting you with their Russian-based members. Arrange a briefing with officials from the U.S. and Foreign Commercial Service to gain additional information on doing business in Russia and to learn how they can assist American businesses that are planning to enter the Russian marketplace. The contacts established during the trip will become vital information resources for any U.S. company choosing to go forward with a business venture in Russia.
Evaluate the Data and Decide Whether to Go Forward
If the preliminary findings suggest that pursuing a business venture in Russia is not a good idea for whatever reason, then focus on another foreign market. You have lost nothing; you had a great trip to Russia and met a lot of nice people. But if the data suggest that the potential offered by the Russian marketplace outweighs the challenges, then the time has come to start serious planning. The obvious first step is to prepare a business plan for Russia. A key element of the business plan, or a separate planning document, should be a market-entry strategy and action plan. The plan will help to guide a company’s efforts and is essential for any chance of success.
Corporate staff members are usually responsible for preparing business plans. However, you should consider hiring qualified outside consultants to assist with preparing a market-entry strategy and action plan and its implementation. The added value of having professionals with in-depth experience in the Russian marketplace help companies successfully establish a profitable business in Russia without major problems should justify the consulting fees. Numerous resources are available to choose from, including law firms; business, auditing, and accounting consultancies; and market-entry consultants.
Strategy and Action Plan Contents
The plan should address key political issues that a company should consider when opening a business in Russia. These considerations include not only Russian politics and associated risks, but also legislative and regulatory issues, such as customs, tax, and employer and employee matters; company registration and expatriate residency issues; licensing issues; and intellectual property rights protection. If specific regions are of interest, regional and local legislation and regulations will also need to be analyzed. The plan should have a description of the approval process that foreign businesses must undergo at the federal and regional levels, as well as a list of the key officials in the federal and regional governments who will make or influence decisions about your business. The company will also need to know its foreign and domestic competitors and to have a strategy for managing any attempts by competitors to negatively influence the decision-making process.
The plan should provide an analysis of the domestic and foreign competition and market data figures for the industry sector. If more specific data is required, the company should consider retaining a research company to conduct consumer, economic, and industry sector research. An external affairs plan should be included to announce the opening of the business in Russia and to manage stakeholder communications. The action plan is a working document that list all tasks, timelines, and assignments under each section-political, regulatory, office space and commercial land, tax, audit, and more. Each section should include a contact list of recommended professional resources for services, including auditing and accounting, legal, commercial real estate, strategic communications, public relations, and advertising services.
Find the Right Russian Partner
The right business partner is the single, most important factor to a company’s successful entry into the Russian marketplace. Again, give serious consideration to working with qualified outside consultants to locate potential Russian partners and to conduct comprehensive due diligence investigations. The task of finding the right Russian partner should not be left to a staff member who does not have knowledge of and experience in the Russian market.
The decision to invest in a foreign marketplace is a major commitment involving company staff members and financial resources. Companies that embrace careful planning and take a sober view of Russia are the most likely to make a successful entry into one of the most dynamic markets in the world. But when things go wrong — and they will — the impact on such disciplined companies will be manageable, whereas it could be disastrous for a less prepared company. Developing a good strategy and finding the right team of staff members and external advisers will give you the best chance of success.
Tom Thomson is a partner in RST International LLC (www.rstinternational.com), a Russian-American strategy and business consultancy, and is president of T. Thomson & Associates (www.tthomsonassociates.com), an international strategic communications consultancy. He is based in Washington, D.C., and frequently travels to Russia.
Read more articles about doing business in Russia and the CIS countries on the BISNIS web site