Tips and advice

by GNC.Group GNC.Group No Comments

Expanding to Russia

Doing business to Russia

Expanding to Russia is every year getting less and less difficult. Many foreign businesses are discouraged by the Russian reputation of a corrupted and ruleless country difficult to operate in. However, international organizations constantly point out that Russia gets business environment under control. As an example, in 2018 the Russia is number 35 out of 190 countries in World Bank’s Ease of Doing Business ranking.

Russia’s economy is the 8th economy in the world. With 142 million people, it is the largest consumer market in Europe. Demographic trends in the country have been constantly improving and the population continues to grow.

Moreover, Russia shares the common market with other members of Customs Union and Eurasian Economic Union created for the establishment of free movement of goods, services, capital and labor. At the moment the Member-States of the Union are Russian Federation, Republic of Armenia, Republic of Belarus, Republic of Kazakhstan and Kyrgyz Republic. Expanding in Russia also means the first step on your way to the markets of the Commonwealth of Independent States (CIS), due to the large number of similarities that exist in countries’ consumer behavior and business culture.

Russia and Europe. Sanctions.

Deterioration of geopolitical situation followed annexation of Crimea by the Russian Federation in 2014. The western world and Russia implemented mutual sanctions. These measures stopped export to Russia of arms and dual purpose technologies, restricted export of high tech goods and services in the energy sector. Russia imposed embargo on import to Russia of a large list of food and agricultural commodities.

On one hand, the sanctions had a bad impact on manufacturers of the above-mentioned goods. On the other hand, they have stimulated the launch of import replacement program in Russia. The country is currently working on reduction of its reliance on raw materials favoring development of a large number of industries that require instrumentation of production units. Shall you be manufacturing industrial equipment or looking for a new place to localize production, it’s the ideal time for expanding in Russia.

Russian foreign trade. First half of 2017.

Foreign trade turnover of the Russian Federation in the first half of 2017 showed 28.3 % growth in comparison to the previous year, exceeding $268B. Import grew 27.1 % reaching $101.8B. Industrial and laboratory equipment, aircrafts, vehicle spare parts, pharmaceuticals and food commodities accounted for a large part of  the Russian import. Stronger ruble was one of the reasons for import to grow. Among other reasons there was inflation decline and consumption growth which, according to experts, recovered to 2014 level.

Challenges of expanding in Russia

Russia represents a rich opportunity for a large number of foreign businesses. However, it is important for foreign companies to get well prepared before expanding in Russia.

Russia is the largest country on our planet, spanning eleven time zones. Its area is roughly equal to the surface of Pluto. With such a size, it has remote areas difficult of access, varying in infrastructure, level of life and industrial development.

Russian business culture vastly differs from West European or American. To succeed foreign companies need to attune to this culture.

Language barrier is the issue number one. A large part of Russian businessmen do not speak English, and even if they do, they are reluctant to discuss commercial matters in foreign languages. Sometimes, companies involved into foreign trade have interpreters in-house. However, it’s not a standard. We highly recommend to attend all business meetings accompanied by your own reliable interpreter. Many foreign companies have found it useful to hire Russian speaking managers to coordinate business in Russia and CIS.

If you plan visitting the market for the first time do not have inflated expectations. First meetings are essentially about getting-to-know your business. Your potential partners would assess your credibility and decide whether your offer is worth of further consideration. You should be ready to defend competitive advantages of your product or service and “persuade” your interlocutors into working with you. Be sure you are up to speed on technical side. It also often helps to have presentation materials both in English and in Russian languages.

Once you are through with the first stage, you can rely on your Russian partner to put all efforts for your company’s success in the Russian market.

Personal relations are crucial for building trust in the Russian business environment. Socializing might become a part of negotiations and a routine of your trips to Russia. Feasting is an indispensable part of Russian hospitality.  Partners will likely invite you to dinners that often imply drinking.

Due diligence is a must both in regard to potential partners and when potential customers are concerned.

It’s highly recommended to sell EXW (ex-works). Russian distributors master cost-optimization of logistics and customs clearance. You will hardly be able to calculate true to life DDP (delivered duties paid) prices without experience of importing to Russia.

Finally, until the long-term relationship is established, insist on the total prepayment of goods. Letter of credit is also an option. However,  it is not all Russian companies are used to.

Russia is not a market for everybody, but GNC Group Russia can make expanding in Russia process smooth and accessible.

Contact us for a consultation