Commerce revolution

With enough oil and gas to fuel western Europe for a generation, Russia looks like the hottest growth market on the continent, but first impressions can be deceptive.

For a start, real GDP growth is targeted to fall this year to 5.5%, and 5% in 2007. And much of that growth comes off the back of hydrocarbon industries: if world oil prices fall, GDP growth will slide back even more.

In any event, says Darren Middleditch, a senior economist who specialises in eastern Europe at D&B Country Risk Services, Russia won’t benefit fully from high world oil prices “because it can’t get the stuff out of the ground fast enough. One of the reasons for that is that foreign companies are still quite reluctant to invest because of political risk.”

Yet the economy is in a healthier shape than in the late 1990s when the rouble was devalued, there was talk of state loan defaults, and thousands of public workers went unpaid.

But with much of its heavy industry a rust belt, the country needs to import billions of roubles’ worth of capital equipment to become competitive in non-commodity markets.

Political and regulatory environment

The World Bank ranks Russia the 31st easiest country in which to start a new business, but that ranking hides a host of problems. For a start, don’t expect the kind of clarity and stability you may be used to in your home territory.

“Russian customs authorities have gained a reputation for making frequent and unpredictable changes to regulations, which has created significant problems for foreign and domestic trade and investment,” says Middleditch.

A key problem is endemic corruption at every level of the administration. There is also widespread crime, and a judiciary that doesn’t always exercise the independence expected in a western democracy.

Doing business there

Despite all the difficulties, there are plenty who believe it’s still worth trying to win business in Russia. “The rewards are high but the risks commensurate,” says Godfrey Cromwell, executive director of the Russo-British Chamber of Commerce (www.rbcc.co.uk).

“Find out who actually owns the company you are dealing with,” he advises. “Can you see past accounts, management and shareholding structures? Are the corporate governance procedures credible? Follow up on possible references from trusted sources. In short, do your due diligence thoroughly and do not be tempted by short cuts.”

Cromwell says opportunities do exist beyond the energy sector. “The economy now presents a more diversified picture and British businesses ranging from basic household product manufacturers to real estate agents, from luxury brand good providers to scrap metal dealers, from gold miners to corporate governance consultants are all active.”

Management/accountancy staff

Technical staff in Russia rank among the best in the world. Managers are of more variable quality.

A UK businessman with experience of hiring and managing Russian staff says there can be a big difference in outlook between older managers, brought up under the communist regime, and younger people.

Generally, FDs should expect to spend far more time developing managers’ basic commercial skills than they would in the western world.

As for accounting, most Russians take the term to mean bookkeeping rather than the more sophisticated financial reporting concept in the west.

Making a success of business

“In spite of some superficial similarities, Russia is not the UK, nor is it Europe, and it’s a mistake to forget this,” warns Cromwell. “Russia really is a fun place to work but you need to evolve your own way of dealing with the cultural differences. Don’t think you can build a relationship, close the deal and start a business success by remote contact, email or a one-off visit. Perso nal contact, really understanding each other’s expectations and developing a robust relationship are essential.”

Nor should FDs expect easy-going ways. “Russian society – particularly in larger organisations and government structures – is hierarchical, and management style and attitudes are often unreconstructed,” warns Cromwell. “Juniors are very much in awe of seniors while very conscious of their own authority. This can make clear internal communication inefficient and opaque at times.

“On the other hand the Russian style of discussion can be disarmingly direct – and constant politeness can be seen as insincere. Discussions will challenge you to make your points and to defend them well.”

Cromwell adds: “Finally, one of the pleasures, but also one of the stress factors, is the high level of spontaneity. Russians, even at senior levels, often find organising meetings well in advance and with a specific agenda pretty alien. Meetings arranged well in advance often end up cancelled at short notice while a call to your mobile asking for a meeting with your CEO in an hour’s time is quite common.”

Case study: Back in the USSR

Inflows and outflows