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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

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 (

“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

When Instron, a $200m turnover US-owned company with a significant UK
operation, decided to re-enter Russia in 2002, it was concerned to mitigate the
financial and technical risks.

The company, which makes materials testing equipment, knew from bitter
experience what they could be. At the end of the 1990s, it lost money from sales
in Russia when government-backed organisations defaulted on payments.

Kieran McGrane, Instron’s north Europe sales manager, who spearheaded the
company’s return, says that the company became far more cautious following the
experiences of the late-nineties. But by 2002, he believed the economic and
political environment had changed enough to make reentry a real possibility.

The company decided it could manage the downside risk more effectively by
appointing a distributor to carry some of the financial risk.

It eventually teamed up with Novatest, a Russian company that makes a
complementary range of products.

It is widely thought that, compared with the UK, Russia is bandit country,
awash with bureaucracy, corruption and organised crime. McGrane wanted to
distance Instron from those problems, yet still develop an effective way to
build the business. The deal with Novatest has delivered, but it’s been a
cautious process of building trust at every step.

This is evident in the relaxation of payment terms. Initially the company was
looking for Novatest to make payments with order but Instron’s position on this
has since significantly relaxed.

But no market is entirely risk-free. McGrane adds: “We are still exposed to
some financial risk and you have got to be conscious of that and make sure that
you’re taking on risk in a measured way.”

Inflows and outflows

Exports $134.4bn

Mineral products




Machinery & equipment




Imports $81.7bn

Machinery & equipment


Food products






Net foreign direct investment $4.5bn

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