Doing Business in Russia: Enormous Opportunity, But Understand the Market
The Russian market holds a wealth of opportunity for new business, but it takes on the ground knowledge of how Russia works to successfully tap it
The author is Chairman of the Disciplinary Committee, National Association of Corporate Directors, Russia, and a partner at OPKO Russian Market Partners
We have all at one time or another worriedly searched to find something, keys, glasses, papers that have strangely disappeared. Then, after taking a break from frantic exploration into every unlikely nook and cranny, we pause, sit down, try to chill, and then discover the object of desire has been sitting out in the open under our noses all the while. It is in our nature to make assumptions, our perceptions do get guidance from what we choose to assume as fact, in some cases concealing the obvious.
Writing about “unintended consequences” emerging from anti-Russia sanctions and the growth opportunities they have sparked in Russia is popular. Viewpoint and perception plays a role in how we find and accept opportunity, especially in a market like Russia where predisposition, language, distance and worldview have for many non-Russians combined to obscure the obvious.
A repeated, and somewhat justifiable view of the Russian market is that it only remains alive due to the intravenous lifeblood of Oil & Gas, and a steady roughage diet of other natural raw materials, all of which it regurgitates onto the world for further processing. Can this be all the opportunities Russia has to offer? Is something hidden, unreported, uninvestigated? Seems to me there is quite a bit, and one writing will not begin to cover this subject so I’ll cherry pick randomly. Most reporting and analysis has been about the major firms, like Gazprom, Norilsk and so on. The reporting on non-Russian companies tended to cover the Ford, Archer Daniels, Mercedes, Schlumberger, Macdonald’s, Halliburton, Exxon, and Allianz’s of the business world. What has escaped popular note are the many dynamic small and midsize businesses from tech startups to the organically evolving standalone’s and the developing franchise horizon.
One very basic homey example. Two partners started a small T-Shirt silk screening business on the edge of Moscow in their two room apartment. Their raw materials such as the basic colored cotton t-shirts were imported through intermediaries from either Turkey, China, Vietnam, Pakistan or India. As they were dependent on outside suppliers for their raw materials, this also exposed them to the variables of exchange rates, import controls, and changing prices/availability of product.
Over time, they realized that Russia produced excellent 100% natural cotton and linen fabrics, the cost of which was appreciably less than imported. This “realization” stemmed from a blind attitude Russians had regarding locally made products, assuming they were inferior to imported. However, when they finally tested the fabrics, they found that in many ways they were qualitatively first rate. How the Russian textile mills marketed their textiles was a bit frumpy, yet that too is changing for the better.
Soon they developed the expertise through trial and error in dying, and treating fabrics like denim (stone wash, enzyme processing, very high temperature coloring, and so forth). Their business expanded beyond t-shirts to include processing for Russian high-end designers who sought them out due to their reputation for consistency, quality and the willingness to work with the designers to get exactly the right result. This allowed them to move to a larger commercial space nearby. Since sanctions began just under 2 years ago and the ruble lost 50% of its buying power outside of Russia, their small company “Fabrika Varki” (the boiling factory) has seen their business volume increase by 300%.
Today they work 24/7 with 12-14 employees and hire on additional shifts as and when needed. They’re not just doing t-shirts anymore. As of this writing it looks like they are on their way to further doubling this business throughput by first half 2017.
No credit lines, no debt, they re-invest profits into technologies and machines enabling them to meet and match growth. Much of their production now goes for export globally as well as via E-Commerce in addition to satisfying growing local demand. No secret here, just hard work, learning, consistency, pride of workmanship, and aligning opportunity. Sounds like the “American dream”, being lived here in Russia.
In fact, foreign businesses have an advantage as they are aware of and have operated in a different business and cultural environment. The similarities in growth curves, needs and supplying those demands in Russia are very much the same as in Europe, the USA, Asia and elsewhere. The advantageous difference crudely speaking is that various business specializations and their associated support or derivative businesses have already developed to one or another degree elsewhere. This can be a strong competitive advantage for at least the first years as you no doubt were part of the development in your home country. That being said, these past few years have shown Russians aren’t slouches and they quickly assimilate new processes, take ownership of concept, improve it to suit, and compete well at the cutting edge.
Franchising is another area coming into its own throughout the Russian Federation, with some variations on the theme. The concept makes sense to many Russian businesspeople who have the ability and funds available to place into a proven, sustainable business model. The franchise concept proved itself strong in Russia during and after the 2008 crisis. The giant international food service franchises have had an initially turbulent yet largely successful relationship with the Russian market. McDonalds, KFC, Subway, Dominoes, and so on.
One of the barriers to market entry and growth is a reluctance, variously justified, to establish one or more wholly owned and operated by the franchisor business sites in Russia. This is an obvious and necessary step. Markets must be convinced of the need and viability of any business service. What better way that to set one or more up and prove the concept? Russians, like Americans are a “show me” people. More important is that every business template needs fine tuning to work with customers in vastly different cultural and economic settings. Recall MacDonalds adjusting the size of its burger for Japan, or others having to alter their spicing, or median clothing sizes and even key product offerings.
Starting up your wholly owned core franchise businesses in Russia is ultimately the lowest cost and most efficient way to make the effective operational adjustments to optimize and satisfy market and consumer expectations. It is also important to keep in mind that Russia is not Moscow, (like Manhattan isn’t America) and success in Moscow may give visibility but may not work and be profitable in the many regions throughout the nine time zones of Russia.
Consider starting in a less competitively compressed area, like Vladivostok, Novgorod, Ekaterinburg, Yakutsk and similar. Overheads are lower, and the result will align to broad market acceptability. The Russian Franchise Association estimates that the Russian franchising market has been growing by 25% a year since 2010. Franchising companies’ are projected to contribute to Russian GDP by 2020 somewhere between 300-500 billion rubles, with more than 100,000 points of sale and approximately 2 million people gainfully employed in what is still predominantly a food service industry. Franchises for services, products and similar are still in comparison at early stages.
Some companies looking to enter Russia’s market have spent heavily up front, contracting with one of the so called big four or similarly renowned international advisory and consulting behemoths. Personally, I see their value more for an IPO or getting a duly impressive seal of approval to support and raise comfort levels for one investment direction or another. The costly disadvantage I see is despite employing highly educated academically competent specialists, there are few if any on such staffs in Russia who have personally risked and succeeded in start-ups here, or accountably brought a business to life in Russia, or personally run such businesses. Advice, given from the distance of macro perspectives may be interesting and well researched, but it is rarely a useful tool. Reality is not a one-size-fits-all event, just as managing a business in a foreign land can’t be planned on projection models or extrapolated from the numbers alone.
Just to illustrate: In 1996 a major US international insurance company, retained one of the large international consultancies operating in Russia to advise them in setting up operations in Moscow. They wanted to start classic insurance agencies selling to Russian customers accident & health, auto, third party liability and similar policies.
Following consultants advice the company rented a recommended space, being told it was the best available. It was far removed from any public transport, of questionable durability, and limited to 42 agents maximum with no connecting rooms. They contracted to pay a “reasonable” US$900,000 per annum rent.
After the 1998 financial crisis and subsequent dismissal of most staff for poor performance, they independently hired an experienced expat “Russia hand” who never sold insurance to turn the business around. What this fellow did know was sales and the mindset of buyers and sellers in Russia. He terminated the lease his first week, found a larger (300 agent capacity) open plan office over two main metro lines in Moscow center at the ruble equivalent of $170,000 per annum all-in.
The agents were happy, they could travel to customers quickly & easily, customers were happy as they were served (a novel experience), and business that first year grew 170% with 75% less overhead. Experience and hands-on knowledge of the practical details inside Russia makes economic sense. Amazingly enough that initial international consulting company was kept on retainer despite dismal results until the insurer itself imploded in America during the critical events of 2008, go figure.
When considering taking a position to set up business in Russia I suggest starting by talking with the small, specialized midmarket firms, created by expatriate executives who have actually gone through the processes and lived the evolution of doing business in Russia with granular, proven, and earned expertise. There are a few such as: OPKO Russian Market Partners (www.opko.org ), Kortina Advisory (www.Kortina.ru ), Alinga (www.acg.ru/english/), and perhaps several others which can be useful in assessing realistically with you your business goals in Russia, advising on methods and approaches, regulations, guiding you step by step through the actual procedures here.
They are better positioned to define a real timeline, as well as the direct and indirect budgeting needed to implement your business in Russia.
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