Know thy markets and know thyself, and a thousand opportunites shall be yours
The author is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
Eurasia covers around 55,000,000 square kilometers (21,000,000 sq. mi), or around 36.2% of the Earth's total land area. The landmass contains approximately 70% of the human population.
Tacitly accepting all that is said and written by mainstream pundits and talking heads when describing the geopolitical and economic ebbs and flows worldwide, you could miss seeing the forest for the trees.
So, what does this have to do with Russia and business horizons? When reporting focuses on shifting populist perceptions, it is often at the cost of inadequately appreciating key game changing shifts. One such shift is the de facto merge between the romantic sounding “Silk Road” initiative long envisioned by China, and Russia’s vision for a Eurasian Economic Union. Over the past few years, this trade vision has assumed shape, depth and infrastructure as a means to bring together and integrate trade throughout Eurasia, especially from the Black Sea and east to the Pacific Ocean. It is similar to the once representationally successful concept of the European Economic Union before it politicized and became the EU.
During this year’s International Economic Forum in St. Petersburg, and the Shanghai Cooperation Organization summit in Tashkent, and during his recent visit to China, Vladimir Putin proposed a new vision of economic cooperation in Eurasia. It would involve the creation of a network of bi- and multilateral trade agreements between the Eurasian Economic Union, China, member states of the Shanghai Cooperation Organization and ASEAN, as well as the European Union. Initially, these agreements would involve the simplification and unification of regulations regarding cooperation in specific areas of commerce. Later, the agreements would involve the lowering of tariffs, and ultimately the creation of a free trade zone.
China now renamed this Eurasian concept the “New Silk Roads”. It calls for the creation, integration and continued development of high-speed rail, roads, ports, fiber optics and connected pipelines. When seen as a whole, Russia and its many contiguous international borders becomes a major geographic hub for these New Silk Roads of interconnectivity, directly enhancing access and trade with economies serving two-thirds of earths population. Russia has international borders with 16 sovereign countries, including two with maritime boundaries (US, Japan). Its land border runs 20,241 kilometers (12,577 mi) in total.
The two key players, China with its One Belt, One Road (OBOR) and Russia with its Eurasian Economic Union (EEU) are already implementing parts of this broad territorial connectivity, which is now evolving. The costs, speed and improvement of efficiencies for transporting goods and services are clearly positive and in the interests of all participants.
One component is already fully operational, the free of duty Trans-Eurasia railway running between Chongqing across Kazakhstan, Russia, and Belarus through to Duisburg in Germany. One future idea under consideration is a Eurasian Canal from the Caspian to the Black Sea, thus linking to the Mediterranean. Rail linkages from China with the Trans-Siberian rail system and BAM are in final stages of completion.
Eurasian integration makes business sense among the nations comprising Eurasia, and the process is progressing at a steadily quickening pace with Germany, Britain, Australia and South Korea also being to one or another degree party to it. The US is notably absent from this trade integration initiative as it firmly placed its bets on TPP as its key program for the Asia-Pacific regions. Now the US looks to be out of the picture as the Eurasian project mandates free and open trade between member countries. In addition, efforts to delink this Eurasian economic zone from the US Dollar in favor of a more representative basket of currencies to finance such trade are underway. That in itself is not a minor shift and has geopolitical ramifications, which will no doubt play out in time one way or another. After all, money is power at its most liquid. Cui Prodest?
This is an opportunity for internationally focused businesses to participate in and benefit from by being physically present and operational in Russia. Supporting the Eurasian New Silk Roads and the associated broad infrastructure developments would require a wide range of varied businesses and services across large territories. Previously ignored lands and routes will steadily become economically viable, connected to cost effective means of access to many markets. The rest is the normal business development process of interest, presence, effort, expertise and work.
The first step in productively engaging is to know your market, like anywhere else. Opening a representative office, branch office, or a wholly owned Russia subsidiary is a good way to start, and investing the necessary funds, be they large or small, to research and set up stimulates expectations of positive activity and sharpens focus.
Opening an office in the Russian market requires a bit of adaptation. You should understand both the flavor and legal requirements of this market to create the management and reporting systems that will meet the interests of both your foreign head office as well as the Russian office. The main challenge for companies is the parallel maintenance of accounting, management and tax accounting. Even Russian resident companies must deal with the complexities of parallel accounting and tax accounting. A foreign company’s Russia office faces additional challenges because it also must meet the accounting standards of the parent — either European IFRS or U.S. GAAP. The difference essentially is that Russian standards developed with tax monitoring in mind while GAAP and IFRS standards for investors.
Until 2015, this was a costly, involved and labor-intensive aspect of doing business in Russia, detracting from concentrating on core business and adding to overhead load. Today, the Central Bank allowed the transfer of supportive business operations, including accounting, financial reporting and disclosure, to specialized firms performing on an outsourced basis. This has greatly simplified what used to be an unwieldy and expensive affair. Adjusting global standards to local requirements if done in-house is often a larger project than originally envisioned, often resulting in spiraling costs and time investments. There are firms in Russia who can advise and guide you, especially those with expatriate advisors who have the experience doing just that in Russia, and at the same time competently aware of the reporting realities required in your home country.
Whatever path is more appealing I strongly urge personally performing a very hands-on due diligence investigation in Russia itself. Additionally, and depending on the type of business you are involved in, make the investment of time to visit and learn about the several regions of Russia where the Eurasian project will have immediate commercial benefits. Cities like Irkutsk, Khabarovsk, Birobidjan, Blagoveschensk, Vladivostok and others. Such due diligence will also serve as a reality check on the social, political and economic actualities in Russia. I would venture to say that many if not most currently popular tales describing living and doing business in this “evil empire” will be safely put to rest and relegated to the dustbin for useless outdated things.
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