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Efficient Market Entry into Russia
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Tips for Entering the Market of Russia

06.06.2014

By Stanislav Grafski

Practice Proven Tips for Market Entry and Business Launch in Russia.

 

Last week witnessed the final formalisation of the Eurasian Economic Union (EAEU) between Russia, Kazakhstan, and Belarus.  Being an attractive market with many underdeveloped sectors, rising consumer disposable income and growing middle class, Russia has de-facto increased its consumer base via EAEU by an extra 25 million people with great prospects to grow further by adding new member states of Armenia and Kyrgyzstan.

According to the last CMO Survey, Russia boasts the highest sales growth rate for US companies at 57% out of BRIC countries, followed by India (38%), China (26%), and Brazil (19%). World Bank identified Russia as the 6th largest economy in the world.

I’d like to share some practice-proven advice for prospective entrants into the growing market of Russia.

1. Ignore the MSM find your in-market source 

Recent political tensions between Russia and the West/ US negatively affect businesses on both sides. Many international businesses are scared of expanding into the Russian market because of Russia’s image in the Western mainstream media (MSM). However, we don’t hear about Western majors leaving the market. Why?  Don’t let the politics-driven media leave out your share in the fat Russian pie. Find a reliable source or business compatriot in Russia who can comment your questions and concerns.  Then, make your decision.

2. Do or do not do DONT TRY  

First, make sure your decision to enter the Russian market is well-grounded.  Russian opportunities are often counter-weighted with issues you never faced in other markets. The latter could require extra effort and time devoted. Be prepared to that.

3. Do market research before diving into the market 

In many instances, you don’t necessarily need a costly in-depth feasibility study to identify demand for your products in Russia.  The Russian market is unsaturated in many sectors.  Getting the first reaction among your potential consumers might send you a clear signal whether to proceed further.

4. Find a reliable partner in Russia  

Strictly speaking, market entrants don’t need a joint venture in the country to launch Russian operations.  However, having a partner who is successful or your provider / supplier speeds up the market entry process significantly.  The key to successful partnership is in building trust and personal relationships.

5. Build trust first 

The first meeting rule in Russia is to be open, decisive, clear and straightforward with your offer, as well as highly competent in your product/ service area.  Once you get to know each other, clearly show what really makes you different.

6. Personal relations is key to business success 

Don’t be surprised if you are invited into the family and house.  Russians somehow subconsciously tend to screen you at the personal level to answer the question if you are a trusted person to deal with.  Once you establish such relationship, it is a common practice that they will likely introduce you to other decision makers and business connections, thus paving the ground for your business success, leads you need, and sales after all. Personal relations always prevail over formal contracts.

7. Dont underestimate your Russian partner  

Throughout the relationship-building process, be respectful to your partner and openly explain your strategy and plans if you want them to help you.  Make sure your partner fully understands your actions and rationale behind them before you take your first step. If you stick to this rule, you might be surprised how creative and efficient your partner is with the solutions proposed.

8. Competitors and networking value 

Be friendly with other companies operating in your chosen area and consider them as your allies rather than your local competitors. That would broaden your business relationships significantly and you’ll learn the local landscape much faster.

9. Stay politically correct 

Russians are generally proud of their culture, heritage, and history.  Quite often, they appear to be self-criticizing and over-demanding to their political elite.  But they don’t like outsiders to judge them – Russians believe the internal issues are strictly ‘their family business’.  So, be focused on business and stay away from criticizing their leaders, politics, and/or traditions. Don’t let your unwanted message affect your relationships and, after all, business.

10. Choose your starting base 

It is easier and less costly to start from one geographical location and keep building success from there.  That might be a Special Economic Zone (SEZ) that meets your requirements.  Another option is your Russian partner’s location where your partner is well established and can easily help your new venture to grow fast.  Many entrants traditionally choose Moscow or St Petersburg as their entry point, ie, two major business centres where most of required resources are at arm’s reach.  There is also a tendency among technology and manufacturing companies to start in a region with existing local facilities and cheaper workforce.

11. Have professional expertise handy 

Cross-border trade is regulated by ever-evolving Russian legal system. So, take a closer look at what your local consultant and/or lawyer recommends as to the business model, customs formalities, papers required, contract contents, logistics operations, and communications with government officers, etc.  Local experienced advisors are normally pre-requisite for doing trade transactions the right way.

12. Payments and due diligence 

One of most known myths is questionable payment discipline by Russian contractors.  Experts admit that in many cases the Russian contractors/ buyers are willing to pay up front even before the goods delivery, once your relationship is established.  However, due diligence is always recommended as another pre-requisite step of your first Russian experience. As a matter of fact, local advisors could perform those checks better and faster than their international counterparts due to peculiarities in information access/ collection practices.

13. Language, communications, and access to the market 

Hiring English-speaking staff could easily solve the language barrier issue.  Millions of Moscow and St Petersburg residents speak English these days. Dealing through a local agent/ distributor/ representative could be even more efficient solution.  JV opportunity with local established business is another efficient model for successful operation on the market. Don’t discard local trade and business associations, which could be extremely helpful (access to local market leaders, faster contractor search and negotiations, efficient due diligence and background checks, etc).

14. Cultivate government relations 

Government relations should be taken very seriously as the State authorities are often the most powerful stakeholder in Russia.  Showing respect and getting to know is key. In industry clusters/ Special Economic Zones (like Kaluga or Yaroslavl) it is wise to focus on regional and municipal level.  Consider local government as your partner, not just as a taxpayer, and you will be rewarded.  It is crucial to show that as an investor you are bringing real benefits to the local communities and people who live there.

15. Identify the Government needs 

Russian Government at all three levels – Federal, regional, and municipal/ local – has multiple programmes to fund public-sensitive projects.  Check such government tenders or investment programmes if your product/ service could meet some of those.  Many such projects are in the areas of infrastructure projects of all kinds, railway modernisation (transport, construction, and services), high-tech (check Skolkovo Innovation Hub for a list of projects), construction, aerospace, energy, ICT, pharmaceuticals, healthcare, international events (e.g., FIFA World Cup 2018 – construction, services, transport needs), technology transfer tenders for shipbuilding, power engineering, transport, etc.

16. Be creative and capitalise on challenges 

Be pro-active and creative with identifying your niche with fewer, if any, competitors. For example, Russia’s vast territory and underdeveloped transportation infrastructure is considered a challenge for trade.  At the same time, Russia has the highest internet and mobile phone penetration across Europe.  There are a number of new logistics companies on the market that both undertake delivery to any point on the Russian map and collect payments upon delivery.  Use those players as your logistics and payment processing contractors and start selling your goods on-line. Ecommerce is one of the boosting industries in Russia these days with great growth prospects for the years to come.

If you have any questions or comments, feel free to contact us at stan@grafski.com

Thank you for your time,

Stanislav Grafski, Grafski Consulting

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