Doing business in Russia
Article Date: May 09 2008The Russian economy is growing by 7.7 per cent per annum, buoyed by the soaring price of oil. But with lurid stories about government corruption and mobsters, how attractive is the country for the more entrepreneurial-sized business? GrowthBusiness examines the issues.
Gradually, more owner-managers are putting their fears aside and accepting that Russia is a territory in which they need to have a presence. British exports to Russia rose 36 per cent last year to reach an all-time high of £2.8 billion. As impressive as that may sound, it’s only the UK’s 16th largest export market.
Tremayne Elson is the British-born MD of recruitment company Antal Russia, which was recently acquired by the FiveTen Group. He’s been based in Moscow, which is the commercial heart of the country, for 15 years. ‘I’ve almost gone local,’ he admits.
There has been talk that Russia’s economic boom is hanging by a thread – the sky-high oil price. Elson doesn’t believe that for a second. ‘Sitting in Moscow, I don’t sense any of the concerns about the future that you hear. All the talk is about investment and there is a huge amount of IPO and M&A activity.
‘The business environment is very exciting; it’s racing ahead. Nothing is saturated. In terms of small to medium-sized enterprises, the market can accommodate many more than we have right now.’
For a mid-sized, entrepreneurial concern operating away from the natural resource sectors, the real trouble with expansion lies not with state corruption, mobsters and attempted assassinations, but with the language barrier, complex bureaucracy and inflation nudging 13 per cent.
Joint ventures
Andros Symeonides is the senior vice president of development at Scottish family business Axios Systems, which specialises in software and IT consultancy. Axios is in the process of opening an office in Moscow and has found forming partnerships with Russian companies an effective route to market.
‘Russia is a little different to any other country we have entered,’ says Symeonides. ‘Most businesses will almost always work with a Russian IT systems integrator. Unless you’re IBM or HP, you will need to operate through a local partner base.’
Symeonides observes that, in order to forge strong working relationships, the issue of language was addressed early on. ‘The partners and key managers will speak English very well but, when you start on-site implementation, business is conducted in Russian. We hired Russian salespeople who were initially based in Amsterdam and now we’re hiring locals directly.’
The alternative is to use translators, which, as European director for professional services network RSM International Paul Langhorn points out, ‘can be quite alienating, and extremely tiring unless you’re used to working with an interpreter’.
Symeonides is already seeing the benefits of removing that barrier. ‘With our first partner, we realised the importance of localising our software into the Russian language and that’s been a huge help,’ he says. ‘When you do business with the public sector, they expect it to be done in Russian.’
Axios has expanded operations into Western Europe, the US and parts of the Middle East. Symeonides believes the Moscow office provides a base to win new business in Eastern Europe and is upbeat about the future. For other companies, the transition hasn’t been quite as smooth.
Hard bargains
Scott Nursten is MD of s2s, a security-focused integrator of IT networks that has clients in the US, India and the Caribbean. He’s found the process of negotiation in Russia to be surprisingly robust in comparison to other countries: ‘They’re quite used to the Russian way of working to the golden rule – he who has the gold makes the rules.’
The process of agreeing a price, he says, can be frustrating: ‘Just in trying to put a pitch across, you’re already facing cultural differences that go beyond language barriers.’
A tough stance will need to be taken. Nursten continues: ‘It’s a case of having your proposal thrown out of the window and the price halved. That’s the sort of response you get. It’s an approach that doesn’t go down too well in the UK, and it assumes we’ve put a 100 per cent mark up on it in the first place.’
Nursten acknowledges he’s only dealt with a few clients and is talking from his ‘personal and limited experience’ in Russia, but it’s generally agreed there is a no-nonsense approach to getting business done.
It’s a point also made by Mark Shashoua, CEO of events specialist Expomedia: ‘If you’re used to a political way of working, it can be surprising. They’re very strong. If they like you, they work with you. If they don’t, they won’t. They tend to work with the person who will spend the most time with them.’
When Expomedia established itself in Moscow in 2003, Shoshoua went to live there for two years. He says: ‘If you’re an entrepreneur setting up your business from nothing and you’re entering Russia, you have to be prepared to spend a considerable amount of time there. And that’s no bad thing. It’s a wonderful country and the people are great.’
Commercially, it’s proved to be a wise decision too. At present, Expomedia employs 185 people in Russia and it’s bringing in 25 per cent of total sales.
‘That will be 30 to 40 per cent in the next few years,’ he says. ‘Russia and India will be our two main markets.’
Red tape
Bureaucracy in Russia may not reach the mind-boggling scale of India, but it is generally agreed to be demanding and, if you don’t want to get on the wrong side of the authorities, advisers will be needed.
Charles Bond, a corporate partner at law firm Cobbetts, says there’s a lot of paperwork to plough through: ‘On the legal side you have a federal regime, which operates out of Moscow, and separate administrative authorities. Often, the rules provided by the federal regime are in direct conflict with the local regimes’. So you could be given a licence at a federal level, but the local administration has to put its stamp on it.’
Challenges increase the further you go from Moscow. RSM’s Langhorn observes: ‘In some cases, once a business moves outside certain regions and into the provinces, the way business is done can become more complicated. There may be local monopolies relating to the old way the country was run, especially in the road construction and hotel business.’
With regard to the rumours of mobs and protection money, the consensus seems to be that if you don’t court trouble, you won’t find it. Elson says: ‘I’ve worked here for 15 years and, in relation to Antal, I’ve never experienced any crime, or paid a bribe or been asked to pay a bribe. I’ve run the business transparently and openly without any direct or indirect influence from anyone else.’
For Shashoua, the issue of criminality is hugely overstated, unless business is to do with the natural resource sectors. ‘Anything that is government-related we don’t get involved with,’ he says. ‘We are a pure business-to-business conference and exhibition company.’
The main hurdle for businesses in Russia will be holding onto employees and finding office space. Mobility between jobs is high with salaries constantly rising, and office space currently costs £60 per square foot in Moscow.
Shashoua says: ‘Keeping staff is the biggest issue. Moscow is frightening – salary rates are going up by 30 per cent a year and there is a lack of property.’
Russia may not be the easiest market in which to set up a business, but for a number of UK entrepreneurs it has been rewarding. For Elson, a lot of the supposed difficulties are exaggerated. ‘I set up a business in Germany and I find the bureaucracy there more frustrating than in Russia,’ he says.
Nursten believes anyone looking to internationalise their business there has to weigh up the good and the bad. He acknowledges the attractions, pointing out the ‘glut of oil and gas, so there is tons of cash, meaning the spending power is huge’, and there is a pool of impressively well-educated, talented employees to draw on. However, he argues that the way business is conducted needs to mature: ‘Russia holds a promising and exciting future but, as the country stands today, I think it possibly brings as many challenges as it does value to the market.’
Elson disagrees. While the first-mover advantage that he enjoyed when setting up Antal Russia may be gone, he is adamant that the country’s wealth, as it diversifies into new sectors and spreads beyond Moscow, presents a fabulous chance for risk-taking entrepreneurs from the UK and beyond. ‘This is a boom time in Russia,’ he says. ‘It’s been like that for three to four years and there is no end in sight.’
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