The Challenges and Obstacles for EU Companies Entering the Russian Market

Understanding the culture of the business is important, however, understanding the culture of the country is a key requirement.

The success of doing business in Russia requires a deep understanding of cultural similarities and differences between partners and business decision-makers.

The biggest challenge for many companies lies in making the right decision regarding the market. The dominating factors may many times be the internal decision makers’ attitudes and beliefs, without necessarily based even on their own personal experience of the particular market, in this case, Russia.

How do you perceive Russia as a market?

Amazingly still today I hear people thinking making business in Russia requires vodka and a hangover, and white envelopes. Well, any company exercising modern compliant and transparent business cannot afford that in any market anymore and surprise against all stories and bad talks about business in Russia, I bet in most of the dining occasions with your Russian partners today, you will be offered tea. And be happy, as this can be the deal of your lifetime when clear minds agree about clear business. Competition of talents in Russia is incredible, as everywhere in the world, and the talents indeed know what to do and what not! Don’t be fooled by the stories from the ancient history of grey business. You will not last long if you count on those opportunities.

Convert the challenges to opportunities

The Government of Russia has and is constantly implementing new means of eliminating grey business from the country, a great example is the ChestnyZnak, digital marketing, and traceability system for products entering the market. This system enables you to manage your business and the parallel import and counterfeits won’t be a headache to you and your clients in the future. Hence a lot of details and even investments are needed to manage the processes according to the import requirements of the products affected by this system and its regulations.

Sanctions and counter-sanctions, product traceability and risk of theft, payment practices, currency risks, extremely fast-growing interest for e-commerce and digitalization in general, sustainability or lack of it in business practices, are the often-heard risks related to the business in Russia. The list is longer than this. All these, however, can turn from risks to opportunities, with a clear strategy, healthy attitude, and partners striving for joint success.

Forming the strategy for sustainable business

To determine the right strategy for entering the market, to drive expansion, and in some cases a successful exit, one needs experts with up-to-date knowledge and experience on the ground. Decades of experience can be valuable to understand the history, but current experience on every level in managing risks and creating opportunities with your own experienced Russian experts is key to success in market development. Investments in the market by your potential partners are great signals of a sustainable successful future.

 

Structuring your business

Big industrial players often set up legal entities or even factories in Russia, based on financial justification and a long history. Very interestingly in recent years, despite the political turmoil, many global premium brands have listed Russia as one of their top priority markets in their global corporate strategy.

The possibilities for compliant business growth in Russia are exponentially building their growth strategy with equally compliant partners. The work one needs to do to make the KYC and AML checks and to manage the currency risks are somewhat a lot, but the reward of finding a decent and dynamic partner with an understanding of international business makes a good ROI. Having control in your own hands of the whole trading setup from sourcing and procurement to manufacturing in managing demand and your supply chain, including transparent import and customs procedures to final customer service and payment structures is the key.

Setting up your own legal entity or choosing a partner with one in Russia are your options. The more control you have of your business the more potential you must drive significant growth. In deciding to set up your own legal entity, you should consider the risk of miscalculation and possibly increasing your resources or regional setup. If you however have a reliable partner with proven history and references available providing you with the transparency needed, you can finetune the day-to-day investments based on the market development.

From B2B to D2C and beyond

The B2C segment in Russia is extremely attractive as well as the whole Eurasian Economic Union. The e-commerce opportunity and increased consumer demand call for easy purchasing solutions. This creates a big opportunity for European players to manage this development. Even B2B is undergoing significant growth in their online businesses, proving the digital transformation of businesses is undergoing in Russia.

To those who hesitate and have a negative outlook on this market I would say wait and see, Russia will be one of the most advanced digitally run countries in the world some years from now, and businesses that ignore this will be out of the game soon.

Investors should also pay attention to SMEs and start-ups offering services around online businesses, as those could be the future Amazons of the world.

Another kind of a justification for investing to the Russian market

Sustainability and environmental awareness are key drivers for many companies today. International shipping is a concerning growing source of greenhouse gas emissions. As we all know, the EU calls for global action to tackle these challenges and to put in place EU-wide data collection measures.

Did you know that maritime transport emits around 940 million tons of CO2 annually and is responsible for about 2.5% of global greenhouse gas (GHG) emissions (3rd IMO GHG study). These emissions are projected to increase significantly if mitigation measures are not put in place swiftly. According to the 3rd IMO GHG study, shipping emissions will increase from 50% to 250% by 2050, should we carry on with business as usual, even the targets are the opposite.

Having worked in an international logistics business and international trade my whole life, I would recommend readers to take some strategic decisions and investing in reconsidering in which market they play.

Take the markets of St Peterburg and Moscow only and calculate how many consumers live there! Population in Moscow is a bit more than the whole population in Belgium, and St Petersburg is the one in Finland. From Antwerp to the USA the nautical miles sail is 2.5 times longer than to St Petersburg, from where you can plan the coverage of the whole Russian market distribution and distribution beyond, to the whole Eurasian Economic Union. From Helsinki to St Peterburg time-wise it is less than a workday with whichever transport mode!

How about shifting your strategy of stressing your logistics suppliers and shipowners to decrease freight costs and at the same time thinking of more sustainable solutions, for the far-away markets, to simply changing the priority market to one in the closer vicinity such as Russia?

Can Russia be the market you were looking to not only grow your business but make an eco-friendly move at the same time? An interesting and worthwhile question to look at, but in getting the right answers you need a trustworthy partner present in Russia with your own legal footprint and skilled personnel, to explore the feasibility.

Authored by: Ulla Keino Commercial Director, Ahlers
Published in Russia Business Today News - 13.08.2021