Introduction
The feeling of excitement and trepidation can best describe the idea of branching out into Russia. Our company already has a proven track record in the United States and without a doubt we can always expect a fair level of profitability in the next few years and even in the next decade or so. But Russia beckons and the strong urge to go there is not based on wishful thinking but facts that says there is an emerging market and that every company that hopes to be relevant in the middle part of the 21st century must find a way to establish a business presence in Russia.
On the other hand it must be pointed out that this venture into the unknown is not without its perils and problems. Russia is very much different from the United States and the Russian people are very different from Americans and even Europeans. It will be revealed in the course of this study that the Russian people are not Europeans and yet at the same time they are not Asians. They are in the middle and they learn how to get the best of both worlds. This can be seen in the presence of dual characteristics: the kindness and other good-nature qualities of the Asian people as well as the toughness, energy, and sometimes insensitivity of the Europeans when it comes to work and survival in the midst of difficult circumstances such as the need to live in a land with meager resources.
It is not only the Russian people that will become a major obstacle for our company to hurdle. There is also the problem of their past. This was once a communist country ruled by the iron hands of dictators (Shevtsova, 2005).It has to be pointed out that millions of people were murdered or massacred for the sake of ideology and this bitter memory prevails and creates some sort of a heavy weight that has to be dragged around and to the detriment to the rapid success that Russia is supposed to have accomplished already. Nevertheless, opportunities abound and this is the reason why our company must send the first team to scout and establish a business presence in Russia. This report will help forewarn of the danger and struggle up ahead in order for them to create a better strategy that will ensure the future success of this company.
Historical Background
In the not so distant past Russia was formerly known as the Great Russian Empire. It began to unravel during the time of the Industrial Revolution because during that season of radical changes the many flaws of the monarchical system of governance began to show. The Industrial Revolution started in England (Landes, 2003). But the ripple effects were felt thousands of miles away. As Great Britain began to be transformed by the Industrial Revolution, many are also seeing the negative impacts of rapid industrial growth (Zacek, 1997). Workers began to comp lain about squalid living conditions and inequality between business owners and laborers. These events happened at a time when Russia was in the middle of social and political upheaval.
At the latter part of the 19th century, more and more people are disillusioned with the monarchial system of government in Russia. The masses are now well aware of the hardships brought upon by the well-entrenched and self-serving elites. The patriots are not only wary of the elites but they are also concerned about the effects of the Industrial Revolution. By the end of the 19th century a significant number of Russian intellectuals were already influenced by Marxism. They are now convinced that capitalism is coming their way and they are not happy about it. Capitalism and industrialization are perceived to be the twin evils that will destroy their way of life.
It did not take long before Marxism was transformed into Leninism which is a radical interpretation of the ideas of Karl Marx. When Lenin took control of Russia he created the Communist Party and from that day forward the empire became the Union Soviet Socialist Republic and known the world over as the USSR (Wesson, 1978). But after many years it was also revealed that communism, particularly the way the government tried to control a huge territory and great number of people from a central office quickly became the major error in the whole system. After many decades of posturing and boasting that communism is the answer to the problem of humanity the Soviet Union disintegrated and the once great union of Russia and Eastern European states crumbled.
What was left in the center is what is currently known as Russia. It is located in Norther Asia and the area west of the Urals is considered part of Europe and it is bordered by the Arctic Ocean, between Europe and the North Pacific Ocean (Central Intelligence Agency, 2010, p.1). This is why it has been said that the Russians are not from the West and they are not also from the East.
The Economy
The only way that Russia can be able to distance itself from the economic slump of yesteryears is to exercise caution with regards to its overdependence on natural resource. There is a need for sound fiscal policy, for a non-corrupt efficient state apparatus, and for a strong civil society but ultimately the most important change must be the diversification of the economy and the ability to create the appropriate policies that will enable Russia to break the “resource curse” that is brought about by resource based development. If Russia will succeed then it will join the elite company of resource based economies able to transform weakness to strength.
The presence of resources should be a blessing but sometimes if not managed properly then it can easily turn into a curse. The presence of resources means that there is something that can be turned into fuel, building materials, or refined into expensive commodities such as gold, platinum etc. The presence of rich natural resources can also mean increase in incomes. This would lead to other positive developments such as a strong expansion in the non-tradable sector e.g. services and construction. Natural resources usually mean exports and growing resource exports also allows the country to increase its capability for imports.
The importation of essential products such as medicines is a good thing and can help modernize the country. Overall improvements in the economy will jumpstart a chain-reaction of events that will point Russia to the path of sustainable economic growth. But the resource based economy of Canada, Australia and Scandinavian countries are examples of economies with rich natural resource endowments and yet able to sustain growth and became very successful in the long run.
On the other hand, it can be argued that overdependence on natural resources will open up Russia to important potential risks in a resource-based economy and these are listed as follows:
- Vulnerability to external shocks
- Dutch disease
- Political economy problems inherent in resource based development
For instance data taken from Russian government agencies clearly showed the country’s overdependence on oil exports (Tomalin & Knicks, 2007, p. 208). But history teaches that oil prices are volatile and thus the economy can easily be affected by external shocks. As a result the government may create policies based on high prices.
Thus, government expenses and the national budget are based on projected incomes using data from high prices of oil. But if prices will fall then the projected income will be useless. A sharp fall in prices means that the Russian government will have limited sources of income because the profit margins were wiped out. They are overly dependent on this one commodity and therefore they can easily feel the negative impact and as economists aptly label it – external shocks.
The Dutch Disease, on the other hand, can be easily contracted in a resource based economy that suddenly experiences significant improvements in the way they exploit and export their natural resources. Thus, there is an unexpected rise in prices. Even when Russia was still under the control of the Communist Party, it was already an established fact that Russia was in the resource exporting business and that the government generated income from the sale of such commodities.
But in the new open market, the presence of rich deposits coupled with free enterprise made it possible for the export industry – focused on extracting and selling oil and gas – to experience a great degree of success. Businessmen operating in this sector can adjust prices based on world demand and unlike in the previous type of government these businessmen can benefit from high prices.
This will lead to the creation of an industry that is so attractive to businessmen and other talented individuals. It does not require rocket science to determine that one will make more money in this industry as compared to non-resource based industries. As a result there is little incentive to develop the manufacturing sector. This is a common symptom of the Dutch Disease. Therefore, talent and resources will begin moving into the oil and gas export sector. Other sectors of the economy will suffer especially those that are linked to the service industry.
Legal Aspects of Doing Business
It may comes as a shock for Americans and Europeans who are accustomed to a fair and open market to come into Russia and experience roadblocks that they may not even understand. The first major roadblock for any investor is the difficulty of setting up shop in Russia. This means that investors must understand and accept that doing business here comes in stages and cannot be completed in one swift move just like when a businessman decides to set-up a corporation in the United States.
The most important thing to remember is that there is an easier route to establish a business presence in Russia. The first thing to do is to create what the Russian bureaucracy calls the representative office. This policy is a remnant of the former glory of USSR. It is now possible for our company to set-up a wholly-owned subsidiary company and “may participate on an equal basis in the various forms of partnership prescribed under Russian law” (Terterov, 2005, p.217). However, a representative office is the best entry vehicle into Russia.
If this is the path that our company will take then we have to understand a few things about this set-up. First of all, a representative office is not a separate legal entity but a mere office of the parent entity that is established in Russia to represent the interests of the parent company (Terterov, 2005, p.218). This limits our capability to conduct a wide range of business in Russia for example we will not be able to import good for purposes other than our own needs and we will not be able to register title to immovable property (Terterov, 2005, p.218).
But since our company is in the business of financial consulting then this will not be a major setback for us. The most important thing is that we can secure a beachhead because the representative office provides us the legal basis to bring in the first team of workers that will handle the legwork for most of the legal requirement required to operate in the said country.
After all these things are done then we can work on the other things needed to set-up a private company that can be considered as separate and legal entity in Russia. In this regard it must be understood that the Russian government is some form of a Federation but it is unlike the Federal form of government found in the United States. Staying true to its communist roots the new government of Russia is ruled centrally. Thus, when it comes to registering a private company the government has created a one-stop-shop requirzing foreign based companies to complete five types of paperwork:
- an application;
- a resolution on the establishment of the legal entity;
- charter and foundation agreement or decision on foundation;
- a document confirming the payment of the registration fee; and
- an extract from its trade register confirming its legal status (Terterov, 2005 p. 228).
The Russian People
Maurice Baring, in his excellent book The Russian People, provided an excellent sketch of the Russians that helps explains their temperament and both their good and bad traits. He said that at the core the Russians are a Slavic people (Baring, 2009, p.39). In other words they are Slavs and the most dominant characteristic of this ethnic group is that of patience, kindness and overall a good-natured people (Baring, 2009, p.39).
He was able to prove this assertion when he studied Russians who are pure Slavs and those that have mixed blood. He said that those who intermarried with the Finnish people are more tough and full of energy (Matthews, 1989). But he added that those who are pure slaves are weak-willed and yet abundant in ideas, understanding and sympathy (Baring, 2009, p.38). In other words a Russian a typically good man or woman but there is another element that explains why in the eyes of the outside world they are bad-mannered and oftentimes difficult to understand.
Aside from ethnicity the most powerful force that shaped the Russian psyche is the without a doubt the harsh climate of Russia. It has to be pointed out that Russia is located between Asia and Europe. However, it is not located in the tropical part of Asia but the region where the Mongols used to reign. Thus, it is easy to understand the kind of climate that the Russian people had to endure the whole year through (Gamble, 1999). It is cold most of the year and if not the freezing weather they also had to contend with meager resources.
In their battle against nature the Russian people learned to be strong in order to survive and at the same time the daily struggle developed in them the qualities of tenacity, energy and strength (Baring, 2009, p.39). On the other hand they quickly realized that it is almost futile to fight because the weather takes so much out of them. This is why there is an assimilation of both good and bad in their character as explained in the following commentary:
This, again, accounts for that mixture in the Russian which more than all things puzzles the Western European, namely, the blend of roughness and good nature, of kindness and brutal insensibility. The very fact that he has been hardened by his struggle for existence under desperate conditions has taught the Russian to sympathize with the sorrows and sufferings of his fellow-creatures … On the other hand, in the face of obstacles, the stoicism which the bitterness of the struggle has taught him, gets the upper hand. And he applies to an adversary, an enemy, or to any person who has been found guilty of transgressing his code of laws, a brutal treatment, with the same inflexibility with which he would be ready to undergo it, should he be found guilty of an offence calling for a similar punishment (Baring, 2009 p.39).
The last statement made by Baring is indeed a scary thought and this will not simply create a shock for first time visitors or first time investors in this country. Yet at the same time it offers a glimmer of hope. This means that the Russian people are not bad-mannered after all. They are simply misunderstood. Investors and businessmen coming into this country must fully comprehend their cultural and social background. These are not Asians and these are not Europeans. They are a blend of these two great civilizations.
Analysis
There are challenges and numerous obstacles up ahead but looking at the activities and business decisions made by other giant companies one can argue that Russia will be able to find the correct strategy to build its country and its reputation once again. It is important to keep in mind some of the practical advices that the team must adhere to when in Russia. First of all we must learn patience and we should never criticize Russia, the people and its government. Second, we must learn to be firm in negotiation because the Russians respect strong leadership.
Third we must learn to understand and respect the Russian calendar because their important dates may not be the same as ours. Fourth, we must learn to respect the hierarchy of leaders because it is important for them to respect the top leader or the boss. And most importantly it is important for the team to recognize that Russians love to show personal warmth and that they will do business only if they think that they like us (Tomalin & Nicks, 2007 p.208).
There are problems but there are opportunities. The problem with a resource dependent economy can be corrected over time. We can also come in as an expert when it comes to creating a diversified economy. We can share our knowledge and expertise when it comes to diversifying a business portfolio so that they will not be vulnerable to external shocks such as the sudden drop of prices. This is very much evident in the recent global financial crisis wherein oil producing countries enjoyed high prices for oil only to experience a radical downturn.
Conclusion
There are obstacles up ahead. The culture, language, the type of governance is difficult to understand at first. But after a few weeks within Russian the team will learn the necessary steps required to establish a business presence. It is also important to be forewarned and to be forearmed with knowledge regarding the cultural differences and the language barrier. The team must realize that the Russian people are kind and good at the core we must only keep in mind to show respect and honor in order for them to reciprocate the same to us. We must be careful not to show any sign of fraud and to make them feel that we are taking advantage of them because they are also a tough people forged in the trials and suffering of the past and the ruggedness of their country and climate. It would not be a pleasant idea to give them any reason to be upset with our company.
References
Baring, M. (2009). The Russian People. SC: Bibliolabs.
Central Intelligence Agency. (2010). World Factbook. Central Intelligence Agency. Web.
Gamble, A. (1999). Marxism and Social Science. Illinois: University of Illinois Press.
Landes, D. (2003). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. New York: Cambridge University Press.
Matthews, M. (1989). Patterns of Deprivation in the Soviet Union under Brezhnev and Gorbachev. CA: Hoover Press.
Terterov, M. (2005). Doing Business with Russia. VA: Kogan Page.
Shevtsova, L. (2005). Putin’s Russia. Washington, D.C.: Brookings Institution Press.
Tomalin B. & M. Knicks (2007). The World’s Business Cultures and How to Unlock Them. UK: Thorogood Publishing.
Wesson, R. (1978). Lenin’s Legacy: The Story of the CPSU. CA: Hoover Press.
Zacek, J. (1997). Legacy of the Soviet Bloc. FL: University Press of Florida.