Doing Business in Russia: 2011 Country Commercial Guide for U.S. Companies INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2010. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES. • Chapter 1: Doing Business In Russia • Chapter 2: Political and Economic Environment • Chapter 3: Selling U.S. Products and Services • Chapter 4: Leading Sectors for U.S. Export and Investment • Chapter 5: Trade Regulations, Customs and Standards • Chapter 6: Investment Climate • Chapter 7: Trade and Project Financing • Chapter 8: Business Travel • Chapter 9: Contacts, Market Research and Trade Events • Chapter 10: Guide to Our Services Return to table of contents Chapter 1: Doing Business in Russia • Market Overview • Market Challenges • Market Opportunities • Market Entry Strategy Market Overview Return to top • With over 140 million consumers, a growing middle class, and almost unlimited infrastructure needs, Russia remains one of the most promising markets for U.S. exporters. • Russia is the world’s 11th largest economy and has the highest per capita GDP ($15,900) of the BRIC countries. It is an upper middle income country, with a highly educated workforce and sophisticated, discerning consumers. • Russia’s economy has begun to recover from the economic crisis that started in 2008, with GDP growth at 4.0% for 2010. This growth was slightly less than anticipated due to drought and wildfires, which disrupted agriculture, commerce and industry. Economists forecast real GDP growth of 4.3% in 2011. • Russia was the U.S.’s 37th largest export market and the 17th largest exporter to the U.S. in 2010. U.S. exports to Russia were $5.97 billion, a 12% increase from 2009. Russian exports to the U.S. were $26.5 billion, up 41% from 2009. Russian sources list the country’s leading trade partners as: Netherlands, China, Germany, Italy, Ukraine and Turkey. • U.S. accumulated investment in Russia is approximately $21.3 billion. According to Russian data, the U.S. is Russia’s 10th largest foreign investor. • Russia anticipates joining the WTO in 2011, which would liberalize trade with the rest of the world and create opportunities for U.S. exports and investments. Market Challenges Return to top • Russia is a geographically vast market, spanning nine time zones and encompassing over 17 million square miles. • Seriously underdeveloped infrastructure poses logistical challenges, especially accessing markets outside of major cities. • An incomplete transition from central planning has led to an insufficiently integrated economy and disparities in wealth distribution, geographically and demographically. • Conducting business may be impeded by: burdensome regulatory regimes; inadequate IPR protection; extensive corruption and lack of rule of law, inconsistent application of laws and regulations; lack of transparency; and excessive government interference in business matters. • Recent reforms make it easier for companies to hire expatriate employees, but the Russian immigration and visa system requires time and patience for business travelers to obtain necessary permissions to do business in Russia. • English is not widely spoken, although knowledge of the language is expanding, especially in the major cities. Market Opportunities Return to top In alphabetical order: • Apparel • Automotive Parts & Service Equipment / Accessories • Aviation • Construction / Greenbuild • Consumer Electronics • Cosmetics / Toiletries • Electric Power Generation & Transmission Equipment • Medical Equipment • Refinery Equipment • Safety & Security Equipment • Travel & Tourism to the U.S. Market Entry Strategy Return to top • Developing business in Russia is resource intensive, requiring serious commitments of time, personnel and capital. • Conduct market research, such as with the U.S. Commercial Service’s Gold Key or International Partner Search services, to identify opportunities and potential Russian business partners. • Conduct due diligence, such as with the U.S. Commercial Service’s International Company Profile service, to ascertain the reliability of business partners. • Consult with U.S. companies already in the market, as well as with the U.S. Commercial Service and business organizations, such as the American Chamber of Commerce and U.S. - Russia Business Council. • Communicate regularly with Russian business partners to ensure common understanding of expectations. • Frequent travel to Russia is strongly recommended to establish and maintain relationships with business partners and to understand changing market conditions. • Maintain a long-term timeframe to implement plans and achieve positive results. • Abide by all Russian laws and regulations (taxes, customs, labor, etc.) – retaining local tax, legal and government relations advisors is strongly recommended. • Conduct business in accordance with all applicable U.S. laws, as well as standard U.S. and international business practices. • Utilize letters of credit or other secure financing vehicles, avoid sales on open account. • Explore use of U.S. government financing, such as the Export-Import Bank (Ex- Im Bank) and Overseas Private Investment Corporation (OPIC), as well as multi- lateral development banks, such as the European Bank for Reconstruction and Development (EBRD). • Develop working relationships with national, regional and/or local governments and consider implementing corporate social responsibility programs. • Patience, perseverance and perspective are keys to success in Russia. Return to table of contents Return to table of contents Chapter 2: Political and Economic Environment For background information on the political and economic environment of the country, please click on the link below to the U.S. Department of State Background Notes. http://www.state.gov/r/pa/ei/bgn/3183.htm Return to table of contents Return to table of contents Chapter 3: Selling U.S. Products and Services • Using an Agent or Distributor • Establishing an Office • Franchising • Direct Marketing • Joint Ventures/Licensing • Selling to the Government • Distribution and Sales Channels • Selling Factors/Techniques • Electronic Commerce • Trade Promotion and Advertising • Pricing • Sales Service/Customer Support • Protecting Your Intellectual Property • Due Diligence • Local Professional Services • Web Resources Using an Agent or Distributor Return to top Encompassing nine time zones, Russia is the largest country in the world by landmass. Therefore, many businesses tend to approach the Russian market on a regional basis. Most new entrants start in Moscow and then move into the regions either through an existing distributor or by seeking new distributors in those locales. As both Moscow and St. Petersburg are major population and business centers, many Western firms have representatives there. Some companies have successfully entered the Russian market by starting distribution in other key regions first because of market features and industry sector concentrations (e.g., woodworking in northwest Russia, energy projects in Sakhalin and western Siberia) and then expanding elsewhere. Well-organized distribution channels are established in western Russia, especially in Moscow and St. Petersburg, and continue to develop rapidly in southern Russia, the Volga region, Urals, Siberia and Russian Far East. To succeed in Russia, it is important to choose sales targets and distributors carefully. U.S. companies have four basic options when choosing a distribution channel: 1) Agents It is not a common practice in Russia for foreign companies to rely solely upon the services of an agent. Distributors and representative offices, however, often employ agents in the Russian regions in order to promote their products. 2) Distributors The most common market entry strategy is to select a good distributor or several distributors (depending on the product). U.S. companies can consider a variety of national, regional and local distribution alternatives. In some product categories (e.g., apparel, cosmetics, packaged foods, alcoholic beverages, consumer electronics, and household appliances), foreign suppliers can choose from a growing number of established distributors. A good distributor will typically sell and deliver foreign suppliers’ products to end-users and/or the retail market and provide a wide range of logistical support, i.e., customs clearance, warehousing, inventory management, etc. However, handling promotion and advertising campaigns exclusively through independent distributors can often produce disappointing results. Russian distributors normally handle products from multiple suppliers and are not typically dedicated to promoting a specific company’s product unless the supplier provides substantial support for promotion and advertising. Russia’s retail law also limits some types of promotional activities. 3) Representative/Branch Offices Some foreign manufacturers, in addition to using distributors, have established their own representative offices. The major advantage of opening a representative office is that foreign companies have more direct contact with their end-users and control over the promotion and distribution of their products. However, under the Russian Civil Code, such offices cannot be directly involved in commercial activity. Instead, they typically oversee a network of distributors and/or agents that perform commercial functions. This approach affords greater control by the foreign supplier over the distribution process and helps to reduce risks. As Representative Offices may not take