GBU 355

Global International Business

Starting a Business in Russia






By: Tabatha Sauls
January 28, 2014




INTRODUCTION
Starting a business anywhere can be difficult especially in another country like Russia.
Opening a truck accessory and service store called Truckd Up may have a few challenges.
Russia is one of the largest countries in the world. Its capital is Moscow and it is considered to be
the only bicontinent country. Demographically, three quarters of the country is in Asia and the
other quarter is in Europe.
Overview of the Country
Political and Economic Development
With Russia having a civil law system now it makes it slightly easier than before when it
was under a command system. Russias economic freedom score ranked 51.9 making its
economy the 140
th
freest in the 2014 Index. It has risen 0.8 higher this year and has grown in 4
out of the 10 major economic problems such as: corruption, control in government spending,
trade barriers and fiscal freedom (heritage.com). Russia used to lack globalization however, it has
become more of a market based region. In 2011, Russia became a top producer of the world's oil, natural
gas, steel and aluminum.
With trade barriers in Russia being tight, Russia joined the World Trade Organization in 2012
to help open trade with foreign markets allowing Russian goods and services to be bought. Russias GDP
(growth rate) is decreasing slowly, with 4.5% in 2010 to 3.4% in 2012. However Russia's GDP
(purchasing power) has increased from 2.305 trillion in 2010 to 2.486 trillion in 2012. In 2012, The GDP
of composition were as follows: agriculture 4.2%, industry 37.5% and services were a whopping 58.4%.
Although, Russia looks like a great place to invest in however with the corruption index reporting a score
of 28, Russia loses some attractiveness from a management standpoint (transparency.org).


Culture
Russian culture is different than other countries. Russians seem to have more of a pessimistic
view in comparison to Americans. The people tend to expect things to go wrong and have learned to deal
with misfortune. The religion has been Russian-Orthodox for almost 1000 years. The country is now
growing to be more of a Western culture, although it will take time to get there completely. The main
language of Russia is Russian. Russia has a different education system and the children are taught in a
very black and white manner. The answer is right or wrong and never an explanation to why? Students
aren't able to think for themselves and Higher Level thinking skills is out of the question (Goehner).
Russian people are said to be, patient, compassionate and sensitive but also can be very cruel and
untrustworthy. When meeting people Russians are very laid back, one wouldn't expect a bunch of smiles.
Handshakes are appropriate when meeting and leaving although one must remove their gloves before
shaking hands and one must not shake hands over a threshold or it usually leads to an argument
(Ediplomat.com).
Russias social stratum hasnt evolved much since the late 19
th
century. During that time (1897)
Russias social groups were divided into 4 categories; upper class, middle class, working class and
peasants. The upper class made up 12.5% of the population, middle made up 1.5%, working made up 4%
and the peasant class made up 82% of the population (ALPHAHISTORY). Meanwhile in recent news,
Russian inequality reaches a new record high for having the greatest gap between the super rich and the
poor, greater than any other major country in the world. Billionaires usually account for 1-2 percent of
total household wealth, but in Russia today, 110 billionaires own 35 percent of all wealth (WSWS.ORG).
Russia still has those divided categories with 40-59.7 percent of the population being poor or has little
and 12.6 percent live in extreme poverty.
Hofstede states that Russia's score of Power Distance was an 88. This shows as a nation power is
very distant in society, and country is highly centralized. As far as individualism, Russia scored a 39
reflecting that the society works as a group. Hofstede states, that if Russians were to go out with their


friends, they would say "We with friends" rather than "I and my friends". It is important in Russian
culture to be trustful and authentic when carrying on a conversation rather than implicit conversation.
This displays that one must be prepared to behave in Russian mannerism in order to run a successful
business. With the Masculinity score of 34, this shows that the culture is more feminine than masculine.
Even the most successful people in Russia such as scientists are very modest. Russia scored an 84 in the
Uncertainty Avoidance category displaying Russia is fearful of unknown situations. Russia has
established one of the most complex bureaucracies in the world states, Hofstede. It is of no surprise
Russia would score high (86) in the Pragmatism category. Russian people are very black and white,
especially when it comes to education. Lastly, in the Individualism category, Russia got a low score of 20.
A score of this nature depicts a cynical and pessimistic society. Russians show little resistance to
gratification and leisure time. All the above information is extremely helpful in gaining insight into the
real way of Russian culture. As Americans we are used to knowing or wanting to know why things
happen but in Russia, it is a different story. All management that is not native to the location of the
business must be educated in Russian culture and be able to communicate verbally. This will lower the
chances of problems that could occur due to language and social barriers.

Ethics
The Russian labor code forms the basis of labor relations in Russia and outlines employee rights,
however there are discrepancies between the letter and the practice of Russian Labor code. In Russia
normal working hours are 8 hours a day and 40 hours a week with one lunch hour break. Russian law tries
to limit overtime. Employees are provided 28 paid vacation days off. Russia also offers maternity leave
and keeps the mothers position open until the child is 3 years of age. Today, Russia has a ban on
homosexual propaganda. Its people are not allowed to hang rainbow flags or anything to this nature. Also,
the Federal Drug Association blocked certain websites that displayed information on certain controlled


substances. These laws restrict the Russian people, things that Americans have been accustomed to... like
freedom of speech, expression and gender. Russia's air is polluted 10 times more than the accepted level
that people are to breathe in. Children more susceptible to the highly polluted air, some of 17% are
diseased. The review highlights many concerns about the long term affects on these children. Evidence
supports the relationship between the air pollution and developing lung function (TED CASE STUDIES)
With starting a business in Russia, a manager would need to investigate the working conditions
of the area to which the business would be located. Next, look into the common ethical practices that the
culture is associated with. Third, consider the products that will be used, disposed of and where disposal
will take place. Forth, consider the wage and working conditions in Russia and how it contrasts with
American ways. Fifth, look at the social culture of Russia and decide if the company's values are closely
related to that of Russia. Lastly, hire managers that have strong moral backgrounds, enforce ethical
standards when hiring, provide ethical training courses, background checks and polygraph tests. This will
weed out any applicants that do not fit the company's ethical policies.
Ease of Entry
After almost 19 years of negotiations, Russia became a member of the World Trade Organization
in August 2012. It is evident that Russia is making strides to engage in a trade-free zone. That doesn't
mean the country has made a complete transformation since its communist ways but over the years as
new leaders come into office, little steps are being made. Now that Russia has joined the World Trade
Organization, steps can be made to really promote trade. Since this has taken place, Russias overall
economic competitiveness has increased causing prices such as pork to drop as much as 30
percent, impacting negatively on local producers (MOSCOW TIMES). This affect was expected in the
food and light industry manufacturers of the first two years of joining the WTO. However, it is going to
take some time for the changes to actually affect the economy, states Prime Minister. Measures are being
made each day to work out the kinks to better the economy as a whole in the near future.


Now in reference to instruments of trade policies, Russia has been working hard with the WTO to
decrease tariffs, quotas and subsides just to name a few. In respect to the truck accessory industry, most of
the products the company will need will come from Russia. The products needed to provide the services
to Russian vehicles will not be offered in any other country. Just like Germany has German cars, Russia
has Russian vehicles that are not made anywhere except in the domestic country. These goods will be
related to the auto manufactures in Russia that make Russian vehicles. Being that Russia is a top producer
of steel and aluminum, this is beneficial to the company since most of the products that are needed will be
made of those components. Any other products that may be needed will come from other member nations
such as China or the EU. Conducting business in any other country would require a different set of rules,
procedures and barriers to overcome. The overall concern is relying on the automotive industry to supply
some of the goods the company needs in order to operate.

Russia's relationship with the WTO is a good one. So far since the accession, Russia has
complied with the World Trade Organizations rules and commitments. In April 2005, Russia reported the
completion of bilateral negotiations on goods with a total of 29 WTO members, which represents 50% of
members of the Working Party and 87% of total Russian imports. The WTO believes that Russia will
bring substantial benefits to the organization and its members. The Working Party Chairman Ambassador
Jhannesson feels Russia will help strengthen the multilateral trading system and enhance global
economic cooperation. As part of the accession, Russia concluded 30 bilateral agreements on market
access for services and 57 on market access for goods. Even with reforms and transitional periods ahead,
Russia and the WTO are working together effectively.

Monetary Considerations



Due to Russias undervalued currency, foreign exchange will result in a loss when converting the
money into U.S. dollars. The ruble is currently undervalued by 43.3 percent which is large enough to
assume high risk in regards to profit. The only possible way to decrease this risk is to diversify to other
areas to offset any losses that can occur. The predictability of the currency value is extremely short-
sighted due to the current political warfare Russias president is now facing and the stability of the
economy may be affected. Now that that the ruble is convertible it does make certain transactions easier
but doesnt increase the ability to turn a higher profit. The best way to get the most bang for the buck is to
make Russia the domestic market and continue to do business there and only there. However, this limits
the business to grow into a global company.
Financing the Business
If the firm is using capital acquired from retained earnings from the domestic country, this will
cause a considerable amount of loss. If the business has to convert the money into rubles to finance the
operation and then have to convert it into U.S. dollars, it leaves little room to earn a profit. Also, financing
the business in Russia from the domestic country just may bleed that location dry. Therefore, it may be
in the businesses best interest to find an investor in the foreign country to help absorb some risk. After all
these considerations, it is in the business best interest to have a partnership with a local entrepreneur that
not only provides some of the startup capital but has an internal interest in managing the business. This
will give he/she the confidence in knowing there will be a return on investment and opens more
opportunities with local suppliers and labor. Borrowing the capital from the domestic market maybe too
risky seeing that interest rates are higher and borrowing from a foreign market isnt appealing either. With
limited deregulations in the foreign market it poses too high of a risk as well making Eurobonds a more
attractive fit.


Strategy
Deciding which strategy to use for the location in Russia first bears the question: to which area
can the company most benefit? Looking at the demographics of specific areas will help determine where
the business can create the most value. The firms value lies within the product and services it provides.
Truckd Up company focuses on quality products and services that cannot be strategized into a low cost
category rather than using a differentiation strategy. The focus is derived by producing and servicing well
made quality products that extend the life and value of the vehicle or equipment. Most of the products
will contain warranties that provide adjustments, replacement services and repairs for normal wear and
defects at zero cost. The next aspect to evaluate would be the primary operations and then the secondary
operations. Organizing these components is extremely important to execute the strategy chosen. When
some time has passed, the business will reassess to see if any learning effects have been created and if
value creation costs can be reduced.

After those objectives have been met, the firm will then decide which pressures the business will
face in competing in an international market. Given the industry and area (Russia) to which the business
will operate, the localization strategy would make sense. Although the accessory business can be
universal, in this case its location specific. Having chosen Moscow as the location of the business, the
firm can better scale which products the location will most likely need.

Because the firm doesnt have the ability to take advantage of economies of scale due to a niche
market and reliance on other suppliers, this can put the business in a risky position. There are a few the
ways the business can strategize to reduce some long term risks such as moving towards a transnational
strategy if heavy competition arises, work towards a more short-run measure or expand the business by
opening a manufacturing facility in that location to take advantage of economies of scale. On the other


hand, having an investor that is currently involved in an industry that complements the truck accessory
business, preferably in the manufacturing area, may be a better strategy.
Structure
The organization of the business will follow based on the localization strategy, where each
geographic area will contain its own functional structure. Decisions regarding firm strategy, major
financial expenditures, financial objectives, and legal issues will be centralized whereas operating
decisions such as purchasing, production, finance, research & development, human resources and
marketing will be decentralized. Top management will oversee, coordinate and control those of the
subunit managers, and the subunit managers will oversee their department accordingly. Top management
will also be responsible for setting output controls for subunits to achieve by expressing those goals in
terms of objective performance measures. The top manager(s) can then reward the subunit managers with
a bonus or reward for achieving those goals. This process will give the unit manager greater responsibility
of the units performance, therefore reducing conflict and the blame game when things go wrong. In
addition, by using decentralization for these components it allows top management time to focus on
critical issues by delegating more routine issues to lower-level managers (HILL, 2012).

To keep the business from duplicating production or creating higher costs that leads to lower
profit, it is crucial the subunit managers from each department steadily communicates with the other.
Many benefits can arise from team work. Although, each department is separate from one another,
sharing valuable information can create greater possibilities for the company as well as the employees.
Because our services are highly diversified, the firm could later expand into an international division
opening new headquarters and setting up manufacturing plants where economies of scale can be
facilitated. If the firm reaches its goals and have the ability to expand, it may have to restructure its
strategy to reach new, higher goals.



Recommendation
The level of uncertainty in Russia poses too much of a risk for the firm. Proceeding forward in
setting up a location in Moscow would be ideal using the localization strategy for the growth and
development of the business however, with instability of governmental regulations still ongoing; it seems
to be a never ending state of warfare. The problem the Russian government has been facing has increased
the level of uncertainty, especially among members of the WTO, EU and the G20. Although, the ease of
entry has been less difficult due to these relationships being established, the recent events of war have
suppressed these abilities.

Having an investor would have been in the best interests of the business in regards to production.
Making connections with other manufacturing facilities would have been the best decision until the
business started turning a real profit and capital could be spent on production facilities of its own. In
order for a profit to be made, great expenditures have to be considered in the development of the products
and value creation. Manufacturing facilities could be built to shift towards a lower cost for products and
profit from economies of scale. Those elements would have to be set in order to balance the loss of profit
during currency exchange. With the currency being undervalued by 43.3 percent against the dollar, is
more than the firm is willing to consider. Notwithstanding , the tax rates of Russia are much higher than
the United States and those percentages increase dramatically after the first year of business, meaning if
the business doesnt make a profit then the capital account will be negative. In addition to the high tax
rates, the corruption level in the professional industry is much too high and ethical issues may pose a
problem.



The firms mission is to provide the best of service which cannot hold if corners are being cut. It
is understood business doesnt always go as planned and there are many economic forces that may come
its way, however the bad outweighs the good in this location. Having considered all of these components,
it is not recommended to open a location in Moscow, Russia at this particular time. The business may find
opportunities there in the future, to which then the company will evaluate the economic and governmental
factors surrounding Russia, making a decision based on those elements at that given time.





















Work Cited:

Transparency International
http://www.transparency.org/news/pressrelease/highlights_from_transparency_international Web. 25
January 2014
CIA World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html
Web. 26 January 2014
World Trade Organization http://www.wto.org/english/news_e/news13_e/ita_13sep13_e.htm Web. 22
January 2014
Hill, C.W.L., International Business: Competing in the Global Marketplace, 8E (Boston:McGraw-Hill
Irwin,2011)
Doing Business in Russia. http://blogs.worldbank.org/voices/doing-business-2014-russias-progress
Web. 22 January 2014
Start up Overseas. www.startupoverseas.co.uk/ Web. 26 January 2014
Bailik Discovery Ted Case Studies http://www.baikal-
discovery.ru/en/index.php?option=com_content&task=view&id=56&Itemid=58 Web. 2 February 2014
Hofstedes Dimensions of Culture http://geert-hofstede.com/countries.html Web. 2 February
2014
World Socialist http://www.wsws.org/en/articles/2013/10/19/russ-o19.html Web. 2 February 2014
Alpha History http://www.alphahistory.com/russianrevolution/russian-society/ Web. 13
February 2014
WTO http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm Web. 22 February 2014


Trade Representative http://www.ustr.gov/trade-agreements/bilateral-investment-treaties Web. 22
February 2014
Moscow Times http://www.themoscowtimes.com/business/article/government-sees-wto-dividend-
one-year-on/488705.html Web. 18 February 2014