Foreign Business Climates

8/2/2019 Foreign Business Climates

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Russias Business Climates

From the centrally planned Soviet system to a market-oriented economy: over the last 20 years

Russia has faced extensive modification of business and management. The dramatic changes

have transformed Russia into an economic power with a GDP of $1 trillion. Being the biggest

owner of global gas reserves and second biggest of oil reserves, todays Russia supplies 25% of

Europes energy. Today its capital Moscow is considered the fourth most expensive city in the

world (Krivobok, 2010). Despite its being a G8 member and a natural resource giant, Russia

doesnt hold leading positions for its business environment (Puffer and McCarthy, 2011). In

2011 Russias Ease of Doing Business was ranked 120 out of 183 countries (World Bank, 2011).

In this paper the author will present Russias overall business environment, its state of trade and

foreign investments, as well as the level of corruption and political risks.

It goes without saying that the easiness of starting a business is correlated with the countrys

productiveness in corporate sector. Hence, the study will commence with the evaluation of start-

ups in Russia. So, it takes 22 days to fulfill 13 formal procedures in order to start a business in

Rostov-on-Don, and that is considered to be the shortest term among other Russian cities (World

Bank, 2011). On the other hand, the country's capital and, by far, the most populous city Moscow

has the most difficult conditions of entering into business sphere. In average, registering a start-

up business in Russian Federation involves 9 procedures that last for 30 days to fulfill them.

According to the research carried out by the World Bank the easiness of opening a business in

Russia was ranked 111th (World Bank, 2012).

Registering a business is only the first step that an entrepreneur takes in any country. In fact,

further development of business depends on other different conditions. What concerns Russia,

the country has several unfavorable circumstances that hinder business growth there. Endemic

corruption and low level of legitimacy of formal institutions are among the key factors that

hamper the development of Russia's business environment. President Dmitry Medvedev stated


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doing their business in such countries like Russia, since the rewards are worth all of that risks

(Leach, 2011). In reality, there are undoubtedly lots of leverages that foreign entreprenuers can

seriously benefit from. If there had been none, Russia would have been a country with solely

domestic firms. The practice shows that the annual averaged 7% economic growth in the last

decade, together with doubled real disposable incomes, have created favorable settings for

entering into Russian markets. Moreover the appearance of a middle class in the country has

proved the stability of Russian economy (CIA, 2012). Added to this the low personal and

corporate income taxes are significant incentives for potential foreign direct investors (Business

Monitor International, 2012). Indeed, the government has passed some reforms that have

decreased the number and time of payments per year, as well as the total tax rate in the country

(World Bank, 2012).

However, it is widely acknowledged that the vast majority of Russian businesses in energy and

natural resource sectors are ruled by oligarchs, who get a significant protection from the state

(Frye, Timothy, Andrei Yakovlev, and Yevgeny Yasin, 2009). There have even been cases

when international companies such as Royal Dutch Shell and Exxon were forced to take an

action that was totally driven by Russia's national interest and favoritism (Business Monitor

International, 2012). Thus the BMI report indicates that the activities of foreign investors can

meet their opportunities in banking, retail, automobile and pharmaceutical spheres of the

economy. Despite the fact that Russias foreign investment policy is generally favorable to

attracting foreigners to do business in Russia, such factors like corruption, exchange rate

instability and weakness of legal protection have created unfavorable conditions for foreign

entrepreneurs. Nevertheless, it should be noted that unlike the drawbacks in Russias overall

business climate, the government stays liberal and open to foreign investments, especially in

manufacturing and service sectors (Business Monitor International, 2012).

Unlike today's globalized world, where trading between countries is becoming more and more

easy, trade barriers which are the significant part of Russia's protectionist policy, still challenge


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other economies. The money, time and documents required for import and export are higher than

those in OECD countries and in some cases even more complex than those in Eastern European

and Central Asian economies (Euromonitor International, 2010). That is the basic reason why

Russia's ease of trading across borders was ranked 160 out of 183 (World Bank, 2012). On the

other hand, there is a big hope for future improvement of Russia's international trade sector

which comes from the country's accession to WTO after a long-standing 18 years process (WTO,

2011). Researchers believe that foreign companies will benefit largely from easier access to

Russia's growing economy. Specifically, the highest risk/reward rating is given to the retail

sector, especially the food & drink market, as well as the autos industry. These sectors of

economy are forecasted to attract foreign investors, which in the long-run will challenge Russian

firms because of the intensified competition (Emerging Markets Monitor, 2011).

Unlike lots of regulatory and formal inconviniences that exist for foreign business entities in

Russia, which tend to slowly diminish, there are some cultural aspects of business management

practices that do surprise oursiders. Many observers believe that Russian business culture and

ethics are largely driven by informal cultural-cognitive institutions. Thus, the cultural imprints of

Soviet and Tsarist past largely influence on modern business affairs. The old-boy network and

personal connections are among those phenomena that Russian businessmen utilize quite often

(Puffer and McCarthy, 2011). However some researchers have found notable differences in the

informal rules of game between oligarch-dominated companies and non-oligarch ones. They

found that the informal infrastructures were less collaborative in relationships between non-

oligarch firms and the government. Moreover, they believe that the recent financial crisis will

reshape the relations between businesses and the state making them more transparent (Frye,

Timothy, Andrei Yakovlev, and Yevgeny Yasin, 2009).

It is widely acknowledged that there are such businesses that are laborious and there are those

that are capital-intensive. It has long been known that China used to attract investors due to its

'cheap' and vast workforce (Malcolm, 2011). However, the case is completely different in


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Russia, where investors usually face shortages of skilled labor. Despite the 99.6% adult literacy

rate, the country's information and communications technology (ICT), business management and

medicine sectors are seriously affected from the lack of workforce with appropriate skills

(Euromonitor International, 2010). Nevertheless, labor costs in Russia are considered to be low.

4,330 rubles, which is about US$ 139, is the minimum monthly wage in the country (Pitalev,

2009). Personal income tax is set to be 13% for residents and 30% for non-residents

(Euromonitor International, 2010).

In conclusion, summarizing all the sights of Russia's business climate covered by the author, it is

evident that socio-political and economic performance risks are comparatively high in the

country. Researches carried out by different authors and organizations indicate on high levels of

corruption and bureaucracy and poor infrastructures that plague Russian business and society

(Euromonitor International, 2011). Thus, Russia has gained a negative investment image in the

West (Business Monitor International, 2012). Moreover, the IMF underscores the improvment

of business climate and governance as the primary sources leading to Russia's economic

diversification and growth (IMF, 2011). However the country's wealth in natural resources, the

fast growing domestic market and economic growth perspectives are among those factors that

attract potential foreign direct investors (Business Monitor International, 2012). Summing up,

the author believes that the improvement of Russia's business environment lies in strengthening

legitimate formal institutions and reducing endemic corruption and bribery.


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Foreign Business Climates