Global Invest

Russia’s Emerging Economy Creates a Business Opportunity Frontier

It is time to toss preconceived ideas about Russia out the window.

- By William Bell

The differences between the U.S. and Russia have been stark over the decades, especially during the Cold War (1947-1991). Unfortunately, that one period in time has shaped many peoples’ perspectives of Russia, and many people continue to see the country as isolated, mysterious and a bit stuck in the past. It is time to toss out the old views and look at Russia with new eyes, because the country is now a recognized global trade partner, emerging economy, and a land of growing business opportunities for international partners and investors.

Russia has worked long and hard to take its place on the world’s economic stage, long before globalization became a business strategy. The work of the previous 18 years paid off when Russia was invited to join the World Trade Organization (WTO) in December 2011, thrusting the country onto the global economic stage. Officially becoming a member in August 2012, Russia has relentlessly continued its efforts to expand its economy and develop trade opportunities, with success confirmed when Russia moved up eight positions to 120 out of 185 countries in the World Bank and International Finance Corporation’s Doing Business 2013 report. Of particular interest to potential investors is the fact that Russian President Vladimir Putin has established long-term goals that include moving Russia to the 50th place by 2015 and the 20th place in 2018. Reading between the lines, Russia is aggressively moving forward to become a significant world economic participant.

Lifting Shadows of the Past

As Russia moves up the list, the shadows of the past are inevitably dissipating, as should old perspectives. The Doing Business report evaluates factors that promote or impede business development, such as tax regulations, ease of cross-border trading, safety of investments, ability to start new businesses, the legal structure and the government regulatory environment, to name a few. The Russian government’s efforts to modernize its economy have led to bureaucratic reductions and laws clamping down on corruption. In 2010, the World Bank had named Russia as one of the top five emerging markets, and its assessment has proven to be correct.

Emerging markets represent underdeveloped market-oriented economies and countries with potential domestic demand growth. That is just a way of saying that foreign investors, exporters and businesses looking for global joint ventures can find a wealth of opportunities. Russia represents a wide-open economic frontier, because years of isolation have left it in need of modernization in almost every area. This is particularly important to small- and medium-sized minority and women-owned enterprises (MWBEs), because U.S. government contract opportunities, typically important sources of business, are shrinking as federal and state agencies experience budget cutbacks. In addition, the U.S. federal government is aggressively working to increase exports to balance the trade deficit. In doing so, new opportunities form as trade agreements and investment opportunities.

Between 2009 and 2011, the U.S. State Department reported that exports to Russia rose 57 percent and U.S.-Russian trade rose more than 80 percent. What MWBEs should understand is that Russia has 140 million consumers and a rapidly growing middle class. It also has a desperate need for improved infrastructure, according to the U.S. government’s export agency. To promote foreign business exports, the tariff rates on industrial and consumer goods have declined from 10 percent to less than eight percent.

There is a high-level need for different types of equipment related to agricultural, automotive parts and accessories, electric power and transmission, medical, refinery, refinery, and safety and security. With a growing middle class, it is not surprising that there is also a demand for apparel, consumer electronics, and travel and tourism services to the U.S. The U.K. guide to doing business in Russia adds advanced engineering, financial services, airports, rail, water, construction and creative industries. Improvements and upgrades to Russia’s technological infrastructure are one of the government’s top priorities as Russian e-commerce rapidly expands.

Finding the Gateway

There are two ways to take advantage of Russia’s emerging economy. Small- and medium-sized enterprises (SMEs) can research U.S.-based global manufacturing and export corporations operating in Russia with compatible contract opportunities. Despite Russia’s progress in areas of trade, entering its markets still requires a significant amount of capital and in-depth knowledge of the business risks. Many of the large foreign manufacturers have opened representative offices in Russia, giving them a means of overseeing Russian distributors handling the sale and distribution of products. In other cases, they have opened Russian-based subsidiaries.

There are many organizations able to simplify market research efforts. They include: the U.S. Commercial Services Gold Key, the U.S.-Russia Business Council, the U.S. State Department, and the Council for Trade and Economic Cooperation of the Chamber of Commerce and Industry of the Russian Federation. Finding and developing successful Russian business partners almost always requires an intermediary. According to the U.S. Commercial Services, the most common market entry strategy is using distributors to sell and deliver products.

There are many large corporations that have been operating in Russia for a while, such as Wrigley®, McDonald’s®, PepsiCo® and Ford®. Joint ventures have proven to be a successful approach, but there is no doubt that the Russian market must be entered carefully and systematically. The reputation the country has for tolerating high levels of corruption was earned, but there are ongoing efforts to change that culture, evidenced by the National Plan to Counteract Corruption and anti-corruption legislation. However, it takes time to bring about systemic change, and realistically there is still a lot of work left to do in this area. SMEs interested in doing business in Russia can best manage risk by following the lead of companies successfully competing in the Russian markets.

As Russia continues its progress toward a stronger free market economy, there is bound to be some inconsistency in its approach to business. However, that is to be expected in a transitional economy, and businesses that establish connections now are poised to take advantage of increasing GDP growth rates. That promises significant opportunity when talking about the largest country in the world, the fourth largest European market, the 20th largest U.S. trading partner and the eighth largest retail market in the world.