“Kendrick, how hard is it for a foreigner to open his own small or medium business in Russia? What difficulties will he face here?”
“He will come up against the first problem not in Russia, but in the West. This problem is called Russia’s negative image. In the West, they are convinced that the Mafia and corruption are widespread throughout the country… I’ve been working in Russia for more than 18 years now, and I have never come across the Mafia, I have not had any problems with them. Believe it or not, but I have never had any major problems with any administrations either, though I have had to adapt to local conditions, of course”.
“And what has been the most difficult?”
“Taxes and relations with employees within the framework of the Russian Labor Code. Relations are quite different from what they are in America. In Russia, if I fire an employee who doesn’t suit me or who I don’t need any longer, I am obligated to pay him severance package of two months salary… Even for a medium business, let alone a small one, this is a considerable sum. The Labor Code is very inflexible, and there are high social taxes on top of that. To pay someone one dollar in salary costs a further 47 cents in taxes. Profits tax is very low, but the social taxes are a nightmare. It’s very expensive…”
I’ve been working in Russia for more than 18 years now, and I have never come across the Mafia.
“Then why are Western companies, one after another, opening their production lines and offices here, and why do you quite often hear Western businessmen say that they look at the Russian market as the main one for development?”
“Because the Russian market is not only huge, it is still not yet full. Profitability is very high.”
“So you might say that these problems act as a valve keeping out the undecided? But if you’ve got past that…”
“Russia is a market with enormous potential for growth. But there is no foundation in the form of simple and understandable rules for conducting business. This is what hinders the development of companies. And it is the negative image of Russia being the valve which keeps out the undecided. But things here are not always as they seem from outside.
‘I have real experience, I am a venture capitalist. I sold that company for 125,000,000 dollars. Are you interested?’
20 years ago Russia failed to understand a very important thing. It is not enough to say: we are open for business. You must constantly promote yourself. Here’s an example: five years ago I took part in the work of the BRICS forum in New York. The audience consisted of about 500 people, all really major investors. They were absolutely open for investing in Brazil, Russia, India and China. They were simply seeking information on projects with good prospects. Chinese and Indian companies acted as sponsors of the conference. There were no representatives of Brazilian or Russian companies. Accordingly, the moderators were also from China and India. The moderators gave a great deal of time for speeches by their fellow-countrymen, and cut all the others short quite severely. I was due to make a presentation about venture investments in the afternoon, immediately after an Englishman, who was also talking about a Russian project. The Chinese moderator didn’t let him finish interrupting him with a ‘joke’: ‘That’s enough about Russia, you probably love the place because you have a Russian wife’. The Englishman was embarrassed and cut his speech short. I was given the floor. My presentation was devoted to the company called NizhFarm. A student of mine had bought it. I started to talk about investments in the pharmaceutical market in Russia. The Chinese moderator tried to interrupt me in the same way. ‘He’s an American, he probably has a Russian wife, that’s why he’s talking about the prospects of the Russian market’. I couldn’t hold back after that. I turned to the audience and said: ‘I have real experience, I am a venture capitalist. I sold that company for 125,000,000 dollars. Are you interested?’ After that they all applauded. The audience came to my defense and they heard me out… But some less decisive speakers did not get to speak at all.
At the very beginning of my stay in Russia I lost money too.
But that was my loss, my mistake…That’s why Russia has a negative image – it’s just lack of information. Everything is quite different from the way it’s talked about. In fact, everything is not so bad and hopeless, you just have to understand how to do things properly. At the very beginning of my stay in Russia I lost money too. But that was my loss, my mistake… I had an incompetent lawyer, and I did not have a Russian partner to warn me in time about my incorrect actions”..
“The share of small and medium businesses in Russia does not exceed 20 percent of the gross internal product…”
“Twenty years ago, the share of small and medium businesses in the Russian gross internal product was less than one percent. A 20-fold increase in two decades is a very good result”.
YOU WANT TO OPEN A BUSINESS IN RUSSIA?Five pieces of advice from Kendrick White1. Russian partner.This does not have to be a co-founder of the company. But you must have a good Russian consultant, a person you trust. Preferably a lawyer.2. Don’t be afraid of building personal relationships with business partners.In America I had business relationships and, accordingly, friends in this field, and of course I had friends through the family and university as well. In Russia, they all come together for your birthdays or other festive occasions, and come to you for help in difficult situations. The rule “My friend’s friend is my friend” operates here. And my advice to foreigners is not to build personal barriers between them.3. You must get to know your competitors thoroughly and study the niche you’ve set your sights on.And remember: if you become the partner of a state company, you can’t lose.4. Invest in long-term projects and value your reputation.But don’t reckon on a short-term quick profit. And on no account give up in the face of difficulties. Many Russians came to look on me as one of their own after I had been through the 1998 crisis with them. They said to me then: “You’re an American, but you’re one of us!” Reputation is worth its weight in gold in Russia. Sometimes you can obtain “on the strength of your reputation” something money can’t buy.5. Russia is not just Moscow, there are 82 regions too.Opening a business in one of the regions has its own specific features and difficulties, but the growth potential is simply enormous! Among the regions with good prospects (calling them after their central cities) are: Nizhni Novgorod, Kazan, Novosibirsk, Kaluga, Tomsk, Yekaterinburg and Astrakhan. There are many regions in Russia with progressive administrations, a good market and outstanding partners. You can start a business in one of them and think about expanding into Moscow later.
“Yes, but in Europe and the USA, small and medium businesses are the foundation of the economy and have 60-80 percent of the gross internal product. Can you say that Russia will achieve threefold growth in this respect in the next 10 to 20 years?”
“I’m an economist, and I’m sure it will happen. In the next five years, I think, Russia will see great changes in this field. Those in power are more open now; they are beginning to listen to the problems of small and medium businesses. I know many officials and Duma deputies who are very critical of Russian laws. They understand that they hinder small and medium businesses in Russia. In Nizhni Novgorod I see a considerable number of young people, who have built up successful companies in the past five to ten years, but their growth has come to a halt. They have enough money to go on vacation to Europe, they change their cars every three or four years, but local conditions do not permit them to expand their business any further. According to Russian politicians, who speak at our forums, Russia can expect great changes in this respect in the next five years”.
“But those who are already here and those who enter the Russian market in the next few years will have the opportunity to prepare for this growth and to get established in the most interesting market niches. Or is it better to wait?”
“I understand what is behind your question. I recently heard this Russian saying: The rich man fires while the clever one is still taking aim. Of course, the one who begins earlier always has more chances and opportunities. I repeat: the market is not only enormous, it is still not full.
A Russian partner brings contacts, experience and knowledge of the local situation to the table. A foreign partner brings excellent knowledge of business processes.
But any competent Western entrepreneur thinks about the business process. That means not only production, but distribution, brand development… And the businessman is looking for a clear path for the business processes. Therefore, in my view, success is possible, but a good partner is necessary. A Russian partner brings contacts, experience and knowledge of the local situation to the table. A foreign partner brings excellent knowledge of business processes. This combination is the best choice for success”.
“Which sector has the best prospects?”
“I can’t be objective about this, because I am now busy promoting innovations in business. It seems to me that Russia has the best technology solutions on the planet. But here, they haven’t a clue how to commercialize them. In my view, this is the market niche with the best prospects: the commercialization of Russian technology solutions, and taking them into the global market. In English, this is called ‘commercialization strategy services’. Therefore anyone dealing in the commercialization of technology solutions, software, IT technology and innovations in the medical and pharmaceutical fields, who has the experience and wants to continue building a career along these lines, ought to think about Russia. There is a huge deficit here of specialists in dealing professionally with global and strategic marketing and international sales. In my view, this is the field with the best prospects at the present time.
And I think that Russia is now building a very good foundation for an innovative economy, Skolkovo is not just a Potyomkin village, just for show. This is a real process. Very many major companies are represented in Skolkovo. I think there are very many market niches there for young American and European entrepreneurs, for those dealing in the technology commercialization field.
Russia is now building a very good foundation for an innovative economy, Skolkovo is not just a Potyomkin village, just for show. This is a real process.
And another thing. Very many Russian companies do not know how to sell their products. They are not thinking of ways to use technology to attract investments into their business processes. Therefore there are open market niches here too for Western consultants and specialists”.
“Which aspect of business in Russia irritates you the most?”
“Hotels. There are very few decent hotels in Russia, particularly in the regions. This market is virtually non-existent here. Although from the point of view of a potential investor or businessman, this could be a good thing”.
“And can a business be run from somewhere else?”
“I wouldn’t recommend it. You ought to spend a minimum of five years here to finish building up business processes. Then, if you have good partners, you can go back home. But you need a good partner. Not just a manager. You and your partner have to feel that you are both in the same boat. Only then, in time, will you be able to return to London, Berlin or New York”.