“How difficult is it for a foreigner to open a small or medium-sized business in Russia?”
“The media most often reports the arrival on the Russian market of major banks and European car giants, and on government cooperation in the power generation field. It can sometimes appear hat only big European companies can work here. But actually, these companies simply have greater resources, and their arrival in a new market gets noticed immediately. But medium and even small businesses organised in Russia by West Europeans are developing very actively. This is a natural process. The members of our Association also include small companies which have been operating in Russia for about 20 years now. And these are not industrial giants. Their owners are ordinary people from Germany, England, the Netherlands, France, Italy and other European countries who started building their businesses here from scratch and who are doing very well.”
“In what do these companies specialise?”
“In food production, construction, and many in services. Some are successfully building up consultancy businesses. For example, the Lighthouse company was founded by Jeroen Ketting from the Netherlands. He came to Russia way back in the nineties. He has very wide experience of working here, and is a member of the Board of our Association.”
In 2007, Frank Schauff was elected Director-General of the Association of European Business in Russia.
“What did these companies find was the main problem in starting up a project in Moscow? What is the main difference about business in Russia?”
“There are not many differences. The main one (and at the same time, the main problem) is the amount of “red tape” you have to get through in order to open a business. It’s no secret that many processes in Russia are tangled up in bureaucracy.”
“But don’t expect, after overcoming these barriers, that you will not have competitors. That time is completely over. No matter what field of production or services you specialise in, similar companies already exist in Russia. Therefore you must offer a really unique product or favourable pricing to be competitive.”
“Another problem for business in Russia is the high additional costs. For example, the cost of leasing an office in Moscow is on a par with Paris or London. The salaries of qualified staff in the Russian capital are also no lower than in the European market. If you are thinking about a business in Moscow, you have to be prepared for this.”
During and after the economic crisis, the situation changed. Today there is much more willingness for a dialogue with foreign partners.
“So is the game worth the candle?”
“If you have managed to solve all the organisational questions, you can reckon on a very successful business. Russian Gross Internal Product is rising, and so is the purchasing power of the population. All the members of our Association (and there are more than 600 of them) are very pleased to be operating in the Russian market. For some of them, turnover last year was up by more than 10 percent. This is a very good figure, particularly against the background of the situation in the European countries. The comparison of business profitability in Russia and Western Europe for 2012 will also be unambiguously in favour of Russia.”
“Which sector of the economy is the most promising?”
“All the sectors are interesting at present, but particularly car manufacture. More and more cars are being bought in Russia every year. Almost all the major players in the international car market have already invested in Russian factories in Kaluga, St. Petersburg, Tolyatti and other cities. And the question of localisation of production keeps arising. This means that small and medium companies engaged in producing car components can also open their own production facilities here.”
“Another very interesting trend is the production of building materials. The best example is probably the Knauf company. This company, a medium-sized one by German standards, has become very successful in Russia. It has already opened several factories here. The reason for its success is that Russia is experiencing a real boom in construction.”
The members of our Association include small companies which have been operating in Russia for about 20 years now. And these are not industrial giants.
“Many say that you can put your money into Russia, but there is a lack of technology and of top-quality managers. So investment should not be only in the form of money, but also of technology?”
“I visit the Russian regions and I see that a great deal of money is needed to raise living standards and modernise the infrastructure. It is probably incorrect to assume that this can only be done from the Russian state budget. Remember East Germany. After unification, vast sums were invested there. And now look at the situation in Russia – here we have 10 times the population and 150 times the territory of the former GDR. And there is never enough state money. Partnership relations between the state and private investors are needed. They have been thinking seriously about state-private partnership in Russia, by the way. A draft law has even been produced.”
“As for Russian managers, their quality is steadily improving. Many of them work no worse, and some work better, than Western specialists. But that does not mean that there will be no demand here for European or American managers with good knowledge and experience. Incidentally, the law was relaxed in Russia two years ago to attract foreign specialists.”
“Therefore the correct answer to your question is: money, knowledge and technology are all needed.”
The Knauf company, a medium-sized one by German standards, has become very successful in Russia. Its products are very popular and well known here.
“If we come to matters of security, what does the European businessman have to fear?”
“In my view, there are no particular problems about the security of foreign companies in Russia. If we are talking about personal safety, I also see no great difference between the situation here and in large cities in the West. Actually, as compared with some American super-cities, Moscow is much safer. Here you can happily walk in any part of the city in the evening. But in New York, I would strongly advise you against it.”
“Nor does Russia differ much in taxation, although there are situations in which the tax authorities blatantly and unjustifiably interfere with business. However, there is one significant fact: if companies, being sure of the justice of their cause, appeal in court against the actions of the tax authorities, in most cases, they win.”
I see no particular problems about the security of foreign companies in Russia. The same applies to personal safety.
“But what does the average European, and more specifically the average small or medium-sized businessman, know about Russia? In general, does he realise that he can open a branch or company here and start trading?”
“For a foreign businessman working in a small or medium-sized business it is often not that easy to understand how the market is developing in Russia. Russia’s image in the West is not very positive, to put it mildly. And the Russian government is doing very little to change this situation. It is very rarely that the Western media highlight and analyse successful investments in the Russian economy. It is no coincidence that those who have worked in the Russian market take a much more positive view of Russia than those who have never been involved in business here. Negative views usually change quite rapidly when people start working here.”
“Obviously, the market in Russia is very different from that in Western Europe, where the rules of the game are much the same (or at least approximately similar) wherever you go. Russian law is built on a different basis. This, in my view, makes it more difficult to open and run a business. But in spite of all the difficulties, trade with the European Union is growing in Russia, particularly in the case of small and medium-sized companies. And it will continue growing, because Russia has joined the WTO. In time, more and more medium and small-sized European companies will enter the Russian market. Russia’s entry into the WTO will also make it easier for foreign financial corporations to come here. It will eventually become much easier to work in insurance and banking here.”
“How does the Russian state, those same officials we mentioned earlier, relate to foreign investors? Is there any interest on their part?”
“When I took up the post of head of the AEB in 2007, the dialogue with the Russian state authorities was not going well. In private conversations, many officials said frankly that everything could be done without foreign partners. But now, during and after the economic crisis, the situation has changed. Today there is much more willingness for a dialogue with foreign partners.”
For some members of the Association, turnover last year was up by more than 10 percent. This is not at all bad, against the background of the European countries.
“Are relations with the Moscow administration any different in this respect?”
“The situation has improved for the Association of European Business over the past two years, since the composition of the Moscow administration changed and Sergei SOBYANIN took over the leadership of the city. It has become much easier to conduct a dialogue.”
“If a medium or small-sized European or American businessman decides to open his business in Russia, where should he turn for advice?”
“To his country’s embassy and to auditing and consultancy agencies. To the various associations of European businessmen in Russia, including ours. And although we mainly represent major European companies, our members also include those in small and medium-sized businesses. We are constantly being approached for advice. For example, we were recently visited by a Danish pharmaceutical company which was planning to enter the Russian market. Before that, an architectural design bureau in Germany ordered studies from us on how the Russian market was developing in this field. We are receiving similar requests more and more often, virtually every week. The WTO has drawn Russia still closer to Europe!”