Doing Business in Russia: Interview with Anton Fleck
Dan: You've spent a number of years working in Russia. Can you tell us about Russia and what's happening in the country at the moment?
Anton: First of all I would stress that despite the problems in Russia's current macroeconomic environment, the country offers vast opportunities for foreign manufacturers and service providers, due simply to the sheer size of the country. Australia could fit 2.5 times into Russia's surface. So if you take the population, which is more than 146 million people, and the need for modernisation within the country, and the lack of locally produced products in many segments of the economy, if you take all this into account - there are big opportunities.
"For many of the customers I have supported, Russia has become their most profitable market"
Dan: What about Russia's current economic environment?
Anton: I've worked and spent many exciting years in Russia. At the time I started, GDP growth was fantastic. It was far above the European average, peaking at about 10% in 2008. So within a relatively short timespan, the Russian standard of living increased considerably. Incomes tripled, quadrupled even. Also, one has to say, that the distribution of wealth has not been even. You can see that when reading for example, statements by Forbes at that time: Moscow was named by Forbes the "Billionaire Capital of the World".
After these good years, the financial crisis - triggered by the collapse of Lehman Brothers - led in 2008 to a contraction of GDP in Russia by almost 10%. The economy recovered again for a few years, but then in 2015 due to sinking oil prices and the sanctions imposed by Western countries, and because of [Russia's] annexation of the Crimean Peninsula - the economy contracted again. In 2016 the recession ended and now in 2017 for the first time, the Russian government is expecting modest GDP growth.
To cut a long story short - due to the strong devaluation of the Russian rouble, in combination with continued low oil and gas prices and Western sanctions - the standard of living for many Russians has deteriorated.
Dan: So there was this period of growth, in the early 2000s, which has now slowed?
Anton: That's right, Vladimir Putin took over at the end of 2000. Since then there has been considerable growth in the economy. In 2008, everything went right down.
Government budgets depend very much on exports of oil and gas. When I lived in Russia in the mid-2000s, the oil price was US$150 a barrel. And then as you now, it's fallen down to US$40-50 a barrel (and even lower for shorter periods of time) so the economy suffered a lot; the currency was devalued. This wasn't good for imports of course, because imports became relatively expensive for the Russian population. Imports still haven't reached the levels that we saw years ago.
Dan: What kind of impact is this having on everyday Russian consumers?
Anton: They must be very careful with how they spend their household income. In the past, they liked to buy imported goods because of their quality and superiority. But nowadays, they either have to wave certain purchases - for example, imported cheeses - or they have to choose locally made, cheaper alternatives.
"Despite the problems in Russia's current macroeconomic environment, the country offers vast opportunities for foreign manufacturers and service providers"
Dan: Given the context of the Russian economy, what kind of opportunities currently exist for foreign businesses? And which ones are worth exploring?
Anton: There are still a lot of opportunities in different sectors of the economy. For example, in the pharmaceutical industry, 80% of the products consumed (on a value basis) are still imported. That means only 20% are produced locally, but the Russian government wants to be more independent from imports. They launched the Pharma 2020 Agenda where they are trying to lure foreign investors and foreign pharmaceutical manufacturers into the country by offering them tax incentives, by subsiding foreign investments. And in the wake of this Russian Agenda you can imagine very good opportunities are popping up for foreign manufacturers of factory equipment, of machinery etc.
The same is true for the food industry. There are these sanctions now - the import of agricultural products is affected by these sanctions - and you cannot export cheese from EU countries to Russia anymore. So the Russian government is forced to increase local production of many raw food products, which were previously imported. Again, new factories have been built or are in the process of being built. So foreign manufactures of equipment see vast opportunities there.
Dan: So the Russian government is trying to limit imports, while external factors like sanctions are also impacting the amount of goods coming into the country. But it sounds like, as a result, this environment is creating opportunities for businesses who can help support domestic production within Russia of these kinds of products?
Anton: That's exactly right. In the mid- to long-term, the import of finished products might be lower than it was in the past. But because Russia is building state of the art factories, whether they're in the pharmaceutical or food industries, will still depend very much on equipment and technological imports.
Also the segment of the Russian population with higher earning potential continues to drive demand for foreign manufactured consumer goods - luxury goods. As long as these products aren't on the list of sanctions, they're still being imported.
Dan: Is that across the country, or within certain cities and provinces?
Anton: Most people in Russia who earn higher incomes tend to live in urban areas. I'd say those urban centres, in particular Moscow and St. Petersburg, account for a vast percentage of all imports of finished, Western made, quality products.
Dan: Are there particular products or brands that are in high demand? Or are Russians open to goods from all over the world?
Anton: In the fashion industry, the Russians generally favour products from Italy or France for instance. In the wine industry, it's France again but also Australia - you can find a lot of Australian wines in Russia. So it really depends on the goods. Russia has a very strong trade relationships with Germany for example, which for a long time was Russia's number one trading partner. Although due to sanctions, Germany is exporting less and I think now China is Russia's primary trading partner.
Dan: What kind of challenges or barriers do people in foreign businesses tend to face when they first start trying to do business in Russia?
Anton: What can you do if you are a newcomer? Again, you use the same instruments and tools you would use when entering another country. There are embassies you can go to for information. Most countries also have trade offices. There are manufacturers associations you can also go to in order to get relevant information about the market. The internet offers vast opportunities to get information about the country. And also your suppliers and customers who are already doing business in Russia can give you very valuable advice.
It's always an advantage if you speak the local language, but I wouldn't say it's a must to be able to speak Russian. Nowadays in particular, Russian companies that are exposed to imports and exports have staff you speak English quite well. I have to admit that you should be able to at least read the Cyrillic alphabet if you're going to use public transport or be walking around in the city, otherwise you might get quite lost! But in general it's ok. When I first started working there I didn't speak Russian at all.
Dan: Why is that?
Anton: The pharmaceutical market in Russia is not as transparent as it is in western countries. So the pressure on pharmaceutical manufacturers in the West and the US to cut the health costs is enormous; the markets are very transparent. So you can easily compare prices. Russia is still a little bit opaque in this sense. I had a customer in the medical business and the prices we achieved in the Russian market were 50-60% higher than in their home market. For many of the customers I have supported, Russia has become their most profitable market. Especially in the pharmaceutical business.
Dan: Many people might still fear Russia to some degree, because they think doing business there is so different to their own country. How much truth is there?
Anton: There is still this opinion that Russia is a very difficult country or market to enter. But I would like to quote a Scottish writer, Robert Louis Stevenson, who wrote "There are no foreign lands. It is the traveller only, who is foreign." What do I want do say by that?
If you lack knowledge about a cultural aspect of the Russian market - of course it's a difficult market - but if you are familiar with the specifics and peculiarities of the Russian market, then Russia is not more difficult than other foreign markets to enter. I think here comes the opportunity for companies like Dearin & Associates, who are here to bridge this gap about the cultural, economics and regulatory specifics of the Russian market. If a state of the art manufacturer or service provider lacks this knowledge, they should simply refer to companies like Dearin & Associates who have the resources and know how to tackle a market like Russia, in order to succeed.
I can only warmly, full heartedly, recommend any company that is interested in global expansion to consider the Russian market as one with lots of potential. Once more, if companies don't have knowledge or experience in Russia's society and economy, they should simply take advice. Because, "if you never take advice, one day you'll have to pay the price" as the saying goes!
Anton Fleck is a Senior Associate with Dearin & Associates, an international management consulting firm that helps micro-to-medium companies succeed in international markets. Anton advises companies on market access in the Central and Eastern European, EU and Russian markets. He is today based in Vienna, Austria.
To find out how you can start expanding your business to new markets, consider joining our International Business Accelerator - a structured online program to teach you everything you need to succeed overseas. Through it we help small businesses take on the world. Apply now!