Everything you need to do business, from St. Petersburg to Siberia
During Perestroika, the 1980s loosening of the government control that eventually led to the dissolution of the Soviet Union, Konstantin Smolentsev helped launch one of Russia’s first business schools. In the Communist state, it was something of a novelty. “There was no business experience in the Soviet Union,” says Smolentsev through a translator. “I had to study everything myself first.”
Today, Russia, with a population of about 139 million, has become the world’s 11th largest economy. Powered by massive oil, gas and mineral reserves—and in desperate need of upgrading its crumbling Soviet-era infrastructure—the country’s economy has become a magnet for investors, entrepreneurs and corporate giants. Despite all the time that has passed since Smolentsev first began his scholarly undertaking, the Russian marketplace is still on a learning curve, still transforming into a Western system of democracy and capitalism.
Smolentsev, who moved to Toronto about six years ago and now runs a consulting firm helping Canadians do business in Russia, has witnessed much of that curve, from the early 1990s, when small and medium-sized enterprises and foreign-owned entities didn’t even exist, to the present when the more typical culprits of bureaucracy, protectionism and corruption remain key challenges.
Russia’s acceptance into the World Trade Organization last December—expected to be approved by the Russian parliament by mid-2012—could be considered Russia’s capitalistic coming-of-age. It was the only major world economy that was not a member. Eighteen years in the making, its membership required mass privatization of government-run enterprises, the opening of markets to foreign companies and lowering of trade barriers.
“The accession of Russia to the WTO is a win-win deal,” said WTO director-general Pascal Lamy last December. “It will cement the integration of the Russian Federation into the global economy. It will bring greater certainty and stability to business operators and trading partners. It is a contribution to the rule of trade law.”
The WTO ascension concludes 30 bilateral agreements on market access for services and 57 on market access for goods. Tariffs will drop to an average of 7.8% from an average of 10%. Many of the key tariff reductions play to Canada’s strengths: cereal tariffs will drop to 10% from 15.1%; oilseeds, fats and oils tariffs will drop to 7.1% from 9%; electrical machinery tariffs will drop to 6.2% from 8.4%; and wood and paper tariffs will drop to 8% from 13.4%.
“It won’t happen overnight,” says Vitaly Paroshyn, area director for Eastern and Southeast Europe in the Ontario Ministry of Economic Development and Trade’s international trade branch. “It will take maybe seven to eight years. The trade barrier reductions are very specific.”
The Russian marketplace is still dominated by large, former-state-owned enterprises whose decisions often reflect national policy. So the growth so far has understandably attracted large global players with pockets deep enough to be in it for the long haul. The WTO ascension might spread the opportunities around a little.
“Some Canadian corporations have lost their investment and gotten shoved out by the government. The legal system is not reliable and hard to predict,” says Wesley Cragg, project director of the Canadian Business Ethics Research Network (CBERN) and professor at York University’s Schulich School of Business. “Corruption is harder on the small- and medium-sized companies because they don’t have the resources.”
Because of the history of Russian governments expropriating property and unexpectedly changing regulations, some experts suggest exports and services, rather than large-scale investment, is the safest way into the market. The authoritarian style of government established by Vladimir Putin, president from 1999 to 2008 and a candidate for president in 2012, makes some people antsy. From a strictly business perspective, Russia-watchers find him less worrisome.
“The things they do are not so egregious as to deserve a boycott. They’re not a pariah state by any stretch of the imagination,” says Ian Lee, who teaches at the Sprott School of Business at Carleton University. “Putin is a certainly a thug. The current president [Dmitry Medvedev] is more of a western-style technocrat. Generationally, they’re 10 years apart and that makes all the difference in the world.”
Cristian Mandachescu, vice-president of global risk management at Scotiabank and Toronto chair of the Canada Eurasia Russia Business Association, admits that financing Russian operations needs careful attention. Foreign companies typically can’t borrow money in Russia. Though corruption tends to be a problem, in sectors that the Russian government have designated as priorities, it’s not so bad. “Many companies do business in Russia without having to do it the Russian way,” says Mandachescu.
Martha Harrison, an international trade and investment lawyer from Heenan Blaikie, points out that not only are Russians still learning international business expectations, foreign companies are still learning how things work in Russia. For example, some companies forget that Russia has its own certification and labelling requirements on an array of products from cosmetics to electrical goods. “In the last couple of years, it’s become a lot smoother,” she says. “Canadian businesses have become more sophisticated and Russian businesses have become understanding of what the global rules are.”
What makes Russia worth the risks is the country’s dire need for North American know-how in everything from housing construction and agriculture to telecom and the extractive industries. “If the Russian and Ukrainian steppes [a large area of temperate grasslands and savannas] were ever farmed as efficiently as in Canada, they would put us out of business,” says Lee. “Our saving grace, is that though their soil is vastly richer, they’re much more inefficient and they have major problems with their distribution. They’re still using horses on a lot of farms.”
Though Moscow is considered a cosmopolitan global capital, living and working conditions drop dramatically beyond its city limits and those of the second city, St. Petersburg. Efforts to relieve the development pressures in the capital and to improve the housing stock and infrastructure across the country has resulted in many new communities being built from scratch, including commercial and industrial centres. Over time, WTO membership will enable international companies to participate in Russia’s boom, without being sideswiped by unexpected costs and regulations. Canadians have a particular advantage; because of our geographic similarities (and love of hockey), Brand Canada has more meaning in Russia than in other countries. We’re seen as technically innovative people who know how to manage a resource-based economy. And we don’t suffer from the Cold War baggage that Americans bring with them.
“They continue to have a very negative view of the U.S.,” says Lee. “We are seen as different there, a kinder, gentler version of the U.S.”
ALL ABOUT RUSSIA
Only a Canadian can appreciate the vast size of Russia, its extreme climate conditions and its mix of disparate regions and ethnic groups. Despite these geographic similarities—and both countries’ stakes in the Arctic—history has, for the most part, kept the two countries at a distance. Russia’s embrace of Communism for most of the 20th Century put us on opposite sides of the Cold War. Despite our shared love of hockey, our populations don’t overlap so much. (Although there are about 500,000 Canadians of Russian descent. That’s less than half the number of Ukrainian Canadians.)
Since the 1991 dissolution of the Soviet Union and the abandonment of Communism, Russia has slowly adapted to democracy and shifted from a centrally planned economy to a market-driven one. Former Soviet government enterprises and property have been privatized. Restrictive Communist-era policies concerning business, property ownership and personal freedoms have been liberalized in principal, if not always in practice. The era of Vladimir Putin—which began in 1999 when Putin became president and continues with him as prime minister and a presidential candidate in the 2012 elections—has been marked by an authoritarian approach. Still, Russia’s economic growth has been undeniable.
Though hit by the global economic crisis, the country’s growth in the previous six years ranged from 5.6% to 8.1%. Economists forecast real GDP growth of 4.3% in 2011. Today, it is one of the world’s largest economies and has the highest per capita income (US$15,900) of any of the BRIC countries (Brazil, Russia, India and China). With a growing middle class, Russia has become one of the Canadian government’s priority markets. In particular, its rapidly deteriorating Soviet-era infrastructure, as well as its massive oil and gas industry, has created a huge demand for services and equipment for construction, engineering and extraction. Despite having a land area more than twice that of Canada and four times the population, Russia has a road network 50% smaller.
While Canada’s Constitution recognizes two kinds of regional subdivisions—provinces and territories—the Russian Federation has six kinds of federal subjects, adding up to 83 entities. Each type of federal subject has a different relationship with the federation. The 23 republics, for example, each have their own constitution and legislature, relying on the federal government primarily for international affairs. The 46 oblasts function as provinces, while the two federal cities, Moscow and Saint Petersburg, have more autonomy than other cities. To make things more manageable, the federal subjects are often grouped into 12 economic regions, each sharing similar levels of economic development, climatic and geographic conditions and customs oversight.
Bureaucracy, and the corruption that seems to come with it, are cited as major obstacles to entering the Russian market. So is language and the sheer size of the country, which touches on nine time zones.
Russia’s GDP was estimated to be US$1.465 trillion in 2010 (Canada’s in that year was US$1.574 trillion). Per capita, Russia has a GDP of $15,900. Its Gini index, which measures social economic equality, was 42.2 in 2009, according to the CIA World Handbook, compared to Canada’s more equitable 32.1, measured in 2005.
Russia’s currency is called the ruble and bears the ISO 4217/SWIFT CODE of RUB. One Canadian dollar was worth about 31.11 rubles in the first quarter of 2012. Since 2007 there have been no significant currency controls in Russia pertaining to convertibility. According to the global law firm Baker & McKenzie, there remain a number of rules affecting Russian residents. Residency refers to Russian citizens as well as foreigners with permanent residence in the Russian Federation as well as companies set up inside Russia. The country’s Currency Law requires that Russian companies hold all foreign currency export proceeds in Russian bank accounts. “Transaction passports” must be used at Russian banks for some kinds of transactions such as external trade or loans. These passports must be applied for under the Currency Law using supporting documents (in Russian) as required by Instruction of the Central Bank No. 117 –I. All payments require a certificate on currency transaction identification which includes details on the transaction as well as those of the transaction passport.
Most Russian residents may not perform actual foreign currency transactions, although there are some exceptions under the Currency Law. The purchase and sale of foreign currency may only be performed at authorized Russian banks and pure cash exports are subject to restrictions. Should a Russian company or individual open an overseas bank account in OECD/FATF member countries they must notify Russian tax authorities and file regular reports on the cash flow in such accounts. Russian maintaining overseas bank accounts are subject to certain restrictions. Violation of the Currency Law may result in punishment from seizure of the entire transaction all the way up to imprisonment.
Russian is the main and official language, though there are many smaller minority languages. The nation’s median age is 38.7 years. In terms of literacy, 99.7% of males can read and write; 99.2% of females can. About 51.8% of its 75.49 million-strong labour force is devoted to services, while 31.9% work in industry and 10% in agriculture.
The Constitution of the Russian Federation guarantees the rights of all constituent republics to establish their own languages, enabling them to conduct official business in two languages, one of them Russian. Foreign firms operating inside Russia must conduct activities such as bookkeeping, tax records, office paperwork, public advertising and the publication of consumer-protection information in Russian or a republic’s local language.
Russia was the 19th largest destination for Canadian exporters in 2010 and is expected to be No. 16 by 2040, according to a forecast by the Department of Foreign Affairs and International Trade. From 2006 to 2010, our exports to Russia grew to $1.190 billion, up from $876 million. Our Russian imports declined slightly during that period, coming in at $1.643 billion in 2010. Between 2002 and 2009, bilateral trade more than quadrupled. Canadian direct investment in Russia reached $725 million in 2009, while direct investment in Canada from Russia was $358 million.
In 2010, Canada’s top exports to Russia were: frozen boneless pork (10.35%), distilling and rectifying plants (7.32%), gas turbines exceeding 5,000 kilowatts (6.95%), frozen shrimp and prawns (5.14%) and parts of boring or sinking machinery (4.36%). Top imports to Canada from Russia were more focused: crude petroleum oils and oils obtained from bituminous minerals (50.22%), petroleum oils and oils obtained from bituminous minerals other than crude or light oil (12.61%), light petroleum oils and oils obtained from bituminous minerals (9.32%), palladium in semi-manufactured form (3.24%) and urea (2.33%).
Tariffs and Customs
In order to join the World Trade Organization, Russia has agreed to cut tariffs, eliminate industrial subsidies and allow foreign companies greater access, particularly in banking and finance. The process is likely to be gradual as legislation is brought into line with WTO commitments. Existing customs regulations are published here. The official website of the Russian Custom Service is here. There is a wide array of tariffs on imports. A non-official list is published here.
Canada has a number of trade agreements with Russia dating back to 1991, including one concluded in 1995 on double taxation.
ON THE GROUND IN RUSSIA
The federal Department of Foreign Affairs and International Trade’s most recent travel advisory on Russia recommends a high degree of caution due to politically motivated demonstrations and possible terrorist activity, particularly in Chechnya, Ingushetia, and Dagestan, the republics of Karachai-Cherkessia, Kabardino-Balkaria (including the Mount Elbrus region) and North Ossetia, and the regions of Budyonnosky, Levokumsky, Neftekumsky, Stepnovsky and Kurski, part of the district of Stavropol Krai, all of which should be avoided.
Canadian tourists visiting Russia must obtain a visa. Visits are for a maximum of 30 days. Single entry visas are $75, double entry $130; to obtain a visa in less than 20 days, it costs about double. Specific visas are required for business, study, religious or cultural purposes. Applications must include a letter from their company explaining who is travelling, where, when and with what purpose. Most importantly, applications must include an invitation from their Russian host provided via the Federal Migration Service of the Russian Federation (FMS). Work, study or business applicants must also submit an HIV test certificate. Medical insurance is a condition of visas for temporary or permanent residence. The rules can change and are available on the website of the Russian Embassy to Canada.
Russians, like North Americans, like to get right down to it when doing business and don’t need lengthy cultivation the way Arabs or Asians would. However, 20th Century history has inculcated an instinct for getting and keeping friends in high places who can get things done for you, a concept known in Russian as “svyasi.” You know you have cemented a relationship when your new colleague asks a favour of you.
When planning to meet a government official request your meeting as much as six weeks in advance. Confirm the meeting a day or two prior and be punctual even if your host isn’t (it may be a test of your resolve). Accept that appointments can get rescheduled, even at short notice. Prepare your materials, including business cards, in English and Russian or the official language of the republic you’re dealing in. It may be necessary to bring your own interpreter. Occasionally, at the more advanced level of negotiations, your Russian counterparts may become flamboyant: walk out of the room or threaten to break off relations. Once again, it may be a test of your commitment to the relationship and can be finely gradated. Remember the canny Soviet foreign minister Andre Gromyko, who once noted of a meeting with the Americans: “We did not walk out, we did not get angry, we did not even take our eyeglasses off and fling them on the table.”
Although corruption is endemic in Russia remember that you are subject to Canadian and sometimes American corruption-of-foreign officials, so understand what you can and cannot do before leaving home.
Russian labour law is primarily governed by the “Labour Code of the Russian Federation,” as well as the 1996 “Federal Law on Trade Unions, Their Rights and Guarantees of Activity,” and Russian legislation on minimum wages and labour safety. These laws apply equally to all levels of staff in Russian companies, including branches of foreign companies accredited in Russia, employed foreign nationals and foreign businesses in Russia.
All employees enter into a written agreement setting out the basic terms and conditions of employment. The Labour Code provides mandatory minimum employment-related guarantees, benefits and compensation, which cannot be superseded by an agreement between employer and employee.
These agreements are usually for an indefinite period of time, although some agreements have a fixed-term length. Relevant duties and obligations are included in the agreement and employees cannot be required to perform tasks outside of their job’s scope without their written consent.
Russian employers must issue an internal order each time an employee’s status changes, such as a new hire, job transfer, vacation, discipline or termination, which is signed by the employee. Each person has a labour book, which contains a formal record of their employment history and a record of employment for each job exceeding five days’ length and confirms their right to a state pension and social benefits. Employers are responsible for updating their employees’ labor books in a timely manner and in strict conformity with the required format. On the employee’s final day of employment their book is completed, stamped and returned to them.
Mandatory policies and procedures are provided by employers to their employees. Once employees have familiarized themselves with the policies and provided their signature, the policies become binding.
Employees may be terminated by an employer only on specific grounds provided in the Labour Code, including a reduction of work, the employee’s repeated failure to perform their duties without justifiable reasons, or an unjustified absence from work for more than four hours during one workday. An employee cannot be arbitrarily terminated, (except for company CEOs, who can be terminated by the company owner, and as long as at least three months’ severance pay is provided).
Employers must comply with procedures and document requirements provided by the Labour Code when terminating employment for any reason. The Labour Code provides additional protection to specific categories of employees including; females, employees with children and trade union members. However, employees can terminate their employment at any time, without stating a reason, and generally provide two weeks’ written notice.
Employee salaries are to be paid at least once every two weeks. If there is a delay in payment, the employer must pay interest in accordance with the Labour Code. Employees have the right, with prior written notice from their employer, to stop working if salary payment is delayed for more than 15 days. Employees are paid in rubles and in general, payment in foreign currencies (both cash and bank transfers) is prohibited.
When hiring foreign nationals, employers must obtain permission, individual work permits and work visas before the employee begins work. Any foreign national who wishes to work at an accredited Russian office also needs to obtain a personal accreditation card from the appropriate accrediting body before applying for a work permit or visa. Work permits and work visas are generally issued for a one-year period.
The process and required documents can vary, depending on whether the foreign national needs a Russian visa, and can sometimes take a number of months to complete, especially in Moscow. Russian employers must provide financial, medical and social guarantees to their foreign employees and file notifications of their employee’s travel into, out of and around Russia. Highly qualified foreign nationals are categorized as “specialists” and enjoy a simplified procedure while obtaining a work permit and visa, and their work permits can be issued for up to three years.
There are severe penalties for non-compliance with foreign national work permit/visa requirements and the Russian government has made it a priority to increase control over the use of foreign employees. As Russian migration legislation is currently being reviewed and amended, verify the processes and document requirements before hiring a foreign national.
Trade secrets that an employer wishes to protect from unauthorized disclosure can implement a procedure known as a “commercial secrecy regime” in accordance with Russian federal law. This includes creating a list of trade secrets, restricting access, keeping track of individuals with access, and marking documents containing trade secrets. Employees sign a confidentiality agreement that outlines the liability of violating the commercial secrecy regime. –Heather Hewer
THE PRIVATE SIDE OF BUSINESS IN RUSSIA
Although Russia has more than 90 cities with more than 200,000 inhabitants, and 13 cities with more than one million inhabitants, it’s amazing how much of the country’s activity is centred in Moscow. Extractive industries like oil, gas and mining may take place in far-flung corners of Russia, but most of the deals are struck in the capital. With a population of almost 11 million people—17 million by some counts, including illegal residents—Moscow is bursting at the seams. In fact, the national government is looking to relocate some of its departments to other cities to ease the traffic pressure.
Regularly listed as one of the most expensive cities in the world, Moscow is both a playground for rich and a place where people live on less than US$300 a month. Although suitable housing is hard to find, the city’s other offerings have come a long way since a Canadian, George Cohon, opened the first McDonald’s in Moscow in 1990, just before the collapse of the Soviet Union. A wide variety of consumer products are available; gas and food and other goods produced in Russia can be very cheap. Russia’s second city, Saint Petersburg, is also a financial and industrial centre and a major shipping centre. Outside these two cosmopolitan cities, the quality of available housing declines sharply, as does the availability of imported goods.
Since 1991, the healthcare system, which used to be centralized, has undergone many reforms; it is still a work in progress. There is now a mix of public and private care. Russians citizens receive free health care in public clinics and hospitals. The quality of private care is considered to be better, though it can also be expensive for those without insurance.
Emergency and ambulance medical care is provided free to foreigners. Foreign citizens who have temporary and permanent residence are required to have medical insurance, which is paid for by the employee’s company. It is recommended to check with the insurance company before seeking non-emergency treatment. Some hospitals and clinics used by expats are listed here and here.
Where to live
Suburbs are an unfamiliar concept in Moscow; there’s little division between residential, commercial and business areas, which means it’s possible to avoid hassle-filled commutes if you choose to live close to work and school. Patryarshy Ponds, located in the heart of Moscow, is a popular neighbourhood for expats. Tverskya Street and Kropotkinskaya are even more fashionable, though, with so much nightlife centred in these spots, they are considered a little hectic for families. St. Petersburg, with a population of about 4.9 million, is considered much more liveable than Moscow, though there is far less of an expat presence.
Social life and kids
Moscow is a party town, with new clubs and restaurants opening all the time. The English-speaking expat community is large, although dominated by Brits and Americans. Those seeking the company of fellow Canucks can attend the regular social nights, including a year-round pub night organized by the Canadian embassy’s community liaison officer.
Moscow is also a hockey town. Like in Canada, there are recreational rinks, though most of the recreational leagues operate in Russian. For those` who would rather watch the puck than pass it, the Russian equivalent to the NHL is the KHL. The capital has three home teams: CSKA Moscow, Dynamo Moscow and Spartak Moscow. Online ticket sales are in Russian only.
Most expats send their children to international schools, which are usually based on the North American system with nods to the British system. (In Russian schools, all teaching is in Russian.) The Anglo-American School, Hinkston Christian Academy and the British International School are popular choices. There is a British American School in St. Petersburg, which is used by most western expatriate families living there. Lists of international schools can be found here and here.
Hopewell Management International Corp.
Hopewell Management didn’t discover the Russian housing market so much as the Russian housing market discovered Hopewell. Back in 2007, a group of Russian developers and officials was touring Calgary by helicopter, looking for housing developments that might work for the Russian market. “Every time they pointed to a project they liked, it turned out to be a Hopewell project,” says Paul Taylor, who has been with Hopewell since 1990.
When the Russian delegation came calling, the company, which builds homes and industrial areas and creates master plans, was already looking to expand internationally. At the time Taylor started with Hopewell, the Calgary-based company had four employees and no land base. Now it has 300 employees and thousands of acres, mostly in Alberta. In 2008, Hopewell met with Russian developers to come up with a master plan for a brand new community, New Stupino. Located next to the existing community of Stupino, a city of about 67,000 about 75 km beyond Moscow’s main ring road, the planned community will cover 4,000 acres and is expected to have an eventual population of 60,000. New Stupino will include commercial and industrial areas, as well as homes catering to a mix of incomes. Construction started in late 2010 and, if the project sells, will be finished by 2017.
Outside major cities, decent housing is hard to come by. One of the priorities of President Dmitry Medvedev’s government has been to move its citizens from apartment blocks to single-family homes and to move government agencies out of Moscow in order to redistribute the population beyond Moscow. The government expects to build about 20 million square metres of housing in 2012, about 30% of all residential construction, although New Stupino is a private initiative.
“There’s not so much a desire for housing as a desperate need,” says Taylor. “A lot of it is falling down. Traditionally they don’t have suburban communities so this is a very new thing for them.” Over the last few decades, Taylor says North American and European companies have been good at selling Russia plans and ideas, but in the housing market, few companies have been on the ground to make sure the plans were properly executed. Weatherproofing “is there on paper but not in practice.” So Hopewell is involved in every stage of the development. Because the Russian and Canadian climates are similar, Russian developers have no interest in adapting Canadian construction techniques—they want Canadian-style housing right out of the box.
“We’re working very intently on doing it exactly the way we do it in Canada and we’re getting closer and closer to doing it that way as time goes by,” says Taylor. “They want it exactly the way we build it in Calgary, which was a surprise to me. They have no interest in recreating some home style they had here 100 years ago.”
Making the job easier is the fact that Russia’s current national building standards are based on Canada’s. Though they are not consistently implemented, Taylor says all levels of government are very open to the way things are done in Canada, though, of course, nobody wants to “walk in the door and tell them their plans are garbage.”
The supply chain, too, is good, “especially since China is so close.” With three other Russian projects in the works, Taylor is optimistic that Canadians can help Russians have housing they enjoy, rather than housing they endured.
Wolfgang Spillner, president of Toronto-based Albacor Shipping, has seen Russia change and change again since he first started doing business there in the early 1990s.
He and Gerald Hess founded Albacor in 1998, after the German-based freight forwarding company they were working for was bought by German industrial giant Krupp. With his old job, Spillner had worked with many Russian clients going back to the collapse of the Soviet Union. Some of Albacor’s first contracts involved shipping used automotive presses from various parts of the former Soviet Union as they were sold all over the world including Canada, the U.S. and Mexico.
“We continued some previous [pre-Krupp] relationships, mostly exporting from Canada into Siberia for a number of oil companies, but through those businesses, we developed new customer relationships and built our Russian market segment from there,” says Spillner, who moved to Toronto in 1974, after beginning his career in freight forwarding in the German port city of Hamburg.
With Russia eventually accounting for 30% of their business, they established Albacor Shipping Russia and Albacor Siberia in 2010. Focusing on project-oriented business—heavy lift and oversized cargos—the spectrum of goods they move in and out of Russia is large, ranging from tunnel-boring machines to shipments of steel. The oil industry, which has many Canadian players, has been the most dependable sector.
Spillner was glad to the see the end of the 1990s post-Soviet phase of the Russian economy. “It was certainly the wild, wild East. It was a very unregulated place to do business,” he says.
After the 1998 currency collapse, Vladimir Putin took over, first as acting president, then, in 2000, as elected president, bringing with him a more regulated, more structured style of government. Combined with rapid economic growth, Putin’s policies started producing clear industry winners—and lots more bureaucracy.
“The difference now is you have rules and regulations to follow, and if you do it right, you can be very successful,” says Spillner, who usually visits Russia three times a year. “They’re trying to be up-to-date in how they do things. Personally I think they’re still lagging behind. It is more convoluted to follow the rules. Customs clearance is quite a challenge because of the very narrow rules. The documentation is just tremendous and with any small mistake you make, you have a delay of shipment, which can be a huge cost.”
For example, although a customs union among Russia, Belarus and Kazakhstan came into effect in 2010, Spillner has not yet seen any improved efficiencies. Shippers are too nervous to try it out. “The numbering system for the tariffs is still not all in line between the three countries, so there’s still a lot of work to do to make it a reality,” he says.
Still, the infrastructure has improved remarkably. “You can navigate most of the rivers. The roads, there’s still lots to be done, though they’ve gotten better over the last 10 years. With the railways, they haven’t brought the railway systems into one system. Railroads are owned in different countries by different private and state enterprises. Sometimes Russia won’t make a railcar available for Belarus, for example, or vice versa. There is a problem in the supply of conveyance that is politically motivated to a certain degree.”
Though most industry players have headquarters in Moscow, decision-making can be spread out among regional offices. Albacor has 10 offices in Russia, including two in Siberia, one in Omsk and one in Novosibirsk; the latter two handle the contracts for shipping between Russia and China. “It’s important to cover the individual regions, for the time differences and the distances and to be close to the market you’re dealing with.”
Spillner still sees remnants of the Soviet central-planning style in Russia’s “directed market.” The major players in many sectors are often the heirs to old state-run companies. Their rivals are often run by people who used to work at the state-run companies.
“At one point there was an oversupply of companies and the market had to adjust itself, with many of them going out of business,” says Spillner. The ones that have been successful are often run by people under 40, whose attitudes are not weighed down with the baggage of Soviet-style thinking.
When Spillner first saw Russia becoming a market-driven democracy, he figured it would take 40 years for it to transform into a Western economy. Despite the economic success—Albacor is expecting an annual growth rate of 15% to 20% there over the next five years—he’s become a little more pessimistic about the political side of things.
“Now I think you have to add another 20 years to it. It’s such a big country it takes so long for things to change.”
MORE ON RUSSIA FROM BUSINESS WITHOUT BORDERS
The Global Opportunity Tool, available exclusively on Business without Borders, offers plenty of information on how your business would fare in Russia. Pick your industry and sector from one of several hundred and learn what opportunities await. Also the tool provides extensive information on risk management. It reports that while macroeconomic risks have fallen markedly since the 1990s the country scores inordinately high for risks stemming from government effectiveness. That is a result of poor efficiency in public administration and widespread official corruption.
Obstruction by public servants has slowed a long-standing policy of “debureaucratization” and its attempt to reduce government meddling in the economy. Meanwhile, the judicial system is woefully underfunded and slow. Moscow has had some success at reducing red tape, such as reducing the number of business activities subject to licensing. Although Russia has a corporate governance code to increase transparency and shareholder rights participation in only voluntary.
Progress is being made elsewhere. The Russian Central Bank is building up its supervisory powers over the financial sector. Stability and liquidity in the banking sector are improving. There remain areas in the Caucasus that are dangerous but most cities elsewhere in Russia as no more dangerous than those in Western Europe. And there’s good news in the matter of taxes: Russian extremely complex taxation system has been simplified and overall tax rates have fallen.
However, there is still much work to be done. PwC, in its annual global survey on paying taxes, ranks Russia 105 out of 183 countries for ease of paying taxes (Canada ranks 10th). Also, it ranks 132nd for the amount of time required by companies to process all tax obligations. (Canada ranks 34th in the amount of time required). And Russia ranks 1123rd in its total tax rate (TTR), which comprises profit tax + labour taxes + other business taxes for a TTR of 46.5%. (Canada, with a TTR of 29.2% ranks 37th). For more information on paying tax in Russia, see PwC’s annual survey and a detailed report on Russian taxation (site registration required).
In addition, Business without Borders has produced or reprinted other valuable stories about Russia:
Canada’s missing in Russia
Greater leadership from the top would vastly improve chances of success for businesses
Cracking pieces of the BRIC
A recent conference yielded ways to sell into three of the four fastest-growing emerging markets
This old house
The huge opportunities in rebuilding Russia’s dilapidated housing stock
Canadian softwood’s new dominance in China
Soaring exports of softwood logs and lumber has resulted in Canada displacing Russia as China’s No. 1 supplier
Kremlin confidential: Russia’s back in the game
Foreign cash is once again flowing back into Moscow
How to plan an investment strategy in Russian business
Lack of domestic financing leaves vast resource deposits unexplored. Canadian companies can profit, but need to learn the ins and outs of a different business culture
Is Russia the next Silicon Valley
Efforts at modernizing the nation’s technology sector hinge on leveraging talent and overcoming a poor track record for innovation
Six things you need to know about doing business in Russia
Productivity, perseverance and wooing local governments are some of the lessons from a recent Russian business forum
There’s no place like a Canadian home
Nascor International sells the manufacturing processes of Canadian home construction around the world
CONTACTS AND RESOURCES
The government of Canada has published a brief overview of the opportunities for Canadians in the Russian market.
The Embassy of Canada in Russia
23 Starokonyushenny Pereulok, Moscow 119002
The Embassy of Canada in Russia is also responsible for Uzbekistan and Armenia. The Trade Commissioners Service’s priority sectors are agricultural technology and equipment; agriculture; food and beverages; building products and construction; fish and seafood products; metals, minerals and related equipment, services and technology; and oil and gas equipment and services. Trade commissioners can help businesses on the ground by providing market research, resolving business problems and arranging meetings with government and business leaders.
Canada Eurasia Russia Business Association (CERBA)
333 Bay Street, Suite 2900
Toronto, Ontario M5H 2T4
CERBA is a large and well established business network with seven chapters located in Moscow, Toronto, Montreal, Ottawa, Calgary, Vancouver and Almaty, Kazakhstan. It has more than 200 members in a wide range of sectors and provides an extensive network of contacts with frequent networking events, informative seminars on pertinent topics in the Eurasian market for Canadian companies, an annual national conference, a quarterly printed newsletter, committees of the Canada-Russia Business Council (CRBC), access to trade missions, as well as market intelligence, advocacy on government policy, and sector-focused committees.
Russian Chamber of Commerce
5000 Dufferin Street, Suite 215
Founded in 2005, the Russian Chamber of Commerce is an independent non-profit organization created to develop and promote trade, business, financial and professional interests and relations between business communities of Canada and Russia. RCC also provides informational and trade support for businesses within the system of Canadian and Ontario Chambers of Commerce and other ethnic business organizations operating in Canada, Russia and the Eurasian Union.
Canada-Russia Chamber of Commerce
5250 Hastings Street, Suite 210
Burnaby, British Columbia
The Canada-Russia Chamber of Commerce is a Vancouver-based organization developed to promote trade, business, technology, cultural awareness, sports and education between the two countries.
The Embassy of Russian Federation in Canada
285 Charlotte Street
Consular Division of the Embassy of Russian Federation in Canada
52 Range Road
Serves the Ottawa area, British Columbia, Nova Scotia, Nunavut, New Brunswick, Newfoundland and Labrador, Prince Edward Island, Yukon and Northwest Territories.
Consulate General of the Russian Federation in Toronto
175 Bloor Street East, South Tower, Suite 801
Serves Ontario (excluding Ottawa), Alberta, Manitoba and Saskatchewan.
Consulate General of the Russian Federation in Montreal
3685 Avenue de Musee
The Russian Federation’s consular services provide visa services for Canadians (visa queries sent to the embassy will go unanswered). The website provides some basic information about the country.
Funded by the Russian Federation, this website covers economic and social development in Russia. Not the most critical source of information, it does provide up-to-date information on recent government initiatives.
The Moscow Expat Site
This online community, dedicated to the English-speaking expat community in Moscow, contains lots of useful information about living in Russia, including advice on everything from dining out to real estate.
Canadian Women in Moscow
Any female Canadian passport holder can email@example.com to meet others Canadians. Its informal gatherings usually happen once a month.
Founded in 1980 as the Trade Facilitation Office Canada, this non-governmental organization assists developing countries to export to the Canadian market. It has become an established source of training for exporting and for investment attraction for developing and transition economy countries. The agency can also help Canadian importers learning about sourcing alternatives.
Canadian Association of Importers and Exporters
This 800-member not-for-profit organization provides trade policy information through its events, publications and websites. IE Canada also lobbies the federal government on issues of international trade. Its members-only membership directory provides networking and expert contacts.
Export Development Canada
This Crown corporation provides insurance, financing and bonding to help Canadian companies do business internationally. It also has detailed and up-to-date market reports on the Russian Federation and many other countries. You can download an EDC overview here.
Business Development Bank of Canada
This Crown corporation provides financial and consulting services to Canadian small and medium-sized businesses, with a particular focus on the technology and export sectors of the economy. It also offers advice on going after international markets.
Organization for Economic Co-operation and Development
Founded in 1961 to stimulate progress and world trade, the OECD publishes several reports on the economic situation of the Russian Federation and the other 33 member countries.
The global institution prepares regular market reports on markets, including the Russian Federation, as well as country-specific background papers. Its Doing Business reports ranks countries according to the ease of doing business, calculating the time and cost of various permit and registration processes.
The International Trade Centre
The ITC helps small businesses in emerging markets and so-called transition-economy countries with their export strategies. It does this by providing “sustainable and inclusive development solutions to the private sector, trade support institutions and policy makers.” For Canadian exporters or firms interested in investing in Russia its Website provides an overview of issues and topics, including trade and investment data, trade information and contacts.
Federation of International Trade Associations
The federation has a mini-portal with more trade data, including economic indicators, practical information, agricultural data and an overview of the Russian media.
Paul Gallant, Business without Borders
March 12th, 2012