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A REPORT ANALYSING THE PROSPECTIVE STRATEGIC ACTIVITIES AND DECISIONS OF LLOYDS TSB ENTERING RUSSIA

University of Ulster London

Msc International Business

Acknowledgement
We very much grateful and would like to extend our special thanks to International Global Policy & Strategy lecturer Mr Daniel Hagen. He was a source of inspiration and guided us throughout the course and specially in writing this assignment. We appreciate his constant guidance, willingness to support without any hesitation even when he was very busy. He shared his expertise knowledge, opinions regarding this assignment. We would like to mention that, without his guidance, this would have never become a reality.

MSc in International Business Environment 2012

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Table of Contents
Acknowledgement .................................................................................................................................. 2 Introduction ............................................................................................................................................ 5 Company Overview ............................................................................................................................. 5 Aims of Study ...................................................................................................................................... 6 1. Reasons for Lloyds TSBs International Expansion .......................................................................... 7 1.1. Evaluation of the companys historical performance ............................................................. 7

1.2. Product/service range .................................................................................................................. 8 1.3. Share of the market and competitive position within the industry ............................................ 8 1.4. Why going international .............................................................................................................. 9 1.4.1. Competition Law by European Union ................................................................................. 10 1.4.2. International Diversification ............................................................................................... 10 2. Possible Strategic Choices Available to the Lloyds TSB................................................................. 11 2.1 The Banking Sector in Russia and the Chances Available for Lloyds TSB .................................... 11 2.1.1. The Background of the Banking Environment in Russia ..................................................... 11 2.1.2. Present Banking System in Russia: ...................................................................................... 12 2.1.3. Emerging Chance for the foreign financial institutions to be in Russia: ............................. 12 2.1.4. What strategic Choices Available to Lloyds TSB? ................................................................ 13 2.2. Available Strategic Choices ................................................................................................... 13

2.2.1. Fierce Competition in the Banking Sector .......................................................................... 13 2.2.2. Securing and highlighting the Global Brand Name ............................................................. 13 2.2.3. Russian crave for Investment Banks at Present .................................................................. 14 2.2.4. The favourable policy changes in recent Russia ................................................................. 14 3. Reasons for Choice of Location (Russia) ....................................................................................... 15 3.1. 3.2. 3.3. 3.4. The change of General perspective about Savings among Russians .................................... 15 Further Growth in Russian lending Market .......................................................................... 15 Ever Growing Bank Card and Credit Card sector in Russia. .................................................. 15 Russias Changing Policies ..................................................................................................... 15

4. Strategic methods of entry and the possible consequences ............................................................ 17 4.1 Strategic Methods of Entry ......................................................................................................... 17 4.1.1. Exporting ............................................................................................................................. 18 4.1.2. Licensing .............................................................................................................................. 19 3|Page

4.1.3. Franchising .......................................................................................................................... 20 4.1.4. Joint Venture ....................................................................................................................... 20 4.1.5. Foreign Direct Investment .................................................................................................. 21 4.1.6. Foreign Acquisition ............................................................................................................. 22 4.1.7. Green Field Entry ................................................................................................................ 22 4.1.8. Subsidiary: One of the Best and Popular Methods of Entry for banks ............................... 23 4.2. The Threats and factors that could hamper the Lloyds TSB entry to Russia and its Consequences ................................................................................................................................... 24 5. The Potential Organizational and Managerial Problems for Lloyds TSB operating in the New International Environment of Russia. ................................................................................................... 26 5.1 How would the Culture affect? ................................................................................................... 26 5.1.1 The Impact of Cultural Differences ...................................................................................... 26 5.1.2 Cultural Difference from Nation to Nation .......................................................................... 26 5.2. The Language Problem............................................................................................................... 27 5.3. Human Capital............................................................................................................................ 28 5.3. Salaries ....................................................................................................................................... 28 5.4. Working Ethics ........................................................................................................................... 28 5.5. Tax and Legal Issues ................................................................................................................... 29 5.6. Thin Capitalisation Rules ............................................................................................................ 29 5.7. Competition Law ........................................................................................................................ 29 6. Recommendation .............................................................................................................................. 31 Changing policies and the developing pressure ............................................................................... 31 Huge potential for a prospective sizable market share .................................................................... 31 Emerging political instability and Bureaucracy ................................................................................. 31 The lack of Trust towards foreigners and their Companies .............................................................. 31 7. Conclusion ......................................................................................................................................... 32 List of References .................................................................................................................................. 33

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Introduction
Company Overview
Lloyds Banking Group is a UK based financial services group, which provides a wide range of financial products and services to different customers groups, primarily in UK. Lloyds banking group was formed in January 2009 following the acquisition of HBOS by Lloyds TSB. The group is listed on both London and New York stock exchange and it is said to be one of the largest companies in the FTSE 100. It is also the biggest retail bank in the UK and has more than 25 million customers. The main banking activities consist of retail, wholesale and corporate banking services etc. The banking group has few well-known brands namely, Lloyds TSB, Halifax and Bank of Scotland. (Lloyds Group annual report, 2011). The graph below shows the formation of the Lloyds banking group. (Lloyds banking group, 2012)

(Ibid)

Despite the widely spread reputation and dominance in retail-banking sector in the UK, domestic market remains challenging due to macro economic and regulatory factors. Therefore, the management of the company has decided to expand their business to international markets in order to offset the risk and take advantage of opportunities in emerging markets.

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Aims of Study
Companies aspiring to meet the challenges of todays rapidly changing markets and increasing competition require strategic management decisions to be founded on wellconceived strategies. Well-justified decisions and clearly defined strategies are vital if the firm is to achieve its goals and objectives while optimizing the use of its resources (Ward and Lewandowska, 2008). The aim of this group study is to critically evaluate strategic activities and decisions of Lloyds TSB in entering the Russian financial sector. Therefore to understand and analyze, this report would discuss the following topics, undertaken by four individuals in the group. Reasons for Lloyds TSBs International Expansion Possible Strategic Choices Available to the Lloyds TSB Reasons for Choice of Location :Russia Strategic methods of entry and the possible consequences The Potential Organizational and Managerial Problems for Lloyds TSB operating in the New International Environment of Russia At the end of the evaluation and analysis of the different aspects of strategic activities and decisions of Lloyds TSB in entering the Russian financial sector, this report would draw recommendations and conclusions.

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1. Reasons for Lloyds TSBs International Expansion


This section would analyse why companies go international taking the different aspects of Lloyds TSB.

1.1. Evaluation of the companys historical performance


Share price of a company reflects the performance of a company within a certain period of time and it is a great way to identify the past, present and future direction of a company. The chart 1.0 shows the historical share price of Lloyds banking group. However, during the period of 2003 and the beginning of 2009, the chart reflects the share price of Lloyds TSB group. Since the end of 2007, the value of shares has dropped dramatically. This was due to the impact of mortgage crisis, which occurred specially in the UK and USA. However, the share price has stabilised since the formation of new group also thanks to government aid. It is said that the group have returned to profit in 2010 with profit before tax of 2,212 million on a combined business basis. Additionally, the group managed to increase combined business profit before tax by 21 percent in 2011. (Group Annual Report, 2011). Figure 1

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1.2. Product/service range


The main business activities of Lloyds TSB are retail, commercial and corporate banking, general insurance and life, pensions and investment provisions. The groups retail banking sector is accounted for 47% of the total income and it is the leading provider of current accounts, savings, credit cards and mortgages. Wholesale business accounts for 21 percent of the total Group income and their key product markets are corporate banking services, treasury and trading and asset finance. Furthermore, the group has gained foothold into the international markets through their wealth and international division. The division focuses on the privet banking and asset management businesses of the group and operates the groups international business. Their key product markets are asset and wealth management and international banking. The division have setup international private banking offices across the globe. They have offices in Dubai, Monaco, Luxemburg and USA etc. Therefore the bank could exploit its strategic experience in entering a new market, possibly Russia. (Annual report, 2011)

1.3. Share of the market and competitive position within the industry
Moodys (2011) claims that Lloyds banking Group is the 4th largest bank by assets as at 31st of December 2010 and also has presence in more than 30 countries. According to Groups annual report in 2011, it is the biggest retail bank in UK with over 30 million customers. It is also the largest provider of personal loans and credit card in the UK. Moodys (2011) states that following the acquisition of HBOS bank; the Lloyds group became the market leader of many key areas of UK banking, including current accounts, savings products, and residential mortgages and insurance. Despite the fierce competition in the industry, the strength of its retail-banking sector is reflected in UK market shares for current accounts (30%), residential mortgages (24%) etc. However, after the mandates disposal of bank branches, the independent commission on banking has estimated that groups market share will reduce. However, they are still expected to remain the market leader in many business areas. Market shares of largest UK banks are shown below in chart 2. Therefore Lloyds TSB should look for new markets where they could maximise their gains.

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Figure 2.0

(Moodys Investors Service, 2011)

1.4. Why going international


Essentially, banks have two options of expanding their operations in foreign markets. They can either service foreign clients through their domestic offices or they can establish a presence in the foreign markets. Banks give out loans and raise deposits on their home market as well as on a foreign market. Assuming perfect competition between banks, interest rates are taken as given. (Claudia, Buch. 1999) Considering the present state of Lloyds TSB and its operations and its performances during the times of recession have the financial institution under immense pressure from both government and public shareholders. As a result unless new innovative ventures are not met, the company would face severe hardships in the present economic environment.

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1.4.1. Competition Law by European Union

As a result of the state aid received during the financial crisis, the European commission has demanded to sell part of Lloyds banks business for the purpose of increasing competition and customer choice in the banking sector. According the group CEO Antonio Horta (2012), due to the mandate branch divestment, the group has come to an agreement with the CoOperative Group Plc to sell part of business. This deal is said to establish Co-Operative as an effective competitor in the UK banking sector. As the Lloyds Group has been forced to shrink its retail business in the UK, the company need to look beyond their geographical borders to achieve Groups true potentials and maximise return for their shareholders.

1.4.2. International Diversification

Despite having some international operations, the Group heavily relies on the UK for its core earnings. Therefore, Moodys (2011) argues that the Group is vulnerable to macroeconomic conditions in the UK. Therefore, it is important to find new markets, which allow them to utilise their banking expertises to increase profitability.

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2. Possible Strategic Choices Available to the Lloyds TSB


In this chapter, would be looking at all the possible strategic choices available to the parent company from Lloyds TSB banks perspective while considering what this country has to offer analysing Russias banking sector. The sections that would be discussed are: The Banking Sector in Russia The Strategic Choices Available to Lloyds TSB

2.1 The Banking Sector in Russia and the Chances Available for Lloyds TSB
This section would analyse the past and the present of the Russian banking sector and the presence of foreign banks in Russia. It will clarify some of the misconceptions that have evolved and what the real political and social background that support the emerging business environment specially the financial service sector in Russia. At the end, analysis into how Lloyds STB could enter the Russian banking sector is discussed. 2.1.1. The Background of the Banking Environment in Russia

According to Luc Laeven (2001) during the Soviet Regime, the Russian banking system consisted of a single, monolithic bank owned by the state. Financial reform in 1987 created three regional banks spun-off from the former state bank. Since the financial reforms in the early 1990s, a large number of private banks, over two thousand by 1993, have been established in Russia. As the corporate and governing policies changed drastically during the 1990s, foreign involvement in the financial sector of emerging economies rose substantially. By the end of the decade, foreign-owned banks in Central and Eastern Europe accounted for an average of 70% of bank assets and 40% in Latin America (Mathieson and Rolds (2001)). As one of the BRIC (Brazil, Russia, India, and China) economies, Russia offers foreign firms material commercial opportunities. This is especially the case in the financial sector where there is a strong desire to attract Foreign Direct Investment (FDI) into the sector in order to obtain additional capital to finance a plethora of infrastructure projects and to modernise its banking system.( Webber, Grant. 2009) In this perspective it is obvious, that there prevails a strong opportunity lying ahead for the Lloyds TSB to enter Russia.

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2.1.2. Present Banking System in Russia:

The Russian banking sector consists of 1,007 banks. This number is large both in absolute terms and even when compared to the number of banking institutions in countries of similar size such as Brazil (163), China (370), and India (169). Despite the large number of institutions operating in the country, the Russian banking sector is fairly concentrated and dominated by state-owned banks. The largest 20 banks control approximately 70 percent of total bank assets and six government-controlled banks account for 52 percent of total bank assets and 60 percent of deposits. The largest government-owned bank, Sberbank, is also the largest credit institution in the country and accounts for 25 percent of total assets of the Russian banking system. (Anzoategui, D. et al.2010) The Russian state essentially renounced its monopoly on banking in May 1988 with the adoption of the Law on Cooperatives. Two types of banking entities subsequently emerged to join the banking systems nascent second tier. The first group was made up of greenfield private banks established by private individuals and small business associations (cooperatives). The second group of commercial banks consisted of transmutations of local branches of state-owned specialized banks. (Vernikov, Andrei. 2007) 2.1.3. Emerging Chance for the foreign financial institutions to be in Russia:

The strategic chances available for Loyds TSb to enter the Russia could be viewed from different perspectives. While some point out the negative aspects related to such foreign entry, it could be argued the same negative factors have opened new opportunities for the UK bank Lloyds TSB to start business in Russia. When Jason Corcoran of Bloomberg Business week, (2011) wrote how foreign banks are fleeing Russia due to many reasons such as lack of banking interest of Russians and the monopoly of the Russian state banks such as Sberbank and VTB, the same article wrote Leonid Slipchenko, a banking analyst at Uralsib Financial in Moscow stating: "Russia remains a growth story, and there is huge potential for banks to tap the rapidly growing consumer lending market." Adding to this emerging growth, the examples such as, the entry of Socit Gnrale , a French bank, which bought Moscow-based Rosbank in 2008, has more than 16,000 employees in Russiamore than in any other country outside of France. Italy's UniCredit acquired full ownership of International Moscow Bank in 2007 and has more than 100 Russian branches. (Corcoran, Jason. 2011)

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2.1.4. What strategic Choices Available to Lloyds TSB?

When analysing moves such as of Socit Gnrale and UniCredit , of the banking industry in Russia, it is advisable for Lloyds TSB to enter Russia not as a separate new financial service provider but either by acquiring ( taking over the other) or merging with a financial institution already operating in the Russian soil. In this way Lloyds TSB would have the local knowledge and the expertise in understating the culture and language barriers, in addition to the state bureaucracy that seem to protect and favour the local banks.

2.2.

Available Strategic Choices

In this section, we would be looking at all the possible strategic factors available to Lloyds TSB in entering the Russian financial service sector. 2.2.1. Fierce Competition in the Banking Sector

The competition posed by the international financial services and at large all the MNC have influenced the local banks to engage in the global operations. Therefore globalization is a business imperative today, rather than a mere business strategy. (Schneider et al. 2008) In this perspective if Lloyds TSB remains local in UK, soon it would be wipe out unless new and innovative global approaches are not made. In this circumstances and considering the present banking sector in Russia, that there remains a tremendous opportunity, as many foreign banks have sold their retail banking operations in Russia in recent years. (Barentsnova. 2011) However there are new players emerging. For an example, Swedish IKEA has announced its plan to open banks in Russia and this demonstrates how industrial giants have eyed the availability of opportunistic financial service sector in Russia. (ibid) 2.2.2. Securing and highlighting the Global Brand Name

In this highly competitive banking world, no bank could survive unless it satisfies its share holders. While other UK banks such as Barclays having and expanding its international portfolio means Lloyds international business expansion is a business imperative rather than a strategy to satisfy its shareholders. According to Ranking the Brands (2012) Lloyds TSB stands at 58th position with the brand valve of $ 2.7bn compared to Barclays 12th position with the valve of $ 13.5 bn. Therefore positioning the global brand name in the right place is required of Lloyds TSB in the survival and of its existence in the global financial sector. 13 | P a g e

2.2.3. Russian crave for Investment Banks at Present

An increase of financial services FDI in Russia has been identified as an important trend for the continued modernisation of the financial services industry as well as providing much needed capital for a decaying infrastructure and a multitude of other capital projects (Webber, Grant. 2009). As a result, the long upheld communist ideas which restricted the entry of foreign banks to Russia have been overturned and today the Russians are forced to change their policies to facilitate the entry of foreign banks and their FDIs.

2.2.4. The favourable policy changes in recent Russia

In 2012 Russia stated that it would amend the policies regarding the foreign financial service providers in Russia, complying with the WTO rules (RT. 2012). According to that the foreign banks would have equal rights as that of local banks which have dominated the local banking sector in recent years. According to a study by Anzoategu (2010) five Russian banks dominate more than 50% of the Russian banking concentration. Russia will abolish the procedure when foreign-owned banks had to get permission from the Central Bank (CB) to open a branch. The procedure will be changed so that overseas banks will have to only inform CB about their intention to start operations in a new city in Russia. (RT. 2012) As many foreign banking giants have left Russia, Lloyds TSB should exploit this wonderful opportunity.

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3. Reasons for Choice of Location (Russia)


This section of analysis would delve deeply to examine the reasons why Lloyds TSB has chosen Russia as a preferred choice of location.

3.1.

The change of General perspective about Savings among Russians

According to studies done about the consumer behaviour patterns of Russians of their saving habits, Russians disposable income (The amount of money that households have available for spending and saving after income taxes have been accounted for.) has gone up. In addition today 72% of Russians are saving, up from 46% in 2004, and one-third of these savings are being kept in bank deposits. (The Moscow Times. 2012) Therefore Lloyds TSB should position itself in Russia before other banks set in.

3.2.

Further Growth in Russian lending Market

The average Russian has relatively little debt and is considered a low credit risk (Aris, Ben. 2010) Russia is a growing market for lending, with Russian loans growing 10% in 2010 and 20% in 2011 (Doing Business in Russia. 2012). However, only 24% of Russians take out loans (Ruvinsky, Vlaimir. 2011), indicating room for further growth in the Russian lending market.

3.3.

Ever Growing Bank Card and Credit Card sector in Russia.

In 2011, the number of bank cards in Russia grew 38% to 200 million. However, only 50% of those cards are active, and Russians still make 80% of their payments in cash (ITAR-TASS. 2012), leaving bountiful opportunities for expansion of bank card and credit card businesses in Russia. This would prove to be a successful venture for Loyds TSB to explore such growing market at its on set.

3.4.

Russias Changing Policies

In 2012 Russia stated that it would amend the policies regarding the foreign financial service providers in Russia, complying with the WTO rules (RT. 2012) Russia's evolving market for savings and credit is generating greater demand for the services of banks and credit card companies, leaving more room for growth and new opportunities. According to Russias WTO commitments providing for 100% foreign ownership of banks and increasing the

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allowed percentage of foreign-owned banks in the Russian banking sector to 50% from the current 15% (Cooper, William H.2012), Lloyds STB could garner a fair portion if invested.

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4. Strategic methods of entry and the possible consequences


In this chapter, different methods of entry in the global business operations would be discussed. Further to that, the best options available to Lloyds TSB and its entry to Russia are analysed using different perspectives both company and the country possesses.

4.1 Strategic Methods of Entry


When a firm is going to explore a foreign market, the choice of the best mode of entry is decided by the firms expansion strategy. The main aim of every business organization such as Lloyds TSB is to establish itself in the global market. Thus, the process calls for developing an effective international marketing strategy in order to identify the international opportunities, explore resources and capabilities, and utilize core competencies in order to better implement the overall international strategies. Therefore the decision of how to enter a foreign market such as Russia can have a significant impact on the results. Companies can expand into foreign markets via the following four mechanisms: exporting, licensing, joint venture and direct investment. All of them have their advantages for the firm to explore as well as disadvantages which must be considered by the firms top management. (Zekiri& Angelova.2011)

What entry mode that a multinational company chooses has implications for how much resources the company must commit to its foreign operations, the risk that the company must bear, and the degree of control that the company can exercise over the operations on the new market.(Charles Hill et al, 1990) Mode of entry into an international market is the channel which organization that want operate in international markets employ to gain entry to a new international market. The choice for a particular entry mode is a critical determinant in the successful running of a foreign operation. Therefore, decisions of how to enter a foreign market can have a significant impact on the results. (Root.1994).

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Expansion into foreign markets can be achieved via the following mechanisms: Exporting Licensing Franchising Joint Venture Direct Investment

Figure: 1 (Root, R.F. 1994),

4.1.1. Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. There is no need for the company to invest in a foreign country because exporting does not require that the goods be produced in the target country. Most of the costs associated with exporting take the form of marketing expenses. (Wood & Robertson, 2000)

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Exporting commonly requires coordination among four players: 1. Exporter; 2. Importer; 3. Transport provider; 4. Government.

Exporting as a mode of entry, means going alone in a particular market. Some of the main advantages of exporting are: Companies that export have initial investments; They reach customers very quickly; They have complete control over production and products; They benefit and learn from the experience of exporting for eventually any future expansion:

Whereas Exporting has some disadvantages as well: Potential costs of trade barriers, like tariffs and quotas; Transportation costs Difficulties in responding to customers needs and wants well; It gives up of any potential location economies.

Therefore, exporting is appropriate when there is a low trade barrier, home location has an advantage on costs and when customization is not crucial.(Zekiri, J., Angelova.B.2011) However in this case of Lloyds TSB which is a financial institution, it cannot adopt this method of entry to Russia. In terms of the operational perspective of this method, exporting works for companies who are engage in manufacturing goods but not financial services.

4.1.2. Licensing

A license arrangement is a business arrangement where a licensor using its monopoly position and right such as a Patent, a Trade Mark, a design or a copyright that has exclusive right which prevents others from exploiting the idea, design, name or logo commercially. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. (Cateora& Graham.2002) The licensing agreement gives the following advantages to both the licensor and the licensee: 19 | P a g e

Companies have low initial investments; Trade barriers are avoided; There is a great potential for utilizing location economies; The access to local data and information is possible; There is an easier ability to respond to customers needs and wants.

Whereas the disadvantages of licensing: The licensor lack the control over operations; Companies face difficulties with transferring the tacit knowledge, for example negotiation of transfer price, monitoring transfer outcome, etc; There is a great chance of creating a competitor, in this case your licensee. We can conclude that licensing is appropriate if there is a well codified knowledge, strong property rights regime, and location advantage.(Holmes & Lofstrom, 2004) However considering the financial institutions such as Lloyds TSB this method of entry is not a popular and a viable one.

4.1.3. Franchising

Franchising is a similar entry mode to licensing. By the payment of a royalty fee, the franchisee will obtain the major business know-how via an agreement with the franchiser. The know-how also includes such intangible properties as patents, trademarks and so on. The difference from the licensing mode of entry is that the franchisee must obey certain rules given by franchiser. Franchising is most commonly used in service industries, such as McDonalds, etc. (Zekin& Angelova.2011) However in the case of financial institutions franchising is not an option.

4.1.4. Joint Venture

Joint ventures represent an agreement between two parties to work together on a certain project, operate in a particular market, etc. Some of the main common objectives in a joint venture: Market entry; Risk and reward sharing; Technology sharing and joint product development, etc. (Sharma.1998) 20 | P a g e

Some possible advantages of joint venture agreement between parties would be: Companies can have access to partners local knowledge; Reduction of concern about overpayment; Both parties have some performance incentive; Significant control over operations.

Whereas some of the disadvantages of Joint- venture are as follow: Potential loss of proprietary knowledge; Potential conflict between partners; Neither partner has full performance incentives Neither partner has full control.

Joint Venture is appropriate when both parties contribute hard to measure inputs, and if they expect large mutual gains in the long run. (Zekiri, J., Angelova.B.2011) However like the earlier modes of entry, joint venture is not a viable option for the financial institution like banks.

4.1.5. Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves capital, technology, and personnel. FDI can be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment, and the market in general. However, it requires a high level of resources and a high degree of commitment. (Taylor,Zou& Osland.2002)

As an alternative to servicing a foreign market from their home base, banks may decide to set up affiliates in foreign markets. Traditionally, such foreign direct investment decisions of banks have been analyzed based on the eclectic paradigm which implies that locationspecific factors and ownership-specific factors should affect the decision of banks to set up affiliates in a foreign market (Sagari. 1992). The example of German banks setting up in the EU in the early 1990 is an example given for this. (Claudia, Buch. 1999)

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4.1.6. Foreign Acquisition

Acquisitions can be defined as a corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own.(Investopedia.com. 2011) The main advantages of acquiring a foreign company: Access to targets local knowledge Control over foreign operations Control over own technology Uncertainty about targets value Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped

The main disadvantages of acquiring a foreign company:

(Zekin& Angelora.2011) However in the case of banks acquisitions is a common aspect which has taken place due to many reasons. Especially during the times of 2008 recession many banks found it difficult to survive and as a result, acquisitions took place of various forms such as governments taking over banks which were getting closer to bankruptcy and some bigger banks buying the smaller ones which happen at many times due to numerous reasons. For an example the government of United Kingdom took over the Northern Rock on 22nd of February in 2008. However this take over took the shape of nationalization as the bank was taken over by the government.(BBC. 2008) In addition Spanish bank Santander bought the UK lender Alliance & Leicester (A&L) for about 1.26bn on 14th July 2008 which was a proper acquisition in the real terms. (Larsen, Peter., and Burgess. 2008)

4.1.7. Green Field Entry

Green field can be defined as a form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. (Investopedia.com. 2011). The main advantages of setting up a new company: Normally feasible

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Avoids risk of overpayment Avoids problem of integration Still retains full control

The main disadvantages of setting up a new company: Slower start up Requires knowledge of foreign management High risk and high commitment

Considering the foreign banking operating in Russia, it is seen that many foreign banks have used this methodology to enter Russia. However their lack of understanding of the Russian financial sector and the government intervention, along with the public perception has made many of such ventures not profitable and some of the foreign banks have left the country recently. (Corcoran, Jason. 2011) 4.1.8. Subsidiary: One of the Best and Popular Methods of Entry for banks

A subsidiary is a separate legal entity incorporated in the host country, mostly acted as wholly owned subsidiary company of a parent bank and often it is engaged in a broader range of financial services than branches. Since the beginning of transformation the subsidiaries were the most frequent forms of entering foreign banking markets. Heinkel and Levi (1992) point out that subsidiary differ from other forms of banking operations and thus respond differently to various factors. First, they operate in the different area of competition than other legal forms. Second, the parent bank has different motivations on establishing it. (Hryckewicz, Aneta. 2008) With respect to the forms of entry, according to Konopielko (1999), the most appealing vehicle of entry is through setting up a subsidiary, either from scratch or through the acquisition of existing banks. (Konopielko, L. 1999) Considering the new policies that govern the financial sector in Russia, the best and the most favoured way for Lloyds TSB to enter Russia is through subsidiary which seems to get the best approval from the bureaucratic government of Russia as well (RT. 2012).

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4.2. The Threats and factors that could hamper the Lloyds TSB entry to Russia and its Consequences
The financial crisis in 2008 brought to an end the rapid expansion of the Russian banking sector according to a Forbes Report (2010) As a result the bond between the investments and funding became clearly dried up and state banks were struggling to get funds even to finance some small investment projects. In addition, the foreign banks to try to flee Russia due to factors related to the economic meltdown and the state bureaucracy which favoured the state banks in the times of financial turbulence. (Corcoran, Jason. 2011) Another aspect that Lloyds TSB should be cautious is that Russia remains under banked: Only about one-third of households have a bank account and just 10% of fixed investments are financed by loans. (Oxford Analytica. 2010) With the economic meltdown in Russia, the banking environment has transformed its course into a new dimension. State-controlled banks' share of total assets rose from about 30% to 45% in the 10 years prior to 2008. As a result of the crisis, state banks are now estimated to control 60% of total assets. So far there do not appear to be any plans to roll back the state's increased presence. Therefore the state monopoly on the banking sector in Russia is overwhelmingly high and that could pose a tremendous influence on the foreign banks such as Lloyds TSB. (Ibid) Russia has a weak institutional framework and poor corporate governance which has resulted poor lending policies, namely lending to insiders. (Laeven, Luc. 2001) This is a weak aspect with regard to the financial institutions which heavily depend on strong institutional framework and its policies. Lloyds TSB should take such aspects seriously specially in employing people who have a strong professional banking career which is not damaged by any inside lending controversies which seem to take place more often in the present financial sector globally. In addition according to a report by OECD (2004), the lack of confidence in the way Russian courts enforce the law and corruption throughout the public sector continues to undermine investors trust in Russias legal system. Therefore when the theory of PESTEL is applied there are numerous draw back related to the Russian financial service sector. However, the consequences could also result in progressive aspect as the scope for the development in the Russian financial service sector is tremendously endless and so far no body has fully explored. For an example the mere fact that Russia is under banked (The

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Moscow Times. 2012) itself suggest that there is enormous space for development and at the moment Russia is looking for such new dimensions.

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5. The Potential Organizational and Managerial Problems for Lloyds TSB operating in the New International Environment of Russia.
5.1 How would the Culture affect?
In simple terms, culture is a shared and learned system of values and beliefs that shape and influence perceptions and behaviour within society. (Intersperience, 2012) Doing business and understanding the culture are no longer two different aspects but they both shine when they come together in global business operational activities. In international business world, many mergers and acquisitions (M&A) fail due to clash between the cultures of the buying country and selling country. The clash of cultures usually consists of differences in management philosophy and company culture, which can slow down the integration of operations. Moreover, after a merger or an acquisition, the sold companies sometimes experience high management turnover, possibly because their employees do not accept or follow the buying companies ways of doing things. (Hill, 2011) 5.1.1 The Impact of Cultural Differences

As mentioned above, the differences in the type of management and company culture may negatively affect the reorganization and integration after an M&A in the case of Lloyds entering the Russian market. In particular, such differences can cause serious misunderstandings or troubles when the employees from companies of different cultures have to do things together. Considering the cultural and political aspects that UK and Russia have, Lloyds entering could face numerous issues unless such important sensitive aspects are not addressed at the beginning of this business venture. In addition, inadequate or inappropriate communication would make the situation even worse. In fact, this makes huge challenge for the leaders in different companies. In the case of Lloyds TSB, it is of utmost important that the company pay much emphasis to such cultural details as the Russian branch of it would no longer have the same aspects related to the British banking sector. 5.1.2 Cultural Difference from Nation to Nation Throughout its notable history, Russia has assumed a strong communal spirit, namely collectivism, which is still reflected in Russian business practices today. Russia's severe climatic conditions have also meant that cooperation and collaboration, rather than competition, have been vital for survival. This sense of togetherness is one of the traits that distinguish Russians from many Westerners likewise Britains capitalism. It could be one of the reasons why in Russia, they have a lowest bank account rates per head compared to 26 | P a g e

other developed countries. However recognizing the communist and socialist traits that still exist in their socio consciousness is an important aspect for Lloyds TSB in engaging in financial activities with the Russians. Egalitarianism is another important social philosophy that supports the removal of inequity and promotes an equal distribution of benefits. In Russian business terms, this equates to important strategies of equality, reciprocity and mutual advantage. Russians are very status conscious and believe in co-equals from the perspective of equally shared benefit; this is very unlike the UKs unequally rewards and penalties system. However, the hierarchical structure in Russian business practices suggests that the decision makers higher up have authority over their subordinates, which is widely known as bureaucratic. Therefore, showing respect for seniority and recognizing the hierarchical structure is vital for establishing and maintaining strong business relationships. It is believed that the Russians are a combination of collectivism, egalitarianism and bureaucratic. (Communicaid, 2009) Moreover, generally speaking, Western European nations such as Britain emerge as low context culture, more oriented towards the short term, more individualistic and valuing assertiveness and material possessions. In contrast, Russia comprises high context culture, more oriented towards the long term, more collectivist and valuing nurture within society.(Intersperience, 2012) This contrast features may cause organizational and managerial problems if not dealt properly by Lloyds TSB at the beginning of its international expansion to Russia.

5.2. The Language Problem

Communication is crucial to management. But communication depends on a common language, a condition seldom existing in many international business settings. That could be the origin of many problems (Feely & Harzing, 2002). Therefore it is important to understand the common ground which prevails in the international business environment when doing business with the Russians. The necessary adjustments in communications should be achieved at the beginning and should develop as the time goes. The main aspect of some of the international business failures in Russia has occurred due to this lack of communication and lack of language skills and understanding. Therefore the difference in languages, as another important factor that may result in managerial problem, also needs to be taken into consideration in order to achieve effective 27 | P a g e

communication and negotiation etc between the two countries. Russia having more than 27 languages mean, for any company which enters the country has to take up this matter seriously. Especially in providing financial services such as of Lloyds STB which base on trust, requires the ability to communicate in plain and clear terms.

5.3. Human Capital


The importance of employees may vary in different industries. In the case of financial services industry, the employees who provide services to the customers are undoubtedly the key assets. Therefore, for the buying company, it is important to keep the key employees after the merger or acquisition, and build their trust. Podolsky, the Director, Finance, Corporate Reporting and Compliance of Mobile TeleSystems (MTS), mentions that often just prior to being acquired, the target company stops working, while for the buyer it is vital to ensure that the company continues functioning until after the closing of the deal. It is generally agreed that regular communication with employees could be the key for success. Also, Knoll, the Partner and Head of M&A Lead Advisory of PricewaterhouseCoopers, says: Many foreigners come into this market basically unprepared. They dont know much about Russia, so they really need support or hands-on experience and support from people who have already proven themselves.(Mergermarket, 2008)

5.3. Salaries
According to the experts in the round table discussion about M&A in Russia, what Russia lacks are qualified personnel, despite rising wages. However in engaging in international business, the disparities in salary structures make a huge problem and this could lead to different other problems. (Smith, Herbert. 2010) In addition the Russian labour laws speculate many rules regarding the salary structure and when starting an international business such aspects should be thoroughly accumulated.

5.4. Working Ethics


Ethics are the principles of human conduct regarding either an individual or a group (Shaw, 1999), and business ethics refer to What is right and wrong? Good or bad? in business transactions (Weiss, 1994). As discussed, Russian labour laws speculate many aspects regarding the employees. However according to many studies, they differ from that of the western perspective. The employees place in the Russian work culture and the role of the employer, therefore, are 28 | P a g e

viewed differently than in the West. A reasonable employment situation by Western standards, in terms of job security and benefits, would not meet the expectations of a Russian accustomed to the labour process of the Soviet planned economy. (Riisanger, Thomas.2002)

5.5. Tax and Legal Issues


Since M&A transactions have become increasingly common in Russia in recent years, there are a number of legal and tax issues that should be taken into consideration when such transactions are planned. For instance, according to KPMG, in the case of an M&A the legal entity resulting from such merger or the accessing legal entity should be recognised as the successor to the obligations to pay taxes and fees of each of the original legal entities or the accessed legal entity. (KPMG Ltd., 2011) Thus, it is vital for the foreign investor to choose a company or companies of clear tax duties.

5.6. Thin Capitalisation Rules


Russian thin capitalisation rules have been vastly irrelevant since they were established in January 2006, as most taxpayers avoided them either through the sister-company loophole (a loan from an affiliated sister company is technically not subject to thin capitalisation) and/or under non-discrimination or special deductibility provisions in the protocols to double tax treaties. However, as the thin capitalisation rules have been extended recently, both the non-discrimination and the protocols based defences are largely no longer available. (Sitnicov, 2012) In this context it is important to revisit the historical financing structures that have been used for any Russian transactions/businesses, and the potential need to comply to the 12.5 to 1 debt to equity ratio for M&As concerning financial services going forward.

5.7. Competition Law


On the other hand, the modern global economy, the impact of an M&A transaction one country is very often not limited to that country alone, and may have an effect on the competition in other countries. Therefore, the competition authorities of different countries usually do not limit their activity to the M&A transactions in their home countries, but seek to control foreign M&A transactions that nevertheless may influence the competition in their home countries. The Russian competition authority, the Federal Antimonopoly Service (FAS), is no different. M&A transactions over Russian assets are very often structured abroad, involving a company outside of Russia with assets held directly or by its subsidiary 29 | P a g e

in Russia. FAS also wants to control such M&A transactions. Under the new general provision of the Russian competition law, introduced by the Third Antimonopoly Package (TAP), it applies to agreements made and actions performed outside of Russia, if such agreements or actions impact competition in Russia. The TAP has further established that M&A transactions with regard to foreign persons and/or organisations must generally be cleared by FAS, if the foreign persons and/or organisations supplied goods (performed works or rendered services, including banking, insurance, lease and other financial services) to Russia worth over RUB 1 billion (approximately EUR 25 million or USD 33.3 million) during the year preceding the date of the M&A transaction. Explicitly, this criterion applies only to the acquisition or more than 50 per cent of shares in a foreign company, or of other rights to determine the terms of business activity of the foreign company, or the functions of its management body. (Kuzmishin&Sokolova, 2012)

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6. Recommendation
When analysing the strategic activities and decisions that were discussed in the above report, there are a number of recommendations that could be drawn. Specially using the PESTEL theory and its contents, Russian market has both pros and cons related to each aspect such as politics, economy etc. However there are a few important recommendations that could be drawn out of the analysis.

Changing policies and the developing pressure


In recent months, there are a number of policies that were drafted in Russia mainly due to the influence of the WTO (RT. 2012). As a result, Russia allows 100% foreign ownership of banks and increased the allowed percentage of foreign-owned banks in the Russian banking sector to 50% from the current 15% (Cooper, William H.2012), This is a fantastic opportunity, especially at a time some banking giants have already left Russia and the country is expecting more foreign financial institutions to be in the country. This is a situation where Lloyds STB could garner a fair portion if invests.

Huge potential for a prospective sizable market share


Since Russia is considered to be an under- banked country (Oxford Analytica. 2010), necessary studies should be carried out how the marketing strategy of Lloyds TSB should be carried out attracting new customers in Russia. Having a 150 million people is an asset where there is a huge potential for a prospective sizable market share in the banking sector.

Emerging political instability and Bureaucracy


One of the recent political developments (Nicholas, Jim. 2012) related to the freedom of speech in Russia, reverberates some of the earlier communist propagandas where the ideology of the government or the ruling party dominating social ideology in the society. Once such developments emerge, there is a state of instability in any country and Russia has long experienced this situation and it has hampered its international relations due to such political activities. Therefore Lloyds venture in Russia should be cautiously made taking into considerations the international business laws and following the rules drafted by the WTO.

The lack of Trust towards foreigners and their Companies


In Russia doing business, is not just making money. The whole scenario has a different life and sensibility that follows the basic business life from a Russian business perspective due to the strong cultural and ethical; etiquette the country has evolved into, during its political and cultural history. Therefore Lloyds TSB should never portray itself as another foreign

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bank in Russia and instead should emerge into the present Russian banking sector where the local expertise should also be used. (Timakow, Valentin. 2012)

7. Conclusion
At the end of this study, and analysis, we have noticed a number of threats and opportunities available in Russia for Lloyds TSB to enter. Especially when analysed using the SWOT analysis, there are a number of points that could be taken into serious consideration. As mentioned in the recommendations, such strategic activities and decisions are a must before venturing into this market. Though Russia is a sizable market where a huge unexplored potential lies, there are lots of points that should be dealt before. In addition the cross- cultural aspects should hold an important place in the international business strategy and decision making. However, taking the overall study into consideration, there are many positive aspects if entering into the Russian financial sector. At present, the general savings among the ordinary Russians have gone to a satisfactory level (The Moscow Times. 2012) and in addition the usage of credit and debit card is rising phenomenally. From the point view of a banker, these are the emerging signs of a new era in the Russian financial sector.

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