MGMT1101 - Global Business Environment

Memorandum regarding to week 12 discussion

Date: 20/10/2015
TO: Yulius Santoso
FROM: Ana Caroline Silva Melo
SUBJETCT: We are thinking about expanding our business to Russia. Is it still risky to
do business in the country? What should we watch out for when doing business in
Russia? Briefly justify your answer.
Being the country with the largest natural wealth in the world, Russia has acquired to
itself important attention in the global business environment. Furthermore, its rapidly
growth in GDP rates in the few years added to the lack of competition in some of the
economy sectors and a significant increasing in purchasing power has made Russia an
interesting place for foreign investments. However, as a consequence of its economic
and political history in the last few decades, Russia is still known as a place of high risk
investment, which has created many barriers to foreign companies entry in the Russian
market. Nevertheless, this market still presents great opportunities, once companies
better understand such market and learning how to minimize the risks.
The business climate in Russia during the first half of the 1990s was surrounded
by uncertainty and difficulty owing to the high economic and political countrys
instability during the same period (Puffer, et al., 1998). Even after the reform which has
been performed by the government of President Vladimir Putin, many factors which
causes business instability and preventing companies to expand its operations to Russia,
still make part of the countrys current scenario. Such factors are: lack of law
enforcement, difficulty to engage in legal business practices, corruption, low support to
business development, local authorities high level of power and the need for
establishment of good network relations with government authorities (Aidis & Adachi,
2007).
The first factor to be discussed, also known as the biggest barrier for foreign
companies deal in Russian market is the lack of law enforcement. In Russia, the
enforcement of law occurs in selective or arbitrary manner, which means that
government authorities can interpret legislation in numerous ways and applying those as
better benefit them. One case that illustrate this situation is the high profile of
government crackdowns on tax evasion (due to politicians involvement), which
reinforces the idea that government authorities do what they want, wherever they want,
and consequently, it increases uncertainty and the lawlessness within the business
environment (Aidis & Adachi, 2007).
Another factor is the difficulty to engage in legal business practices. This one is
directly associated with the high level of corruption practices within the country, once
government authorities or agents constantly ask for illegal payments (bribery) in order
to allow the operation of companies activities (Aidis & Adachi, 2007). The low
support to business development is another problem faced by companies in order to
establish itself in Russia, once the current government has not set clear measures to
support and sustaining the companies activities (Aidis & Adachi, 2007). Another
obstacle for companies establishment in Russia is the high level of power wielded by
local authorities. Numerous regions of the country are mainly governed by those who
has extreme levels of power. Even the federal reform executed by President Putin was
not strong enough in order to weaken the power of such authorities (Orttung, 2004).

Thus, the local government continues to have enough power to selectively enforce
legislations and laws in an arbitrary manner (Aidis & Adachi, 2007). Another factor
which could affect the success of foreign companies in Russia is the need for
establishment of good network relations with government authorities. The payment of
briberies are not enough to establish such relations in Russia. Hence, friendly
relationships with government officials and bureaucrats are extremely important in
order to facilitate businesses operations within the country (Aidis & Adachi, 2007).
Despite the risks involved in investing in the Russian market, there are also
reasons why this market can be attractive and offering great opportunities for those who
learns how to operate on it. Some of the companies which have obtained favorable
outcomes in its operations in Russia are: Toyota, Mercedes Benz, Phillip Morris, IKEA
and Carrefour (Fey & Shekshnia, 2008; Aidis & Adachi, 2007). The great opportunities
of the Russian market are associated mostly with its rapidly growth in GDP rates in the
last few years, but also owing to the low competition in some of the economy sectors
and the significant growth in purchasing power (Fey & Shekshnia, 2008). It is important
to highlight that once the GDP rates of a country increases, these data indicates
possibilities for gaining higher revenues, thus, even if the country in question, as it is
the case of Russia, it presents high level of risk for investment, this one becomes more
attractive since it can result in higher returns (Aidis & Adachi, 2007).
As previously mentioned, the key for being successful doing business in Russia
is better understanding how the market is affected by economic and political factors and
learning how to operate within these circumstances. In other words, by adopting
practices which will help companies to minimize the risks (Fey & Shekshnia, 2008).
Furthermore, one effective way to reach such desired outcomes is learning with early
entrants what are the right motivations, attitudes and strategies that should be taken in
account when doing business in Russia. Some of the lessons that new entrants should
learn with the early ones are: 1) The motivation for establishing the company
operations in Russia should be thought for long-term (not short-term), it should be
aligned with the companys global or international business plan. 2) Working with
Russians partners (enterprise and government partners) in a flexible manner is very
important to facilitate the companys business operations within the country. 3)
Accepting the inevitability of ups and downs in the Russian business environment and
then, adopting flexibility and complexity absorption in its strategies, which will help
such companies to deal with the instability present in the market. 4) Focusing in the
development of appropriated strategies for the Russian market, not reproducing
strategies that have worked in any other places. Additionally, utilizing the experience
which has been gained with its international operations in order to create strategies
which will allow its strong presence in such market over the years. (Puffer, et al., 1998).
Therefore, even though the risks in investing in the Russian market nowadays
are still high, these can be managed and alleviated. When such thing is done, companies
acting in this market enjoy great opportunities and consequently success. However, it is
important to have in mind that the entrance of new enterprises in Russia will continue to
be a difficult task once the country's current political and economic scenario have strong
impacts in its business environment. While the levels of corrupt practices do not
decrease within the central government and among the regional authorities as well as
the level of law enforcement remains low, only slight improvements can be expected to
happen in the Russian business environment. Hence, whether Russia desires to become
more open and attractive to foreign direct investments, such issues should quickly start
to be addressed.

References
[1] Aidis, R. & Adachi, Y., 2007. Russia: Firm entry and survival barriers. Economics
Systems, Volume 31, pp. 391-411.
[2] Fey, C. F. & Shekshnia, S., 2008. The key commandments for doing business in
Russia, Fontainebleau: Social Science Research Network.
[3] Orttung, R. W., 2004. Business and Politics in the Russian regions. Problems of
Post-Communism, 51(2), pp. 48-60.
[4] Puffer, S. M., McCarthy, D. J. & Zhupvlev, A. V., 1998. Doing business in Russia:
Lessons from early entrants. Thunderbird International Business Review, 40(5), pp.
461-484.