International business in Russia works in different ways. Businesses come and invest in Russia, but these investments are limited due to the considerable barriers of bureaucracy, law, lack of trust and local business behavior. So what is the problem with Russia?
Russia is still a very attractive market to invest in and at the same time a challenging state to work with. We have investigated what people on the ground (those who do business with Russia) consider obstacles in their everyday business. As one of our sources (top executive, US, engineering) puts it: “It’s very attractive and lucrative, but it is a considerable challenge.” So what is the problem with Russia? Based on our in-depth interviews with executives and corporate lawyers, there are at least four problem areas:
1. Sprawling Bureaucracy and Access to Courts
The executives and lawyers we interviewed give similar accounts of their dealings with Russia’s bureaucracy: “It is pretty frightening” (top executive, Finland, resort and retail); “Sure, the first reaction of any foreign client is, ‘It’s a nightmare’” (lawyer, Finland, retail). The fear is rooted in the fact that bureaucratic prescriptions are unknown and unexplainable. On the one hand, a huge amount of importance is given to paperwork: “When we submit papers to financial authorities, we rent a van, and when we have to submit quarterly accounting reports, huge heaps of paper appear in the office” (finance manager, Germany, transportation); “A stamp is an amazing thing, I’ve never seen one until I came to Russia” (top executive, US, engineering); “We had to get between 45 and 50 different documents in order to open a terrace” (lawyer, Finland, resort and retail).
Foreigners who do business in Russia do not understand what all the paperwork is for exactly: “For foreign partners it is unusual to sign and handle in originals of different acts that do not exist in their countries” (lawyer, Finland, resort and retail). Bureaucracy is something business must “overcome” (lawyer, Finland, retail), but it makes it “hard to be successful, it takes a lot of time” (top-manager, US, engineering) and it makes “business pointless” (manager, Finland, resort and retail).
There is also a time concern when it comes to access to the courts. Courts can take years to wrap up cases concerning small fines: “It took us six months to avoid a small fine” (lawyer, Finland, resort and retail). Courts can provide refuge from government officials who must approve the decisions of businesses in Russia: papers must be signed by fire and tax officials, cultural and urban development committees, representatives of district and city governments. But when managers are faced with the choice of going to court or doing the paperwork that government officials demand, they actually are deciding between years of court proceedings or years of bureaucratic procedures. One executive said: “I’d rather walk away” (US, engineering). The end result does not justify the means.
2. Law and the Rules of the Game
International corporations operating in Russia are usually staffed by Russian lawyers because “to be successful in this market you really need to know Russian laws 100%” (manager, Finland, resort and retail). The task of these lawyers is to follow the constant changes to the law and save the company time: to use alternative forms of dispute resolution when possible, to ensure that all the formal prescriptions are followed, and to compare the time legal procedures take with business purposes.
Russian law is considered notoriously difficult: “Russia has its own legal standards and arrangements that are set by taxation inspectorates and other official agencies” (lawyer, Finland, resort and retail); “Money transfers go through Russian banks and they require the kind of agreement in the exact form and with the exact information” (lawyer, Finland, retail). So the legal environment is shaped by strict formal requirements from different agencies which are ultimately controlled by the state. However, there are complaints that Russian law “is not stable and encourages bribes” (top executive, US, engineering), “rigid” (lawyer, Finland, retail) and “is never ultimately enforced” (lawyer, Finland, resort and retail). International businesses demand that “the rules of the game are more open and transparent. The government greatly affects our ability to do business, and we hope that this will be stabilized within the WTO” (top executive, US, engineering).
3. Trust and Transparency
The law makes it “possible for a company to be transparent in Russia, but it’s not easy to be simultaneously transparent and successful in Russia” (top executive, US, engineering). The problem of business transparency is not only related to law and interaction with government officials. Speaking broadly, the question is, “What should we believe!?” (top executive, Finland, resort and retail). The main rule of the companies surveyed is to play fairly and they expect the same from Russian partners and the Russian government. But they are usually confronted with a different strategy: “A letter of credit at the end of the day is just a piece of paper” (top-manager, Finland, resort and retail).
Trust in Russian partners is achieved in different ways. On the one hand, international executives try to avoid complications: “Some years ago we decided to take prepayments” (finance manager, Germany, transportation). Instead of using official financial reports that they do not trust, they use other sources of credible information: “There is a black list on the Internet, all bad companies are listed there” (lawyer, Finland, retail). On the other hand, international executives consider themselves responsible for helping to form a healthy business environment in Russia and they actively contribute to this process: “We try to ‘educate’ our partners. We’ve worked for four years with them, only in the last few months have they really started to get it: transparent business is good for them, too” (top executive, US, engineering).
4. Business Culture and the Russian Mentality
The choice to do business transparently or not is sometimes associated with the Russian mentality. Well, some foreign executives confirm this: “The Russian mentality includes carelessness and irresponsibility” (executive, Finland, resort and retail). Others describe Russia’s business culture as formalistic and rigid: “The expectation of people when they are doing business should not be overoptimistic” (top executive, US, engineering). In this case, the task of executives is to work with “predictability, openness and quality” (executive, Finland, resort and retail) to oppose formalistic and vague rules.
All these issues mean that international business in Russia works in different ways. Businesses come and invest in Russia, but these investments are limited due to the considerable barriers of bureaucracy, law, lack of trust and local business behavior. As one of our sources puts it: “So rather than not come, we’ve chosen to come, to invest, but to only participate in deals that we can be proud of, and so we follow our rules and keep our goals modest” (top executive, US, engineering). The demands are as simple as that: transparent deals and business, stable laws and rules of the game, and fairness.
The author is a laureate of the
Valdai Club Foundation Grant Program