"Within one month our revenues had jumped over 50%."

Doing Business in Russia

business in Russia

What you need to know about doing business with Russia

Russia and business in Russia has undergone several changes in the last two decades. Learn what key components affect business in Russia so that you can decide if it’s an economy that you’d like to invest in.

The Russian economy has come a long way in the past two decades, ever since the collapse of the Soviet Union. After the collapse, the Russian economy went through gut-wrenching changes as organized crime and bureaucratic corruption stripped many state-owned enterprises from the government at below market rates. What eventually became the norm in Russia was the rise of “gangster capitalism” or as it was known in the west as “capitalism with Russian characteristics.” While Russia was classified as one of the BRIC economies by Goldman Sachs, it has hardly performed like any of the other BRIC economies. While Brazil, India, and China, have consistently posted high levels of growth. The Russian economy has produced peaks and valleys in terms of growth rates. For example, after the U.S. financial crises, the Russian economy contracted by more than 5% per quarter for at least quarters, yet for the year 2011 the Russian economy clocked in at close to 5% growth rate.

Oil Plays A Role On the Economy and Business in Russia

One of the reasons why the economy has been so inconsistent in terms of growth rates is probably due to its heavy dependence on oil revenues. Whenever oil prices are high the Russian economy grows very fast with more than average growth, but whenever oil prices are low the economy tends perform poorly or contract at alarmingly high rates. While oil represents the biggest portion of Russia’s economy, the level of production has virtually stagnated since 2008, due to declining investment in increasing production. While Russia does produce a large number of other raw materials such as gas, coal, and timber; natural resources, especially oil and gas, dominate Russian exports and continue to be the main source of hard currency. Russia is also a leading producer and exporter of minerals and gold. Ninety percent of Russian exports to the United States are minerals or other raw materials. However, the Russian economy has been unable to diversify itself away from exports and raw materials towards more stable forms of economic growth. As a result, the the Russian economy is highly cyclical and inconsistent in terms of economic growth. If Russia’s problems were existent in only the economic sphere, then at least they would be somewhat manageable, but there are many other problems that businesses face in Russia.

Russia’s Population

According, to statistics posted by the Russian Federation, the Russian population has shrunk by 240,000 on a annual basis since 1992. The reasons for this being the high level of crime, high alcohol consumption rates, as well as poor health care; this overall trend does not seem to show much sign of slowing. As a result, there is a smaller and smaller market for companies to sell into. The Russian political system does not seem very favorable to the investment climate either, with Russia ranking near the very bottom of the Transparency International list, at 143 out of 182. There have also been many high-profile incidents of foreign companies getting in trouble with the Russian authorities over political problems as well. With one of the most notable being BP, when its Russian offices were raided by the police over disagreements between BP and major Russian industrialists. This is just one example of a company running into problems in Russia.

For all its faults, Russia does have a strong advantages such as abundant raw materials as well as having more science graduates than any other country in Europe. However, it seems highly unlikely that small businesses will be able to take advantage of the opportunities in Russia, due to the legal uncertainties as well as the less and less appeal of the Russian economy to foreign investors. In fact, cumulative investment from U.S. sources of about $4 billion are about the same as U.S. investment in Costa Rica. Considering that the Russian economy is many time the size of Costa Rica’s and that the size of the market does not correspond with the level of investment in the economy, there is clearly a lack of trust by foreign investors in Russia’s political and economic policy. If you have any questions about Russia, feel free to email me at zadey@globial.com

-Jay Zadey

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Author:Globial International Business Team

The Globial International Business Team researches, analyzes, and reports on all things related to global trade and business.

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