“Doing business in Russia:
it’s important to understand how things work here”
Despite the difficult political and economic situation, foreign companies are not losing interest in Russia. After all, the Russian market offers not only high risks, but also great rewards for those who succeed.
Chet Bowling, who has worked in Russia for many years and is managing partner and co-founder at Alinga Consulting Group, speaks about the peculiarities of doing business in Russia for foreign companies, taxation, and the market for outsourcing business processes. He also gives several valuable recommendations to foreign executives at Russian companies.
Chet, in your view, what are the risks and opportunities today for foreign companies in the Russian market?
Chet Bowling (hereafter, C.B.): It goes without saying that political risks are some of the main ones. Investors are also apprehensive about the slowdown in Russia’s economic growth, seeing instability in the exchange rate and falling oil prices. However, if you assess these risks and hedge for them properly, the payback can be quite substantial.
Foreign companies are currently best represented in Russia in retail, commerce, banking services and oil and gas. There are fewer of them in some sectors, such as food production, and they’re completely nonexistent in others, such as agriculture. These are areas where I also see strong potential for development.
What is the situation like for foreign companies already operating in Russia? How are they being affected by sanctions, as well as the sharp fall in the exchange rate between the ruble and the dollar and euro?
C.B.: We recently held a working breakfast with the heads of foreign companies in Russia. Representatives came from such sectors as luxury motorcycles, international media, hospitality, coffee, and others. They all have a positive view of the potential of working in Russia, and no one is planning to leave the market. This decision cannot be considered short-sighted and based on a misunderstanding of the true situation here. This is especially true for international media companies that have great access to information about the political and economic situation.
The executives who attended see good opportunities to expand their market share. A representative of an international hotel chain noted, for example that in light of recent events the share of domestic tourism in their profit increased by 20-30%.
Foreign companies fear volatility in exchange rates more than anything. As one manager from a coffee brand put it, it’s not important how much the ruble is worth; what’s important is that it’s stable.
How would you assess the impact of changes in Russian law on the ease of doing business in the country?
C.B.: In general, my view is positive, since the changes are all in line with global trends and are generally aimed at establishing more clear-cut rules of the game. This is good for both business and the state. However, several recent changes in law, including the now enacted law on personal data that requires foreign and Russian companies to keep and process the personal information of Russian citizens in Russia, threatens business, as it requires additional expenditures in order to comply with it. Given the unstable economic situation this doesn’t seem especially timely.
What is the basis for a tax optimization strategy for foreign companies in Russia?
C.B.: Foreign business in Russia largely operates transparently and within the law. The demand for tax optimization manifests itself in moving to so-called aggressive tax planning – a more uncompromising approach to compliance with legal standards, which is reflected in increased demand for corporate tax specialists and accountants.
Along with this, companies are generally optimizing costs by increasing the efficiency of labor, freezing hiring, increasing functionality and expanding each employee’s area of responsibility, more clearly formulating job descriptions, and so on.
Against the backdrop of sanctions, all companies are looking for import substitution opportunities. More and more foreign companies are localizing production in Russia and creating new supply chains. Until 2014, one of our international clients in the food sector used approximately 70% imported components in their production processes, with about 30% being Russian. Now it is exactly the opposite. Finding compatible local products that meet the same quality standards was not easy, but they managed, just as many others have. As you probably know, almost all steakhouses in the country now use Russian meat. There are a lot of examples like this.
What about taxation of foreign companies? Have things become easier or more difficult for them?
C.B.: In recent years, officials have said a lot about relaxing the administrative burden on business. However, in practice, we see that the tax authorities are becoming more aggressive in conducting tax audits due to the economic decline and the need to improve tax collection and fill state coffers. Tax agents are spending less time talking to us and more time applying punitive measures and increasing the number legal proceedings. All of this has served as a stimulus for business to more carefully monitor the activities of their finance departments, conduct audits more frequently, and more actively defend their position in tax disputes. In this sense, things have become more difficult.
To minimize fiscal risks, even conservative Russian companies are more frequently outsourcing their accounting functions. Foreign companies almost always enter the market with the help of such providers. How do you assess the situation on the Russian market for outsourcing services, if in fact it’s possible to find such a provider here?
C.B.: In coming to Russia foreign companies almost always work with international accounting firms. They operate in a way that is familiar to foreigners, using similar approaches, methods, business ethics; complying with international accounting and reporting standards; having English-speaking employees, etc. Many of these companies use firms like Alinga Consulting. Membership in PrimeGlobal, an international association of accounting companies, the American Chamber of Commerce in Russia and the European Business Association help us in finding clients and working with them. Most local providers still don’t have the competencies to work with foreign companies.
The difference between the Russian and Western markets for BPO services is still large.
The principles of how participants on the Russian market for outsourced accounting and audit services interact also differ from those in the West. Let’s say, for example, that we get a new client from abroad. We can contact their previous auditor for information. Business ethics require disclosure of certain information in such cases. This is something that Russian audit companies aren’t ready for yet.
However, the situation is slowly changing. Local, Western-style consulting companies started by former employees of Russian subsidiaries of the Big Four are starting to appear. I think foreign companies will soon be able to get the desired quality of service from local BPO outsourcers as well.
In Russia, as in many other countries, large companies prefer to create Shared Service Centers (SSCs) instead of BPO since it’s less expensive over the long term. How do large foreign players entering the Russian market resolve this question?
C.B.: As a rule, in coming to Russia they immediately begin working with outside accounting service providers and using the services of embedded employees – for example, for personnel record keeping. This is the right thing to do at the start when a company still doesn’t have a local team of experts. As they settle into the market, they look for the optimal model for themselves. Several create SSCs on the basis of their own accounting divisions, while others continue to outsource. Still others establish an optimal and less expensive business process by bringing the accounting function in house.
What are the main problems faced by foreign companies that auditors and accounting firms have to solve?
C.B.: If we’re speaking in general terms, then we play the role of a pilot in a sea of bureaucracy. We help when it comes to interactions with the tax inspectors, working with banks, accounting, reporting, and audit. We explain the rules and laws concerning Russia’s business environment that are frequently unclear to foreigners. For example, in the West, a bank serves as your partner; in Russia, on the other hand, it’s more likely to be an agent of the state. There are a lot of nuances like this.
You also offer consulting services to Western CEOs and CFOs who are working at Russian companies. What do they come to you for most often?
C.B.: They often use us as advisors and consultants, including on issues related to management of local human resources. For example, finance specialists in Russia are rather conservative. In their work, accountants are focused above all on the tax authorities – on what they will say and how they will react – rather than on the advisability and advantages of a given decision made by their employer. We explain to foreign managers why accountants hold such a position, share the experiences of other clients and work out an optimal solution.
For example, the chief accountant at a large Italian client of ours saw huge risks in using the services of a foreign contractor. It turned out that the sharp criticism was chiefly the result of insufficient experience in conducting cross-border transactions. We gave legal examples, shared the experience of other companies and gave concrete recommendations on protecting the transaction with regard to taxation. This enabled us to convince the head of the accounting department and our client to find a favorable supplier.
What are five things a foreign CEO should do after arriving at a Russian company?
C.B.: First, it’s important to get to know all of the leaders personally (the directors of HR, finance, operations, accounting, sales, marketing, etc.) in order to assess their level and vision of the business. It’s possible do this by using outside consultants. I don’t recommend making staffing changes right away. If possible, it’s worth working with the existing management team for at least six months in order to understand what is going on at the company and why.
Second, build a clear system for reporting on work completed. Use it not only for the purpose of monitoring, but for timely assistance in getting tasks done. In Russia people are often very busy, but the results are often difficult to see. I believe that correct positioning of tasks and regular communication will allow a situation to be improved.
Third, create a system of internal control – especially as it relates to finance. Be certain that there is a division of functions and that processes don’t duplicate one another. Conducting regular audits is absolutely necessary. They won’t provide complete security, but they’ll make life significantly easier.
Fourth, start learning Russian. This is a major but important undertaking that shows respect for the culture and the environment you find yourself in. If you’re able to master Russian, you’ll have a much greater understanding of what’s taking place in the country at every level.
Finally, a general recommendation to adapt quickly in Russia: be as open as possible. Listen more than you talk. It’s wrong to think that an approach to business that works in the West will work here. It’s important to understand how everything works here and to make improvements with this already in mind.
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