30.11.05

  To be mature means to face, and not evade, every fresh crisis that comes.
– Fritz Kunkel

Renee Stillings is a partner and co-founder of Alinga Consulting Group, a full-service consultancy offering audit and tax consulting, accounting and payroll, and legal services. Alinga celebrates its fifth year in Moscow this year. In the following interview she discusses Russia’s maturing business environment and what it takes for entrepreneurs and companies to succeed here.

Is Russia still a place for “cowboys,” businesspeople who ride in here, make a million bucks fast, and ride out again?

The business climate in Russia today is one of business building. Pre-1998 was the era of deal making, with business people expecting to get in quick, make the big bucks, and get out. Everything has changed.

Let’s just say to succeed in business here it requires a sophisticated cowboy, a cowboy with an MBA or a lot of experience working in challenging business environments. If he cannot write a business plan, this is not the place for him.

When did Russia become a more mature business environment and how did it happen?
In the 1990s, people wanting to make a killing in business would buy a ready-made structure, a “shelf company,” and use it to make the big deal, or even several deals, until it was of no more use or was catching the attention of too many authorities. At the same time, they would set up an offshore company to hide the money. They usually had the deal in mind, and just needed the structure/mechanism to make it happen.

I am not talking about the Coca Colas of the world; big multinationals had procedures and policies for going into new countries, which were set at their home offices.

But for independent entrepreneurs and small businesses in the mid 90s, there was a “set up the structure for the deal” mentality, for both Russians and foreigners. Why bother with things like planning and accounting when you never intended to file any tax documents?

Post-1998 there was a change, which was reflected in the vocabulary of business; for the first time we started hearing words like “business plan.” Business owners began to open more transparent, real businesses alongside their shelf companies. At the start, perhaps 90 percent of their capital was in the non-tax-paying company and just 10 percent in the tax-paying one. But as the tax situation normalized they gradually put more and more effort into the real businesses operating with more transparency.

Now it is about the long term, starting with people thinking about what to name their business, creating a brand name. We are seeing so much more of this.

So is it too late for entrepreneurship in Russia?

I don’t think it is too late. This economy is full of money—lots of cash around—and Russians are looking for places to put their money. Everyone wants to come here and capture that cash.

But this is no longer a dumping ground for products that won’t make it in other places. Russians are in many regards even fussier consumers than Americans. Why should a Russian buy a bad imported product? He can easily get a hold of all the bad products he wants. He wants to buy quality products at good prices.

The same is true of business ideas. Sometimes foreign business owners and entrepreneurs who are not doing well in their home country turn their sights on Russia, thinking it is fertile ground for marginal business concepts. This is a recipe for disaster. I don’t think these marginal ideas and businesses will fool Russians for very long.

Is the market saturated here for new businesses?

Many markets may seem saturated, but even in a seemingly saturated market there is room for improvement. In any given niche there are clear indications that it could be done better. For example, it may seem like there are enough restaurants in Moscow, but there is always a way to do it better. This doesn’t mean coming to Russia and making quick money; businesses need to plan for the long term.

What’s the wrong way to enter the Russian market?

In the old days, most of the foreign cowboys coming here to start a business relied on friends and friends of friends, people they might have met on the street or even in a bar; everything was based on personal acquaintances. The Russians they met by chance usually boasted of great connections, but never did they say they knew how to do something.

The foreigners then became reliant on these individuals, who may or may not have even been trustworthy. Some of the businesses I have seen from those days were a mess; others were just unproductive.

Now businesses coming into the Russian market must take a much more mature approach.

What is a more mature approach?

First of all, no more random finding people on the street; people want professional help, which has created business for consultants.

Mature international companies have standing relationships with accounting and law firms worldwide, and have well-established accounting and tax policies. These companies already have in place a mature way to approach Russia; their consultants already have established practices here and can smooth their entry into the market.

Smaller businesses considering entering the market must take a hard look at the cost of doing business here. Russia is more bureaucratic, and the time and financial costs are higher. In the U.S.A. you can open a business in under ten minutes: just go online, fill out the forms, pay the fee, and that’s it. At that moment you are a fully operational business. You can get a tax ID by phone, open a bank account, get business cards, and be ready to go in a half a day. And it hardly costs you anything other than the state fees.

In the States you can also do all of your own accounting work, and if the company didn’t have much activity, this may take just a few days right before tax filing time. So it costs you just a few days of accounting, the state fee, and perhaps some assistance from a tax preparer.

You can’t walk into Russia and start a company like you can in the States. Here you cannot do your own accounting; it is practically impossible for even Russians to do this. For example, one of our clients tried to do his own books on the simplified tax system—he ran into problems and we had to help him reinstate tax declarations for the entire previous tax period.

You must file quarterly or even monthly tax documents even if your company made no money. As a foreigner, you can’t even officially designate yourself as the general director initially, as you will need a work permit. During the work permit process, which can take a few months, you must hand over the director title to a Russian national that you trust.

There are Russians out there who will register your new company for a fee of $250—so technically it could be done—but they wouldn’t explain anything to you or help you decide which structure is most appropriate to your planned activity. Someone offering to both explain and file documents might charge $1,500 to $2,000, or even more. And once the company is created, immediately your maintenance costs kick in. For instance, with tax filings you have to pay someone to do them right away, even if you do no business.

So you have to decide how serious you are about this country.

Start by doing market research. Consider hiring a professional company to do this. To a certain extent you can self-educate by attending conferences and meetings. Always keep an eye on the market here and be aware of the competition, how people stay competitive is changing rapidly. Russians, like the rest of the world, are outsourcing to China to keep their products competitive. Plus this is no longer a cheap labor market; it is not a China or an India. Russia is resource and cash rich, and good people expect to get paid a decent wage. You have to consider all of these things.

If I decide to start a business in Russia, what would my next step be?

You would next need to think about how you plan to operate, who your clients would be, and how you envision a typical transaction would go. Do you really need people on the ground or are you just going to be bringing a product to Russia? Are you looking for opportunities to present to the home office? The structure you choose mainly has to do with how you are positioning yourself.

If you are selling a product you can get into Russia via a distributor. But this is risky because the distributor could destroy your product; give it a bad reputation. You can open a representative office, which will get you just a few people on the ground reporting back to the home office. Or you can create a Russian legal entity.

Quite a few companies come in as one thing and transition to another. They may start working with a distributor and then open a rep office, and then form a Russian company to take over the whole process. Starting with a joint venture is no longer the most common approach for entering this market.

What businesses will do well in the coming five years in Russia, in your opinion?

Light production of more necessary goods will probably do well, if the products can be priced competitively. Local food production, because it cannot be outsourced to China, is ideal. For example, we have a client company that produces Mexican food locally: flour tortillas, corn chips, and the like. Its tortilla business is booming because the Russians are familiar with similar products, like lavash bread, but the tortilla actually holds up better than lavash. This is a food everyone understands and needs, and it is made locally so it can be priced competitively.

Russians, in terms of food, now want to buy locally. There is a valid recognition among Russians that imported food is full of preservatives. So ecological, natural, locally produced foodstuffs should do well.

Parallel to that, I suspect locally produced and/or branded cosmetics and health and beauty products, if they remain price competitive, could do well. Where in the old days I used to bring suitcases of products here from the States, now the opposite is true; I take local products home with me. There are some great locally produced products, and the market has room for more.

I think homegrown ideas, marketing to local flavor, is what will succeed in the future. I’d like to see more Russian branded things; lots of the multinationals are already recognizing the value of local branding.

Anything related to self or home improvement should also do well. Russians are now looking to the future with greater optimism and that means they want to live longer and better. Health, exercise, home improvement, education; all these improve the quality of life. And if it is targeted toward children, it is even better.

How do you think a boutique brokerage firm might do here?

Not well because the trust factor is missing. Russians will not hand their money to a stranger. They know all about MMM and pyramid schemes, and have had their money vanish too many times.

So what is the key for deciding what will soar and what will sink here in Russia?

Businesses need to look at what would succeed in any mature market. They need to ask, “Would my business succeed at home?” If it is a dubious business in your home country, it’s dubious here. If this model will not work in a competitive market, it will not work here, and on top of that you have the difficulty of working in a foreign culture.

Businesses that will do well here are those that have a long-lasting effect, that would do well anywhere. Businesses work because what they are doing is natural; it is human nature, whether in Russia or anywhere.

How is the business climate in Russia changing?

Transparency in business is growing, and the legislative and tax situation is improving. There are still questions of bureaucracy and enforcement, but fundamentally it’s not bad. Business interests are playing a part in driving improvements. Russia has to lower the level of bureaucracy here.

What advice do you have for foreigners considering starting a business in Russia?

You should first reach out, spend time here. Talk to other expatriates; even go to bars, clubs, and restaurants where you’ll meet them—although avoid bars that give away free beer because they generally do not attract the more successful businesspeople. Go to meetings of the American Chamber of Commerce in Russia and other business associations. Before you come here, use the Internet to find out which committees, in which organizations, are of interest to you. Determine who the chair people are and arrange to meet with them. Meet people active in your sector. Yes, you might be talking to the competition, but expatriates are usually willing to share stories and advice.

Come here and do a reality check. That’s the best advice.

Interviewed by Leslie Witt (November 2005)

Source: The Well