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. Last Updated: 07/27/2016

Regional Business Edge

Decisions regarding partner selection, form of venture and plant location have often been the difference between success and failure for Western ventures in Russia. In a business sense, Russia is not a conventional country, and conventional reasoning has often led Western companies to make decisions they later regret.

Russia is a difficult country in which to "go it alone." The maze of often conflicting and frequently incomprehensible regulations and laws and the unpredictable and capricious behavior of the bureaucracy can add great risk to Western ventures that don't have a savvy and capable Russian "partner." Many Western ventures try to solve this need by selecting Russian partners in similar or related businesses. This often has resulted in disputes over management or objectives, disputes that have cost the Western partner loss of control, assets -- or both.

Russian contract law is not adequately developed, and the Russian legal and judicial systems are not adequate to adjudicate disputes, nor to offer protection to Western companies that choose partners that prove unreliable or unfaithful to their commitments. Nevertheless, it is possible to meet the requirements necessary for a Western business seeking to locate in Russia without the risks of a joint venture or the selection of a Russian partner in a similar business.

A "similar business" partner is only needed if the Western company needs Russian technology, management, marketing or distribution, or an in-place work force. But, realistically, only an unusual Russian company can offer an established Western company any significant contributions in these areas.

In most cases, a "partner" is needed for two reasons only: to supply a suitable building with clear title or a clear right to occupancy for an acceptable period, and to obtain the necessary bureaucratic support for the venture while insulating it from both "official" and "unofficial" interference.

Much of the Western investment that is expected to flood into Russia is from firms that have already established significant sales and distribution in Russia and now plan to strengthen their position with area manufacturing. They have the necessary technology, established marketing and distribution. Given the recent history of Russian-Western joint ventures, other options may be preferable to joining with a Russian partner in a joint venture simply for the expediency of obtaining a building or political cooperation.

Factory location is also an area in which alternative options are often overlooked. Companies without a compelling business reason to do so often select a location in or near Moscow. There are a number of reasons why this can be faulty reasoning.

A decision to locate in or near Moscow means high costs. Building rents are some of the highest in the world. Construction costs are high and performance risky. Employee costs in Moscow can be five to seven times the regional equivalents, a cost difference that alone can give significant competitive advantage to a regional producer. Freight costs are often less from a regional location to Moscow than from one Moscow location to another.

The residency permit structure in Russia limits workers in their job opportunities. In the regions, there is frequently a surplus of skilled labor and a scarcity of job opportunities. A small company can be an important employer. In Moscow, employees have many more alternate opportunities. Employers in this city often find they have trained their workers only to have them leave for greener pastures with other Moscow employers.

Russian regional governments are catching on to the fact that even small or medium-sized enterprises can make a significant economic impact on the region. Often the regional governments can offer tax advantages not available in Moscow, particularly in the area of regionally controlled taxes on gross revenues, perhaps the most onerous group of Russian taxes on businesses.

Regions can also offer privatized land and buildings in clear title with no strings. Moscow is often reluctant to do so, resulting in a situation in which a company either has uncertainty in its future landlord-tenant relationship, or, worse, an unwanted government entity as a business partner. Under the Communists, the businesses were run by the government, and it is still difficult for officials to understand that they are not part of the executive committee of every company in their territory.

The two drawbacks to regional locations are communications and the personal inconvenience of travel by visiting executives. The communications problems can be and are being solved. The executive travel inconvenience is small when weighed against the overall advantages of a regional location.

Industry is coming, and time is passing, and the cities and oblasts can no longer wait for industry to come to them on their terms. There is a growing understanding that areas compete with one another for industry and an increasing awareness that if they do not develop a progressive attitude to the independence of private enterprise and the appropriate sense of urgency, the opportunity may be forever lost.

The face of Russia will be transformed by the Western investment that is expected given perceived post-election stability. The decisions made by these companies will determine which areas have jobs and affluence, and which continue to have unemployment and poverty. This reality, in contrast to the traditional Soviet experience, when such decisions were made by the state, is gaining acceptance in more forward-looking regions of Russia. There will be a measurable advantage to those Western investors who recognize the regional potential.

John V. R. King is president of Saint Springs Water, a venture in association with the Kostroma Eparchy of the Russian Orthodox Church, with its offices located near the Volga city of Kostroma. He contributed this comment to The Moscow Times.