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your business guide to russia your business guide to russia novosibirsk 2011

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contents ·why russia ·taking the strategic approach · i m thinking of doing business in russia but don t know where to begin ·suggested approach to the market suggested approach to the market ·why exhibit ·distribution and sales channels ·using an agent or distributor ·market entry and startup considerations ·advertising and trade promotion ·customs duties ·customs duties incentives customs duties incentives ·documentation and procedures ·contract and terms of sale ·freight ·getting paid and managing credit risk ·certification ·currency regulations ·disclaimer disclaimer

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why russia why russia russia is the largest country in the world in both total area and in both total area and geographic extent constituting more than oneninth of the world s land surface it has an area land surface it has an area of 10,672,000 sq miles 17,075,200 sq km and a population of 142 million people it extends across people it extends across the whole of northern asia and 40 per cent of europe spanning 11 time zones and incorporating a great and incorporating a great range of environments and landforms the country possesses a wide array of mineral and wide array of mineral and energy resources including major deposits of oil coal natural gas iron ore manganese chromium manganese chromium nickel platinum titanium copper tin lead tungsten diamonds phosphates and gold the forests of siberia contain an estimated one fifth contain an estimated one fifth of the world s timber the russian coastal zone of 23,533 miles 37,653 km along the arctic and km along the arctic and pacific oceans the baltic black and caspian seas holds significant reserves of fish and energy of fish and energy resources on the sea shelf most of the country s territory is dominated by the strongly continental the strongly continental and subarctic climate which is prevalent in european and asian russia except the tundra and except the tundra and the extreme southeast only a small part of black sea coast around sochi has a subtropical climate a subtropical climate this guide aims to provide a route map of the way a route map of the way ahead it identifies the main issues associated with initial research market entry risk management and cultural management and cultural matters it also includes questions you should ask at the beginning of your research into russia research into russia

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in novosibirsk the cold starts to set in during october with snow and with snow and temperatures below zero beginning and continuing until march or april average january average january temperatures are around 15°c but can drop to 30°c this is not as bad as it sounds as this is a dry it sounds as this is a dry cold in contrast to the chilly dampness of the average european winter in summer temperatures summer temperatures average around 24°c with the occasional thunderstorm winters in st petersburg winters in st petersburg are moderated by relatively warm air blowing in from the atlantic ocean in summer atlantic ocean in summer temperatures are slightly cooler than in moscow in ekaterinburg and the urals region winters are generally colder and generally colder and summers are generally warmer than in moscow you can expect to have snow on the ground any snow on the ground any time from october to may and even longer in the northern parts of the siberian region the siberian region the main oil and gas area russia s geographic extent severe climate and remoteness from major remoteness from major sea lanes impede even economic and social development of the country s territories with country s territories with large parts of the country having almost no population and development development russia is a middleincome country it is the eighth largest retail market in the retail market in the world world having surpassed brazil mexico spain and italy in recent years italy in recent years and the fourth largest market the fourthlargest market the fourth in europe behind only the uk germany and france.

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taking the strategic approach taking the strategic approach often new exporters will feel a bit overwhelmed about trading with russia about trading with russia much consideration and planning will need to go into deciding on the company type delivery company type delivery of products and services marketing strategies and local conditions before making these big decisions making these big decisions exporters and investors should spend some time thinking about business objectives business objectives the questions listed opposite should help you to focus your thoughts your answers to them will your answers to them will highlight areas for further research and also suggest a way forward that is right for your company for your company you may then want to use this as a basis for developing a formal strategy although this will not be necessary or appropriate for or appropriate for all companies do you wish to sell to russia do you wish to establish your own company own company presence in russia for example through a representative office or limited liability company limited liability company do you need to be involved in russia at all what are the unique selling points features points features and benefits for your product or service do you know if there is a market for your market for your product or service in russia do you know if you can be competitive in russia in russia do you know where in russia you should start do you know how to locate and screen potential and screen potential partners agents or distributors your aims:

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i m thinking of doing business in russia but don t know where to begin ite puts you directly ite t di tl in touch with staff in our three offices in russia moscow novosibirsk and krasnodar who k d h are able to give you access to the best country and sectorspecific business trade shows as well as offering t d h ll ff i support during your visits to russia they can advise on local business conditions and provide tailored and provide tailored information specific to your needs remember that collection and analysis of information of information about the market major players potential partners and clients local rules and regulations are essential for regulations are essential for informed business decision making getting started with a trade show g tti t t d ith t d h participation not only involves the collection of reliable information like · the size of the market · how it is segmented between different types bet een different t pes of customers · an explanation of the various distribution various distribution channels · competitor activity their strategy and strategy and performance it is also far better to spend time and money to spend time and money in carrying out thorough trade show exhibiting before entering the market bfti th k t than to enter russia in a hurry not wishing to miss the boat only to discover that you have made a very th t h d costly mistake european and asian companies remain tough competitors due to i t h tit d t their proximity to the russian market and their longstanding relations with russian organizations and companies thus starting with a and companies thus starting with a trade show exhibiting will help you to get in touch with them as well.

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suggested approach to the market suggested approach to the market reducing the market to bitesize pieces russia is quite a challenging market for foreign companies new to exporting as it requires serious time and financial commitment the majority of exporting companies experience problems with lack of management time and resources it is important therefore to concentrate efforts where there is the highest degree of success probability if you are not a webbased business russia is best broken down to economic regions e.g siberia central russia north west of russia etc a concentrated effort of sales technical support l h l and executive staff is to be directed at the selected region or regions regional success correspondingly will allow expansion out in diverging rings from this initial base focused trade show exhibiting is invaluable in making decisions across market entry strategy formulation and local partner selection establish a local presence or select a local partner for effective marketing and distribution of your products in russia due diligence is a must there are thousands of russian trade associations many are very professional and are an excellent source of industry information f d f and practice.

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why exhibit why exhibit trade shows give you the chance to meet new prospects by your sales staff in the previous year reinforce existing customer relationships and expand 87 share information they learned at shows 64 talk to product or brand awareness product or brand awareness at least 6 other people at least 6 other people but let s face it trade shows also cost time money and 77 found at least one new supplier at their last show effort when all of these are tight you might be tempted 76 asked for quotes to decide they just aren t worth it 72 say show attendance influences their buying before you decide trade shows just aren t worth it take before you decide trade shows just aren t worth it take decision a look at some facts 71 of attendees can authorize or approve purchases 70 of attendees are planning on buying at least one did you know product the average cost to close a sale originating at a trade the average cost to close a sale originating at a trade 51 of executive decision makers request a followup 51 of executive decision makers request a follow up show is less than 2/3 the cost for leads from other visit sources 50 come to see what s new 75 of people attending trade shows arrive with a 46 of decision makers make purchase decisions at a specific goal in mind specific goal in mind show closing a sale from a trade show lead takes an average of 26 signed purchase orders as a direct result of a show 1.6 personal sales visits versus 3.7 for nonshow leads you can talk with as many prospects in an hour as bottomline normally takes a day normally takes a day 1 trade shows shorten the sales cycle so each sale 1 trade shows shorten the sales cycle so each sale costs less to close more numbers about trade show attendees from 2 attendees are arriving these days to meet specific industry surveys needs 95 of decision makers look for their current vendors at 3 shows are the next best thing to bringing prospects 95 of decision makers look for their current vendors at 3 shows are the next best thing to bringing prospects shows to your office 88 of attendees on average have not been contacted

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distribution and sales channels the market for most consumer products is concentrated in three major concentrated in three major cities local presence is essential for the success of foreign for the success of foreign firms in the russian market this is especially true when considering the fact that business the fact that business relationships in russia are built upon personal ties and social introductions and that much of the and that much of the major competition is only a few flighthours away in addition for sectors that involve any type of that involve any type of government procurement an entity must be registered with the russian government russian government in order to bid on the procurement projects hence many western and asian firms enter into a consortium with a russian company or with a russian company or enter into a representative agreement especially for the purposes of market entry finally the language entry finally the language barrier and established social/business circles make it extremely difficult to enter the russian to enter the russian market without a qualified russian representative methods of distribution and the number and and the number and functions of intermediaries vary widely by product area and local conditions the market for most consumer market for most consumer products is concentrated in major cities there are many largescale retail stores in the major cities stores in the major cities especially in moscow novosibirsk st petersburg and the outlying suburbs large shopping malls have opened up on the ring opened up on the ring road circling moscow foreign companies also export directly to end users and this method is users and this method is often observed where equipment is manufactured on a oneoff basis many large retail chains large retail chains including department stores and supermarkets can purchase in bulk rather than using traditional than using traditional wholesale channels.

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market entry and startup considerations market entry and start up considerations new exporters have three basic options when choosing a distribution channel agents it is not a common practice in russia for foreign companies to rely g p y solely upon the services of an agent since agents do not provide product p promotion support pp distributors and representative offices however often employ agents in order to sell g their products in remote russian regions distributors the most common market entry strategy is to select a good distributor or several distributors depending on the product p a good distributor usually provides a wide range of logistical support to an exporting partner including customs clearance warehousing g inventory management etc however handling promotion and advertising campaigns exclusively p g y through independent distributors can turn out to be inefficient russian distributors normally handle y products from multiple suppliers and are not necessarily dedicated to promoting a specific p g p company s product unless the supplier provides substantial financial support for promotion pp p and advertising branch/representative offices some foreign manufacturers g in addition to a distributorship network operate their own representative office the main advantage of opening a representative office is a direct access to the market/endcustomers and control over the promotion and distribution of their products however p such offices cannot be directly involved in commercial activity having no right to operate g g p commercial accounts under the russian law instead they typically oversee a network of distributors and/or agents who are directly engaged in trade activity operation through a representative office p ensures an exporter s greater control over the distribution channels and helps to reduce risks p

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advertising and trade promotion advertising and trade promotion advertising in russia plays a very important role in marketing as elsewhere in g the world according to russian buyers and industry sources for consumer g goods traditional advertising g media are well established in russia television print media outdoor billboards magazines pointofsale g ,p promotions and displays and free samples are widely used foreign products face tough competition against g p g russian products there is a need to russify advertising to suit russian culture most major western j advertising agencies are active in russia domestic agencies are growing and their professionalism p continues to improve advertising tax is levied at 5 per cent on all direct and indirect advertising expenses excluding vat p g tax is paid in full to the local budgets local authorities may decrease the tax rate but in moscow and st petersburg the maximum rate of 5 per cent applies advertising tax is deductible for profits p tax purposes for industrial goods trade shows and trade magazines are the most effective advertising g methods industry publications which are widely read by industry managers and y g specialists are among the most effective places to advertise in addition to seminars and exhibitions industry professionals rely upon them as key sources on industry development and technology advertising in such publications builds p name recognition and product awareness in the professional community trade shows represent the important p p part of marketing in russia russians prefer to shop at the shows because they can learn from the variety of y technical experts and company displays the high participation rate of european companies in p p russian shows is a source of their success in this market around 90 per cent of all foreign companies g p participating in russian trade shows are european and their market share of industrial equipment q p is about 70 per cent.

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representatives of regional governments and state enterprises from remote areas often visit exhibitions in major cities to purchase goods promotional seminars are also effective in increasing awareness of the equipment and brand names in the russian business community often companies sponsor a seminar for specialists at a scientific and research institute under the auspices of the ministry of industry and energy or other governmental agencies such seminars are very popular among industry specialists during the seminars the company tells the specialists about technologies where its h l h equipment can be used usually such seminars receive very good press coverage in industry publications tips for exporters · generally under exports and imports between a foreign company and a russian company the russian company is responsible for the customs procedures · in order to import goods into russia and clear them through customs an importer has to make all customs payments due in accordance with the chosen customs regime and comply with other requirements established by customs legislation e.g certification l l f requirements · importation of certain goods eg pharmaceuticals meat etc requires licences · russia has several special economic zones that offer customs benefits import restrictions certain imports to russia require permission and certificates eg of conformity sanitation licences and other approvals they should be submitted to the customs authorities for clearance the russian federation imposes an antidumping duty on certain goods.

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customs duties customs duties classification of goods the russian tariff classification system is based on the internationally adopted harmonized commodity description and coding system valuation rules the customs valuation procedure is established in line with gatt/wto principles and is generally equivalent to the daf/russian border transaction value of the goods concerned rates import duty applies to most goods the majority of customs duty rates in russia are ad valorem ie a percentage of the goods customs value there are also specific h l f duties for certain types of imports calculated by volume weight or quantity some duties have a combined rate incorporating the above two types of duty and therefore the tax base may vary base customs duty rates vary widely from 100 per cent on spirits to 0 per cent for some printed matter and some other priority imports zero duty applies for example to a wide range of equipment and machinery on average duty rates fall between 5 per cent and 20 per cent of the goods customs value the base rates specified in the legislation apply to countries that have been granted most favored nation status some goods from developing and least f d l d l developed countries may be imported at 75 per cent of the base rates or zero rates respectively however these are limited to raw materials and handmade goods goods originating in other countries will be subject to duty at double the base rates the following are exempt from customs duty · transit goods · cultural valuables · goods imported by individuals for personal use worth not more than approximately us$2,500 and weighing less than 35kg · means of transport involved in the international movement of goods and passengers · humanitarian aid and some others.

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customs duties continued customs duties continued import vat for most goods the import vat rate is 18 per cent of p the customs value inclusive of customs duty and excise if any food a certain range of children s goods g g and a limited range of other goods may be subject to 10 per cent or 0 per cent vat customs processing fees p g customs processing fees are established as a flat fee and vary from approximately [15 to [3,000 per customs p declaration depending on the customs value of imported goods payments customs payments are generally paid before or when submitting customs g declarations to customs temporary import relief goods may be imported under a temporary import p y p customs regime normally for a period of up to two years generally goods are p permitted for temporary p y importation if it is possible to identify them upon their reexport temporary importation requires p q permission from the customs authorities upon expiry of the period for temporary importation goods shall p ,g be moved out of russia or placed under another customs regime e.g release for free circulation temporary importation requires periodic customs payments of 3 per cent per month of the total customs payments due had the goods been imported for free circulation upon export of the goods these customs p y payments are not refunded customs has the right to require security for customs payments e.g a deposit p g pledge bank guarantee etc g goods which qualify as fixed assets for production purposes may be admitted and be subject to a 3 per j p cent monthly customs payment for a temporary import period of 34 months if the russian user does not yet have property rights e.g for leasing after this period the goods are considered released for home use in these instances the interest on customs duty and taxes is not payable by installments p y y

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customs duties incentives customs duties incentives charter capital contributions fixed production assets p imported as a charter capital contribution by a foreign investor are free from customs duty the y goods must not be excisable and should be imported within the time frame established for the formation of the charter capital a vat exemption is also available for technical equipment q p imported as a charter capital contribution tolling g goods imported into russia for processing may be placed under an inward p processing relief ipr g procedure subject to certain conditions under ipr goods e.g raw materials imported for processing are eligible for full exemption g p from customs duty and import vat provided the processed/finished goods are subsequently moved q y out of russia within a deadline agreed on with customs no export customs duty is charged upon the y g p export of finished goods from russia iprs must be authorised by customs only a russian company y p y may apply for an ipr special economic zones p a number of special economic zones sez with a free customs regime have been established in russia imports to sezs are free of duty and vat i.e foreign goods are delivered to and used within the sez free of import customs duty and p y vat when foreign goods or products of their processing are subsequently released into free circulation to the rest of russia import customs duty and vat are payable if the goods manufactured in a particular p sez are exported to foreign countries they will be subject to export duty if applicable pp foreign goods which were imported into the sez but not processed may be reexported without payment p y of export customs duty.

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