Direct sales to end-users is currently the most popular approach for most U.S. suppliers of capital goods and industrial equipment. Russian end-users of these types of products are predominately large state-owned or recently privatized enterprises. Such enterprises are typically located in and around major cities although many are in more remote, sparsely populated areas throughout the country.
U.S. firms marketing products and services to large Russian enterprises typically operate from a representative office located in a major Russian city. The capital city of Moscow is by far the most popular location for representative offices, although the number of U.S. firms located in St. Petersburg and Vladivostok, for example, is growing. Due to Russia's large size and the geographic dispersion of buyers in this sector, frequent air travel by sales representatives to visit prospective buyers is a necessity.
It is important to emphasize that while U.S. suppliers of capital goods and industrial equipment can and do use Moscow as a base of operations, the great majority of sales are negotiated and transacted "in the field." The number of potential buyers in this sector that are located in Moscow is very small compared to Russia's major industrial zones (i.e. the Urals region, Siberia, the Northwest/St. Petersburg region and the Far East). Moreover, Russian industrial enterprises are now largely independent of central government control and usually do not have permanent representatives in Moscow. Simply put, selling capital goods and equipment in Russia without leaving Moscow is no longer a possibility.
Some U.S. suppliers in this sector, especially small and medium-sized firms seeking a cost-effective alternative to establishing a representative office in Russia, utilize the services of intermediary organizations such as commission agents, export management companies and export trading companies. Such intermediaries, often possessing their own in-country office and sales personnel, can perform a variety of marketing services on behalf of U.S. equipment suppliers such as making sales calls on prospective end-users, exhibiting the supplier's products at trade exhibitions and negotiating sales contracts.
In a few product categories (i.e. apparel, packaged foods, alcoholic beverages, office equipment and personal computers), foreign suppliers can choose from a small but growing number of existing Russian distributors. These Russian middlemen firms can help the foreign supplier by placing its products on store shelves, handling customs and transportation matters and even conducting advertising campaigns. Such existing distributors can be contacted at trade exhibitions, through trade publications and Commercial News USA, and through the Commerce Department's Agent Distributor Search service. However, it should be kept in mind that many of these recently-formed Russian distributors have comparatively short track records in the distribution business, are small-volume operations, and their experience is often limited to the main cities of Moscow and St. Petersburg, or other regional centers.
Because of these limitations, many U.S. suppliers have chosen to market their products in Russia through authorized distributorships which they create from scratch. While obviously this approach entails greater expense than utilizing existing distribution networks, it can provide valuable protection for the U.S. supplier's product quality and corporate image. It also allows the supplier to establish a distribution network capable of handling larger product volumes, which lowers per unit costs and increases market coverage. Moreover, it is worth noting that this approach has proven especially popular among foreign service providers in Russia (e.g. insurance, long distance and cellular telephone services, etc.).
The first step in creating a Russian distribution network is often for the U.S. supplier to establish a representative office in Russia from which it can acquaint itself with the domestic market as well as build and supervise its local distribution network. The second step is to identify Russian firms capable of acting as distributors for an American product. Many U.S. firms seek out Russian companies with experience in manufacturing, handling or servicing Russian products similar to those of the U.S. firm -- for example, a Russian assembler of personal computers that is interested in distributing American-made PCs. Such contacts can be made at trade exhibitions, by working through a Commerce Department-supported Consortium of American Businesses in the Newly Independent States (CABNIS) and through the Commerce Department's Agent Distributor Service and Gold Key Service.
The final step involves the provision by the U.S. firm of considerable hands-on training for its distributor, as well as supervision of the distributor thereafter, to ensure that the Russian distributor upholds the quality standards of the supplier and the product and that it effectively reaches the market segment targeted by the supplier. Often, U.S. firms provide such training by bringing new distributors to their American headquarters for "internships" in marketing and corporate culture. The Commerce Department's Special American Business Internship Training Program (SABIT) can help U.S. firms defray the cost of providing such internships for Russian business partners.
While franchising and direct retailing are comparatively expensive and time-consuming undertakings (involving, for example, the difficult process of locating, leasing and renovating retail space in a major Russian city), they provide the U.S. supplier with the highest possible control over the marketing of its goods and services in Russia.
Firms supplying the Russian market through joint ventures seek to take advantage of lower domestic factor costs, make use of the Russian partner's knowledge of the domestic market, and circumvent high import tariffs on finished goods. Uncertainty regarding Russia's legal climate for foreign investment is a key factor preventing faster development of joint ventures as a form of market entry by U.S. suppliers. Additionally, U.S. firms often have difficulty finding viable Russian partners for joint venture manufacturing because few Russian enterprises are experienced in producing and distributing Western-standard products.
For this latter reason, joint venture projects undertaken in Russia are frequently developed in a multi-phased manner. For example, the initial phase of the project is often limited to the packaging of imported finished goods on the premises of the Russian partner and subsequent distribution of the product. After a period of successful operation in this mode, the project then moves on to assembly and packaging of imported components. With continued success, the project may progress to the final stage of utilizing a large percentage of locally-sourced raw materials in the production process.
At present, production of U.S. products in Russia under license is relatively rare.
Representative offices can be in two forms: accredited or non-accredited. Accreditation is the more time-consuming and expensive approach, and it requires the foreign firm to have a Russian Government sponsoring organization (usually the Ministry of Foreign Economic Relations or an industry-specific ministry). However, accreditation holds certain advantages in that the accrediting sponsor can issue invitations to foreign personnel visiting the representative office (which are necessary to obtain Russian business visas) and can assist the office in making business contacts.
Because accreditation involves the submission of various legal and financial documents to the Russian Government sponsor, most foreign firms seeking accreditation in Russia retain a local attorney to handle the application for them.
Both accredited and non-accredited offices must file a registration form with the Russian Tax Inspectorate within one month of establishment of the office.
U.S. suppliers of many types of products, including capital goods and industrial equipment, achieve success by targeting Russian enterprises that export a significant portion of their production for hard currency or generate good cash flow as a result of domestic sales. A slightly different but equally successful version of this approach is to target regional Russian government authorities located in natural resource-rich areas of the country, as these authorities often receive a share of the export revenues generated by enterprises under their jurisdiction.
For example, U.S. firms frequently report successful sales of small to medium-sized lots of personal computers, office equipment and consumer goods (e.g. home appliances and white goods, sporting goods, automobiles, furniture) to regional and local government administrations or large Russian enterprises located in oil-producing Western Siberia and Tatarstan and diamond-rich Yakutia. These agencies use these products for a variety of purposes, including outfitting their own offices, supplying population centers in remote areas of the country and even distributing them to their employees as incentive awards.
Savvy U.S. firms also watch for announcements of major modernization or expansion projects by Russian enterprises. Often, the Russian Government helps the affected enterprise pay for the necessary equipment imports by providing a special allotment of financing, by temporarily waiving tariffs and quotas on the enterprise's exports, or by temporarily exempting the enterprise from the legal requirement to resell a portion of its hard currency export proceeds to the Russian Central Bank.Finally, development projects in Russia financed by the World Bank, the European Bank for Reconstruction and Development and the U.S. Agency for International Development frequently involve competitive tenders for the procurement of imported goods and services.
U.S. firms also successfully sell for rubles. Some denominate their sales contracts in dollars, but accept rubles as payment. The rubles are then converted on the Moscow Interbank Currency Exchange or some other currency exchange in Russia by the seller's bank, or through interbank mechanisms, and then wired to the seller's offshore bank. Because of the delay between contract signing and receipt of dollar payment offshore, there is usually a slight difference between the contract price and the payment received. The purchaser is notified of the difference, the same bank transfer process occurs, or the seller accepts the small amount of rubles for local costs and then the product is shipped.
At present, the legal/regulatory environment for advertising in Russia is not well developed. The Russian parliament dissolved by President Yeltsin in October 1993 had passed a law banning all tobacco and alcohol advertising, but this law has never been enforced. Russia's first comprehensive advertising law is now being formulated by the new Russian Parliament's information committee, but relatively little has been publicized about the content of this draft law or the timetable for its completion. In response to several highly-publicized scandals involving Russian investment firms which embezzled money from investors through advertisements promising huge and quick returns, President Yeltsin signed in June 1994 a decree calling for stricter standards of "truth in advertising." However, an assessment of this decree's impact on the local advertising market will be possible only after the publication of implementing regulations.
Both foreign and domestic firms frequently advertise in commercially-oriented newspapers and journals in Russia, with the following being the most popular:
Deloviye Lyudi (monthly journal, Russian language) Izvestiya (daily paper, Russian language) Kommersant (daily paper, Russian language) Delovoy Mir (daily paper, Russian language) Ekonomika i Zhizn (weekly paper, Russian language) Business MN (weekly paper, Russian language) Moscow Times (daily paper, English language) Moscow Tribune (daily paper, English language) Moscow Business Guide (monthly business directory, English language) Delovoi Petersburg (daily paper, Russian language) St. Petersburg Press (daily, English language)
Trade exhibitions in Russia are a useful mechanism for U.S. suppliers to expand awareness of their product and meet potential buyers and distributors. Moreover, U.S. consumer goods suppliers frequently make substantial off-the-floor sales at Russian trade exhibitions. This appears to result from the fact that representatives of regional governments and state enterprises from remote, poorly-supplied areas of Russia often visit trade exhibitions in major cities in order to purchase stocks of consumer goods for their region or enterprises.
On the other hand, downward pricing may not be appropriate for products (i.e. luxury automobiles) that target the fast-growing segment of Russian consumers who, due to their involvement in private business and entrepreneurial activities, possess significant discretionary incomes. In some cases, the relative lack of competition in the Russian market for certain products allows foreign suppliers to introduce new products at higher-end prices. Moreover, Russia's relatively high import tariffs and 23 percent value-added-tax (VAT) put upward pressure on the prices of many imported goods. At any rate, it is worth noting that with almost all prices in Russia now decontrolled and with inflation running at 7-8 percent per month, Russian consumers have grown somewhat accustomed, at least psychologically, to higher prices.
When developing their pricing strategies, U.S. suppliers should also take note of the considerable regional segmentation of the Russian market. While the market for a particular imported product in Moscow or St. Petersburg may be characterized by the availability of several competing import and domestic brands, heavy advertising, good consumer awareness and widespread price competition, the market for the same product in major regional cities such as Yekaterinburg or Novosibirsk may be completely different.
However, Russia's implementation and enforcement of laws protecting intellectual property have not kept pace with legislative developments. Piracy in computer software, motion pictures, videos, recorded music and proprietary-label clothing is pervasive, and foreign firms have experienced significant problems with patent infringement as well. Moreover, U.S. attorneys operating in Russia report that adjudication of IPR disputes in Russian courts is difficult due to the latter's lack of experience with these issues.
While one of the key tasks before the newly-elected Russian Parliament and the Government of President Yeltsin is to develop a modern, codified body of business law, this will not be accomplished overnight. Therefore, for the foreseeable future U.S. firms operating in Russia should use the services of a local attorney for most legal transactions. The Consular section of the Embassy maintains and will make available upon request a list of local attorneys.