Cultural Dimension and Business Environment of Russia

7/29/2019 Cultural Dimension and Business Environment of Russia

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Cultural Dimension and Business Environment of Russia

1

Cul tural Dimensions and

Business Environment of Russia

R ussia


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Subm itted To:

T ahm ina K hanamA ssistant p rofessor

U niversity of D hakaFaculty of Business Studies

D epartment of M anageme nt Studies.

Submitted B y:G roup- 5

From M AN AGEM EN T Stu dies 16t h

Batch

Univer sit y of Dhaka

M E M B E R S O F G R O U P- 5

N a m e Serial N o.

Juba y er - A l - M a mun 4 1

M d. Sumsul A rifin 4 2

A mor A dhikari 44N azia Taba ssum 4 5

Pranti Sark er 4 6

M d. M ozammel H oque 4 7

D ebashish D as 4 8

M irsadul A brar 4 9

A fjal H osen 50

Submission Da t e: 2 5 t h F ebr ua r y, 2 0 1 3


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Acknowl edgement

irst and foremost, we would like to pay our gratitude to the almighty Allah, the most

Merciful, the Beneficent, for blessing us with good health and tenacity of mind to

complete the report on Cultural dimension and Business Environment of

Russia.

Many people have been responsible in making this report. We extend our most sincere thanks

and gratitude to our honorable madam Tahmina Khanam, Assistant Professor, Department

of Management Studies, for the subsequent advice and valuable guidance towards completion

of the report.

We are extremely grateful to the officials of Russian Embassy for providing us with all the

necessary documents.

In a word we express our gratitude to all the individuals who have helped us directly or

indirectly.

F


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Letter of Transmittal

25th February, 2013.

Tahmina KhanamAssistant Professor,Department of Management Studies,University of Dhaka.

Subject: Submission of the Report on Cultural dimensions and Business Environmentof Russia.

Dear Madam,

In this report, Cultural dimension and Business Environment of Russia, we have triedto implement our learning so far with due sincerity and would like to thank you for giving usthe opportunity to have the chance to work on this report. Despite many limitations we havetried our level best to address the major and in depth issues in making this paper accurate andreliable. If you have any further enquiry concerning any additional information we would bevery pleased to clarify that.

We, therefore, hope that you will be kind enough to accept this report in appropriate manneras required for the completion of the course.

Thanking you.

Group 5,

16th batch, Sec: A

Department of Management Studies,

University of Dhaka.


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Met hodol ogy

The study is conducted using only secondary data. Information used hare collected from

multiple sources. Most of the cases we have used different site to collect data regarding

Russian cultural dimension and business environment. Analysis and presentation of data is

performed through a group effort.

Data collected from secondary sources have been processed manually and qualitative

approach has been used through the study. Qualitative approach has been adopted for data

analysis and interpretation taking the processed data as the base.


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ExEcut ivE Summa r y

Russia is the world's biggest country with its vast territory that occupies the east of Europe

and the north of Asia. Cultural dimension is a widely accepted tool to measure cultural

differences. One of the commonly used dimensions is Greet Hofstedes cultural dimensions.Russian cultural dimensions are analyzed through the lens of Hofesteds 5-D Model. It

appears that Russia occupies an unusual position among the principal worlds of culture

because of its long political economic isolation. The business environment in Russia has been

steadily improving since the transition from a centrally controlled planned economy to a free

market, though the economic crisis has had a significant impact on the business climate. In

recent years, many reforms have been implemented, the tax system has become fairer and

more transparent, Russia has become increasingly integrated with global markets, and

customs have improved appreciably. At the same time, the operating environment remains

hazardous on a number of fronts, with many foreign investors scared off by poor legal

safeguards, as well as high levels of bureaucracy and corruption. The government has madefighting corruption a key priority. The main problem, especially for small companies, is the

availability of financial resources, the commercialization of science-intensive developments

and the support of exports. Russia is in the bottom deciles on the burden of government

regulation, with its weak institutional framework cited as a key obstacle to growth. Russia has

significant differences between regions. More than 80% of the population lives in the

Western part of the country, and nearly 73% live in cities. Economic activity is also highly

concentrated. In 2010 Moscow had the countrys highest gross regional productmore than

five times that of Saint Petersburg, which was second. Russia has achieved political stability.

Russia is principally occupied by large industrial enterprises, with a small number of small

and medium-sized enterprises (SMEs). In line with its thrust for WTO accession, the

government has changed its focus to improve the judicial system and to develop stringent

laws on copyright, trademarks and patents that comply with the WTOs Trade-Related

Aspects of Intellectual Property (TRIPS) agreement. Environmental regulations have been

taken seriously only since 1991 in Russia. After that they have formulated several low to

cover environmental issue. Russia is renowned for its advanced defense technologies and

military equipments. Over a period of time the country has also become one of the leaders in

space research and development. It has moved its focus on IT sector development. Over the

years, it has increased its expenditure on IT steadily. From this paper, we can get a thorough

analysis of cultural analysis and business environment of Russia.


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Table of contents

TOPIC PAGE NUMBER

Introduction 1

Russia in Brief 1-2

Cultural Dimension 2-5

Business Environment

Internal Business Environment 5-10

External Business Environment

1. Political Factors 11-172. Economic Factors 17-223. Socio- cultural Factors 23-264. Technological Factors 26-29

Conclusion

Bibliography

3031


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Introduction

Culture is such type of phenomenon which affects all aspect of life and business is not out ofits arena. This paper discuss Russian cultural dimension by using Hofsteds five dimensions.It provides clear insights about business environment. Business environment consists ofdifferent factors. This can be divided as micro internal environment and macro- externalenvironment. Internal environment deals with fact within a business organization such asdifferent business etiquettes. External environment includes the fact a business organizationinteracts during carrying out their courses of action. Once Russia was a super-power countrystill now it is one of the most powerful countries. It has a strong political, economical,history. Once it was a communist country. Recently it has moved its focus on market basedeconomy. The Russian business and trade regime has been liberalized considerably,especially during the process of negotiation for membership in the World Trade Organization(WTO). In contrast to the previous tightly-controlled situation, all enterprises and individualsare now allowed to trade without special registration. Russia will grow into a heavy-weightcountry by 2020. Russia contributed largely to globalization and clearly it is a part of

international business life. This paper briefly discuss the factors that affect doing business inRussia.

Russia in Brief

Russia is the world's biggest country with its vast territory that occupies the east of Europeand the north of Asia, i.e. 11.46% of the Earth's land area. Russia is washed by the waters oftwelve seas and three oceans: the Arctic in the north, the Atlantic in the west and the Pacificin the east. The country has thousands of rivers and about 2 million lakes, among which arethe Caspian Sea, the biggest lake in the world, and Baikal, the world's deepest fresh-waterlake.

Neighboring 18 countries (Norway, Finland, Estonia, Latvia, Lithuania, Poland, Belarus,Ukraine, Georgia, Abkhazia, South Ossetia, Azerbaijan, Kazakhstan, China, Mongolia, NorthKorea, Japan and the U.S.) and having world's longest land border of about 60,000 km (over37,000 miles) Russia has a population of 142,905,200 people (according to the census of2010).

The Russian Federation consists of 83 federal subjects, among them there are 2 cities offederal importance - Moscow, the capital of Russia with a population of more than 11 millioninhabitants, and St.Petersburg, the second largest city in Russia also called "the northerncapital" with its population of around 5 million people. There are 10 more cities in Russiawith a population more than a million inhabitants - Novosibirsk, Yekaterinburg, NizhnyNovgorod, Samara, Omsk, Kazan, Chelyabinsk, Rostov-on-Don, Ufa and Volgograd.

With about 80% of the population being ethnic Russians, the rest 20% covers more than 150nationalities living in Russia. The official language is Russian. As for the religioncommunities, the majority of Russian people are Orthodox Christians, there are also manyMuslims, Catholics, Hebrews and Buddhists.

The climate in Russia varies from the subtropical on the Black Sea coast to the continental inSouthern Siberia, as well as from the arctic in the Far North to the maritime one on the Baltic


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Sea and to the moderately monsoon in the southern part of the Far East. Russia's weather isknown to change from extremely cold to extremely hot. Northeastern Siberia is one of thecoldest regions in the world. Average winter temperatures there are below -50 F (-46 C).The summer temperature in this region can be registered up to 100 F (38 C). No other partof the world registers such a wide range of temperatures. While a swimming season may startin the Black Sea region, a harsh snowfall in the Eastern Siberia may be registered at the same

time. Still, the most densely populated part of Russia's territory lies within the moderateclimatic zone. Rather dry summer is hot and rather snowy winter is mild in Moscow and St.Petersburg, as well as in the towns of the 'Golden Ring' and in the cities of the Volga Area.Such weather conditions make the European part of Russia more attractive for the travelersfrom all over the world.

The most popular and convenient transportation means throughout the vast territory of Russiais air and railway transport, so the whole year around the majority of Russian people andtourists prefer travelling by plane and train. The trip from Moscow to St.Petersburg takeseither 5-7 hours by train or an hour by plane, whereas the flight from Moscow to Kamchatkatakes around 10 hours. Moscow and other largest cities have several kinds of urbantransportation: subway, buses, trolleybuses and trams, as well as routed and regular taxis.

Subway is the most popular transport in Moscow, some of its stations are monuments of artfrequently visited by tourists.

Russia has a vast territory that stretches for about 9,000 km (almost 6,000 miles) from west toeast, spanning the country's territory into 11 time zones. The most western and Eastern Timezones in Russia are +2 hours GMT in Kaliningrad and +12 hours GMT in Kamchatka andChukotka peninsulas). Therefore, while people in the European part of Russia enjoy thesunset, the Far East inhabitants start their day.

Russia is a democratic federative state with a republican form of government and a head ofthe state is the President elected by the citizens of Russia every six years. The current RussianPresident is Vladimir Putin, the Supreme Commander of the country's Armed Forces. TheGovernment is headed by Prime Minister Dmitry Medvedev endowed with an executivepower.

The history of Russia and its culture traces back to the ancient times of the Kievan Rus whenthe Russian Empire came to be known and flourished later for about three hundred years.Ancient churches and monasteries have been preserved in many Russian cities, towns andsuburbs leaving us the great memorial heritage of the Russian culture, art and literature.Many world famous writers, artists, sportsmen, scientists originated from Russia broughtgreat success and have glorified the national culture which Russia people are proud of.

Russian people love to celebrate and take most of their national holidays very seriously. New

Year is the most widely celebrated holiday, followed by Orthodox Christmas, so Russiansenjoy the whole holiday week at the start of the New Year.

Cultural Dimension of Russia:

Cultural dimension is a widely accepted tool to measure cultural differences. We speak of

cultural dimensions to designate structures of organizing and thereby characterizing a


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particular group of people. The culture tends to take on a supra-identity constituting the

framework for each individual in the group. Cultures can be very broad as seen in examples

of national identity: the French, the Americans. Or they can be more specific to the common

interests it binds the different participants/stakeholders as seen in corporate culture, urban

culture, ethnic minority culture. In either case, the culture that results is usually a general,

predominant composite of all the constituent parts giving rise to an intangible entity thatincorporates its different elements (an inter-subjective identity). It is the framework by which

a personality develops even if this personality is intangible it represents one, the

representation is found in its image and acts like the glue holding the picture together.

One of the commonly used dimension is Greet Hofstedes cultural dimension, where cultural

data was initially collected from IBM employees from 70 countries and then further enhanced

with data from commercial airline pilots and students in 23 countries, civil service mangers in

14 elites in 19 countries. The contribution from all this research data validated earlier

findings and helped Hofstede to develop a model that identifies five Dimension of culture

to assists in differentiating cultures.

If we explore the Russian culture through the lens of the 5-D Model, we can get a good

overview of the deep drivers of Russian culture relative to other world cultures.

Power Distance:

This dimension deals with the fact that all individuals in societies are not equal. It expressesthe attitude of the culture towards these inequalities amongst us. Power distance is definedas the extent to which the less powerful members of institutions and organizations within acountry expect and accept that power is distributed unequally.

0

10

20

30

40

50

60

70

80

90

100

PDI IDV MAS UAI LTO

Greet Hofested - 5 D Model

Scores of russia


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Russia, scoring 93, is among the 10% of the most power distant societies in the world. This is

underlined by the fact that the largest country in the world is extremely centralized: 2/3 of all

foreign investments go into Moscow where also 80% of all financial potential is

concentrated. The huge discrepancy between the less and the more powerful people leads to a

great importance of status symbols. Behavior has to reflect and represent the status roles in all

areas of business interactions: be it visits negotiations or cooperation; the approach should betop-down and Provide clear mandates for any task.

Individualism:

The fundamental issue addressed by this dimension is the degree of interdependence a society

maintains among its members. It has to do with whether peoples self-image is defined in

terms of I or We. In Individualist societies people are supposed to look after themselves

and their direct family only. In Collectivist societies, people belong to in groups that takes

care of them in exchange for loyalty.

If Russians plan to go out with their friends they would literally say We with friends

instead of I and my friends, if they talk about brothers and sisters it may well be cousins, soa lower score of 39 even finds its manifestations in the language.

Family, friends and not the neighborhood are extremely important to get along with everyday

lifes challenges. Relationships are crucial in obtaining information, getting introduced or

successful negotiations. They need to be personal, authentic and trustful before one can focus

on tasks and build on a careful to the recipient, rather implicit communication style.

Masculinity / Femininity:

A high score (masculine) on this dimension indicates that the society will be driven by

competition, achievement and success, with success being defined by the winner / best in

field a value system that starts in school and continues throughout organizational behavior.

A low score (feminine) on the dimension means that the dominant values in society are

caring for others and quality of life. A feminine society is one where quality of life is the sign

of success and standing out from the crowd is not admirable. The fundamental issue here is

what motivates people, wanting to be the best (masculine) or liking what you do (feminine).

Russias relatively low score of 36 may surprise with regard to its preference for status

symbols, but these are in Russia related to the high Power Distance. At second glance one can

see, that Russians at workplace as well as when meeting a stranger rather understate their

personal achievements, contributions or capacities. They talk modestly about themselves andscientists, researchers or doctors are most often expected to live on a very modest standard of

living. Dominant behavior might be accepted when it comes from the boss, but is not

appreciated among peers.

Uncertainty avoidance:


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The dimension Uncertainty Avoidance has to do with the way that a society deals with the

fact that the future can never be known: should we try to control the future or just let it

happen? This ambiguity brings with it anxiety and different cultures have learnt to deal with

this anxiety in different ways. The extent to which the members of a culture feel threatened

by ambiguous or unknown situations and have created beliefs and institutions that try to

avoid these is reflected in the UAI score.

Scoring 95 Russians feel very much threatened by ambiguous situations, as well as they have

established one of the most complex bureaucracies in the world. Presentations are either not

prepared, e.g. when negotiations are being started and the focus is on the relationship

building, or extremely detailed and well prepared. Also detailed planning and briefing is very

common. Russians prefer to have context and background information.

As long as Russians interact with people considered to be strangers they appear very formal

and distant. At the same time formality is used as a sign of respect.

Long term orientation:

The long term orientation dimension is closely related to the teachings of Confucius and canbe interpreted as dealing with societys search for virtue, the extent to which a society showsa pragmatic future-oriented perspective rather than a conventional historical short-term pointof view. There is no score available for Russia.

Business Environment: Business environment can be divided into two

parts. These are as follows:

Internal Environment:

Business

Environment

Internal

Environment

External

Environment


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Internal environment means environment within the business enterprises. Internal

environment includes the following factors. These factors are discussed bellow with their

effect on business.

Russian Business StructuresAutocracy and centralized decision-making are synonymous with the Soviet system in many

people's eyes and this approach can certainly be seen to be manifested within large Russian

business organizations. Russian companies tend to be driven by one strong central figure who

will make strategic decisions with little or no consultation with anyone other than a handful

of close trusted advisors. (Indeed this centralized decision-making process can be most

clearly seen in the approach of recent Russian presidents

Therefore, when dealing with potential clients or joint-venture partners in Russia, it is

absolutely essential to make sure that the right person is being dealt with. Western companies

who attempt to interface at inappropriate levels within an organization waste massive

amounts of time and resource. Nowhere is the advice, 'Go straight to the top', more pertinent.

The headlong rush from communism to capitalism has made people into entrepreneurs and

centralized decision-making enables organizations to grab an opportunity when it arises.

Thus, as in most developing economies, companies tend to have a short-term view of

business activities and it is imperative that any potential partner can see the short-term

benefits of collaboration.

Russian Management Style

As has been stated, management tends to be centralized and directive. The boss - especially

the 'big boss' - is expected to issue direct instructions for subordinates to follow. Littleconsultation will be expected from people lower down the company hierarchy. Indeed too

much consultation from a senior manager could be seen as a sign of weakness and lack of

decisiveness.

Middle managers have little power over strategy or input in significant strategic decisions.

The most powerful middle managers are the ones who have the most immediate entree to the

decision-maker at the top of the organization. There is little point in wasting time debating

with middle managers who do not have an easy access to the top. The most significant reason

for delay in reaching a decision in Russia is that the decision has not been put in front of the

real decision-maker.

Delegation is usually in terms of managers giving precise instructions to subordinates who

are expected to perform their allocated tasks with little or no discussion. Many westerners

complain of a lack of initiative from local Russian staff, whilst Russian staff often bemoans

the lack of clear, unambiguous advice from expatriate managers.


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It is also important to take age into consideration - younger managers, who have developed in

the post-Soviet era, may be much more heavily influenced by western management theory

than their older counterparts.

Russian MeetingsAs might be expected in a country where managers are autocratic in style, meetings are often

for the purpose of information dissemination, rather than for the open debate of current

business issues. Formal meetings are often held to ratify decisions which have been made

elsewhere and to give clear instruction on key tasks to be performed.

Any open debate on the issues in hand will have been undertaken elsewhere in either one-to-

one meetings or in smaller groups. It is in these 'background' meetings where much of the real

debate is undertaken. Without access to these meetings, it can be very difficult to influence

the flow of events and it is only through cultivating very close relationships that an outsider

will ever be invited into these inner cabals

Formal meetings tend to be very structural and serious. The dour image associated with many

Russian negotiators stems from the belief that a formal meeting is a serious affair and should

be treated accordingly. Humor is seldom used in such serious situations.Here are some

Russian business etiquette tips to help you appropriately interact with your foreign

colleagues:

Avoid high-pressure talk. Russians value patience and appreciate time to debate,

consider and digest negotiations. Trying to force a decision through high-pressure talk

will only make you appear impatient, rude and incapable of professional business

interactions.

Be on time to all meetings. While it's acceptable for your Russian colleagues to be

late to business meetings, as a foreigner, you are expected to arrive on time (if not

early). Also, don't expect your late Russian colleagues to apologize for their tardiness,

as their behavior is considered to be a test of your patience.

Bring technical experts, if necessary. If your business meeting will focus on

technical topics, be sure to bring technical experts and a Russian interpreter. Your

Russian colleagues will expect a thorough presentation of the history and/or

precedents associated with your topic. By bringing experts you will establish your

credibility, foresight and general expertise.

Include a Russian translation on your business cards. Although most Russians

speak English (as English is usually taught beginning in the third grade), be sure to

have a Russian translation of your business card on its flipside, as this indicates your

enthusiasm for doing business with your Russian colleagues.

Also, by offering a Russian translation of all related business documents you will

demonstrate your precision and thoroughness and highlight your willingness to go the

extra mile to do business with your Russian colleagues.

Other helpful etiquette tips for Russian business meetings include:


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o Avoid showing the soles of your shoes (or stepping on any seats), as this is

considered highly disrespectful.

o Expect your Russian colleagues to get angry, walk out of a meeting and/or talk

about ending their relationship with you in their effort to make you give more

concessions during a negotiation.

o Shake hands firmly and maintain eye contact when doing so.

o Wear dark colored, conservative business suits to meetings. Women should

wear longer, knee-length skirts, rather than pants-suits.

Russian TeamsTeams work best together when the relationships amongst the group are close. There remains

a general suspicion of strangers in Russian society and any attempt to bring together teams

from different strands of an organization can be problematic. Once a team has been

established and is working well together it is probably best to keep the team intact for as long

as possible. Move the team wholesale from project to project rather than developing a fresh

team for every situation.

The team leader is expected to play a domineering role and to issue precise detailed

instructions and then supervise ongoing progress. Those western managers who are more

used to a 'hands off' approach will undoubtedly confuse local staff who will feel unsure of

what is expected of them. An expatriate team leader needs to establish credibility through

being decisive, clear and visibly in control.

As different age groups display different attitudes and approaches (pre & post Soviet change

generations), it is often thought best to keep teams quite aligned in ages.

Russian Communication Styles

English language levels vary enormously in Russia. Many younger entrepreneurs (especially

in the cosmopolitan centers like Moscow and St Petersburg) have a fluent command of, not

only English, but often several other European languages. Yet in other more provincial

centers it is not unusual to meet business people who have little or no foreign language skills.

Always check in advance whether interpretation is needed. If in any doubt about the

comprehension levels encountered in meeting situations, be sure to check and recheck by

asking relevant 'open' questions at regular interval.

(Outside Moscow and St Petersburg most signs are written exclusively in the Cyrillic script

and knowledge of this will go a long way on a trip to the more remote areas of Russia.)

As with many other cultures (Mediterranean and Middle Eastern for example) much more

emphasis is placed upon the spoken than the written word. People believe things when they

have heard them from someone with whom they have a trusting relationship. Therefore, it is


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often much more efficient to hold face-to-face meetings at which issues can be fully

explained, rather than sending information in a written format only.

There tends to be very little visual or verbal feedback during meetings in Russia. People

listen silently and with little obvious body language being displayed. This does not, however,

mean that the listener is disinterested or does not understand - it is merely a cultural

characteristic which Russians share with, amongst others, the Finns and the Japanese.

Russians will tend to wait and think before responding to a point made to them - do not be

impatient. Allow the Russians the time and space needed to take part fully in the conversation

(and remember that they are probably struggling with foreign language as well.)

Women in Business in Russia

The communist system of Russia preached equality of the sexes but had far less success in

achieving the objective than their counterparts in the People's Republic of China. Thus,

although a high percentage of the Russian workforce is female, there are very, very few

women in senior management positions. This situation shows little sign of changing other

than in some of the offices of major MNCs stationed in the country.

Western women working in Russia will be showered with old-fashioned courtesies but may

find themselves being less respected in meetings and treated as inferior in rank to male

colleagues - whether they are or not!

Russian Dress CodeRussians tend to dress as well as their salaries will allow. Men would tend to wear either a

dark suit or jacket and trousers with a tie and women mainly wear business suits or blouses

and skirts.

It is important, for westerners to look smart and appear to be expensively dressed as this

enhances credibility. From the safety standpoint, it is probably not advisable to wear very

expensive watches or jewellery. The winters can be extreme (as can the summers) so ensure

suitable clothing to meet whatever the prevailing conditions. Be sure to remember a hat,

gloves and scarf in winter.

Russian Business Negotiation Style:

Negotiating is a very serious business for a Russian because just about everything requiresnegotiation. I suspect, again, that theres something genetic in this and that most Russians are

simply born to negotiate. That may help to explain why negotiation is still a ratherconservative business. There is a lot of theatre in any negotiation and Russians are a trulyartistic bunch (not for nothing has Russian culture and arts had a major impact on worldculture). Not for nothing is the premier theatre in Moscow and Russia called theBolshoi, or Big Theatre. This means that you need to be aware of several factors which willhelp set the stage in the Russian negotiating theatre.

Understanding against whom you are negotiating is a critical part of the negotiators brief and this requires attention to the relationship factor. There are two concepts, which I have


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found to be the keys to determining who holds the cards in any particular negotiation. Theseare: kto kogo (kto kaVO), the sense of which is who does what to whom; and kto zakem, the sense of which is who stands behind whom. In short who is really calling theshots? These phrases indicate that interrelationships and networks of obligations, formal, andinformal are vital parts of the structure of the Russian political economy.

They also show that the results of any negotiation have to be approved by the real power so your task as negotiator is to be sure of whom that real power actually is. Sometimes, whatseem to be very small negotiations can be referred to a power that is very, very high up in theRussian political and economic systems. Finding out where power lies in any given situationis a key task.

This requires an ability to understand something of the makeup of Russian society. Russiansimmediately understand who is who in their own society. It is more than a question ofpecking order (junior versus senior). To an outsider thinking of the old USSR as a socialistand classless system, finding that todays Russia has become stratified can be quite a shock.While Russians may not immediately understand relationships in a delegation of foreigners,they will expect the foreigners to understand relationships on the Russian side. Failure by a

foreign delegation to understand, to be aware of, or to properly acknowledge the presence ofa key Russian decision maker is one of those mistakes which can come back to haunt you.

Bear in mind, too, that the company you keep in Russia, and the company you are seen tokeep, can influence the way Russians look at you. If you associate with one group of businesspeople, for example, you may find yourselves unable to associate with other business groupsbecause their relations are, shall we say, frictional.

Its easy to understand, incidentally, why business and politics share a similar familyapproach in todays Russia. Those in the political circle need to be trusted absolutely, as dothose in the business circle. The leading politician and the leading businessman (or, veryexceptionally, woman) has to provide examples of successful behavior to those below themand, often, to support the pyramid of supporters who are beholden to them in one way oranother, not the least financially.

I mentioned before the Good Cop-Bad Cop routine. Ive seen it often enough, in all sorts ofsituations, to know that the simplest technique like this is often the best: it works a treat withunaware foreigners. I have a suspicion that the routine is taught to Russian children from thevery beginning, at kindergarten, like ballet.

External Business environment of Russia:

A business does not operate in a vacuum. It has to act and react to what happens outside the

factory and office walls. These factors that happen outside the business are known as external

factors or influences. These will affect the main internal functions of the business and

possibly the objectives of the business and its strategies. To analyze the external business

environment, PEST analysis is the most widely accepted tool.

PEST Analysis:


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A PEST analysis (also sometimes called a STEP, PESTLE or STEEP analysis) looks at the

external business environment. PEST stands for Political, Economical, Social &

Technological environment.

Political factors:

The political factors affecting business are discussed below.

Government System:

Russias government system is the presidential democracy where there is a president by votes

and has only 2 consecutive 4 year term. The president has a lot of power as he is the head of

state and armed forces. He is also able to nominate government officials, sack officials; call

for new elections etc. Russias current system of government is characterized principally by

the centralization of power.

Politically, economically,

geographically, and culturally,

virtually all power resides in

apparatchiks or elites wealthy

individuals who are close to the

Kremlin. There is also the prime

minister who is nominated by the

president to be the chairman of the

government. There is also a council

ministers consisting of 23 ministers

nominated by the prime minister and

appointed by the president. There is


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also another federation council and state Duma. The federation council has 178 members

serving four years terms. Its duty is to call for elections, approved border changes, adopts or

rejects bills from Duma .The State Duma is the lower house of the Russian Parliament. State

Duma has 450 members serving four years terms. Its duty is to pass laws, approves ministers

and oversees government operation. The government ensures the implementation of domestic

and foreign policy, works out the federal budget, oversees the implementation of financialand monetary policy, ensures the rule of law, human rights and freedoms.

Ruling Party

The 2012 Russian presidential election was held on 4 March 2012. There were five officially-

registered candidates: four representatives of registered parties and one independent. The

election was for a new, extended term of six years.

At the United Russia Congress in Moscow on 24 September 2011, Russian president Dmitry

Medvedev proposed that his predecessor, Vladimir Putin stand for the Presidency in 2012; an

offer which Putin accepted. Putin immediately offered Medvedev to stand on the United

Russia ticket in the parliamentary elections in December and becoming Prime Minister ofRussia at the end of his presidential term.

All independents had to register by 15 December, and candidates nominated by parties had to

register by 18 January. The final list was announced on 29 January. On 2 March, outgoing

President Dmitry Medvedev addressed the nation on the national television channels about

the following presidential election. He invited the citizens of Russia to vote in the election to

be held on 4 March 2012.

Russian Prime Minister Vladimir Putin received 63.64% of the vote with almost 100% of the

votes counted. With this election, Putin secured a record third term in the Kremlin.

Organization for Security and Co-operation in Europe observers assessed the voting on the

Election Day positively overall, but assessed the vote count negatively in almost one-third ofpolling stations due to procedural irregularities. The next presidential election will be in

2018.

International agreements:

Russia is a major international power. The Russian Federation is recognized as being thesuccessor to the former Soviet Union in international law: it has assumed the USSRspermanent seat on the UN Security Council, membership in other international organizations,rights and obligations under international treaties, and property and debts. As one of the UNSecurity Councils five permanent members, Russia has special responsibility for maintaininginternational peace and security. Russia has participated as a member of the Group of Eight

(G8) industrialized nations since 1994, although the finance ministers of the G7 continue tomeet several times a year, without their Russian counterparts. The Group of Twenty FinanceMinisters and Central Bank Governors (G20), of which Russia is also a member, is to replacethe G8 as the main consulting body for global financial issues. This was announced at theG20 summit in Pittsburgh in September 2009. Russia is a member of a large number of otherinternational organizations, including the Council of Europe and the Organization forSecurity and Cooperation in Europe. Russia plays a special role in Central Asianorganizations: the Commonwealth of Independent States (CIS), the Eurasian Economic


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Community (EurAsEC), the Collective Security Treaty Organization (CSTO), and theShanghai Cooperation Organization (SCO).Membership:

International Structures United Nations: Security Council, General Assembly, United Nations specialized agencies Group of Eight (G8)

Group of Twenty (G20) Council of Europe Organization for Security and Cooperation in Europe (OSCE) Permanent Court of Arbitration (PCA), also known as the Hague Tribunal

Regional Council of the Baltic Sea States Arctic Council Shanghai Cooperation Organization Organization of the Islamic Conference (observer) CIS and CIS structuresEconomic OrganizationsUniversal Trade

United Nations Conference on Trade and Development World Trade Organization (observer)Financial International Bank for Reconstruction and Development (World Bank Group) International Development Association (World Bank Group) Multilateral Investment Guarantee Agency International Monetary Fund International Finance Corporation Bank for International Settlements Paris ClubOther World Intellectual Property Organization World Federation of Trade Unions World Customs Organization International Organization for Standardization International Trade Union ConfederationRegionalTrade Organization of the Black Sea Economic Cooperation Asia-Pacific Economic Cooperation ForumFinancial European Bank for Reconstruction and DevelopmentOther

General Confederation of Trade UnionsNATOOn 27 May 1997, NATO and Russia signed the NATO-Russia Founding Act, which providesthe basis for a long-lasting and robust partnership between the alliance and Russia. Thecreation of the NATO-Russia Council (NRC), unveiled at the 2002 NATO summit in Rome,opened a new era in NATO-Russia relations, providing opportunities for consultation, jointdecisions and joint action on a wide range of issues.EU


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The bilateral basis for EU relations with Russia is the Partnership and CooperationAgreement (PCA), which came into force on 1 December 1997 for an initial duration of tenyears. The PCA established an institutional framework for regular consultations between theEuropean Union and Russia. At a St Petersburg summit in May 2003, the EU and Russiareinforced their cooperation by creating four common spaces under the Partnership andCooperation Agreement: a common economic space; a common space of freedom, security

and justice; a space of cooperation in the field of external security; and a space of researchand education, including cultural aspects. A new partnership agreement is underconsideration, but its conclusion has been postponed for political reasons.he process of negotiating entry to the WTO.

Legal environmentThe Russian legal system has a civil law system and is influenced by traditional Europeanlaws. Various codes like the civil code, tax code, customs code, civil and corporate legislationand labor code govern all major spheres of business activity. The judicial system in theRussian Federation is split into three branches. They comprise of the courts of general

jurisdiction (of which the federal Supreme Court is the court of last resort), the 'arbitrazhniy'or commercial court system with the High Court of Arbitration as the supreme body, and the

Constitutional Court. The judicial system is also divided into a federal system and a system oflocal courts of the various 'subjects' of the Russian Federation.

Structure of the system

The Russian judiciary comprises the Supreme Court, the Constitutional Court and the HighCourt of Arbitration. Under these branches there are several districts, regional and federallevel courts. However, Supreme Court is the highest court of authority for all civil, criminaland administrative cases in Russia. The judges for three branches are nominated by thepresident and appointed by the Federal Council. The judges for these three courts are allowedto serve for life. The president directly appoints judges of federal district courts. The Ministryof Justice is accountable for appointing judges to regional and city courts. However, electionsof judges below the national level are still made by the chief executives of sub-national

jurisdictions.

Legislation affecting business

Industrial acts, legislations and regulations

Russia is principally occupied by large industrial enterprises, with a small number of smalland medium-sized enterprises (SMEs). SMEs account only for 1015% of the Russian GDP,compared to developed market economies where more than 50% of shares is represented bySMEs. Historically, Russia has mostly concentrated on developing large scale industries.However, the government is slowly easing regulations for SMEs by reducing tax andregulatory barriers to small enterprises. This was done by introducing a simplified tax regime

for small companies in 2003. Foreign licensing in Russia has become widespread in a numberof sectors in Russia, including retail and media. Domestic companies with local knowledgecan now expand outlets or brands that offer consistent cash flow for foreign companies.

This approach has reduced the uncertainty among foreign companies. However, thedrawbacks lie largely in the underdeveloped legal environment of Russia: the enforcement ofownership rights is still weak, and forged and pirated goods are widespread throughout themarket. As a result, many foreign companies have put a ceiling on their licensing agreementswith Russian subsidiaries, providing them only with the rights to distribute their parents


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products or pay royalties to use the trademark in domestic production. In line with its thrustfor WTO accession, the government has changed its focus to improve the judicial system andto develop stringent laws on copyright, trademarks and patents that comply with the WTOsTrade-Related Aspects of Intellectual Property (TRIPS) agreement. Furthermore, theCompetition Law limits mergers between companies where there is a possibility of amonopoly.

Establishing operations as a foreign enterprise

A foreign company looking at setting up operations in Russia can choose among thefollowing options:

Joint stock company (JSC)JSCs in Russia are of two forms: open JSCs and closed JSCs. The first refers to a companywhose shares are openly traded and freely transferable. They can also place their shares inpredetermined circle of investors. A closed JSC refers to a company where shares may bedistributed to a limited circle of investors but most importantly to the founders. The minimumcapital is 1,000 times the minimum monthly wage ($47) for an open JSC and 100 timesminimum wage for a closed JSC. A minimum of 50% of the shares to be distributed must bepaid for within three months after the initial registration. Until 50% of the shares distributed

are paid for, the company may not carry out any transactions other than those connected withfounding the company. A mandatory 5% legal reserve is to be maintained by the JSCs.

Representative office or branch

Under Russian company law, representative offices and branches are not considered to belegal entities. A representative office or a branch may carry out business activities on behalfof this entity. Both forms must be registered with the tax authorities and accredited beforecommencing operations. The State Registration Chamber under the Ministry of Justice mustrecognize representative offices of foreign companies.

Limited liability company (LLC)The wholly owned subsidiaries of foreign investors are called LLCs in Russia. An LLC is notallowed to have more than 50 members to have rights and obligations, which may either beestablished by a charter of the company or granted by a decision of the shareholdersmeeting. An LLC does not issue shares. Instead, the charter capital is divided intocontributions, which are not considered securities. As a result, the LLCs need not beregistered with the Federal Service for Financial Markets. The liability of participants isgenerally limited to the amount of their original contributions.

Tax regulations

Corporate profit in Russia is charged at a tax rate of 20%. The tax on company profits ismade up of two rates: federal tax, at a rate of 2.5%; and a regional tax of 17.5% (with apossible incentive reduction of up to 4%). This is significantly lower than that in most otherneighboring countries. However, social tax, levies and other taxes, along with theadministrative procedures (such as registration requirements and tax audits), increase the

pressure on companies in Russia. Taxable income in Russia is either sales income or non-sales income. Sales income is commonly the income from a corporations main businessactivities, while non-sales income is income from all other sources like dividends, interest,royalties, rents, foreign exchange gains, compensation for losses and certain contributionsand reserves.

Individual income taxIn Russia, individual income tax is charged according to the residential status of a person.Individuals who spend a minimum of 183 days in Russia in the calendar year, regardless oftheir citizenship, are deemed to be liable for taxation. Tax residents are taxed on most types


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of their worldwide income. Non-residents for tax purposes are individuals who spend lessthan 183 days in Russia in the calendar year. Non-residents are taxed only on Russian-sourceincome. Tax residents are taxed at a flat rate of 13% on worldwide income, which is one ofthe lowest individual tax rates in the world. However, different tax rates apply to certaintypes of income received by Russian tax residents (9% for dividends, 35% on imputedinterest on beneficial loans, etc). Non-residents are taxed at a flat rate of 30% on income

sourced from Russia. Withholding tax

Russian-source income of a foreign enterprise may be subjected to withholding tax at source.Withholding is possible up to 20% on interest on government securities, 10% on income frominternational freight, 15% on dividends, 20% on royalties and income from leasing activities.

Other local taxes

Besides these national taxes, there are a few other local taxes that are imposed on businesses.Examples of such local taxes include unified social tax (UST), property tax, mineralextraction tax, and transport tax.

Labor law

In Russia, the Russian labor code is the main legislation governing workplace issues. A wide-

ranging new code was approved in 2001 and was implemented in January 2002. Russianlabor laws apply to all enterprises and all employees, regardless of their origin. Employerswho fall short of compliance with the labor code are subjected to civil, administrative,disciplinary and even criminal liabilities. An important feature of the Russian labor law is itsprescribed nature, and it is important for employers to have all necessary documents in order.The standard working week is of 40 hours. For children younger than 16 years, the maximumworking week is 24 hours; for teenagers aged 1618 years and for workers engaged indangerous work, 36 hours per week. Students and schoolchildren younger than 18 years arenot permitted to work more than 18 hours a week during the school or university year.Overtime cannot exceed more than 120 hours per year. The first two hours of overtime mustbe paid at a rate at least one and one-half times the normal rate; additional overtime hoursmust be paid at least double the normal rate. Termination of employment is stringentlygoverned by law. Extensive documentation is required to dismiss an employee. Some of thereasons for a possible termination include liquidation of the employer; employee healthproblems; absenteeism and stealing, and embezzlement or willful destruction of property. Anemployee may appeal against a dismissal in court within one month of receiving the dismissalnotice.

VAT and customs duty

In Russia, VAT is payable by all corporate businesses, including representative offices andbranch offices of foreign companies. The transactions subject to VAT are sales of goods,work and services carried out in Russia, construction and installation work for an enterprisesown use, and imports. The different rates of VAT include 18% on domestic sales, 10% oncertain food stuffs, childrens goods, and scarce medicines. In general, VAT must be paid to

the tax authorities on a monthly basis, and penalties are imposed for late filing or payment.Furthermore, import duties are charged on the basis of the type of goods imported and theirorigin. Duties as a rule are expressed as a percentage of the value of the goods imported.Currently there are rates applicable from 5% to 25%. Export duties are levied on goods andraw materials such as crude oil and natural gas. The rates are ordinarily established in USdollars per unit or as percentage of value.

Environmental regulations


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Policy

Environmental regulations have been taken seriously only since 1991 in Russia. Since then,several laws were passed such as the Law on Environmental Protection (1991), the Law onEnvironmental Impact Assessment (1995), the Law on Conventional Shelf of the RussianFederation, the Law on use of Atomic Energy and the Law on Protection and Use of Fauna.Furthermore, the country also ratified many international conventions during this period. The

government policy on environment focuses on the following areas: Strengthening the legal and regulatory framework. Fostering international co-operation and integration in environmental conservation. Building an effective compliance and enforcement system. Encouraging public participation in environmental activities. Directing investment towards environmental management and control. Incorporating advanced technologies to set standards for pollution control. Strengthening environmental monitoring systems.

Environmental actions

Climate change and energy efficiency

The Russian government, along with various European organizations, is making efforts to

implement policies protecting the country from the ill-effects of climate change. As part ofthis initiative the Russian Regional Environmental Centre (RREC) has taken up a project toimplement an awareness program among the public and policy makers on climate change andthe Kyoto protocol. An information exchange network would be crafted under the project toassist collaboration on implementation of the Kyoto mechanisms, and expansion andimplementation of the climate policies. Furthermore, the government, along with privatepartnerships, is also implementing other initiatives like the promotion of energy efficiencyand GHG emission reduction in glass manufacturing sector, energy security programs, andbuilding institutional capacity to develop and implement climate change policies.

Environmental protection and healthThe government has implemented several policies in the country to encourage environmentalprotection and health. The Department for Environment, Food and Rural Affairs (DEFRA)along with the Department for International Development (DFID) of the UK, hasimplemented projects such as municipal water and wastewater management project(MWWP). This is a five year program (200611) aiming at improving managerial andoperational standards at water and wastewater utilities plants. The main objective of thisproject is to improve water and wastewater services in 14 cities with a population of about300,000 to 1,100,000. Furthermore, during 200205, the government had already completedprojects related to establishing corporate priorities in the field of environmental protectionand health, conservation and development of the surface water resources in several regions ofRussia, and several other projects on air contamination and sustainability of lakes spreadacross Russia.

Economic Factors

GDP and growth rate

During 199296, the first five years after the soviet rule, Russias GDP went through anegative run due to the sudden transition in economic policies. The GDP fell at a rate of14.2% in 1992 and this negative trend continued until 1998. Another factor which caused thisdowntrend was the economic crisis in 199798. Immediately after the crisis, however, theGDP began to expand with a 5.7% growth rate in 1999, which continued until 2006. The


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major factors in this rise were rapidly expanding oil and gas sales, government tax reforms,and improved investor confidence. During 19992007, the country had one of the highestgrowth rates, touching around 8% in 2007. However, the global economic slowdown grippedthe Russian economy too and since then the economy has been on a downward trend. In2008, the economy recorded a much lower growth rate of 6%. In 2009, the country wasseverely hit by the global economic crisis and the economy contracted by 8%. However, it is

expected that the country would record a growth of 3% by 2010.

Foreign trade

After a period of economic transition during 199198, Russias export position improvedafter the ruble was devalued in 1998. From 2000 onwards, the country started to recordpositive trade surplus, taking advantage of the devalued currency. Exports as a percentage ofGDP grew from a value of 18.3% in 1994 to 44.2% in 2000 and stood at around 32% in 2007.Exports increased from $103 billion in 2000 to nearly $471 billion in 2008. Similarly,imports increased from $34 billion in 2000 to $291 billion in 2008.However, due to severerecession, both exports and imports fell during 2009 to $369 billion and $233 billion,respectively. Since the collapse of communism, Russias trade with the West has grownsignificantly, while its trade links with the former Eastern Bloc countries and other parts ofthe former Soviet Union have become less significant in relative terms. The EU has emergedas the largest trading partner of Russia, accounting for more than 50% of total trade. The EUis followed by the Commonwealth of Independent States (CIS) countries, which constitute

around 14% of the Russian trade. On the export side, the Netherlands was the biggest exportdestination in 2008, accounting for 12.2% of total Russian exports; Germany and Italyaccount for another 6.9% and 9%, respectively. Among the CIS countries, Ukraine is thebiggest export destination and receives around 5% of total Russian exports. China (4.5%) andPoland (4.3%) account for the remaining exports. In terms of imports, China accounts for12.9% of total Russian imports, followed by Germany which accounts for 12.6%. Among theCIS countries, Ukraine (6%) and Italy (4.1%) are the most important markets. China (7.4%),Japan (6.9%), and the US (5.1%) are the other key markets.

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250

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350

400

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500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP($billion)

GDP($billion)


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Foreign investments

The level of foreign investment in Russia has remained low throughout the post-Soviet eramainly due to an unfavorable tax system, corruption, the lack of production sharingagreements in the fuel sector, and overall economic uncertainty. During 19912001, morethan one-third of the total foreign investment was from the US. A significant development inthe FDI arena was a $6.7 billion direct investment by British Petroleum in the Russianpetroleum industry. In 2006, a new legislation on FDI was passed, under which foreign firmscan obtain only minority ownership of any energy project deemed strategic. However, laws

restricting foreign banks from opening branches in Russia were not reformed. As a resultthese restrictions still remained a significant hindrance to Russias accession to the WorldTrade Organization. The FDI inflows for 2004 were $28.75 billion, with consumer goods andservices and construction receiving the largest shares among the economic sectors. In 2006the inflow of FDI rose to $30.8 billion, with the largest investments coming fromLuxembourg, Cyprus, the Netherlands, Germany, the UK, the US, and France. The mostlucrative sectors for FDI are the extraction industries which accounted for more than 50% oftotal FDI in 2007. The other attractive sectors are manufacturing, retail industry and realestate services. Total FDI inflow rose to $70.3 billion in 2008.

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200

300

400

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2002 2003 2004 2005 2006 2007 2008 2009

Foreign Trade($ Billion)

Export

Import

Total Trade


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Foreign exchange position

The foreign exchange position in Russia has been steadily growing since 1998. This wasmainly due to devaluation of the Russian ruble and subsequent increase in exports and tradebalance. The foreign exchange reserves increased from being around $76.9 billion in 2003 tomore than $314 billion in 2006. At the end of December 2007, the reserves were more than$475 billion. Furthermore, in July 2008, they rose by more than $100 billion, reaching $575billion. However, deteriorating economic conditions leading to the flight of capital from thecountry has led to a fall in foreign exchange reserves. On May 1, 2009, the official reservesstood at $383 billion. As of December 31, 2009, the total foreign exchange reserves including

gold amounted to $439 billion.

Credit rating

Standard & Poor's retained a stable outlook on Russia in April 2010. The reason cited for thiswas government efforts to rescue the country's financial markets and the financial system.Furthermore, in April 2010, S&P retained its long-term and short-term credit foreigncurrency obligations ratings of BBB+/A-2 from BBB/A-3 in 2009. The long-term sovereigncredit rating on national currency obligations was decreased from A-3 to BBB. The estimateof the risk of translation and the conversion of foreign currency for Russian non-sovereignborrowers was decreased from BBB+ to BBB. The short-term national currency obligationsrating remained unchanged (A-2). According to the ratings agency, the downgrade is due tothe risks arisen from a sharp reduction of the international reserves and investment flows,which resulted in the rise of costs and problems with raising funds required to meet the needsfor external financing.

Inflation

The level of inflation was very high in Russia during the years 2002 and 2003, with ratestouching 15% and 13%, respectively. With prudent monetary policy measures taken by theCBR, inflation was decreased to around 9% in 2006 and 2007. However, inflation shot up

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2002 2003 2004 2005 2006 2007 2008

FDI($ Billion)

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again in 2008 and reached 13.1%. However, it decreased to 10.7% in 2009 and it is expectedto come down to 8.9% by 2010.

Money supply and interest rate

The CBR cut its key lending rate by 0.25percentage points to 8.25% per annum with effectfrom March 29, 2010, following a slowdown in consumer price growth. The CBR last cut itsrefinancing rate by 0.5 points to 12% in May 2009. In March 2010, the money supply (M2)increased by 2.8% from the previous month, according to the Bank of Russia. Cash money incirculation (the M0 aggregate) decreased from RUB 4.38 trillion to RUB 3.98 trillion duringJanuaryMarch 2010, while non-cash funds increased from RUB 11.66trillion to RUB 12.1trillion. (The money supply in national definition, the M2, is defined as total cash incirculation (outside banks) and balances in the domestic currency on accounts of residentnon-financial organizations, financial organizations (except for credit ones) and individuals.It doesn't include deposits in foreign currency).

Banking SectorThere has been a rapid increase in banking and financial sector services in Russia during200008. By the end of 2008, there were around 1,000 banks in Russia, however, the top 200

banks control 90% of the banking assets. Although total bank assets in Russia have recentlyshown an annual growth of close to 30%, they represent just 45% of GDP in 2008. Theproportion of the market held by the top 10 banks has remained more or less constant forseveral years, with the big state-owned banks (Sberbank, VTB and Gazprombank) havingdominant positions. Foreign bank penetration in Russia has been low, but is increasing. Theshare of foreign-owned banks in the total assets of the Russian banking sector increased from8% in 2002 to almost 20% in 2008. The increasing number of M&A deals in the bankingsector is not driven by the arrival of foreign players. There has also been consolidation amonglocal institutions, either through mergers (such as Uralsib) or acquisitions (Vneshtorgbanks

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Inflation(%)

Inflation (%)


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acquisition of Guta Bank). Many leading banks have been evaluating their entry into theRussian market, which is dominated by Sberbank and a few strong regional banks (such asAKBars and Chelindbank). At the end of 2009, the Bank of Russia reported the number ofbanks to be 1,058. However, only the 5070 biggest banks are important to the functioning ofthe sector as a whole. The remaining 1,000 are mostly small or very small. A new lawgoverning the minimal amount of capital banks must hold was formulated on January 1,

2010. This legislation requires banks to have capital of at least RUB 90 million ($3 million)and this would be raised to RUB 180 million from 2012. After enforcing the new regulation,it was seen that there were only 22 banks with capital lower than the minimal requirement.Even after going through severe financial crisis, it was reported that more than 57% ofbanking assets were state owned in the country.

Employment

Russia has a well-educated and skilled labor force spread across different sectors of theeconomy. In 2008 around 58.1% of workers were employed in the services sector, 31.9% inindustry, and 10% in agriculture. The employment scenario in Russia has been on a sluggishtrend throughout 200008. The total employed people reached 71 million in 2008 from 65million in 2001. The highest amount of growth was seen in 2007, when the employment grew

by 3.2%. In 2009, the number of employed came down to 69 million.

External debtIn 1991, the former Soviet Unions outstanding debt of $67.5 billion was passed completelyon to Russia. By 1997, additional borrowing had doubled that figure, and Russias external

lenders postponed the debt several times between 1995 and 2001. Since 2001, theinternational pressure for repayment has intensified because of Russias favorable tradebalance and increasing foreign exchange reserves. Russia prepaid its entire Soviet-era ParisClub debt of $22 billion in late 2006. The total foreign external debt stood at $540 billion inOctober 2008, but declined to $453 billion by the end of March 2009, of which governmentdebt was minimal at $28 billion. Banks' and other corporations' debts have added heavily tothe total debt. The total external debt by the end of 2009 amounted to around $369 billion.

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72

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Employment(Millions)

Employment(Millions)


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Socio-cultural Factors:

Demographic Composition:

Age and gender-wise composition

Russia is the seventh most populous country in the world with a population of 140.0 million

as of July 2009, and there are about 106 males for 100 females in the country. The total lifeexpectancy is 66.03 years, with males living for 59.33 years and females living for73.14years. The Russian population has been on a decreasing trend since the 1990s and thecountrys aging population is beginning to increase. The fertility rate stood at 1.41 in 2009.

Mid-year population by age (million) in 2009

Mid-year Population By

Age

Female Male

04 3.7 3.9

59 3.3 3.4

1014 3.2 3.31519 4.2 4.4

2024 6.0 6.2

25-29 5.7 5.7

30-34 5.3 5.235-39 4.9 4.8

40-44 4.8 4.5

45-49 6.1 5.5

50-54 6.2 5.2

55-59 5.5 4.2

60-64 3.5 2.4

65-69 3.5 2.070-74 3.8 1.9

75-70 2.8 1.1

80+ 3.2 .8

Urban/rural composition and migration

Around 73% of Russians live in cities and towns, while the remaining 27% live in rural areas.Around one million residents of Russia come from other countries. The migration rate inRussia has been decreasing since 2004. The net migration rate came down by 7.5% in 2005 to1.07 per 1,000 people. In 2009, net migration rate stood at 0.28 per 1,000 people, much lowerthan 1.03 in 2006.

Religious composition

The official state religion in the country is Russian Orthodoxy which is followed by 20% ofthe population. The Islamic population is slowly increasing in Russia with about 15% of thepopulation being Muslims. A small grouparound 2% of the populationbelongs toChristianity. The majority of the population (63%) is atheist.


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Standard of living

After the fall of Soviet Union, there was a transitional period during which the governmentestablished various policies to create a new economic system. During this time, the countrywas faced with high corruption and crony capitalism. As a result, a natural divide between anaffluent high class of rich people and low labor class was formed in Russia. The Ginicoefficient (a measure of income disparity, with 0 meaning complete equity and 1 meaningextreme inequity) more than doubled during the first six years of the transition period (199399). According to the Russian Statistics Service, the Gini coefficient was 0.42 at the end of2008. This shows that although the income is less evenly distributed than in some of theEuropean countries, it is more equitable compared to the US or China. Russia's Ginicoefficient was 0.29 when the Soviet Union collapsed. Income inequality has been sharper inthe cities of Russia. Along with rising income inequality, poverty is also on the rise in Russia.The living conditions of Russians are set to deteriorate with the economic slump. Accordingto the Federal State Statistics Agency (Rosstat), 19.7 million citizens (14% of the population)were below the poverty line as of third quarter 2009. However, unofficial sources state thatmore than a third of Russian population is living in poverty. Russia also faces a severehousing shortage, with about 7% sharing living space with other households and one in twopersons having less than 10 square meters (108 square feet) per capita.

Education

Literacy rateAccording to the 2002 census, Russias literacy rate has reached a new high of 99.4%, whichis one of the highest in the world. The literacy rate was 99.7% for males and 99.2% forfemales. Despite the grave economic crisis during 2009, the government was still able tomaintain a good level of spending on the educational sector. The education expenditure for2009 was around 5% of GDP compared to 3.6% of GDP allocated in 2008.

63%

20%

15%

2%

percentage of Population

Atheists

Russian Orthodox

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HealthcareThe Russian healthcare system is one of the most decentralized forms of healthcare systems.However, this has resulted in a major decline in the quality of treatment provided at varioushospitals in the country. The death rate in Russia is as high as 16.06 deaths per 1,000 people.The infant mortality rate is similarly high, with almost 10.81 deaths per 1,000 people. Themain reasons for the high death rates are the prevalence of non-communicable diseases likeheart attacks and cancer, and traffic accidents. Indeed, the rate of deaths occurring due totraffic accidents is nearly twice that of Western Europe. Moreover, high consumption oftobacco and alcohol has been recognized as important factors behind the low life expectancyof Russian males. The low quality of air and water in many urban areas, and increasedsmoking and alcoholIn-take, aggravate the already existing poor health. Furthermore, in the early 2000s,decreased healthcare and housing standards amplified communicable diseases such astuberculosis, diphtheria, and cholera. Among children, meager nutritional supplies have led toa prevalence of anemia, stomach ulcers, endocrine disorders, and iodine deficiency. In 2006,Russias Federal AIDS Center confirmed 1.5 million cases of human immunodeficiency virus(HIV), 341,000 ofwhich were officially registered. As an effort to take appropriate measures against AIDS, thegovernment allocated an estimated $115m to HIV and AIDS programs. The government alsoput healthcare as one of the top five priorities of its policy. The sector has begun to receiveincreased attention from the government, resulting in an increase in healthcare expenditure as

percentage of GDP since 2005. There are further plans to increase expenditure on publichealth by nearly1.5 times during 200913, during which time the government targets a healthcare spend ofover 4% of GDP. In 2009, the government spent around 4.15% of GDP as a part of healthcareexpenditure and it is expected that it might be over 4.7% of GDP by 2013.

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Technological Factors:

Russia is renowned for its advanced defense technologies and military equipments. Over aperiod of time the country has also become one of the leaders in space research anddevelopment. Russia has to its credit many successful space missions, and Russias spacestation Mir plays a vital role in coordinating with the International Space Station on manyspace missions. Although, the country is unable to play a part in fundamental research inscience and technology, it has been successful in gradually moving over to IT sector

development and related services. The technological factors affecting business are describedbellow with illustration.

Intellectual propertyThe country is among the G8 group; however, it received a very low number of patents.During 200008, the highest number of patents was received in the year 2001, with 239patents. After 2002, there was a decrease in number of patents received, with the least being154 received in 2005. In 2008, the country received 204 patents. The Federal Service forIntellectual Property, Patents and Trademarks (Rospatent) is a government body whichexercises the functions of control and supervision of legal protection and use of intellectualproperty in Russia. Furthermore, the governmenttogether with the patent officehas takenup a project called strategy for science and innovation in the Russian Federation until 2010,for the creation of a balanced sector based R&D and effective innovation system. Thisstrategy is expected to bring in more funds and infrastructure into science and technologyfields in Russia.

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Healthcare Expenditure($ Billion)

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Technology agreements/pacts

Many of Russia's international agreements and pacts are held in space research and relatedareas. The country has several space pacts with the US and also the European Space Agencyin the development of international space station. These mutual co-operations have beenrunning from 1993. In 2007, Russia and the US collaborated to form a new pact for a spaceprogram to find water on the surface of moon and Mars. This will be done through the help ofthe Russian space instrument, the lunar exploration neutron detector (LEND). Russia has alsoinked technological pacts with many Asian countries like India, China, Japan and SouthKorea. These pacts mainly cover the exchange of defense technologies, but with India thetechnology pacts extend to different areas of information technology.

Telecommunications, broadband and internetAfter the dissolution of the Soviet Union, the Russian telecommunication network wentthrough a major shift. This shift happened with liberalization in the licensing regime and theresultant plethora of licenses given to hundreds of companies to provide services. Importantdevelopments took place during the late 1990s which included increased access to digitallines in urban areas and infrastructural improvements in all parts of the country. Withwidespread foreign investment, there was considerable growth between 2003 and 2005,increasing the ratio of land lines per 1,000 inhabitants from 24.3 to 29.5. During this timethere were about 60 regional capitals which offered modern digital systems. However, in2004 around 54,000 rural communities lacked telephone service totally. Furthermore, thefixed line service is still not provided completely, especially in the rural areas of the country.Due to increased delay and slow installation of conventional lines, use of mobile phones hasincreased significantly since 2000 in the country. Between 2002 and 2003, the number ofmobile phone subscribers doubled to 36 million and by 2005 it had reached 120 million;mobile phones accounted for almost 43% of the total telecommunications market. By 2005around 60% of Russians had started using mobile phones. The growth of mobile phones camedown from around 62% in 2005 to around 8% in 2009. It is expected that the mobile phonemarket would soon reach saturation by 2013. Russia has been facing difficulties with thetelecommunications and broadband infrastructure. The insufficiency of hardware and thehigh rates of services have been major obstacles for any infrastructural development in the

Year Patents Received

2000 1852001 2392002 2032003 2032004 1732005 1542006 1762007 1932008 204

Source: Datamonitor

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broadband sector. However, after a period of revitalization of the sector during 200006,there was rapid growth in internet use in the country. In 2009, the number of users was morethan 37.7 million: growth has been particularly remarkable in urban centers, especiallyMoscow, Irkutsk, Krasnodar, Nizhniy Novgorod, Novosibirsk, Vladivostok, andYekaterinburg. The government has also supplied 10,000 public terminals in most regions toavail the usage of broadband.

Figure 20: Growth of fixed and mobile phones in Russia, 200213

IT sector

Russia has a comparative advantage in IT with its previous identity as one of the superpowers. For one, Russia has a large technological research infrastructure. The Russiantechnological institutions and universities have produced advanced military equipment formany years. Currently there is an ongoing transformation of the defense industry intoconsumer applications and the infusion of western technology through joint ventures withother countries. If this is done by production of technologically advanced utilities, then thecountry would soon find more avenues to develop more IT base products. In 2005, theRussian government made IT a national policy priority, with an agenda to establish a series ofIT oriented techno-parks. Furthermore, the government approved laws to provide tax andother incentives for companies specializing in IT. The Ministry of IT and Communicationslaunched a new computer for every home program in February 2007. This program,developed jointly with Russian Post, Intel and Microsoft, is intended to facilitate wider PC

ownership among inhabitants of small cities, and those in the rural areas. The wider objectiveis the growth of a computer culture. With average monthly earnings at around the $400level, inhabitants of the remote regions will be able to order computers at a set price ofaround $300350, at least 10% below the lowest market prices.

The Russian software market generated total revenues of $3.8 billion in 2009, representing acompound annual growth rate (CAGR) of 20.9% for the period spanning 200509. Incomparison, the French and German markets grew with CAGRs of 7.2% and 5.2%respectively, over the same period, to reach respective values of $15.3 billion and $22.6

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billion in 2009. General business productivity and home use applications sales proved themost lucrative for the Russian software market in 2009, generating total revenues of $895.2million, equivalent to 23.6% of the market's overall value. In comparison, sales of networkand database management generated revenues of $813.8 million in 2009, equating to 21.5%of the market's aggregate revenues.

R&D expenditureThe R&D expenditure in Russia has been considerably lower than many industrializednations around the world. The percentage share of R&D expenditure in GDP has consistentlybeen around 1% in Russia. In comparison, other BRIC countries like India and China allocatemuch higher percentage shares than Russia. Russia has made progress in formulatinginnovation policy and creating an innovation governance system in 2008. To regain its formerposition in globalScience and technology, the government has adopted a strategy to foster science and industrylinkages. The R&D expenditure in 2009 amounted to $12.6 billion (1.07% of GDP). This wasmuch lower compared to $17 billion allotted in 2008.

The country is gradually enhancing its capabilities in information technology and relatedareas. The Russian government is currently placing an increasing emphasis on IT as a deviceof reform in various economic sectors. The government is planning to invest $350 billionduring 200813 into IT for enhancing the functioning of the education, healthcare, defense

and power sectors. Furthermore, the country launched a series of IT oriented techno-parks' in2009, and laws were passed to provide tax and other incentives for companies specializing inIT. As a part of this initiative, the government announced in mid April 2010, that it wouldwelcome the participation of companies from the US in projects linked to its future researchand development center in the Moscow Region city of Skolkovo. The future research anddevelopment center will focus on the energy, IT, telecommunications, biotechnology, andnuclear industries. The construction of the center may take three to seven years according tothe government. Furthermore, in December 2009, Prime Minister Vladimir Putin also orderedfor forming of a unified plan for research into and development of armored vehicles of the

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future. The unified plan of R&D includes areas such as power plants, armaments, aviationtechnologies and ammunition.

Conclusion:

Culture is the most influential phenomenon in our life which requires in depth analysis into it.This report will cover only the facts affecting business in Russia. How the Russian businessetiquette has grown up over the years and its present status is discus

Documents

Cultural Dimension and Business Environment of Russia