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Localization in Russia

In 2017, the export value of goods European Union took to Russia was 82bn dollars. Thus, there is a bigLocalization in Russia amount of European companies operating with and in Russia. At the same time, Russia is making an accent on the locally produced goods. Many economic sectors have received a target from the government to import phase-out of certain products in the next few decades. This initiative is forcing foreign manufacturers to establish local production in Russia as well as to compete with Russian producers.

Russian business environment isn´t known as the most welcoming and for many, entering Russian markets seems like too big of a risk to take. No doubt, business in Russia requires good nerves but then again, most of the countries with big opportunities do. Also, there are many changes made towards more attractive operating environment. In an example, tax administrations, legislation for the legal entities and the customs process have been simplified.  Thus, it might be good time to update the old view of unwelcoming and complicated business environment of Russia.

At the time being export to Russia has been the most preferred option among European companies. In addition to the Russian preference to local production there are other cons to it as well like foreign exchange market which can be rather volatile. Additionally, the exporting company will have to compete with other much cheaper brands. Currently Chinese brands have increased their attractiveness recently as the purchasing power of Russian people has decreased. Despite of the favorable atmosphere, localization is not a bed of roses either. There is a risk of unstable economy and purchasing power, there are sanctions that are hindering the overall business and on also Russian business and industrial environment need some severe modernization. This can also be an asset for the foreign company with modern know-how.

There are multiple advantages companies can gain by localizing the production. Due to the ruble devaluation, the entry cost is low and through Russia it is possible to enter new markets, such as Eurasia. Also, localizing company is getting special support from the Russian federation. Not to mention the advantage of the local human capital resource.

Pros of the localization:

  • Low entry cost because of the national currency devaluation
  • Export opportunities to new areas, such as Eurasia
  • The support and incentives for localization from the Russian government
  • Opportunity to develop supplier base
  • Local human capital resource
  • Low operational cost
  • Opportunity to become first in one´s own niche

Cons of the localization:

  • Unstable economy and purchasing power
  • Sanctions
  • Price volatility due to the currency exchange rate fluctuations
  • Local suppliers need modernization

 

Special Economic Zone (SEZ) is a concept designed by the Russian Ministry for the economic development. It is an attempt of Russian government to attract foreign businesses to localize their production. There are 25 special economic zones with 660 companies and 25 000 work places in Russia. Because of the special economic status of SEZ, it provides company with the significant financial benefits and makes the whole localization process a lot easier. For example, by localizing the production in SEZ area, company acquires significant fiscal gains with the lower tax rate. Additionally, these zones are custom-free, which means no import duties or taxes. The land of the SEZ areas is cheap and the company gets one-window approach for dealing with the formalities. Also, there will be no minimum investment problem. Most importantly, the government of Russian federation has promised fixed rules in all SEZ territories till the year 2054.

Other attractive option for foreign company planning to localize in Russia – is an Industrial park. Industrial park is a good option to localize for the company, who doesn´t want to waste time in the construction of the production facilities. There are several good examples of companies that already implemented successful localization process. For instance, the Finnish paint manufacturing company Teknos has already localized its production in Maryino Industrial Park which is located in Petrodvorets district in St. Petersburg. Maryino Industrial Park provides a great investment opportunity for the foreign firms. It is created for localization of foreign enterprises and it provides ready-made facilities. This makes the localization project much easier. It is also possible to tailor the facilities according to the customer needs. Overall size of the park is 180 ha and the sizes of plots varies starting from the 0,5ha.

What comes to trafficking, Maryino park is situated very conveniently. It is situated in 20 minutes ride from the Pulkovo International Airport as well as from the Bronka seaport. It takes 3 minutes to get to the ring road which allows cargo-transport access to all arteries including those heading to Moscow and Finland. Maryino Industrial Park is partnering, among others, with the management company VTB Development, the engineering company Capital-Energo LLC, and with the VTB Bank (PJSC). The project is also supported by the St. Petersburg City Government.

For Teknos, the localization decision seemed to be benefitting. After the localization, Teknos increased its sales volume by 7 % (liters) and in 2017 it aimed to increase its yearly sales by 10%. In addition to Teknos, Maryino Industrial Park has already attracted companies Dipo, Admiral and Sarstedt.

One can thus conclude that there are plenty of opportunities to operate in Russia and each way has its pros and cons. The best operational mode must be selected according to situation and goals of each specific company. If you are interested in entering Russia but not sure which operational mode would be the most suitable, the team of Export Maker is happy to consult you. Export Maker has been taking companies of different fields to Russia and assisted them in choosing the right formula for the successful market entry.

Localization in Russia

References:
https://www.kauppalehti.fi/uutiset/sinnikkyys-palkitsee-suomalaisia—tuotanto-venajalla-elpyy/gUY9m6h8

https://schneider-group.com/wp-content/uploads/2017/03/SCHNEIDER_GROUP_understanding-localization-in-russia.pdf

Written by Miila Leisiö

Petri Sagulin

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