The Russian Federation is a transcontinental country, which extends across the whole of northern Asia and about 40% of Europe. It is the largest country in the world (17,075,400 square kilometres) covering more than an eighth of the Earth’s land area. Population is about 142 million people.

The RF is a semi-presidential republic comprising 83 federal subjects. For economic purposes these federal subjects are grouped into 12 economic regions which in their turn are grouped into economic zones.

An emerging middle class with disposable income is fuelling demand for automotive products, household goods, financial services, retail products and a healthcare system; a major construction boom is creating a need for equipment and materials; franchise businesses are growing in both the food and non-food sectors; opportunities for services and equipment for infrastructure upgrades in power generation and telecommunications are growing; and high energy prices are driving demand for oil and gas field equipment and services. As a fast developing market, Russia presents opportunities for many products and services. There are several sectors which are experiencing significant development; among them are extractive industry, agriculture, medicine, sport facilities.

Historically foreign companies were afraid of establishing business in Russia; they were discouraged by former imperfection of the legislation, unpredictable politic and economic situation. During the last 8 years there was considerable improvement in economic and politic spheres of life. Developing world class infrastructure, transportation education and other fields makes the Russian Federation a pleasant and cosmopolitan environment.

Economic stability

Russia is also considered well ahead of the most resource-rich countries. As the Russian Federation offers lots opportunities and has a great potential as a market and as a resource.

The federal budget has run surpluses since 2001 and ended 2007 with a surplus of 6% of GDP.

Technology (software, semiconductors, biotechnology, advanced materials, etc.) is one field where relatively small investments "sweat equity" in project management and international marketing may result in new commercial products.

The Russian Federation has a considerable consumer market. There are more than 140 million people in Russia. Another growing market in Russia is telecom. It continues to grow substantially because it never had problems of excess - either excess debt or investment. There are growth opportunities for telecom equipment makers.

According to assessments of most consultants for most mid-size firms, it is not cost-effective to establish their own representative offices in Russia. The best approach is to find a Russian partner that is a distributor, consultant or systems integrator and knows that market well. One must develop a trusted relationship with a partner and they become a vehicle for the investor to penetrate the Russian market. It is important to find a trustful partner and maintain this trust as long as you are in business. Business in Russia is more 'people-to-people' oriented rather than contract-based. Many businessmen would do business in Russia without a contract if they know and trust the people, but they would never sign a contract with somebody they don’t know and don't trust. Moreover Russia has rather law and well-controlled by the Government inflation rates and rather strong currency.

Taxation

Russia has a flat personal income tax rate of 13 percent. The income tax is 24 percent for businesses. VAT is set at rate of 18% (special tax regimes 10%, 0%). VAT is discussed to be changed to sales tax; the rate is still under the discussion.

Russia is a signatory to a Treaty for the Prevention of Double Taxation with many countries all over the world. Draft agreements with additional countries are at the discussion stages. It is of the utmost importance to stress that the Double Taxation Prevention Treaty takes precedence over the Russian Income Tax Ordinance.

Human resources

Russia has a long tradition of education, science, and industry. The country has more higher education graduates than any other country in Europe. Russian employees are skilled, highly-motivated and well-educated. About two million persons work in science in Russia, of which one million are researchers, far more than in any other country in the world.

Staff is not, by international standards, overly expensive, although wages for “skilled personnel” are certainly inching up. Starting salaries for a (relatively senior) marketing position in Moscow for bilingual personnel with University degree would probably be in the 000/annum range, and considerably more for jobs in finance.

The Russians, in general, are literate and cultured people. Russians, typically, are very good at working on English and other languages as well. When motivated, they produce work of astonishing precision and quality. Russians can be adept at improvising, and finding quick solutions in a crisis.

Natural resources and energy

Russia has the world’s largest mineral and energy resources; it has approximately one quarter of the world’s unfrozen fresh water and the largest forest reserves. The country is the most abundant in mineral fuels. Though mineral resources are abundant, they are in remote areas with extreme climates, making them expensive to mine.

Russia has the world's largest natural gas reserves, the second largest coal reserves and the eighth largest oil reserves. It is the world's leading natural gas exporter and the second leading oil exporter. A dynamic, reformed (and still being reformed) and liberalised energy market and alliances with major multinational groups have helped the country’s evolution into an important energy centre of the world.

Deposits of coal are scattered throughout the region, but the largest are located in central and eastern Siberia.

Oil, natural gas, metals, and timber account for more than 80% of Russian exports abroad. Since 2003 exports of natural resources started decreasing in economic importance as the internal market strengthened considerably. Despite higher energy prices, oil and gas only contribute to 5.7% of Russia's GDP and the government predicts this will drop to 3.7% by 2011. Eight percent of the land is used for arable farming, four percent—for permanent pastures, forty-six percent of the land is forests and woodland, and forty-two percent is used for other purposes.

The most common type of business entities is LLC (something similar to European LLC and GMBH), but still there are some differences. All the entities are required to be registered with appropriate governmental body.

The main industries are extractive industries , agriculture and wood-processing and energy.

Infrastructure

Russia has a convenient geographical position combined with access and infrastructure. Russia has a wide net of seaports in European region as well as in Asian region. Railroads are wasting along the whole country connecting the most distant regions of the country. All these factors enable companies to serve market of Europe, CIS, Middle East and Asia. Russia is recognised as a gateway between Europe and Asia.

Transportation in Russia remains fairly inexpensive. You can fly anywhere in the country for under 0. Train fares even for first class cabins and for very long distances, remain reasonable.

Setting up a company in Russia. Why should I?

Setting up a company in Russia is not very expensive. But company registration is rather complex. We strongly advise you not to try to do it yourself. The first step is to find a good lawyer or company that can do the paperwork for you. The foreign partner will certainly have to supply a variety of documents (incorporations documents, etc.), some of them must be notarized, and sometimes official translations (verified by, for example, a Russian embassy in your country or legalized under the Hague Convention of 1961) must be provided. Nowadays Russia offers world-class services which enable foreign companies to establish its headquarters to supervise the operations in Europe, Asia, Middle East and CIS subsidiaries.

The main reason for having a local company is if one intends sell locally for roubles – Russian company will be more flexible in local transactions. Owning property, running a warehouse, operating a factory, etc. do not require setting up a local company. The firm is to be registered with tax authorities.

If one finds that a company is necessary or desirable, we often recommend doing this in partnership with Russians. There are some particular advantages when opening a company: local firms or individuals generally will tend to know about local legal and tax regulation, personnel policies, etc. They may also have premises in which the new organization can “camp out”. However, most companies will start doing business in rather large wholesale lots taking direct payment overseas. Foreign companies can rent premises, hire staff, etc. indirectly by passing transactions through a local company or a law firm which is often a cost-effective and hassle-free alternative to opening an unnecessary company.

Difficulties faced when setting business in Russia:

Doing business in Russia you should take into consideration several main factors:

1. Cultural differences: it often seems that many Russian businessmen do not view the ‘contract’ in quite the same way as a foreign businessman might. In some cases, a contract seems to serve more as a ‘statement of mutual intentions’ which need to be implemented in some initial assumptions turn out not to have been valid after all, or if the situation changes. In addition, it is often the case that a contract is less important than the ‘relationship’ (these ways of doing business will be quite familiar to people doing business in Asia or in some other parts of the world). Given that the Russian legal system still has relatively little experience as a mechanism for enforcing commercial agreements.



2. Inexperience: It should always be remembered that even the most experienced Russian businessmen have about 10 years of experience in free market economy to say nothing of international business experience. The fact that a company manager may have decades of ‘industry’ experience does not mean that he has much experience in commercial operations. Sometimes he just does not realize all the things that can go wrong in a deal and may have difficulty in understanding the foreign businessman’s point of view.



3. Poor due diligence: Russian have had numerous bad experiences at the hands of foreign businessmen as well, partly due to inexperience, and partly due to the fact that the first foreign businessmen in Russia during the process of market liberalization were not always the best representatives of ‘western capitalism’. There is therefore a certain amount of wariness on both sides, which can be healthy as long as no one takes it personally.

To sum it up:

As Russia's economy strengthens and political situation stabilizes, an increasing number of foreign companies - large and small, from consumer goods to energy - are establishing their presence there, making direct investments or expanding those already in place. For a multinational firm with an international clientele, a Russian presence is strategic and not optional. Given Russia's natural resource wealth, it is not surprising that this sector has attracted a great deal of foreign investors' attention. Foreign firms have also invested in commercial services, such as advertising and public relations.

The main reasons for doing business in the Russian federation are:

1. a fast developed market;
2. plenty of natural resources;
3. well-educated and motivated human resources;
4. stable economic and political situation (in comparison with other CIS countries);
5. high pace of economic development;
6. convenient geographical position;
7. developed transportation.

We kindly advise you to seek professional advice in relation to legal, fiscal, structuring and registration issues prior to establishing business in the Russian Federation. Femida-Audit LLC is a multi-disciplinary practice offering such advice. Our firm has established links with regional companies to provide further services for its clients on the highest level. If you are considering establishing a business or investing in a new or existing operation in Russia, please contact: tel.: +7 (495) 785-71-36.