U.S. Russia Relations

Russia, a vast country with a wealth of natural resources, a well, educated population, and diverse industrial base, continues to experience, formidable difficulties in moving from its old centrally planned economy to a modern market economy. President Yeltsin’s government has made substantial strides in converting to a market economy since launching its economic reform program in January 1992 by freeing nearly all prices, slashing defense spending, eliminating the old centralized distribution system, completing an ambitious voucher privatization program, establishing private financial institutions, and decentralizing trade. Russia, however, has made little progress in a number of key areas that are needed to provide a solid foundation for the transition to a market economy. Russia, spanning 11 time zones and serving as home to about 150 million people, possesses tremendous natural and human resources. Demand today for imported consumer goods, capital equipment, and services remains remarkably strong, with imports representing an unusually large percentage of the national market. Despite outstanding long-term market potential, Russia continues to be an extremely difficult country in which to do business.

The Russian Federation continues to pursue a program of dramatic economic, political and social transformation. Despite President Yeltsin’s successful re-election campaign, continued economic reform remains subject to the influence of the communist controlled State Duma (the Russian parliament). Even the most optimistic scenarios envision a protracted process as Russia continues the task of fashioning a legal foundation for commerce, rationalizing the regulatory and taxation regimes with which businesses must comply, and completing the task of creating from scratch a highly effective and consistent customs administration. The duration and final outcome of this process are still uncertain. Consequently, Russia offers U.S. business both high risk, and potentially high rewards. Russian firms and customers admire U.S. technology and know-how, and generally are interested in doing business with U.S. companies. At the same time, there is a tendency in some quarters to suppose that the U.S. is responsible for the changes which have occurred in Russia, especially those which have caused most hardship to individuals and to industry.

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This sentiment has attracted the support of some political leaders, and in given credence by a significant proportion of the populace. At the same time, a strong U.S. commercial presence is viewed in the Russian Far East as a counterbalance to other regional economic powers. Most Western products and services are in demand in Russia. Of particular interest are: consumer goods, including poultry and meats, paper industrial chemicals, telecommunications equipment, medical equipment and pharmaceuticals, building construction equipment and materials, food processing equipment, and oil and gas mining equipment. Business in Russia is regional, and so is third country competition. In European Russia and the Urals, Western European firms, particularly those from Germany, Italy, Austria, France and the United Kingdom offer U.S. business strong competition.

Surprisingly, Korean and Chinese firms have made strong progress in the Urals over the last year. In northwest Russia Scandinavian firms are active. In the Russian Far East and southern Chinese, Korean and Japanese firms are aggressive. Russian firms in all sectors offer significant, low-cost competition, particularly outside the major cities Moscow and St. Petersburg. Western Europe’s share of exports to Russia is comparable to their share of direct investment in Russia: in each case they contribute around 40% of the total. The U.S., o the other hand, accounts for only 8% of Russian imports but contributes 29% of the Direct investment. There is a clear contrast between the trade oriented policy of Western European countries vis-a-vis the Russian Federation, and the U.S. approach. Distributors in America expect-defined distribution channels, relentless competition, and million dollar advertising budgets. Distributors in Russia, by contrast, encounter primitive, erratic distribution, sporadic competition, and word-of -mouth advertising.

To sell in Russia is to work in a system that differs greatly from what is seen elsewhere. Although Russia is home to increasing numbers of joint ventures and Western-style stores in major cities, most goods distribution particularly outside of Moscow and St. Petersburg takes place through less formal channels. Penetrating these channels is often the key to success or failure for an American operation in Russian Market. Each U.S. company must find its own path to the Russian consumer. Western companies that have succeeded have done so through a combination of improvisation and innovation, combined with a substantial investment of time and tolerance for early mistakes. Russia is a vast country, with a vast array of possible buyers and partners.

U.S. firms generally find success by choosing their sales targets carefully. Possible candidates for export sales include: Russian enterprises that export for hard currency development projects in Russia financed by Western funding sources Russian enterprises with good domestic cash flow regional Russian government in natural resource-rich areas the Russian federal government major modernization or expansion projects by Russian enterprises the general Russian consumer market the upscale “new Russian” market. Advertising through television, radio, print and billboard media is typical in the consumer goods and financial services markets. As one would expect, the number of western as well as Russian advertising agencies active in Russia is growing rapidly. The legal/regulatory environment for advertising in Russia is not well developed. Both foreign and domestic firms frequently advertise in commercially-oriented newspapers and journals in Russia. Trade exhibitions in Russia help U.S. suppliers potential and distributors. Moreover, U.S. consumer goods suppliers frequently make substantial off-the-floor sales at Russian trade exhibitions. Representatives of regional governments and state enterprises from remote.

Poorly-supplied areas of Russia often visit trade exhibitions in major cities to purchase goods for there region or enterprises. Pricing behavior is often counter-intuitive, some firms price high to create a perception of exclusivity and skim the new-Russian market. In general, price competition in the large cities is muted. The radio of retail outlets per thousand residents in Moscow and St. Petersburg is a fraction of that found in Warsaw or Budapest, which partially explains the lack of competitive pricing. Other credible influences are the likelihood of collusion, and the monopolistic instincts of organized crime. Regional markets are also characterized by few alternatives in outlets, and little competition on price by the availability of several competing import and domestic brands, heavy advertising, consumer awareness and widespread price competition, the market for the same product in Omsk or Tomsk may differ markedly.

After sales and customer support is a major comparative advantage for U.S firms entering the Russian market. Russian manufacturers are known for their almost complete lack of after sales service. Russian buyers are accustomed to buying many more of an item than they need, just to provide spares and backups to keep a small part of an inventory running. U.S. forms able to provide even rudimentary support for products, particularly in remote sites, will achieve a major advantage over domestic competitors. Often the hardest part of doing business in Russia is bridging the substantial cultural gulf between Russians and Americans. The best overall piece of advice is simply to recognize that Russians business customs often differ from American customs. Russians may act or think differently, and visitors cannot expect them to adapt to or even understand American business customs. For example: A Russian’s sense of time may differ markedly from a American’s.

Many Russians want to keep their wealth and their business dealings secret. Russian decision-making is still highly centralized in most organizations. While Americans prefer to base their business relationships and legally enforceable contracts, may Russians still doubt the value of their business laws and courts. Most Russian business dealings are based on strong personal relationships, with the contract considered to be merely a formality. Americans think “win-win”; most Russians think “win-lose.”

Russian Holidays include: January 1 New Year’s Day January 7 Orthodox Christmas March 8 International woman’s Day May 1 International Labor Day May 2 Spring Day May 9 Victory Day June Independence Day November 7 Revolution Day December 12 Constitution Day In the event holidays occur on week ends, Russian authorities announce during the week prior to the holiday, if the day will be celebrated on the following Monday. Overall, after decades of separation from work markets, Russia today is a tremendous potential market. 1995 saw a surge in demand or construction materials, hotel and restaurant equipment, and furniture. Ultimately, Russia is a good potential market for travel and tourism services.

Sources

www.state.gov CIA The World Factbook 1999

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