Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Russia is the largest country in the world by landmass, spanning eleven time zones. Therefore, many businesses tend to approach the Russian market on a regional basis. Most new entrants start in Moscow and then move into other regions, either through an existing distributor or by seeking new distributors in those locales. Since Moscow and St. Petersburg are major population and business centers, many Western firms have representatives in these two cities.
The Northwest Federal District consists of European (western) Russia and includes eight federal subjects (equivalent to U.S. states), including Russia’s second largest city, St. Petersburg. St. Petersburg and the surrounding Leningrad Region are home to Russia’s largest port facilities and the region possesses significant natural resources, such as forest products and oil and gas. The region’s population of over 13 million also provides a stable and highly educated workforce, and 40% of European Union-Russia trade takes place along the shared border with Finland. American companies including Caterpillar, International Paper, Kraft Foods, Procter & Gamble/Gillette, and Mars/Wrigley have made significant investments in northwest Russia.
Some companies have successfully entered the Russian market by first establishing distribution networks in key regions with attractive market features and industry sector concentrations (e.g., forest products in northwest Russia and energy projects in Sakhalin and western Siberia) and then expanding to other regions. Most companies take advantage of the well-organized distribution channels in western Russia, especially in Moscow and St. Petersburg, and then develop distribution in southern Russia, the Volga region, the Urals, Siberia, and the Far East.
With a high concentration of revenue-generating mineral resources (e.g., diamonds, gold, silver, tin, tungsten, lead, and zinc), fishing, and timber resources, the Russian Far East presents some U.S. exporters with compelling business opportunities. The Russian government is promoting a shift to this region to capitalize on the abundance of natural resources and foster local production of high value-added products while maintaining a focus on resource extraction. Efforts to grow value-added processing are focused on the timber, fishing, and agricultural (meat and milk production) industries and are intended to grow demand for equipment to support growth in these industries. Local and international environmental groups support this strategy, which is aimed at fostering more sustainable economic development in the region.
The Russian government has supported mega-projects in the fuel and energy sectors, including continued development of major Sakhalin oil and gas projects at a cost of over 1.8 trillion rubles ($28.6 billion). Chemical, petrochemical, and natural gas production facilities using natural gas will likely be built along the project’s pipeline routes. Such production facilities are expected to include methanol, ammonia, and fertilizer products, as well as the manufacturing of polymeric plastics. Such new projects will require the procurement of equipment and machinery to support production. The mining sector is also expected to expand, including continued development of gold deposits in the Amur and Magadan regions and the Chukotka Autonomous Region. New projects in the mining sector will incentivize demand for expanded fleets of road construction machinery and other equipment by local companies.
Using an Agent or Distributor
The most common market entry strategy is to select a well-established distributor or several distributors, depending on the product. U.S. companies may consider a variety of national, regional, and local distribution alternatives. In some product categories (e.g., apparel, cosmetics, packaged foods, alcoholic beverages, consumer electronics, and household appliances), foreign suppliers can choose from a growing number of established distributors. A good distributor will typically sell and deliver foreign suppliers’ products to end-users and/or retail sellers, and provide a wide range of logistical support services, including customs clearance, warehousing, and inventory management. However, handling promotion and advertising campaigns exclusively through independent distributors may produce disappointing results. Russian distributors often handle products from multiple suppliers and are not typically dedicated to promoting a specific company’s product, unless the supplier provides substantial support for promotion and advertising. Russian retail law also prohibits certain types of promotional activities.
2) Representative and Branch Offices
Some foreign manufacturers have established their own representative offices in addition to using distributors. The major advantages of opening a representative office include a greater degree of direct contact with end-users and control over the promotion and distribution of products. However, under the Russian Civil Code, such offices cannot be directly involved in actual sales. Instead, the representative office typically oversees a network of distributors and/or agents that perform commercial functions. This approach affords greater control over the distribution process to the foreign supplier and helps reduce the risk that sales will be hindered by distributor inattention.
Since representative offices cannot take part in commercial activities, branch offices have become increasingly popular. According to Russia’s 1999 foreign investment law, foreign companies may engage in commercial activities through their legally established branches. Branches are accredited for five years and must be registered with the tax authorities and other state organizations.
Both representative and branch offices can be attractive to foreign businesses seeking to minimize taxes, administrative burdens, and currency control restrictions.
3) Foreign Subsidiaries
Some foreign manufacturers, particularly in the cosmetics, pharmaceutical, consumer appliances, durables, and industrial products sectors, have registered wholly owned subsidiaries in Russia. These companies can sell products directly to their own subsidiary companies registered in Russia that import for their own account. This approach provides full control to the supplier over distribution and further reduces possible risks from the false invoicing and other billing irregularities sometimes committed by independent importers and distributors. For more information on registering a company in Russia, please refer to the Establishing an Office section below.
In Russia, distributors or representative offices of foreign companies often employ agents in Russian regions to promote their products. It is uncommon for foreign companies to rely solely upon one agent to cover the entire country.
U.S. exporters are advised to cultivate personal relationships with their Russian representatives and clients; proceed gradually, relative to similar arrangements in the United States; and ensure that they have a contingency plan should problems arise. Since it is often difficult to find information on Russian companies, it is recommended that U.S. firms consider using the U.S. Commercial Service’s due diligence service to validate potential partners The U.S. Commercial Service advises against a U.S. company representative simply visiting Russia once or twice, selecting a representative, granting exclusive representation, and then moving quickly to consignment or credit sales without first establishing a payment and performance history. In addition, exporters are cautioned to take primary responsibility for registering their brand names in Russia and not to rely on a local partner for this step. Finally, it is important to provide a Russian partner Russian-language product information and marketing materials.
The U.S. Commercial Service provides a wide range of customized business development assistance services to U.S. companies in the Russian market. For more information please visit the “Services for U.S. Companies” section of our website (https://2016.export.gov/russia/).
Establishing an Office
The U.S. Commercial Service provides basic counseling on registration requirements and procedures. However, U.S. companies are strongly advised to seek legal advice on business registration. The U.S. Commercial Service staff can provide contact information of U.S. and Russian firms that offer professional legal services in this area. As a general rule, foreign nationals working in Russia are required to obtain a work permit.
Conducting business without a registration is illegal. Although there are federal laws governing the registration, it is often subject to local interpretation.
Russian law offers several commonly used structures to conduct business:
• Representative or branch office of a foreign company;
• Registration as an individual private entrepreneur;
• Subsidiary companies;
• Limited Liability Company (OOO);
• Privately held, closed joint stock company (ZAO); and
• Publicly held, open joint stock company (OAO).
Branch offices and accredited representative offices are both legally distinct from Russian corporations, which may be established by foreign firms either as joint stock companies with partial Russian ownership or as wholly-owned subsidiaries of a foreign firm. Foreign ownership is legally permitted to be as high as 100% in most sectors, but potentially limited in industries defined by the “Strategic Sectors Law” (discussed in this chapter under Joint Ventures/Licensing).
Federal Law N 106-FZ, last amended in May 2016, governs branch and representative offices of foreign entities. Pursuant to the law, accreditation of branches and representative offices of foreign companies is regulated by the Federal Tax Service of the Russian Federation (FTS). The FTS accredits branches and representative offices of all foreign companies, except for foreign banks and foreign civil aviation companies, which are accredited by the Central Bank of Russia and the federal Aviation Service, respectively.
The FTS maintains the register of accredited branches and representative offices of foreign entities (hereinafter the “Register”).
Individual accreditation and visa support for foreign employees of branches and representative offices is supported by the Chamber of Commerce and Industry of the Russian Federation (hereafter “CCI”).
The accreditation procedure is as follows:
• An application for accreditation is submitted to the FTS within 12 months from the date the foreign
company’s headquarters adopts a decision to open the branch or representative office.
• The application should include certain documents (the list of the documents will be published by the FTS) and shall be accompanied by CCI certification regarding the number of foreign employees of a branch or representative office;
• The term for FTS’ decision on an accreditation application is 25 business days;
• A document confirming entry into the Register constitutes confirmation of accreditation;
• Accreditation can be denied in the event of either inconsistencies in the documents submitted or a violation of the term for their delivery. Accreditation will be denied if the purposes of a branch or representative office runs contrary to Russian legislation, and in cases when FTS assesses that establishment threatens the sovereignty, political independence, territorial integrity, or national interests of the Russian Federation;
• Changes in the FTS Register occur within 10 business days from the date of delivery of required documents to the FTS.
Regulations of a branch or a representative office of a foreign company must contain certain provisions, as determined by law. The accreditation fee for each branch office is 120,000 rubles (approximately $1,600, at current exchange rates).
Further information is available 35Ton the FTS website.
Franchising emerged as a business model in Russia following the adoption of formal franchise legislation in 1994. Since 2000, the number of franchising operations in Russia has risen from 54 to more than 2,600. Based on Franshiza.ru data, in 2019, the Russian franchising market grew by 16% and constituted 2.8 trillion roubles (39 billion USD). It is estimated that the franchising sector currently employes approximately 1.4 million Russian workers. etail trade constitutes 57% of all active franchises, followed by services at 25%, and fast food at 16%. According to data from the Russian Franchising Association, 65% of all franchise concepts are established domestically, and 35% are foreign, of which 12% are American, among them McDonald’s, Burger King, KFC, Subway, Papa John’s, Domino’s, Starbucks, Marriott, Hilton and others. The most popular franchises are those that require investments between $15,000 and $150,000. Approximately 14% of Russian franchise entrepreneurs are ready to invest $150,000 – $500,000 and 4-6% have the means to invest over $500,000. The market for restaurants/food concepts is the fastest growing, in terms of franchise entry: 52% of chain restaurants and cafes are franchises; this market is currently showing the most reliable returns, especially in the fast-food segment. Coffee-to-go concepts are also becoming more popular and are growing rapidly. The retail clothing sector also has a sizeable percentage of franchised stores at 23%. Foreign and domestic brands that provide high quality products at affordable prices continue to open new sales points in both Moscow and the rest of Russia. About 35% of children’s retail outlets are franchises. In addition, a growing interest in educational/developmental franchises has been observed in recent years.
In the services sector, franchises such as EMS fitness salons and barber shops are gaining in popularity. Beauty salons and medical centers are also in high demand among entrepreneurs. Demand for modern hotels is growing annually, with the increased popularity of Russia as a business travel destination.
Until 2011, the legal framework surrounding franchising in Russia was an impediment to the development of the sector and strongly favored the franchisee. On July 18, 2011, Federal Law No. 216-FZ on Amendments to Part II of the Civil Code was signed into law, and more effectively balanced rights and obligations for parties of a franchise agreement. Specifically, the Law on Amendments (1) expanded the list of permissible restrictions under franchise agreements, such as use of intellectual property and pricing provisions; (2) amended provisions on the franchisee’s preemptive right to conclude a franchise agreement for a new term; and (3) established new terms for unilateral early termination of a franchise agreement. Although enactment of this legislation is considered a significant development, Russian franchising legislation remains cumbersome, and it is highly recommended that franchisors seek professional guidance regarding legal, real estate, tax, and customs issues.
For a franchising agreement to be valid, it has to be executed in written form. The grant of the right to use the intellectual property under a franchise agreement must be registered with the Federal Service for Intellectual Property, Patents and Trademarks (Rospatent). Absent such registration, intellectual property rights are not considered granted by a franchisor to a franchisee. Prior to the execution of a franchise agreement, any trademarks to be licensed must already have been registered with Rospatent or the World International Property Organization (WIPO), with Russia identified as a designated country.
An area of free circulation of goods between Russia, Kazakhstan and Belarus represents a real commercial progress for the development of the direct selling industry in Russia, offering additional expansion opportunities.
In 2019, weakening GDP growth and declining consumer purchasing power negatively influenced direct selling in Russia. In addition to this, an increase in VAT from 18 to 20 percent in 2019 led to a price growth, which hit the direct selling performance, with the low ruble exchange rate also a negatively factor, since most of the goods or raw materials are produced abroad.
Statistics from the World Federation of Direct Selling Associations (WFDSA) indicated that direct sales in Russia in 2019 amounted to $2.259 billion (a 6.2% year-on-year sales decrease) and that 4.4 million salespeople were engaged in direct selling. The Russian direct sales market accounted for 1.3% of the global market in 2019.
The leading category in direct selling, accounting for almost half of sales values in 2019, continued to be beauty and personal care. Major direct-sales companies such as Avon, Amway, Mary Kay, Oriflame, Herbalife and Tupperware (members of the Russian Direct Selling Association) continue to be active in Russia. Avon products lead Russian direct selling in 2019. Wellness and homecare represent about 28 and 10 percent of the Russian direct sales market respectively.
One of the main advantages of direct sales was always seen as personal consultation and an individual approach. With the increasing digitalization, however, this individual approach is changing, transforming into the use of other methods of communication. The impact of the development of digital technologies is seeing leading players in Russia move in this direction, often involving a revision of their strategies, investing both in staff training and in developing applications or macro-marketing products for clients.
U.S. companies or individuals may become strategic partners with Russian firms by taking equity positions in Russian joint stock companies or establishing joint ventures (JV). The launching of a JV in Russia demands meticulous planning and sustained commitment. In most cases, it is advisable for the U.S. partner to retain managerial and voting control. JVs in which foreign partners hold minority stakes are highly dependent on the good intentions of their Russian majority owners and foreign minority shareholders could face difficulty protecting their interests in Russian courts.
A principal benefit of a JV is the possibility of brand recognition for the U.S. company’s products in the Russian market. Russia’s May 2008 Strategic Sectors Law with amendments adopted by Federal Law №322-FZ in 2011 identified 42 industry sectors requiring the Russian government’s prior approval of a foreign firm’s purchase of controlling interest. Additionally, political pressure is mounting in Russia for domestic content mandates in key sectors and for large-scale procurements, and a JV can sometimes help provide a local footprint with a more Russian “face” for a non-Russian company working in the market.
Russian and U.S. partners often take a different view of JVs. U.S. companies, especially SMEs, often consider JVs as a means of securing a local partner with experience and contacts in the Russian market. On the other hand, many Russian managers view a foreign partner chiefly as a source of working capital, and these managers may place a lower priority on local market development. Before making financial or legal commitments, U.S. firms should thoroughly evaluate whether a potential partner shares their priorities and expectations. Any firm that forms a JV in Russia should be ready to invest the necessary resources, including the personal attention of its managerial staff, to keep the business on course both before and after the establishment of the JV.
Certain types of business activity need a special activity license issued by an authorized licensing body. These include:
- Encryption-capable IT or telecommunication systems;
- Pharmaceutical activities or the production of medicines;
- Development, production, repair, sales or trade of weapons and military equipment;
- Overseas and inland waterway passenger and freight transportation;
- Use of highly explosive or hazardous objects for production;
- Production, storage, usage or distribution of explosive materials for an industrial assignment; and
- Educational activities.
The full list of activities that require licenses is stipulated by the Federal Law “On Licensing of Certain Types of Activity” N 99, May 4, 2011, with amendments adopted by Federal Law № 185 (FZ - N185) in July 2013.
U.S. technology can be licensed for Russian production in the absence of a JV but there can be significant obstacles to doing so, such as: ensuring that desired quality levels are attainable by Russian facilities without significant retooling, addressing uncertain intellectual property protection, and resolving difficulty in receiving regular and prompt payments. Concurrently, Russian companies are usually eager to license their technologies to foreign companies in exchange for the cash infusion.
The Russian territory, one of the largest in the world, with 11 time zones requires serious logistics and organizational approach. The most commonly used method to make home delivery from abroad is the national postal service, as long as orders do not exceed 20kg (44 lbs.). The other available option is to deal with private parcel delivery companies. As an example, express delivery from New-York to Moscow takes about four days.
According to a NeoAnalytics study, Russia’s express delivery market grew 12.,5% to $1.1 billion in 2018 (latest available data). The 38 largest Russian cities with more than 500,000 residents account for 70% of the total volume of express delivery services, with more than 60% of the market coming from B2C (business-to-consumer) transactions.
In recent years, Russian express delivery companies significantly pushed foreign participants on the market. Currently, the market share of large Russian operators is about 60% versus 30% share of foreign companies. The largest international companies in the Russian express delivery market are DHL and UPS. Among domestic companies the market leaders are: DPD, EMS Russian Post, and Pony Express. Usually, the cost of express delivery in international companies is higher. However, international operators benefit in delivery times both within Russia and abroad.
It is expected that in 2020-2021 the express delivery market will grow significantly, primarily due to the growth of e-commerce and online retailers. The COVID-19 situation and introduction of quarantine measures has led to a significant increase in demand for online orders. In Moscow in March 2020, the demand for the delivery of groceries and ready-to-eat meals almost quadrupled and during peak periods increased up to 10 times (Source: INFOLine). In addition, in April 2020, many Russian FMCG retailers which had not previously developed this channel went online, started to provide click & collect services, and began to cooperate with express delivery services. INFOLine experts estimate the market for express delivery of food products may increase from $11 million in 2019 to $420 million in 2020. Total FMCG online sales can reach up to $2 billion at the end of 2020 versus $625 million in 2019.
According to the East West Digital News (EWDN) industry report, the Russian B2C e-commerce market (physical goods) is expected to reach $22 billion in 2019 and jump to $50 billion or more by 2023. Cross-border sales expected to total up to $7 billion in 2019, mainly represented by Chinese sellers. A person can receive goods that weigh less than 31 kilos and a de minimis value of up to 200 euros (starting from January 1, 2020) per month without having to pay customs duties. If the permitted import norms are exceeded, the customs duties are paid at a rate of 30% of the value but not less than 4 euros ($5.80) per 1 kg. Also, since January 1, 2017, Russian Customs has required passport data for individuals receiving parcels from abroad, which significantly increases delivery time.
Russia can be a challenging market which means U.S. companies need to take time to learn about the business environment and select local partners wisely. Taking shortcuts when evaluating business opportunities and selecting local partners is not advisable. Occasionally, basic information about regulations, company ownership and credit worthiness is not readily accessible, and the market’s regulatory framework continues to evolve, requiring companies to closely monitor changes. The U.S. Commercial Service offers an International Company Profile service as a way to evaluate potential partners. For more information on this service and other customized services, please visit CS Russia’s website: https://2016.export.gov/russia/servicesforu.s.companies/index.asp
Russia-related sanctions have been implemented by the U.S. government under multiple legal authorities in the form of executive orders and public laws since 2014. On August 2, 2017, the President signed the Countering America’s Adversaries Through Sanctions Act (CAATSA) which codified and expanded sanctions announced during 2014-2016 on certain Russian entities and sectors. CAATSA includes sectoral sanctions affecting the financial, defense, and energy transactions, and “blocking sanctions” that prohibit business with certain individuals and entities.
Implementation and enforcement of sanctions legislation is a shared and partitioned responsibility across the U.S government. The Departments of State and Treasury have published numerous public FAQs and links to components of the legislation that serve as extremely valuable resources for conducting initial due diligence.
In response to inquiries from the business community, we have compiled the following resource center for use in understanding the multiple components of Russian sanctions legislation applied by the U.S. Government since 2014. This information is not comprehensive and is subject to ongoing updates. We strongly urge U.S. firms conducting business in Russia to perform careful due diligence and seek legal counsel when vetting potential transactions and counterparties. Questions on specific transactions should be directed to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Department of Commerce’s Bureau of Industry and Security.
U.S. Department of Commerce Resource Center on Russia Sanctions: https://www.export.gov/article?id=US-Sanctions-Information-Related-to-Ukraine