Includes typical use of agents and distributors and how to find a good partner, e.g., whether use of an agent or distributor is legally required.
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.
U.S. companies have four basic options when choosing a distribution channel:
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; to proceed gradually, relative to similar arrangements in the United States; and to 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/).