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Country Analysis of the Russian Federation

The Russian Federation was for a long time isolated from the outer world within the formation of the Soviet Union, which in turn was reflected in its economic development. After opening the borders, business in Russia was developing in leaps and bounds. The country has gone through various transformations combined with economic crises and defaults. Nevertheless, currently, the conditions of doing business in Russia can be said to be vastly different than the 1990s of the previous centuries. The economy was stabilized, where “Russia ended 2008 with GDP growth of 6.0%, following 10 straight years of growth averaging 7% annually since the financial crisis of 1998.” (The World Fact Book, 2009).

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Beam Global Spirits & Wine, Inc. (part of Fortune Brands, Inc.) is a leader in premium spirits, among which is the Jim Beam Bourbon, the number one selling bourbon. (Beam Global, 2008) With the intention to expand the production to Russia introducing the bourbon brand Jim Beam, the company is interested in investigating the possibility of exporting Jim Beam Bourbon to the aforementioned region. In that regard, this report provides detailed background on the Russian Federation with the purpose of drawing a picture of favorable conditions for exporting Jim Beam.

Overview

The Russian Federation is located in Northern Asia, with areas located in Europe, bordering the Arctic Ocean, between Europe and the North Pacific Ocean (The World Fact Book, 2009). The European and the Asian parts of the federation are divided with the Ural Mountains with approximately 25% of the land being in the European part and 75% in the Asian area (2009a). Due to the vast area of the Russian Federation, where the total area is about 17,075,200 sq km, that occupies different geographical zones, the climate also vastly varies. In much of the European part of Russia, the climate ranges from steppes to humid continental, while the cold tundra and subarctic climate in Siberia and polar north. Accordingly, the seasons vary from cool to frigid in the winter, and from warm to cool in the summer, going from the south to the north respectively (2009a).

The Population

Regarding the population, as of 2009, the number is approximately 140,041,247, being the tenth country after Nigeria. The population of the country is currently in decline, where the average growth rate is -0.467%. 71.5% of the population comprises people between 15 and 64 years of old, and 73% of the population is urbanized. The average age of the population comprises 38.8 and 35.2 for males and females respectively. Considering the profile of the average drinker of bourbon, which has gotten younger in recent years, it was stated that the core audience is males 25 to 34 years old. (Jim Beam News Release, 2005) Thus, it can be seen that the average population approximately falls into the core audience profile. Additionally, 80% of the population is living in the European part of the Russian population, compared to 20% in the Asian part (2009a). The ethnicity of the population, as of 2002, can be divided between Russians 79.9%, Ukrainian 2%, Bashkir 1.2%, Chuvash 1.1%, and other or unspecified 12.1%. (The World Fact Book, 2009). The main language is traditionally Russian, with other minor languages existing. Additionally, an important aspect of the profile is religion, where considering practicing believers as of 2006, religion is divided between Russian Orthodox 15-20%, Muslim 10-15%, other Christian 2%. The latter fact implies that 10-15% of the population do not consume alcohol and are not included in the core target audience. The educational level in Russia is traditionally high, a residual effect of the education in the Soviet Union, where the literacy level is about 99.4%, and as of 2003-2004, the total number of students of higher education institutions was 5,947,500, including 5,228,700 and 718,800 in governmental and non-governmental education institutions respectively. (The World Fact Book, 2009) Additionally, Russia has more academic graduates than any other country in Europe. The income level in Russia is currently growing, whereas in 2007 the average salary reaches $545, which in turn might be high for the countries of the previous Eastern bloc, but are incomparable to the average salaries in Western Europe which as of 2003 reached 4,317 Euros (2005, 2007)

The Political System

The form of state in Russia is federation, where the head of the state is the president, who is elected for a four-year term. Currently, the president of the Russian Federation is Dmitry Medvedev, who was elected on March 22nd, 2008 (The Economist Intelligence Unit, 2009c). The government is formed by the prime minister, a position currently held by the former president Vladimir Putin, and the prime minister is in turn appointed by the president. Despite the previous fragmentation of the political players and parties in the 1990s, currently, the political scene in Russia has been established and settled with about 23 different parties, which are divided between and opposition, and only two of them have distinct ideologies. (The Economist Intelligence Unit, 2009b) The main parties include United Russia, the main force in the Duma, which main attraction is the support of Putin. Other parties include the Communist Party, one of the best-organized parties in Russia, with the main electorate over the age of 40, the Justice Party, which emerged in 2006 and supports the president’s administration, and LDPR, the main nationalist party in Russia. Mainly, the majority of the parties can be formed into a single political class called siloviki- “members of the security services, the military and the police—at the time occupied almost 60% of all power positions in Russia.” (The Economist Intelligence Unit, 2009b) Generally speaking, the reforms started with Putin and continued during Medvedev’s term imply general political stability favorable for doing business and pro-market orientation. Nevertheless, some obstacles can be seen in several sectors being controlled by the government such as the industrial sector along with corruption and bureaucracy, where “companies continue to report that they are faced with a complex business environment and a high volume of demands for bribes” (Global Advice, 2008). The latter is being fought with several reforms through several political initiatives.

The Economy

The economy of Russia was on the rise, including improved international positions in the world. Although growth was slowed down in 2008, the last six years showed fixed capital investment growth and personal income growth of 10% on average (The World Fact Book, 2009). The main export products as of 2007 are oil, which is 65.2% of the total export, metal, machinery and equipment and chemicals, whereas the main import is machinery and equipment, which forms 43% of the total import (The Economist Intelligence Unit, 2009a). The slowdown in the economy in 2008 has resulted in that the main growth was enforced by non-tradable service and domestic manufacturing, rather than exports. Russia was affected by the global credit crunch, which combined with the Russia-Georgia conflict led to that the market fell by 70%, which was a major concern for foreign investors. The global crisis also affected the banking system to which the government reacted immediately with the rescue plan of over $200 billion to increase liquidity (The World Fact Book, 2009). However, the problems of the business environment did not affect the inflow of foreign investment which witnessed a rise recently.

Social System and Ethics

The social system in Russia has seen an increase of middle-class representatives in recent years. Nevertheless, it can be argued whether this representation can be paralleled to the western analog. In that regard, the middle class in Russia “comprises the embryonic legitimate business elite – entrepreneurs, professionals and managers.” (Vaknin, 2002). This factor can be related to the low poverty line in Russia, which in recent years has never seen many changes in wealth distribution. As of 2005, the richest 10%10% received 29.6% of the population’s total income, and the poorest 10% received 2%, which was similar to 2004 in that regard (RIA, 2005).

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Although, Russia is a country with rich cultural traditions, which roots lie in the European culture, the business principles in terms of ethics were not clearly defined if existed. The business concept was seen as unethical in the days of the Soviet Union, and thus the concept of business ethics was slowly developing with the emergence of many foreign firms in Russia (Kornienko, 2004). Prior to that, business was a separate entity in which gaining competitive advantage prevailed over other considerations. Additionally, without established business codes of ethics, the business might be regulated individually by the religious morals and the moral values of the society.

The legal system in Russia has been gone through many reforms in what concerns the process of carrying out business operations. In addition to the tax reforms of 2000, which were aimed to “rationalize the tax system, reducing the number of taxes and the corporate tax burden” (The Economist Intelligence Unit, 2009a), the reforms included the way foreign companies might operate on Russian territory. In that regard, there are mainly two methods of operation, aside from forming a joint venture, which includes establishing a local branch of the company or acting through a local Russian company. The best option can be seen through different systems of taxation, which in the case of a company that creates permanent establishments include corporate income tax, VAT, and other taxes that are related to employees’ payments such as unified social tax payroll tax. In general, the representative branch of a foreign company is the simplest form of foreign presence in Russia (Terterov, 2005). In terms of trademarks and patents, there is a need to register the intellectual property in Russia so it can be recognized by the Russian government (Embassy of the United States, 2009). In that case, the registration is performed with the Federal Service for Intellectual Property, Patents, and Trademarks, where members of Madrid protocol are allowed to apply for trademark ownership in several member nation countries simultaneously.

Marketing and Corporate Communications

Despite the absence of an established distribution system during and at the fall of the Soviet Union, the current state of privatizations allowed the development of many chains of distribution. The type of distribution channels include Hypermarkets, Supermarkets, Specialized stores, Discount stores, Local shops, Stalls, and Open-air markets. The main form of distribution is still stalls and markets, which represent half of the sales. The products are usually low-quality installs, while open markets usually distribute clothes and electric appliances. Chains are mostly formed by supermarkets, with the recent introduction of hypermarkets. Supermarkets represent more than half of the sales, while hypermarkets are reaching 10% (2009b). Following the aforementioned, the marketing sector is also on the rise, where it can be said that marketing and advertisement are given great importance in the Russian model of business. In that regard, the main driving force in consumer demand, which is expanding from metropolitan areas to the regions.

According to a media and marketing forecast from GroupM, it was predicted that Russia will become a top 5 European ad market in 2009 (GroupM., 2007). Accordingly, it was indicated that the main marketing medium, in order of their share, is: TV, radio, out-of-home advertising, magazines, and newspapers.

Conclusion

The report provided extensive profiling of the Russian Federation, as a result of which it can be said that despite some obstacles, the Russian market is favorable for entry. The recent reforms and market-oriented policies will contribute to the continuation of growth in the economic sector. Additionally, the rise in the middle class can be seen as a factor for the expansion of Jim Beam’s target audience. It should be mentioned that the Russian Federation is an enormous market in terms of its diversity, where it also might serve as a gate for other neighboring countries, such as the former Soviet Republics. Finally, it should be said that despite the economic crises, Russian society is in a state of transformation, in which the business is also transforming toward the market-oriented liberal model.

References

  1. (2007) Average Salary in Russia Reaches $545 – Officials. Kommersant.
  2. (2009a) How to Do Business in Russia. Foxx.
  3. (2009b) Russia: Distribution channels. Laposte Export Solutions.
  4. BEAM GLOBAL (2008) JIM BEAM® BOURBON CELEBRATES ELEVEN MILLIONTH BARREL. Beam Global.
  5. EMBASSY OF THE UNITED STATES (2009) IPR Toolkit. U.S. Department of State.
  6. GLOBAL ADVICE (2008) Russia Country Profile. Business Anti-Corruption Portal.
  7. GROUPM. (2007) GroupM: Russia Ad Market on a Tear, to Overtake Spain. Marketing Charts. Web.
  8. JIM BEAM NEWS RELEASE (2005) “Change” Signals New Era for Jim Beam Bourbon Advertising. Fortune Brands.
  9. KORNIENKO, S. (2004) Teaching Business Ethics if Code is Not Law. St Petersburg Times.
  10. TERTEROV, M. (2005) Doing business with Russia : a guide to investment opportunities and business practice, London ; Sterling, VA, GMB Pub.
  11. THE ECONOMIST INTELLIGENCE UNIT (2009a) Fact Sheet. The Economist.
  12. THE ECONOMIST INTELLIGENCE UNIT (2009b) Russia: Political Forces. The Economist.
  13. THE ECONOMIST INTELLIGENCE UNIT (2009c) Russia: Political structure. The Economist.
  14. THE WORLD FACT BOOK (2009) Russia. CIA.gov.
  15. VAKNIN, D. S. (2002) Russia’s Middle Class. Narcissus Publications. Web.

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