Studies Eastern European Markets
Eastern European Markets
February, 2006

Oksana Ivanova, Hannu Kaipio, Päivi Karhunen, Simo Leppänen, Olga Mashkina,
Elmira Sharafutdinova, Jeremy Thorne

Northern Dimension Research Centre
Publication 28.

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Concluding Remarks

This report gave a comprehensive overview of the development of the economy and business environment in Northwest Russia, and its implications for the cooperation potential between Southeast Finnish and Northwest Russian enterprises. To conclude the analysis, some remarks can be made.

In general, the business conditions in Russia are developing in a good direction from the viepoint of Finnish companies. The general economic growth is showing in an increasing demand for consumer and industrial goods, which has also benefited Finnish exporters. However, competition in the market has also intensified. In some industries, such as the food industry, it is already almost necessary to establish local production in order to stay competitive. The increased economic activity, together with an increase in energy costs, shows in a growth tendency in production costs. Wages, for example, are ascending rapidly. This is influenced by a relative lack of qualified workers, which is in part due to the collapse of the state professional education system. In addition, analysis of the market for industrial and office premises shows that the demand for quality premises is exceeding supply, especially in St. Petersburg.

The institutional environment shows signs of stabilization, although administrative control of business (inspections etc.) is still a major problem for businesses. However, legislation has been developing and attempts have been made to simplify the procedures of, for example, company registration and licensing. Despite the positive developments, it is still often difficult for foreigners to cope with Russian bureaucracy, and a local partner is an asset.

The cooperation potential and implications for Finnish companies’ competitiveness vary. In general, a cautious conclusion can be drawn, in that the cost factor is losing its importance as the production costs in Russia grow. Moreover, the possibilities to use Russian labour at Russian wage level in Finnish operations are restricted by the Finnish legislation. Therefore, for example logistics enterprises operating on both sides of the border have to register in Russia to be able to use the cost advantage for labour. Also, there is an emerging lack of qualified blue-collar workers in Northwest Russia in industries such as metal-working. Therefore, foreign companies investing in industrial production have to put a great emphasis on training, which increases the labour costs.

In contrast, the importance of the market potential in Russia increases. In addition to product exports, the analysis shows that there is a growing demand for cooperation based on technological and other know-how. New industries, such as logistics and tourism are developing rapidly in Russia, which provides business opportunities to Finnish firms with high levels of experience and know-how in these sectors. Also, the increasing investment activity provides demand for upgrading production technologies. For some industries, such as the forest sector, the former emphasis on raw material imports has gradually been shifting towards local production as the Russian economic and political environment stabilizes. In the energy sector there are good cooperation possibilities because of upcoming deregulation of industry and the state of communal housing, so partnerships in innovation technologies and know-how, which are developed especially for the Northern climate will have good potentials.

Also, the general suggestion for all sectors is to take into account the importance of the time factor. Since the markets are developing quite quickly it is important to act on the situation.

In order to secure access to good locations and facilities it is important to start strategic partnerships and get involved before it is too late and the desired place is taken by a domestic or other non-Russian company.

Managerial implications and policy recommendations

The analysis shows one important aspect: Russia is developing so rapidly that Finnish managers should constantly update their knowledge of the market. For example, the interviews with Russians reveal that many Finnish companies have an outdated perception of the Russian business environment. Finns may believe that “everything is cheap in Russia”, which is no longer true. Also, the Russian companies are developing, so they would like to be treated as equals in the cooperation. The situation of the early 1990s, where the Russian companies were often the dependent party in the relationship, has changed. First, their technological and managerial knowledge has improved and second, there is increasing domestic demand that makes Russian firms less dependent on foreign orders.

The study also has implications for public sector actors. Despite all ongoing initiatives to foster Finnish-Russian business cooperation, companies still call for more support in establishing business contacts. This is in part due to the limited resources of Finnish SMEs, which don’t allow a thorough partner search in Russia, and the problems of Russian companies in searching for Finnish partners due to, e.g., the language barrier. The interviews show that in addition to cooperation in core business functions, there is an increasing demand for cooperation in supporting functions such as professional education. Here, the public sector could have a role in drawing up initiatives to stimulate such cooperation. So, in general Russian business is growing up and becoming more competitive and professional, as over time companies care more about quality and reputation rather than immediate profit.

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More information:
Lappeenranta University of Technology
NORDI, Northern Dimension Research Center
P.O.Box 20, FIN-53851 Lappeenranta, Finland
Telephone: +358-5-621 11
Telefax: +358-5-621 2644

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