group 12 ccm project- russia

8/7/2019 Group 12 CCM project- Russia

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2010

Group 12Deirdre Murphy 09362037Evanna Murphy 09557911Kinga Harsanyi 10283528Tadhg Murphy 08310343

Barriers to International Businessin a Developing Russia

I/We declare that all materials included inthis essay/report/project/dissertation is the

end result of my own work and that dueacknowledgement have been given in the

bibliography and references to ALL sourcesbe they printed, electronic or personal.


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I t cti

The word culture has been defined as the collective programming of the mind distinguishing

the members of one group or category of people from another. Geer t H f t ede Each country

has its own deeply held set of beliefs and values that have developed over centuries. They are

the so called unwritten rules as to how we deal with our everyday lives. Culture is the

combined set of factors that influence the way in which we think, feel, and act. These factors

include family, school, politics, history, religion, language etc.

In this rapidly growing global market it is vital that companies have an understanding

of the cultures that exist in the countries in which they operate. They must be sensitive and

adapt their ways of doing business to respect these differing cultures. In our report we will

look into the R ussian culture and its impact on foreign companies involved in business within

R ussia.

R ussia is a very interesting country to study since it has many untapped business

opportunities and a growing market. On the other hand, however, there is much risk involved,

and cultural differences are a major barrier to business for foreign corporations in R ussia. It is

a failure to understand the culture that impedes the success of business operations.

We have divided our report into three main parts. Part I will give an overview of

R ussia as a country. We will investigate its communist past, its current economic and political

climate, corruption in R ussia and cultural factors including language, education, religion and

social structure. In Part II we carry out a more detailed analysis of culture in R ussia and its

effects on business through the use of Hofstedes four dimensions: Individualism vs

Collectivism, Masculinity vs Femininity, Power Distance and Uncertainty Avoidance.

Following this, in Part III we will discuss Negotiation in business in R ussia. Our discussion

will include the negotiation process, pervasive cultural differences in communication, the

existence of corruption and bribery in negotiations and the use of negotiation techniques such

as location, timing and inter-relations. We also include advice which is vital for foreign

managers to know before beginning negotiations in R ussia. Finally, we will conclude our

report with our opinions on the prospects of investing in business and the challenges and opportunities companies face in R ussia.

.


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P t I: A B ck O i w f R i

In Part I we will give a general overview of R ussia as a nation. We will discuss its communist

past, how it has adapted in its transition from a communist to a capitalist market, its economy

today and other general information on the country including its language, religion and social

structure.

R i : C t P fil

R ussia is a nation 1.8 times the size of the United States spanning nine time zones.

Area: 17,075,4 00 square kilometres

Population: 139. 4 million

Capital City: Moscow

President: Dmitry Medvedev

Prime Minister: Vladimir Putin

Major Political Parties: United R ussia, Communist Party of R ussian Federation,

Liberal Democratic Party

Monetary Unit: rouble

Main Exports: Oil and oil products, natural gas, wood and wood products, metals, chemicals,

weapons and military equipment

Source: The F ore i and C ommonwea lt h O ffice, UK

T T iti f t R i N ti t P t C t

B efore we can understand the current political and economic climate and way of life

in R ussia, we must first have an understanding of the countrys history. Here we will

discuss the past century in R ussia which helps to explain much of the cultural values

imbedded in R ussians today

In 1923 R ussia was transformed from a Tsarist republic to a communist state

when Joseph Stalin became leader. The Marxist ideal on which communism is

founded is a state in which equality rules and status is foregone. Stalins

government undertook serious measures to make the country one equal land. Firstly,

it denounced all religions. It believed there was no need for religion as people should

be dedicated to the common good and belief in communism. Those found to be

practicing religion were persecuted. Secondly, all agricultural lands were taken over


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by the government. Farms were combined into one to enable mass production.

However, altering the way of doing agriculture in such a small period of time resulted

in widespread famine and suffering for civilians. Thirdly, the government took

control of all factories, banks and businesses in order to reap all benefits from their

profits, for what they claimed, was for the good of society. And finally, the government moved to intensify and increase the military capacity of the Soviet

Union.

In order to maintain his leadership position throughout the 1930s Stalin

organized widespread political purges and persecution of those who opposed him.

R ussia had become a state where citizens had no choice but to accept the

governments view on matters. If one showed disloyalty or opposition to the

government they, or their family, were be persecuted.

In 1939, Germany invaded R ussia. However the German army were ill

prepared for the R ussian Winter and the Allied Armies of R ussia, Europe and the

United States defeated the Germans in 194 5. At this point Stalins army controlled

much of Central and Eastern Asia. The Soviet Union did not hand power back to

these countries, instead it enforced its communist beliefs across its newly conquered

territories. Stalin recognised that R ussia could not possibly expect to survive in a

capitalist world with communism as its ideal. In order for communism to succeed it

was vital that communism should become internationally widespread. Stalin renamed

R ussia and the new countries it conquered as the Soviet B loc, bringing down an

Iron Curtain across Europe.

Following World War II, the relationship between the US and the Soviet

Union quickly deteriorated. The Soviet Union became a nuclear state in 194 9 and the

country was on the brink of a nuclear war when it came to a head with the US in

1963, the Cuban Missile Crisis, at the height of the Cold War.

During the B rezhnev era of the 1970s which followed the Cold War, R ussia

established itself as an economic and political superpower. In 1979, however, they

invaded the US backed Afghanistan. This ruined, what had been, improving relations

with the west. It also undermined the strength of the R ussian army and displayed their

military limitations.


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Throughout the 1980s Michael Gorbachev was in power. He brought in a

political and economic reform: glasnost and perestroika. However support for the

communist cause was falling. In 1991, there was a coup and civil war in R ussia and

in 1993 B orris Yeltsin was elected President of the new capitalist R ussia.

From this brief synopsis of the communist era we gain an insight into the

culture that has developed in R ussian people. Freedom of speech, creativity,

innovation and individual opinion were all oppressed. As a people the nation had

become distrustful of one another and fearful of forming their own views on matters.

They grew up in an age that involved following rigid orders and accepting the rules of

the elite in government.

P litic i R i T

B efore an organization or any business entity goes ahead and does business in a

foreign country, it is vital for them to understand both what the political situation is and

where the political parties stand regarding foreign investments. This is especially the case in

R ussia. The government comprises of elites, control is tight and corruption is a very real

problem. These factors can influence an organizations decision as to whether or not they

should do business in R ussia. However, the future growth possibilities in the R ussian market

are very appealing to investors and companies must consider whether or not it is worth taking

the risk to set up business in R ussia. Here we will provide some background information on

the political situation and the system of elections in R ussia.

T R i m t

In R ussia there are two elections: the State Duma and the Presidential elections. The

State Duma is the lower house of the Federal Assembly, the parliament of the R ussian

Federation. The first Duma elections took place on the 12 th of December 1993 coinciding

with the adoption of the new Constitution. (politi

a.s u) This marked the end of the

communist era for R ussia. Parties are voted for a period of five years in office for the State Duma. In the

Presidential elections candidates are appointed by their political party and one of them will be

voted for six years, but can be re-elected for another six years. There are many parties

registered, but only a few are actually involved in the elections. The three most powerful and

influential parties are the United R ussia, the Communist Party of R ussian Federation, and the


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Liberal Democratic Party of R ussia.

The last State Duma election was held in 2007 and the United R ussia won the election

with more than two-thirds of the vote. The last Presidential Election was held in 2008, when

Dimitry Medvedev won the Presidentship for the United R ussia party again.

21 st C t R ssi

Vladimir Putin was president of R ussia for more than 8 years, from 2000 to 2008.

Throughout this period he took radical steps to increase his governments power over the

people. Freedom was cut back and media and print were censured by the Federal Security

B ureau which is controlled by the government directly. Only the radio could be called a free

information source. In R ussia today the internet is being used by an increasing number of

people, however, information attained on it is also controlled.

Vladimir Putin became the President on May 7th 2000 with 52.94% of all votes.

Many believed that Putin would bring 21st century thinking and evolution into the country

and would lead R ussia into a new era of democratic freedom and prosperity. The problem,

however, was that Putin was elected President coming basically from anonymity. He didnt

progress into his position and hence his power did not stand on solid support. B y September

2000 people were speculating the voting had been fixed. For this reason he tried to control

everything he was capable of, to make sure that he would be in power for as long as possible.

In the beginning Putin was successful in bringing stability to R ussia, however stability

turned into stagnation and after 8 years as President, Putin had failed to diversify the

economy. He also failed to fight corruption, to switch to a high-technology industry from an

oil-dependent industry and finally he failed to establish a well functioning state apparatus.

Moreover Putin was unable to maintain a good relationship with western countries. He said

that the tension that existed between R ussia and many other foreign countries was the result

of the growing R ussian economy. He claimed that the western nations could not accept that

R ussia was becoming powerful (carnegieendowment.org).

F i P c ti s o f Politic s i R ss i

Many foreign countries perceive or better misperceive the R ussian political situation

and R ussia overall as a country. On November 14 th 2006, Evg en i K i se l ev, an independent

R ussian political analyst, went on a tour of American universities giving a lecture with the

title " The F ut ure o f Ru ss ian P oliti cs: Wha t t he Wes t Perce ives and M i s perce ives" . What he

found is that many well educated students lack proper knowledge of R ussian society. The


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American media has a huge influence on the student community; hence it is understandable

for students to believe that R ussia is not free, although the case is more complex.

In R ussia there is freedom, but it is limited to some extent. The government acts like a

monopoly and they are present everywhere: in the security services, schools, media, election

courts and businesses. There is also another misperception; that Putin ended oligarchy. However, by looking at the number of billionaires in R ussia we can see that the case is

otherwise. In fact, the reverse actually happened; the existing billionaires deepened their

control and new ones emerged from the elites, who wanted to exploit the economy for their

own personal gains, examples are: Dmitri Medvedev and Igor Sechin who both have fortunes

in the hydrocarbon industry.

Foreign companies investing in R ussia will come up against the likes of such

oligarchs. They are fierce business competitors with long established business connections

throughout R ussia and the R ussian government. For example Vladimir Putin has been

associated with R oman A bramovich on numerous occasions. International managers will

need to build good relationships with such powerful people and attain their support if they

want their business to succeed in R ussia.

C orrup ti on in Politic s

Corruption is weakening R ussias economy and the progress of the country, yet no

one seeks to resolve the problem. It is ignored. Many countries think that R ussia doesnt even

have a political life; however, this is not the case. B ehind the scenes there is a huge fight for

power, but this is never seen by foreigners. In the 2008 Presidential election, the elites wanted

another candidate to win; however Putin had already decided that he wanted Medvedev as his

successor. The reason for this conflict is obvious. The elites wanted someone weak to be

elected President so that they could manipulate them and use the Presidential power for their

own personal benefit. ( carne g ieend owmen t .or g ) This was a similar mindset to that of Putin.

He appointed Dimitry Medvedev as a candidate for Presidentship who later won the

Presidential election on May 7th 2008. Putins strategy was that Putin, himself, would be in

the background as Prime Minister and would govern and control the country as he did before,

using Medvedev as his puppet.


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T Im pa ct of Politic s on Fore i n Inves tm en t

In the book, I nt erna tiona l Mana g emen t : C ult ure, S t ra t e gy and Beha vior by Fred

Luthans and Jonathan P. Dos, it describes how R ussian politics can be troublesome for

foreign investors. It describes how difficult it is for a foreign organization to react when the

R ussian partner wants to bail out from an agreement or from a joint venture. (pa g e 323 ) The foreign investors are helpless and are dependent on their R ussian partners. The R ussian

government makes no attempt to intervene or aid the foreign investor.

The article says that when profits are rising and a company is developing its position

in the market, R ussians tend to think that they can handle the organization and that they dont

need their foreign business partners anymore. This happened with the American B usiness

Centers of Irvine involved in R adisson- Slavjanksaya Hotel and with the Seattle-based

company R adio Page involved in Moscow Public Telephone Network. When the R adisson-

Slavjanksaya Hotel started to make money the R ussian partners and the R ussian owners of

the Hotel tried to get rid of the American business partners saying they didnt need them

anymore.

R adio Page, Moscow Public Telephone Network and another R ussian company built

up a system together, R adio Page having a 51% stake in it. When the profits hit $5 million,

the R ussians wanted to take control of the company and threatened the US based company

that they would shut down the radio frequencies if they did not agree to do so. In this case

R adio Page couldnt do any better but renegotiate the agreement. Foreign companies cannot

get help from the government since it is relatively unstable and employees in the government

wont take risks due to the fear of losing their job.

Politic s Today

Now that Dmitry Medvedev is in power, things have changed a bit. Putin and many

more believe that Medvedev will bring the modernization R ussia is looking for. One sign is

that he has a better foreign affairs political view than Putin. Medvedev has said that the

R ussian volatility in its economic and political life is at the centre of the tension between

R ussia and other countries. He has made clear targets under his governance. Those goals are

to encourage investment, strengthening democratic institutions, revamping infrastructure,

and encouraging innovation ( carne g ieend owment .or g ). These goals catch the attention of

foreign investors and are promising for future growth in the R ussian economy. However,

Medvedev is still dependent on Putin, because he is inexperienced and did not build his own

reputation to achieve his position of authority. (carnegieendowment.org)


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Overall R ussian citizens still do not trust the authorities, whether we talk about

communism, democracy, socialism or capitalism; Medvedev or Putin, because having a name

as one of those doesnt make a difference, the fact remains that it is still the elites who are in

control in government. For this reason, international corporations too should be very wary in

trusting those in positions of political power.

R uss ias e cono mic back round over t e pas t 20 years

R ussias economy is the twelfth largest in the world in regards to its nominal value and the

seventh largest when one takes its purchasing power parity into account. R ussias main

exports are its natural resources in which it is abundant; gas, coal and oil. R ussia uses these

resources to provide most of Eastern Europe with energy. After the fall of the Soviet Union

R ussia opened up its economy to the rest of the world and in the 1990s it expanded its

Economic reforms by privatising most industries. Nonetheless, the rapid privatisation

process, including a much criticized "loans-for-shares " scheme which turned over major

state-owned firms to politically-connected remnants of communist R ussia has left equity

ownership highly concentrated.

As R ussia made the transition from a centrally planned economy to a free market

system the countrys finances came under tremendous stress. However, R ussia recovered

from this relatively well. R ussia's gross domestic product (GDP ) lies roughly between that of

Canada and the United K ingdom and the rouble has remained stable. R ussia is the world's

largest exporter of natural gas and the second largest exporter of oil. This meant that they

were among the hardest hit by the 2009 energy price collapse. This dependence on energy

exports makes R ussia vulnerable to boom and bust cycles that follow the highly volatile

swings in global prices. Since 2007, the government has embarked on an ambitious program

to reduce this dependency and enhance the country's high technology sectors, but this plan

has yielded few results so far.

However it was under the Putin administration that the R ussian economy came into its

own. R ussia's economy saw the nominal GDP double, climbing from 22nd to 11th largest in

the world. The economy grew at an average rate of 7% a year, growth which had been

unheard of during the Soviet years. On a per capita basis, R ussian GDP was $11 ,4 00 per

person in 2008, making R ussians 57th richest on purchasing power. During Putin's eight

years in office, industry grew by approximately 75% and investments increased by around

125% . R eal incomes more than doubled and the average salary increased eightfold from $80

to $64 0 per month. The number of people living below the poverty line also decreased from


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30% in 2000 to 14% in 2008. Putin used an effective legal reform system in order to lower

income tax to 13% and also to increase asset ownership security encouraging this economic

growth for both employers and employees. Much of R ussias current success in the

international market is accredited to Putins leadership of the country. [Source:

www.russiaprofile.org]

Inflation has remained a serious issue for R ussia since the collapse of the iron curtain as the

newly elected government failed to contain the exponential growth in prices. B etween 1999

and 2007 inflation was kept below the forecasts only twice, and in 2007 inflation exceeded

that of 2006, continuing the upward trend into the beginning of 2008.

There is also a growing gap between the rich and poor in R ussia. B etween 2000 and

2007 the incomes of the rich grew from about 14 times to 16 times larger than the incomes of

the poor. This can be attributed to the fact that R ussia maintains a high power distance

according to the Hofstede scale thus meaning that the wealth of the country has a low

distribution. These are the two main difficulties that have constantly affected the economy of

R ussia since 1990.

In regards to external economics, The European Union and R ussia have a very strong

trade relationship. B ilateral trade and investments continue to grow rapidly between the two

powers. R ussia is one of the EU 's key trading partners and trade between the two economies

showed steep growth rates up until mid 2008, the fall off thereafter can be attributed to the

collapse in world oil prices. The EU is by far R ussia's main trading partner, accounting for

over 50% of its international trade turnover in 2008. It is also by far the most important

investor available to R ussia. EU exports to R ussia are many from manufactured goods and

food to machinery. Imports from R ussia are primarily energy, raw materials and fuels.

However this trading relationship is not without its problems in January 2006 R ussia

suddenly cut off gas being piped through Ukraine into Europe over allegations of the Ukraine

failing to pay for usage as well as illegally siphoning off some of the supply. Since then,

trading between the two countries has been tense as R ussia maintains a strangle hold on the

majority of heating gas for Eastern Europe. [ Source: E U t rade c ommi ss ion]

The past decade has been one of growth for the R ussian economy as well as one of

stabilisation under the Putin administration. The recovery from the fall of the Soviet Union in

the 1990s is practically complete leaving room for more investment to be made in advancing


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the position of R ussia within the global economy. Along with the increased demand for

energy and a consumer driven market within the EU , R ussia maintains a strong market for its

sale of resources along with an opportunity to receive additional investment. All these factors

indicate continued strengthening of the R ussian economy.

Social St ru ct ure in R uss ia

During the communist rule there was a clear division between the rich and poor despite the

communist ideal of equality for all. Social stratification prevailed. The nomenklatura

consisted of members of the CPSU , the Communist Party of the Soviet Union; government

officials, their families and associates. They lived mainly in Moscow from where they

controlled R ussia's wealth and led extravagant lifestyles. ( count r y- st ud ies.c om) The other

level in the social stratification consisted of average civilians who worked in the factories and

government run businesses in return for a meagre existence.

Following the fall of communism and the emergence of the capitalist market people

hoped for a change in this social structure. However, although the nomenklatura was

disbanded, the gap between the rich and poor continued to grow. State owned lands, factories

and businesses were privatised and handed over to those who had been members of the

nomenklatura. These favourable transfers of wealth to the oligarchs only served to widen

the gap in wealth and it increased the feelings of hardship. ( Ca pit a li sm Ru ss ian -S t yl e,

Gu st a f son )

The oligarchs are R ussian billionaires who reside mainly in Moscow and control

companies in highly profitable R ussian industries such as coal and gas. R oman A bramovich,

owner of Chelsea FC is an example of an oligarch and a close friend of Vladimir Putin. He

owns numerous coal mines across R ussia. Such oligarchs have a huge disposable income and

spend millions each year on luxury items including western cars, yachts, foreign properties,

designer clothes, jewellery etc. An international business that wishes to target its products at

the high end, luxury market should therefore set up the retail department of their business in

Moscow.

It is interesting to note the difference in social status between that of western countries

and that of R ussia. In western countries higher status is given to the educated, professional

workforce. However in R ussia, economists, accountants and clerical workers are generally


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women. This sector is regarded as less important than that of manual workers such as miners

and shipbuilders. Manual workers are viewed in R ussia as the backbone of the economy and

are held in higher regard. Primarily, social status is determined by wealth, not education.

Secondary to this status comes skilled manual workers, followed by educated professionals

and finally, at the bottom layer are agricultural labourers. ( Source: H ar vard E d uca tiona l Pa pers )

Socia l Pro bl ems in R uss ia

As R ussia made the transition to a capitalist economy in the 1990s, serious social problems

developed throughout the nation. These problems include: unemployment, alcoholism, illicit

drug use and human trafficking. ( C IA Webs it e )

Unemployment in R ussia today lies at roughly 9.2% of the population. ( W or l d

Socia li st Webs it e ) The problem has been magnified over the past number of years with the

downturn in the global economy. However the problem existed even before the recession. It

is due to the failure of the government to stimulate the creation of jobs after vast

redundancies by factory and business owners in the 1990s. International companies should

view the current unemployment in R ussia as a potential opportunity to set up a manufacturing

business. They would have access to a huge labour force seeking employment. R ussian

workers are known to be extremely hard working and willing to work in poor working

conditions in return for pay. ( The Te l e g ra ph, UK webs it e ) This willingness should not be

abused by international firms; moreover this enthusiasm could be harnessed to create a

dedicated workforce.

Alcohol, in particular vodka, has played a major role in the countries cultural history.

It is consumed openly as part of the R ussian lifestyle, even as part of business meetings.

However, there has been a significant increase in the cases of alcoholism in line with an

increase in unemployment. At the end of last year President Medvedev launched a campaign

to tackle the escalating problem. (N ew sweeks E d uca tion Webs it e, ne w sweek.c om) It is

recognised that vodka is the serious culprit and that the availability of hard liquor needs to be

addressed. ( R IA N ovo sti ) In recent years, beer has become increasingly popular in R ussia.

This is a market into which international beer companies could expand. However they would

need to be very sensitive in how they market their expansion. Although they would be seizing

an incredible opportunity to attain a customer market that is transferring somewhat from


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vodka to beer, they do not want their company image to be compromised ie: if they were seen

to be fuelling alcoholism.

L anguage :

The official language of R ussia is R ussian. A pproximately 81% of the population speak

R ussian and R ussian alone. However, there are also several minority languages spoken such

as Tatar and Ukrainian.

Edu cati on :

R ussia has a very high reputation for education. According to the R ussian 2002 Census the

literacy rate for the total population was 99. 4% (99.7% for males and 99.2 % for females).

The average time spent in education (from primary to tertiary) is 14 years (14 years for males

and 15 years for females). The government spent 3.9% of GDP in 2006 on education.

Education is divided into B asic Education and Higher Education. B asic Education is

compulsory and lasts for 9 years. In the final two years students specialize. Higher education

is supplied by the state and by non-public accredited Higher Education Institutions. There are

three different levels of higher education:

1. Incomplete higher education which lasts for at least two years.

2. B asic higher level education which lasts for four years. This then leads onto the B akalavrs degree (B achelor degree).

3. Postgraduate Higher Education which may last five or six years or more after

secondary education. Students will then end up with a Magistrs (Masters) degree.

Further education again may lead to a K andidat Nauk Degree (Ph.D.) or a Doktor

Nauk degree (Professor).

B ased on research we advise international managers to be aware of the potential educated

labour market that exists.

R eligion :

15-20 % of the R ussian population are said to be practicing R ussian Orthodox. A large

segment of the R ussian population is made up of non-practicing believers and non-believers.

This is as a result of the religious persecution that was undertaken throughout the Soviet era.

The second largest religious group in R ussia is made up of Muslims and counts for


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approximately 10-15% of the population. Western companies setting up in R ussia will need

to consider the factors that may affect them if they set up in a predominately Muslim area

such as Volga- Urals or the North Caucasus.

Islamic beliefs differ to Christian beliefs when it comes to business. Muslims can

earn a profit once it does not exploit other people and once it is earned fairly. Muslims also consider it a sin to accept interest payments. It is important that international managers

partaking in business within R ussia respect the religious views of the Muslim people with

whom they may be working.

Par t II: Ho f stede s D im ens ionsCulture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best

and often a disaster. Prof. Geert Hofstede, Emeritus Professor, Maastricht University (geert-

hofstede.com).

Geert Hofstede is a famous Dutch born researcher, who has analyzed over 70 countries in his

work which includes data gathered from more than 116,000 respondents. He has come up

with four dimensions to analyze and understand the behaviour and cultural values of nations.

( L ut hans and D oh:104 ) These dimensions are: power distance, masculinity, individualism,

and uncertainty avoidance.

Here we will discuss how each of these dimensions applies to R ussian culture and its

influence on business. There are the minority of people, the oligarchs, living in the cities who

enjoy a lavish lifestyle. Their culture is influenced by money, material items and corruption.

The culture that we will discuss here is the culture of the average R ussian citizen.

Ind ividua lism vs. C ollecti vism

Individualism can be defined as the tendency of people to look after themselves and their

immediate family only. ( L ut hans and D oh:.105 ) In individualistic societies, the relationship

between the individual and the community tends not to be very strong; the individuals own

and relatives well being is the most important. Individualism is seen as selfish in some

countries and western societies are associated with this concept. Technology and progression

encourages the concept of individualism.

Collectivism on the other hand is the opposite. It is defined as the tendency of people

to belong to groups or collectives and to look after each other in exchange of loyalty

( L ut hans and D oh: 105 ). In a collective society children are raised so as to develop very


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strong common senses and believe that the most important thing is the well being of the

entire community. The R ussian society scored high on collectivist dimensions by Hofstede.

They have a very strong national pride.

Hofstede found that wealthier nations tend to be more individualistic, while poorer

countries tend to score higher on collectivism. R ussians believe that by being wealthier or more successful than someone else is only possible at the expense of the weaker and less

fortunate. Individual success in R ussia is viewed negatively by the society as a whole. This

cultural opinion has been supported by the actions of the R ussian government when they gave

businesses and lands to government ministers and family members following the fall of

communism. Even those in R ussia who achieve wealth as a result of hard work are viewed

with envy and distrust.

International companies operating in R ussia need to take this view of R ussian

citizens into account. Their goal in setting up a business in R ussia in the first place is to make

profits. However it is important for a business to be accepted by the community in which it

operates and to be seen in a good light when marketing products within R ussia. We believe

that international companies can address this distrust by investing a proportion of its retained

profits in the community. For example; a company could help the lives of orphans in their

area by donating money to build a playground in a local orphanage. Multi-national companies

can generate a good image by supporting the R ussian communities in which it operates.

Organizations are viewed by R ussians more as social systems than functional systems.

In a business they value friendship and relationships when discussing business contracts.

Therefore it is vital for international businesspeople to form lasting relationships with their

R ussian counterparts. We discuss this in greater detail in Part III.

R esearch of Fey (1999) has shown that R ussian people respect group work and highly

value group loyalty. B elonging to a team offers protection for workers as no one stands out

from the crowd. The management of a company is based on collective leadership, which

means the collective leadership consists of a group of people who make a decision by

majority. Its a tradition that a debate goes until a common agreement is reached. When they

agree on a decision, then all the members of the group will perform that task with

responsibility and with full commitment. (V l ach out sico s:22 -23 ) As a result, international

businesses should recognise that accountability for decisions made in their operations in

R ussia will be blurred as managers tend to hide behind collective decisions.

Unilever recognised that group loyalty is very important in R ussia and so they

developed a system how to make use of this collectivistic cultural trait of R ussians. They can


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do that by motivating the R ussians managers, and because they know that R ussians value

equality and equity, Unilever knows that they can push managers to give up their own

individual interests. Consequently Unilever is able to target specific groups by the innovative

efforts of R ussian collectivist behaviour and the company. ( Beek:12 )

Mas culinit y vs . Femi ninit y

Masculinity refers to those cultural traits that value success, money and material items.

Individuals are encouraged to achieve high goals, independence and power and to earn

recognition. A masculine society is male dominated. An example of this would be Germanic

countries who score high on this scale.

Femininity on the other hand values family, caring for others and for the community. In

feminine societies people value their quality of life and helping others. Money is not that

great of an importance and it is merely a means for living. People within these societies seek

agreement, harmony and feel empathy for one another and those who are less fortunate.

One would expect R ussia to belong to the masculine dimension, since R ussia was a

command nation during communist political oppression. However, when Hofstede analyzed

R ussia he discovered that it actually scored higher on the feminine index. This can be

explained by R ussias history. R ussia was governed by a feudalistic system for centuries and

was then followed by 60 years of dictatorship. Therefore it was very difficult for the R ussian

people to develop any sense of creativity or entrepreneurship. R esearch carried out by

B ollinger ( 1994 ) found that R ussia is very similar to the Scandinavian countries, which are

traditionally feminine in structure. He suggests that centuries of serfdom followed by

Communist dictatorship have prevented its population from developing a sense of initiative.

Secondly, R ussia has gone through many wars which resulted in women raising their children

alone making them feel independent. Since they had so many new roles to fulfil by

themselves they felt more equal to men.

Power D istan ce Index ( PDI):

In the Geert Hofstede analysis of a culture, power distance is used to measure how members

of organisations interact with each other in regards to the distribution of authority. In other

words it is a measure of inequality and suggests that this is endorsed not only by its leaders

but its followers as well. All societies are unequal but some are more unequal than others and

this measurement is concerned with obtaining these values. In countries with a large power

distance such as R ussia, individuals are tolerant of having dominant figures conveying orders.


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However in a low power distance country like Ireland individuals interact with one another

more as equals and expect democratic treatment. People in high power distance societies

express positive emotions to superiors and negative ones to subordinates. Having a PDI of 95

R ussia is considered to have a large power distance. A lot of this can be attributed to R ussias

very large population. Thus, Sma ll v s. L ar g e P ower D i st ance does not measure or attempt to measure a culture's objective, "real " power distribution, but rather the way people perceive

power differences. ( H o f st ede Webs it e )

A prime example of this high power distance in R ussian society was seen in the state

owned oil pipeline company Transneft. This company was exposed as corrupt, November

2010, by a minority shareholder, Alexei Navalny, who leaked sources on the internet as to the

white collar crime running rampant within operations. He produced claims that over $4

billion of state funds were being embezzled, naming prominent members of R ussian society

who were to blame. However just hours after Navalnys post and 6,000 comments later, the

government officially congratulated the company on the completion of its latest pipeline. To

date there has still been no action taken against the heads of the company and the government

has demonstrated officially that they back Transneft. [www.russiaprofile.org]

International businesses can learn a lot from this example. Control comes primarily

from the R ussian government who are corrupt. However their word is accepted above the

truth in all cases due to the cultural factor of high power distance. International businesses

should remember this. In order to succeed they need to have the cooperation and support of

the R ussian government.

Uncer t a inty Avoidan ce Index ( UAI): 0

A measure of how much individuals of a society are able to tolerate uncertainty as well as a

societys attitude towards to change. Countries with high uncertainty avoidance prefer to

enforce strict laws, rules and security measures. Thus as a result minimises the chances of

unstructured situations arising in day to day life, this makes people more motivated

emotionally as they poses a more nervous approach to conducting themselves. Unstructured

situations are those that are unknown or surprising when compares to the usual. R ussia scores

high on the uncertainty avoidance scale with 90 points, this implies that as a whole people in

R ussians dont like to venture out from the norm of day to day living, preferring to obey and

conform to their environment.

Hence International businesses need to set out strict operating guidelines for their


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workers and they, as a company, will be required to comply with strict governmental rules

and regulations.

(Sour ce: d igitalcomm ons .george town.edu )

(Sour ce: spreadshee ts.goog le.com)


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Par t III: Nego ti a ti on in Bus iness in R uss ia Negotiation is defined as B argaining with one or more parties for the purpose of arriving at a

solution acceptable to all. ( L ut hans D oh:204 ) If prospective companies seeking to do business in R ussia wish to be successful in their communications, it is vitally important that

they understand the R ussian culture. R ussia is a very interdependent country and has a great sense of community which

can be seen in their business practices. Their collectivist approach differentiates them from

Westerners. Egalitarianism is defined as a belief in human equality with respect to social,

political and economic affairs. ( M irr iam Webs t er ) This is a key concept in R ussian culture

and in business it leads managers to aim for equality strategies that result in mutually

beneficial deals.

T he Nego ti a ti on Pro cess

The negotiation process is the process businesses use in forming agreements and drawing up

contracts. It includes several stages: planning, interpersonal relationship building, exchanging

task-related information, persuasion and agreement

Planning involves both parties identifying what objectives they wish to achieve

through negotiations with one another. Eg: the reasons why two businesses may want to

merge etc. B efore any negotiations take place it is important that relationships are built

between the two firms. Western firms tend not to give much time to this phase. However R ussians focus heavily on the importance of good relations, so managers should not attempt

to rush this process. After relations have been created the two parties begin to work together

to decide what each party will devote to the project and what is to be gained by partaking in a

specific contract. This is the transfer of task-related information. Persuasion and agreement

follow this stage. Here managers meet, possibly on several different occasions to create an

attractive agreement. ( L ut hans D oh:207 )

C ult ura l Diff eren ces Aff ecti ng Nego ti a ti onsL anguage :

The first obstacle managers will face is the R ussian language. International managers should

learn the Cryllic language before travelling to R ussia. This is an understanding of written text

and is essential as it gives off a good impression to potential business partners if their foreign

counterpart is knowledgeable in the language, both written and spoken.


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In R ussia physical contact in public is common as they are a very demonstrative

nation. Hugs, kisses on the cheek and other similar gestures are frequently seen. R ussians

stand quite close when they talk which may make people from other cultures feel

uncomfortable. Certain gestures which may be acceptable in western countries are

considered rude or offensive in R ussia. For example the ok gesture is considered impolite. International managers need to be aware that in business meetings the first greeting

may not come across too friendly. Handshakes are always appropriate when coming and

going and one should remove their gloves before shaking hands.

Sm all Talk:

Small talk is important before and after business meetings in R ussia. R ussians like to develop

relations; hence it is acceptable for westerners to discuss their homes and families. However

it is extremely important never to offer a compliment publicly. R ussians view compliments

with suspicion and it may cause jealousy. ( communica id.c om)

Em otions :

R ussians frequently use emotions in business meetings. They often test the international

managers by watching their reactions to an emotional outburst. Managers should not be

alarmed. Traditionally R ussians do not hold back their emotions when conducting business.

( g l oba l ne g otia tions.c om)

Alc oho l:

Often a drink of vodka may be included in the business agreement. It is a positive gesture to

accept this drink. After the business meeting it is commonplace for business parties to retire

to a bar for further drinks. International managers should curtail their consumption as this is

an important opportunity to further improve the relationship.

Nego ti a ti on Tactic s

Managers use several negotiation tactics when drawing up contracts with their international

counterparts. Such tactics include: time limits, location and buyer-seller relations.

Tim e Limit s

Time limits are an important negotiation tactic when one party is under a time constraint.

( L ut hans.D oh:210 )

In general, R ussians are known for taking their time in negotiating business deals.


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R ussians also understand that westerners tend to be under tight time-constraints. They know

that westerners like to have fixed dates for meetings to discuss and finalise agreements.

It is important that westerners realise that R ussians are very shrewd negotiators. They

will use western impatience to gain the upper hand. In the past they have been known to

delay a business meeting for several days after the other business party has arrived in R ussia. They often put off making a decision or agreeing on a meeting time. B y doing this they can

force their business counterparts into making further concessions in order to finalise the deal.

Therefore it is important for multinational managers to take their time in finalising deals.

Firms should get to know their R ussian counterparts before signing any agreement.

All too often in the past western firms have rushed into agreements, eager to please their

R ussian counterparts. In general these agreements fail with the western firm losing.

It is also important for international managers to be on time for meetings. However

they should not expect their R ussian counterparts to do the same and should not expect an

apology

Negotiators may use pressure techniques such as applying time pressure or making

final offers. Final offers are almost never final and can be made more than once. If the

other side are aware that you are short on time in the negotiating process they will use this to

their advantage by increasing the demand to make compromises. They may also ask for

concessions at the last minute of negotiations. Time pressure generally does not work on the

R ussians as they are so patient. R ussians do not like to be rushed so managers should be

prepared for the negotiation process to last for a long period of time.

Locati on

International managers should arrange to meet their R ussian counterparts in a neutral

territory, generally in a country halfway between the two territories. This is a key tactic used

as neither side will want to pay for its managers travelling expenses and have no result to

show for it. Therefore meeting in a foreign location encourages both parties to negotiate and

to reach an agreement. However, R ussian managers may insist the meeting be held in R ussia.

If this is the case, then the travelling managers should bring their own R ussian interpreter

with them.

Buyer -Seller R elati ons

This describes how both parties act, even after the finalisation of an agreement.

R ussian managers like to develop lasting relationships with their international counterparts.

They develop such relationships over a long period of time so one should not expect them to


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warm to someone new immediately. Therefore having connections can be very useful to

business strategies. This is because if you introduce a colleague after you have developed a

relationship they will be more likely to accept and trust them quickly. When meeting a

prospective business partner for the first time it is better to be formal to try and develop trust

with them. In a business meeting the speakers will go in order of importance starting with the head of the organisation. ( bu siness -in-r u ss ia.h t ml )

Bus iness C ards

B usiness cards are essential in R ussian business. Unlike in Ireland it is very important

that you take a few moments to read a business card you have been handed. Although it is not

required, R ussian businessmen and women appreciate it if you have one side of your business

card translated into R ussian using the Cyrillic alphabet and hand it to them with this side

facing towards them. You should include your university degrees on your card. Giving your

business card in a professional manner will give off a good first impression as it is one of the

first things you do and thus will aid with your communication and negotiation.

B usiness Cards are also viewed as a method for maintaining communication and a

method to build on an existing relationship. ( communica id.c om)

Barga ining in Nego tia ti on

B argaining is a major element of negotiating in R ussia. It is almost expected when

going into business meetings. As previously mentioned, R ussians are very patient. This is

used in their bargaining along with persistence and being stubborn with their deal making. It

will be hard work to acquire compromises from them due to this. It can be seen as a sign of

weakness to offer concessions and so they may refuse to offer them unless you offer adequate

compromises or are very firm on your decision. They will often offer a small compromise to

encourage you to offer a larger one. It is recommended to stay strong during negotiations as

prices may change by up to 4 0% from beginning to end. The negotiation process is very long

and so it is not advised to offer concessions too early on as they will be expecting more

further along in the process.

R ussians may use misleading tricks such as lying and sending untrue non-verbal

messages to imply disinterest in the deal to get advantages in the bargaining process. These

methods should not be taken personally as they are common practice during negotiations.

When dealing with negotiators they may be forceful and unpleasant. It is common at

the start of the negotiation process for them to get angry and make threats. They may also try


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to make you feel guilty or to catch you by surprise through asking very direct questions or

bringing back up subjects that were already agreed upon.

R ussians like to develop relationships over a long period of time so you should not

expect them to warm to you immediately. Therefore having connections can be very useful to

business strategies. However if you introduce a colleague after you have developed a relationship they will more likely accept and trust them quickly. When meeting a prospective

business partner for the first time it is better to be formal to try to develop trust with them.

Finally, we believe corruption is a major influence on the decisions of international firms as

to whether or not they should set up operations in R ussia. Here we will discuss the impact of

bribery and blat on business negotiations.

C orrup ti on in Nego ti a ti ons in R uss ia

In the 2010 corruption perception ranking carried out by Transparency International, R ussia

ranked 154 th out of a possible 178, behind countries such as Myanmar, Iraq and Afghanistan

and was included in the highly corrupt category. ( CP I Re por t f or Trans parenc y I nt erna tiona l )

B ribery and B lat are commonplace within R ussian business and society. B ribery is

described as the use of public office for private gain and blat has been described as the

informal exchange of favours. Internationally both bribery and blat are viewed as forms of

corruption. However they are part of everyday life and business in R ussia. They have been

handed on from generation to generation as basically a way of life, a tradition. B ribery

requires immediate payment, almost always financial compensation for a favour. B lat on the

other hand relies on membership of a certain social network and is based on long-term

relationships. B lat is more pervasive than bribery, for it penetrates spheres where money

may not be used, either because of the ethics of personal relationships, or because the favour

is so petty or large that it cannot be repaid. ( L ovell , L edene va, R o g ache v sk ii; 2000 )

For these reasons, it is difficult for foreign companies operating in R ussia. How do

multinational corporations respond to a R ussian tradition when it is ethically immoral in their

native country? On one hand multinational corporations wish to be open to understanding and

accepting the traditions of their new partners, on the other hand they do not wish to partake in

unethical behaviour which could potentially ruin their clean company image and public

relations.


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The US G overnment has addressed this dilemma facing US firms. They have made it

illegal for US firms to accept or give bribes of any shape or form. Any companies found to be

involved in bribery in R ussia can be prosecuted under American law.

Bribery and blat are becoming really serious problems however for multinational

companies attempting to operate in R ussia. The problem is forcing international companies to

shut down and leave R ussia for good. This is having a detrimental impact on the R ussian

economy.

Eg: IKEA

IKEA stopped all investments in setting up businesses in R ussia in 2009. B efore entering

R ussia they made the decision that they would not be involved in bribery of any form. They

had planned to build stores across the country. However when setting up their first store they

needed over 300 permits and then the R ussian authorities forced them to pay $3million

toward infrastructure before they could open for business. IKEA recognised at this early stage

that it would not be possible to successfully open at competitive prices without partaking in

bribery. They attempted to arrange a meeting with the President to resolve the problem.

However they were told that it would cost them between $5million and $10million to see the

president. Subsequently IKEA decided to leave R ussia and abandon all plans for expansion

into the R ussian market. ( Deb orah S wa ll ow.com)

The other option for multinational firms is to accept that bribery is all part and parcel

of doing business in R ussia and that if they want to compete in this market they have to obey

by the rules of the game, which is to pay the bribes. One businessman, interviewed

anonymously in The N ew Y ork T imes describes how he recently set up a business in R ussia

supplying equipment for use in offices and apartments. He bribed two intermediaries to fix

government contracts. He has so far received four contracts paying between 5% and 10% in

bribes. The largest bribe he paid was $90,000. He has been successful as a result of paying

the bribes however he remained anonymous for fear of his safety.

When negotiating business with R ussian counterparts it is common practice to

exchange gifts. However these are viewed to be in conflict with US anti-bribery measures.

We advise multinational corporations not to partake in bribery or gift-exchange with R ussian

counterparts. There is too much scope for it to be perceived as bribery, unless it is something


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small with the company logo. Managers should inform their R ussian counterparts that it is

company policy for them not to partake in any form of bribery or gift-swapping which may

be perceived as bribery.

However as it is custom in R ussia, international managers must also be aware that they must take into account this cultural difference. They should acknowledge the existence

of the tradition however explain that it is company policy for them not to partake in such

actions. It is vital to show an understanding of R ussian customs so R ussian managers feel

they are entering into a business agreement with people who understand them.

C on clus ion

We can safely say that R ussia has progressed from a communist economy into a market

based one and that the society and its values are changing rapidly too. The R ussian market

has many untapped opportunities and many possibilities to invest in. However foreign

investors have to be very careful when conducting business within R ussia. R ussian people

prefer friendship and personal engagement when conducting business; this means the

formalities experienced in the western world are not as potent when dealing in R ussia.

U pon reviewing the country it is clear that locals have the upper hand when it comes

to making transactions on a corporate level. Using R ussian people as representatives of the

international business within R ussia will avoid misunderstanding and misperception, as well

as distrust and anxiety. An organization has to be prepared to undertake some risks, and they

should not count on the R ussian governments support. B efore investing and going into the

R ussian market, the company should have a lot of research on the market segment they wish

to operate in.

McK insey, a management consulting firm, is a prime example of a successful business

entering the R ussian market. McK insey did not change their standards relating to their target

audience, pricing and quality of work but they did take the countrys culture into account. It

implemented high power concentration (mentioned in section II) with the CEO s of the

companies and realised the need for formal procedures in dealing with these CEO s (to deal

with the high levels of secrecy and the widespread office politics). McK insey hired many

R ussian-speaking consultants which is something we would highly recommend due to the

language barriers and the fact that they would be used to doing business in R ussia. We feel


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that one of the main reasons for McK inseys success in R ussia is that they kept their own

goals and core operations but still took the R ussian culture into consideration.

Citibank is yet another example of a business success in R ussia. They, like McK insey,

took the R ussian culture and customs into consideration for tasks such as advertisement and structuring products but did not lose sight of the whole companys core business model that it

uses in all its operations worldwide.

We strongly believe that R ussia is a good place for a business to invest, however

industries must be acutely aware of the problems of corruption (such as the bribery seen in

the IKEA case) and employ native R ussians to help them understand the language and

business in R ussia. To this day there remain many markets, yet to be discovered, hidden

within R ussia and for this reason we feel it is viable for businesses to take some risk in order to expose these segments.

During the course of this project we have examined many aspects of R ussia be it a history

of its origins or a study of its social structure. Throughout these it has been made clear that

several large differences exist within the business world. In an ever rapidly changing society

such as R ussia it is key to have people on the ground in order to accurately gauge and react to

issues that occur. Such a strategic move would also appeal to the R ussian sense of

relationship when conducting business, thus further enhancing ones chances of success when

operating within its markets. We believe the outlook for R ussia is very bright with its vast

supplies of natural resources and its improving international relations. In conclusion we

believe that as a country trusted with the prospect of hosting the 2018 World Cup,

international businesses should view R ussia as a nation in which they should invest.


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Bibli ography

http://www.russia-ukraine-travel.com/business-in-russia.html

http://www.globalnegotiationresources.com/cou/ R ussia.pdfhttp://www.communicaid.com/cro

ss-cultural-training/culture-for-business-and-management/doing-business-in/ R ussian-

business-and-social-culture.php

http://www.transparency.org/policy_research/surveys_indices/cpi/20 10/results i

http://www.fas.org/irp/world/para/docs/ruscrime.htm

An A ssess men t o f Pres iden t P utin's Ten ure and t he O utl ook f or Hi s Success or . Carnegie

Endowment For International Peace. Arbatov, Alexei. March 3, 2008. retrieved 28, 10, 2010.

http://www.carnegieendowment.org/events/?fa=event Detail&id= 1099&zoom_highlight=The

+future+of+ R ussian+politics

Bio g ra phica l in f or ma tion ab out Geer t H o f st ede . Hofstede, Geert and Hofstede, Gert Jan.

R etrieved 25, 10, 2010

http://www.geerthofstede.nl/geert.aspx

B RIC G eert Hofstede Scores. S preadsheets.google.com. R etrieved 20, 11 , 2010.

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C ult ure . Hofstede, Geert and Hofstede, Gert Jan.

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http://www.geerthofstede.nl/culture.aspx

http://www.merriam-webster.com/dictionary/egalitarianism

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management/doing-business-in/ R ussian-business-and-social-culture.php

http://www.russia-ukraine-travel.com/business-in-russia.html

http://www.globalnegotiationresources.com/cou/ R ussia.pdf

http://www.east-x-net.dk/oestmag/artikler/working_with_partners.htm

http://www.politika.su/e/fs/gd.html

http://www.russiaprofile.org/resources/political/

http://www.russiaprofile.org/resources/whoiswho/alphabet/m/medvedev.wbp


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http://www.carnegieendowment.org/events/?fa=event Detail&id=93 4

http://www.carnegieendowment.org/events/?fa=event Detail&id= 1099&zoom_highlight=The

+future+of+ R ussian+politics

http://www.geert-hofstede.com/

Steven Lovell, Alena Ledeneva & Andrei R ogachevskii; B ribery and B lat in R ussia; 2000 http://www.nytimes.com/200 5/08/09/world/europe/09iht-russia.html

http://www.country-studies.com/russia/social-structure.html

http://www.globalnegotiationresources.com/cou/ R ussia.pdf

http://www.wsws.org/articles/20 10/feb20 10/russ-f20.shtml

http://www.deborahswallow.com/20 10/05/24 /russia-bribery-corruption-the-high-price-of- bad-business/

https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html

R ussian Collectivism: An Invisible Fist in the Transformation Process of R ussia; Dr.

Charalambos B lachoutsicos

Dare to Embrace Differences: Leadership Competencies for Unilever; Maarten-van B eek

Thane Gustafson, Capitalism R ussian- Style, Cambridge University Press


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Proje ct C he ckli st

We want to ensure that the students adhere to a certain format. In consequence, please enclose

a completed Checklist addressing the following issues:

Ques ti ons Yes NoDoes the Title of the Project R elate to Cross Cultural Management? X

Have all sections of the project been considered and developed? X

Is there an introduction and conclusion to the project? X

Is there a Table of Contents? X

Is there a reference section at the end of the project and are sources referenced in the text

X

Have you checked your reference section against the Harvard style system referred to in Online Classes

X

Have you checked the file Project Editing Details R equirements in Online Classes?

X

This checklist has to be signed by all members of the group.

One checklist per project to be submitted with project.

Group Na mes & Signa tures :

Deirdre Murphy _______________________

K inga Harsanyi _______________________

Tadhg Murphy _______________________

Evanna Murphy _______________________

group 12 ccm project- russia

Documents