Doing Business in Russia: German Companies Positive About the Future

According to a survey on the Russian business climate carried out by the German-Russian Chamber of Commerce in September 2013, two-thirds of German companies working in Russia remain affected by trade restrictions despite Russia’s accession to the W.T.O. Even though import duties have fallen from between 7.8 and 10 percent, the Russian government introduced tariff and non-tariff trade barriers to protect domestic industry immediately after the ratification of the accession document, disappointing German firms who had looked forward to easier access to the Russian market. In addition to the more than two-thirds of the companies that said they faced barriers to trade, over 90 percent of respondents said that in the 12 months since Russia joined the W.T.O., nothing had changed. Despite this, however, the vast majority of German companies sees significant potential for growth in trade in the medium term. After all, Russia’s market is worth 80 billion euros and is particularly attractive for German small and medium-sized enterprises (SMEs).

Particularly troublesome to German companies, however, is the level of the duties. Protectionist measures impact the automotive, healthcare, agricultural and food industries in particular, with car manufacturers suffering most. They have to pay a so-called recycling fee on imported cars which compensates in full the amount saved by the lower import duties and in some cases even leads to a price increase — a situation that prompted the European Union to lodge a complaint against Russia with the W.T.O. Restrictions on imported agricultural machinery, agricultural products, food and healthcare products face similarly large restrictions.

There are a wide variety of reasons for these problems, ranging from the certificates, tests and approvals that only have to be provided through regulations that have not yet been passed to uncertainties when calculating the proportion of local production. German producers and importers are particularly affected by the preference for local suppliers in Russian legislation. “Russian companies can obtain subsidies for agricultural technology, but German companies are excluded, even though they use local technology and Russian on-site staff,” said Bernd Hones, Russia correspondent of Germany Trade & Invest. The simultaneous harmonization of rules governing the Customs Union between Russia, Belarus and Kazakhstan is delaying things yet further.

It should hardly be surprising, then, that half of the companies in the survey answered “yes” on the question of whether the W.T.O. had a direct impact on their business and nearly one-third of the respondents said that trade restrictions also affected their decision whether or not to invest in Russia. Nevertheless, nearly 60 percent of companies said Russia’s accession to the W.T.O. had no effect on whether to invest or not.

“We rather understand that a smoother transition to global markets should be facilitated for some individual sectors in Russia,” said Rainer Seele, President of the German-Russian Chamber of Commerce. “But now, the main point is to create equal opportunities for all market participants and to ensure transparent rules and tenders.”

Jürgen Friedrich, C.E.O. of Germany Trade & Invest, said that the trade restrictions put in place by the Russian government were part of a larger trend. “Globally, we are seeing an increase in protectionist efforts and Russia is just one example,” Friedrich said. “In the long run, however, trade barriers hurt the development of every economy, hinder competitiveness and lead to rising prices. Russia therefore has to start implementing reforms urgently in order to survive in the world market.”

In view of its weak growth at the moment, the Russian economy is very dependent on foreign investment, but this in turn depends on greater market confidence.

The German-Russian Chamber of Commerce has therefore called for a series of measures Russia should take. In particular, the trade body asks that Russia comply with its W.T.O. obligations; harmonize W.T.O. rules with the provisions of the Customs Union; provide equal opportunities for all market participants and equal treatment in bidding on tenders; introduce clear, understandable and universal rules for product licensing and certification and reduce significantly their procedures; ensure consistent implementation of anti-trust rules and apply appropriate sanctions for violations; as well as provide more general support for and development of an innovative and capable middle class and free and liberal market access.

Despite the existing trade restrictions, however, the vast majority of German companies see good growth prospects for business in Russia. Well over 50 percent of respondents to the Chamber of Commerce survey said that in the first half of 2013 their revenues had increased, in some cases very significantly, and forecast strong growth both for the full year and in 2014. This compares with just over 10 percent that experienced a decline or expect one in the future.

The continuing economic difficulties in Europe mean that Russia is becoming increasingly important as a global market for German companies. Nearly one-quarter of the companies surveyed already ranked Russia as their most important global market, another third said it was in second or third position and another quarter ranked it between fourth and 10th place.

German companies are even more optimistic about the mid-term prospects until 2015, with nearly 90 percent of companies expecting Russia to be among their top 10 global markets. “There is no doubt that Russia’s importance for Germany’s export-oriented economy is growing steadily. We therefore consider ourselves as partners both in modernizing the Russian economy and in training a skilled and capable Russian middle class,” said Rainer Seele on the prospects for bilateral economic relations.

Clearly German companies can do little to force the changes Russia needs to make in order to comply with W.T.O. rules, but a few simple guidelines will go a long way to improving their chances of success, particularly SMEs.

Most SMEs do not have a representative office in Russia and thus leave customs clearance for their exports to the country to their local trading partner. Given this situation, the best approach is to prepare shipments together with local partners to ensure that the requisite documents are in order.

Often Russian partners commission “customs brokers” to handle the procedures, sometimes in one of the Baltic republics. This runs the risk that the German SME then receives no proof of export if the original documentation or price is changed.

SMEs and their partners should also agree beforehand on product descriptions — not least because the German custom tariff number has two digits fewer than the Russian one — and ensure that the documentation is correct. Since the description has to be in Russian, the Russian side again has to help.

In the last year or so, over 100 customs offices in greater Moscow have been closed, leading to long delays at the remaining ones, which are understaffed and underequipped. As a result, trucks can wait for days before being cleared. SMEs should therefore look to customs offices in the regions — but they need to ensure that the importer or broker is registered at the office where the goods will be cleared. Perhaps surprisingly, registration only takes three days and can be done online, so it is worth doing for multiple customs offices. Registration must, however, be completed before the goods arrive.

Ultimately, however, success is often a question of sheer common sense. SMEs often enter the Russian market without adequate preparation, so thorough research is essential on topics ranging from the country’s legal system, dispute resolution and redress to the banking system and making and receiving payments.

Ian Pryde conducted an interview in German with Michael Harms, Chairman of the German-Russian Chamber of Commerce.

Published in the Russia – Germany Supplement of The Moscow Times on 12 December 2013 and available complete with graphs on pp. 6-7 of this pdf below:

RuGer_eng_2013

 

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