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The Iron Curtain falls. Do Non-Resident Companies Have Any Prospects in the Russian market?

Russia constantly faces political challenges with almost every high-profile event reflected in the attitudes of foreign companies and investors toward the Russian market. Because of sanctions, ruble volatility, and oil wars, Russia regularly falls back in the ranking of potentially interesting markets, often on a par with Cuba, North Korea, and Iran. But then, with a thawing of international relations, it shoots upward again and appears on the radar along with the emerging markets of Asia, Latin America, and Africa. And so on, the swings do not stop. 

A Game of Red Light, Green Light

Foreign countries' views on doing business with Russia changed for the first time since the late 90s after Crimea situation.

Large developing companies such as Amazon, Booking.com, Facebook, etc, while planning to scale up in the Russian market faced the influence of politics and refused to get involved with Russia. After a few years, business interests took over. 

Another major event that alienated foreign companies from the Russian market was the adoption of a law requiring foreign Internet companies to store personal data of Russians only on servers located in Russia. As a result, foreign companies selling their services in Russia including airline tickets, consumer goods, and social networks, had to either set up their servers inside the country or to require  the international data centers to do so.

In 2016, LinkedIn was accused of violating data storage rules and was blocked by Russian authorities. The social network responded by refusing to enter the Russian market separately, stating that whoever needs it will continue to use the company's services via VPN.

GDPR, a regulation on the protection of personal data of EU citizens, had not been adopted yet at that time. Lacking the international practice in this area non-residents were deterred from pursuing business in Russia. To build the entire infrastructure and own data storages in another country within a short period of time was simply not economically reasonable.

A short period of "thawing" in sanctions against Russia was not enough to rehabilitate relations between foreign businesses and the local market. With the new sanctions imposed later, foreign companies gave up the attempts to puzzle out the restrictions.  Facebook, Asos, iHerb, and Tencent's equation was simple: sanctions imposed on Russia push the local market out of the priority list.

Businesses with a strong customer base in Russia could switch for a choice of markets in India, China, or Brazil. Russian market makes the top-10 in terms of revenue and number of customers only for a few globally operating companies. And it still drops to the bottom lines regularly with any fluctuations in the ruble currency.

Another newest shock for the market was the limitations that came from the Central Bank of Russia for some of payment services -- those working with non-residents. Because of the new restrictions, they were forced to temporarily stop settlements with foreign companies, which undoubtedly had a bad effect on the Russian market and led to its further deprioritization from the perspective of international companies. 

The biggest payment aggregators, which serve international giants like Booking.com and AirBnB, had just started working with local partners and banks in Russia, had built up processes, and made plans for further partnership and development, when everything broke down. As a result, they came to the conclusion that the Russian market is still unstable and unpredictable, and there is no point in spending resources on it in the near future. 

When threats become opportunities 

Even despite this environment, foreign businesses are "leaking" into Russia through all these regulatory filters. For example, representatives of the global online games industry have never been afraid of such difficulties, as the Russian video games and eSports market ranks 11th in the world and 5th in Europe in terms of volume, and the audience of Russian gamers is about 50 million people. Products are adapted for Russia in the Russian language, which, incidentally, is one of the three most popular languages on Steam, the leading global gaming platform. 

The e-commerce industry is also developing steadily, in spite of everything, primarily thanks to the Chinese flagships such as Alibaba. Also some EU companies, like iHerb decided to work in Russia and are successfully building thei user audience and cooperating with the local partners. Global classifieds services, such as AirBnB, also actively keep on developing their business locally.

All these companies need stable payment systems and, ideally, local payment partners.

Now the Russian banks and payment intermediaries have to to explain to international partners that it is still possible to work in Russia. Yes, the rules of the game have changed and become more specific, but, at the same time, quite feasible.

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The market is not covered by an "iron curtain" from the foreign companies, but rather the rules of non-resident companies working on the Russian market become transparent. What is important for a non-resident company to know to work in Russia: 

-- a foreign company must have a local partner with a banking license in Russia;

-- It is desirable that the Russian partner is not on the list of international sanctions. The sanctions themselves do not damage business relations, but make settlements through international correspondent banks sometimes difficult;

-- the company must register for tax purposes with the Federal Tax Service as a foreign company making profits in Russia (a local partner can help to register, draw up documents and even pay special taxes).

For many foreign companies these rules are acceptable and they are even willing to open representative offices in Russia, even though it is not required. The list of non-residents officially operating in Russia under local law is constantly expanding - it already includes about 2,000 companies. 

Conclusions

Global practice shows that the trend of protecting country’s digital borders from international companies compensates for the previous trend of globalization. Deglobalization, protectionism - this is what the post-pandemic era of the world economy will be built on. 

Before countries could not keep up with the rapid expansion of the Internet, could not develop laws and technologies for data protection and transparency of transactions. In all spheres - from households to global markets, there were and are loopholes and gray schemes. But gradually people begin to get used to the fact that you have to pay to download music, movies and books, that if you work in another country, you have to pay taxes there, even for the provision of electronic services. 

The times when a company could open a head office in Ireland and a profit center in the Seychelles and not pay taxes anywhere by optimizing the corporate structure - these times are gone. The regulators in all the these countries around the globe are fighting against such schemes. find it simply not unprofitable.In the U.S., for example, a two-tier system of taxation - a non-resident company must pay federal tax and, separately, pay taxes at the level of each state. EU countries are also beginning to protect their digital frontiers from foreign IT companies. 

The Russian market is no different in this respect. As for the foreign policy factors, they will not be an obstacle either, if we are talking about growing industries, potentially interesting for foreign investors, growing industries. And in future, taxes will no longer be a deterrent for non-residents, because they will be the norm for most developed countries. 

 

 

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