The Trade and Currency of Russia

Russia has been a powerhouse in international trade for the past three decades due to its high abundance of natural resources that are essential to industrialized and developing nations. Before a nation partners with Russia for trade, it must evaluate their trade and currency to ensure they are well equipped to compete with fair wages and prices. Russia’s particular economy policy with currency and exchange rates has heavily influenced the kind of trade partners they are able to work with.

After the fall of the Soviet Union, Russia struggled with maintaining a consistent exchange rate for trade. The ruble (RUB) was heavily managed for the first two decades, until 2005 when Russia switched to a managed or “dirty” float system where the RUB was tied to a dual-currency basket, and has gradually moved closer to a free float system since then. The Bank of Russia made plans to move to a completely free floating currency by 2015 (BIS). The plans for a free floating currency were pushed forward after a rapid decrease in the RUB’s value due to falling oil prices and international sanctions placed on Russia and the currency is completely free floating as of November 2014 (Isachenkov).

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The US has had a free float system since the collapse of the Breton Woods system in 1973 (Hill 357). During the 1970’s it was virtually impossible for Russia to use a free float system because of the strong presence the government already played in the command economy. Since the fall of the Soviet Union, Russia has gradually moved towards a free float system similar to the US, but until recently lacked the necessary economic strength to completely mirror the free float system of the US.

A business working in Russia should be cautious because the value of the RUB could fluctuate depending on political or economic factors. For example, the RUB has recently dropped in value due to low oil prices that have cut in to Russia’s profits from natural gas and economic sanctions placed on Russia for aggression against the Ukraine. To hedge some of this risk when doing business, a company should settle on a forward exchange rate that is close to the 40 RUB to 1 USD rate that has been the historical average.

Russia is famous for having a vast amount of natural amount of natural resources to export, however people often overlook their manufacturing industries. Russia’s manufacturing industry mostly revolved around aerospace and weapons manufacturing (Advantour). Unfortunately for foreign businesses trying to cash in on these opportunities, the manufacturing and energy sectors remain two of Russia’s most highly controlled sectors and are almost entirely left to domestic businesses with heavy oversight by the government. 

A business looking to get in on the energy sector in Russia would be more successful offering a service to a domestic business that is already involved in the energy sector to get a reliable business partner in a mutually beneficial joint venture. Typical entries into these sectors through acquisition, greenfield projects, licensing, etc. would not be allowed by the government. One possible way to get involved would be through a joint venture with a trusted Russian business that already has close ties to the government.

Russia’s abundance of natural resources helps them command a consistent trade surplus of approximately $17 billion each year (Rapoza [1]). China has the strongest trade relationships with Russia, accounting for 8.1% of Russia’s exports and 14.85% of Russia’s imports. Germany is the second largest trading partner with 6.49% of Russia’s exports and 14.37% of Russia’s imports. After China and Germany there is no clear dominant trading partner, but Russia trades in small amounts with over 170 countries (MIT).

While China and Germany have a good portion of Russian trade, no single country has a clear majority. Russia’s breath in trading partners allows them to have a more stable economy because there will always be a wide selection of countries to trade with. The recent trouble between Russia and the Ukraine, and sanctions imposed on Russia speaks to Russia’s flexibility in their capacity to continue trading. Even when foreign relations with powerful countries are stressed Russia continues to have a substantial trade surplus.

Due to Russia’s abundance of natural resources the perfect business to set up would be a manufacturer of fracking equipment. Fracking has been in the spotlight for the past several years in the US as an industry that could offer us energy for decades to come. While the US has been getting a lot of attention for having vast amounts of natural gas reserves that can be unlocked by fracking, they still fall short to the reserves held by Russia. The US is estimated to have a total of 58 billion barrels of recoverable shale oil, while Russia has about 75 billion (Rapoza [2]). The reason Russia has fallen out of the spotlight with this energy source is they do not currently have the technology to reach the majority of their reserves. The business would build specialty equipment to allow Russian companies already involved in the energy sector to expand further by accessing natural shale reserves.

Our strategic decisions revolve around our goals and procedures for entering the Russian market. Our business’ basic strategy is internationally based. Fracking equipment is relatively standardized, so we can take equipment that is similar to what is already available in the US and use it in Russia. We will corner the market in Russia by offering technology that no one else in the region can supply, while gaining access to a market that no other manufacturers capable of competing with us can penetrate. This international strategy is an ideal place to be because there will be few if any competitors to drive down price, while the technology we use will remain predominantly standard with the exception of changing some of the training involved with production and use of equipment to adapt to the Russian language.

The business will enter the market by initially exporting their equipment to the Russian Energy Corporation “Gazprom”, which currently accounts for 74% of Russian gas output (About Gazprom). Since energy is one of the most highly regulated sectors in Russia it will be extremely difficult to enter the market unless it is done gradually. Exporting to Gazprom will allow our business to operate in Russia while remaining relatively free of the stringent oversight of the Russian Government. Because the equipment for fracking is massive and sophisticated it is important to note transportation costs will add up quickly, making manufacturing in Russia the most cost efficient option.

After selling to Gazprom for a couple of years when we have a closer relationship with their business we will attempt a joint venture. In the joint venture we will offer Gazprom joint ownership in a production facility based in Russia in order to cut down transportation costs. A joint venture will be necessary to overcome political barriers since Russia will likely not let a foreign business operate in their energy sector without a partnership with a trusted business.

Gazprom will likely not try to take our technology since they are not a manufacturing business, but our business will still “wall off” essential parts of our technology to ensure we retain our core competencies and our competitive advantages in the field (Hill 497). With a joint partnership we can use Gazprom to lobby the Russian government to ensure no other manufacturers of fracking equipment are allowed to enter the market.

Our business will initially attempt a polycentric human resources strategy in which regional managers are Russian, but key corporate personal remain US citizens. A polycentric approach offers the advantages alleviating cultural myopia, which gives us a greater chance of infiltrating the market if there are trusted Russian nationals acting as regional managers who can bargain with the Russian government (Hill 620). The main drawback of this strategy is that some Russian managers may resent the fact that they are unable to move up past their positions of regional manager, or the Russian government may not like the idea that the corporate headquarters has no Russian representation to reflect their interests. 

If a lack of Russian presence in upper management becomes a problem then we will shift to a geocentric staffing policy in which Russian’s will have a designated place in the corporate leadership to represent what is best for their country, and the ability to move into other key positions within the organization over time. The disadvantage with this strategy would be the considerable limitations placed on Russian immigrants which may vary depending on the global situation and foreign relations at any given time.

Our business has chosen these strategic and human resource decisions with the intent of retaining as much control over the business as possible, but remaining flexible to Russian demands on our organization. With energy being such a highly regulated sector, we have to be ready for the Russian government to push back with strict policies. Our best option is to gradually ease into the market by initially exporting equipment to a nationally trusted business that is already comfortable operating within regulations. 

After we have established a strong relationship with Gazprom we can try to move manufacturing to their country to take advantage of lower transportation costs and their highly skilled work force. A polycentric approach allows us the ideal mix of control and political connections, but if Russia insists on having more control of the organization we must be willing to concede some of our control in order to remain unchallenged in the region. Any perceived arrogance on our part could result in a lost business opportunity so tactfulness and mutual respect is a key part of our strategy to be successful in working within Russia.