SDA Professor of Strategic and Entrepreneurial Management
We’ve met with the Vice-rector of Kaliningrad International Business School (KIBS), Oleg Alferov, during the executive education program organized by SDA Bocconi and KIBS for Russian entrepreneurs and managers in October 2013. So when I thought of the first topic for “Doing business in…” Kaliningrad region of Russia idea emerged “naturally”: the smallest and the most European Russian region largely unknown to Italian and European companies who concentrate their attention on Moscow and Saint Petersburg has a unique and a “niche” combination of “Russian-ness” and “European-ness”.
The idea of this conversation, as of others that I hope will follow on other foreign regions of potential interest for Italian companies, is to start filling the informational voids on what we call the “liability of foreignness”, or “costs” or “disadvantages” of doing business abroad. Firms’ competitive advantages on foreign markets can be strongly threatened by ignorance of local cultural, legislative and economic context. As most of studies treat cultural, administrative, geographic and economic or “CAGE” distances on a country level, I strongly believe that the interregional differences within any single country matter the most. So let us talk about “Doing business in Kaliningrad”, rather than a generic “doing business in Russia”.
Oleg, Kaliningrad region is small and unique. It is the outpost of Russia in Europe, completely isolated from “big Russia” by Lithuania and Bielorussia, with all “pro”s and “con”s for local entrepreneurs and local market.
Kaliningrad city is definitely very close to Europe: 40 km from Poland, 80 km from Lithuania. Sometimes I organize bike trips with my son to Poland just to drink a cup of coffee. Kaliningrad customers and entrepreneurs learn a lot from the closeness to the rest of Europe and our local business owners and managers absorb a lot of best practices from the Western companies. On the other hand, Russian Federal Government understands very well the logistic and bureaucratic disadvantages faced by Kaliningrad firms: our products have to cross at least two borders to reach “big Russia” market. So until 2016 the Special Economic Zone regulation contributed and will contribute to the creation of import-substituting industrial production: components arriving to Kaliningrad and not imposed by VAT and custom duties were used by a number of assembly plants, mainly SMEs, in particular in the electronics industry. At some point, circa half of consumer electronics assembled in Russia was coming from Kaliningrad region. Then, finished products were sold in Kaliningrad and in the rest of Russia as goods of Russian origin. The new legislation active since 2006 and Russia’s access to WTO changed the business context: Kaliningrad aims to attract large foreign investors by favourable fiscal and simplified bureaucratic rules.
Which industries are the most developed in Kaliningrad now, in 2013?
Large industrial plants related to fishery and shipyards inherited from Germany (Kaliningrad is former Königsberg) and further developed during the Soviet Union had been almost completely dismantled during the economic reforms of 1990s. Instead, thanks to the economic growth under the SEZ legislation Kaliningrad developed an industrial structure related in important part on SMEs, in fact the ratio of SMEs is one of the largest in Russia and is comparable to Moscow and Saint Petersburg. The seven largest companies account only for 20% of the regional GDP. Many medium and small size companies work in services: trade, sales and maintenance of passenger cars, tourism and other B2C services. Among local ventures operating also outside of Kaliningrad region, in “big Russia”, we may mention some local retailers, as “Victoria” or “Vester”, a DYI chain “Baucenter”, a frozen food producer Produkty Pitaniya, one of the largest car assembling plants in Russia “Avtotor”, agricultural group “Sodrugestvo”.
Apart of consumer electronics, are there other industrial clusters to be mentioned?
I should certainly say a few words about Kaliningrad furniture cluster, branded in the rest of Russia as “Made in Baltics”, which attributes a flattering European flavour to the products produced in Kaliningrad. Many Kaliningrad furniture producers achieved good quality levels and benchmark themselves with Polish and even Italian competitors. Our “Made in Baltics” furniture can be found in all Russian regions, up to Vladivostok. Kaliningrad furniture producers (for instance, “Lazurit”), use their closeness to Europe to remain updated on the materials, product aesthetics, but also to acquire high-quality components, which is very important to build high quality and durable products.
Could you describe Kaliningrad entrepreneurs and their ways of doing business?
Our entrepreneurs know a lot about customs and dealing with Western partners, whereas entrepreneurs from the rest of Russia may remain frightened by cross-border bureaucratic procedures and cultural differences. I also find their relative level of competences higher if compared to the national average: they learnt a lot from their neighbours, they also face competition from Poland and Lithuania and other Baltic states. Poland recently opened up its borders to Kaliningrad residents for 50-100 kilometres radius, so Kaliningrad families habitually shop in Gdansk, definitely boosting its retailers’ revenues, spending, as many Russian customers do, with a light heart and without second thoughts!
Speaking of cultural differences, what would be important to know before starting to do business in Kaliningrad and in Russia in general?
Kaliningrad is an “island”. We are a relatively closed community, so we know each other and the word-of-the-mouth recommendation is very important, maybe more important than in Russia. Our public administration is also aware of this and, maybe thanks to the exposure to the international projects and initiatives, is relatively efficient. It happened to me that I telephoned to a public administration department and got some bureaucratic problems solved very quickly, even if they had never met me before.
Speaking about cultural differences, I think that Russians, as most of Slavs, treat strangers with quite a bit of diffidence. We also must remember that during the times of Soviet Union a prison sentence was a real threat for exchanging of a few words with a foreigner. To build long-lasting relationships based on trust one has to invest time. One dinner or drinks together after a business meeting won’t solve the issue, but may become the first step towards friendship. As the most of relationships in Russian business are gravitating around two extremes: formal, distant and cool, and informal and friendly.
And if we speak about the content of business relationship, a foreign partner has to demonstrate to be a real industry expert. Just one example. I visited one of our farmers with a Dutch agricultural consultant who after the first five minutes of conversation indicated a piece of machinery used for the cultivation of potatoes and said “Why did you buy it?”. It appeared that the farmer had acquired it through a Russian dealer, and got the most advanced and the most expensive piece they showed him. He would have saved a lot of money if he went for an inferior model, much more suitable and efficient for the size of business he had. In a 10 minute conversation that Dutch specialist save a lot of money for that Russian farmer. In that case I believe they became instant friends even without dining out!
What about the future of Kaliningrad?
With the gradual increase of the economic wealth I expect further growth in B2C services. The 2018 FIFA World Cup hosted by Russia will certainly create a lot of business opportunities in the construction industry, already very strong in Kaliningrad region. In terms of Kaliningrad strategic positioning, we may say that Kaliningrad citizens think of themselves as Russians who understand Europeans much better than an average Russian does. Our region can be a small but efficient starting and testing platform for launching new projects in Russia.