How to Get a Hug from the Russian Bear?

The Russian market holds many possibilities for Israeli companies, but it is radically different from the Western markets that Israelis are accustomed to working with * What to watch out for when starting to look eastward.

In the early nineties, following the collapse of the Soviet Union and its attempt to develop a free economy, Russia resolved to sell its products to the Western market, where the standards, infrastructure and technology were completely different. This forced the Russians to make changes in order to adjust their products to the new markets. It is important to note that the quality offered by Soviet Russia was never problematic; it was rather the manner in which the West perceived the products and technologies Russia produced.

The international transactions made then by the Soviet Union, and the manner in which it protected its technology and knowledge, forced the Soviet legal system to undergo significant changes. Some of those changes were far reaching for example, the adoption of the forth part of the Civil Code in 2008, which for the first time clearly defined common terms such as "know how", technology licensing, software and patents (in the past everything belonged to the state).

Today Russia is investing tremendous resources in order to bring industry, agriculture and infrastructure up to the required level, and as a result, it has become a major consumer of Israeli knowledge and technology. Thus, many Israeli companies find themselves forced to make adjustments in order to succeed in the Russian market. It is not only a language barrier; an Israeli company must understand the expectations in this country, which are based on an entirely different experience and legal system, in order to successfully penetrate the market. For example, a local trademark must be registered with "Rus Patent" (the Russian patent and trademark registry) prior to the beginning of operation in Russia. Technology companies that did not understand the difference in the systems protecting their trademarks (First to register rather than first to use) had discovered that local companies are using their trademarks on consumer products in supermarkets, for instance, and were dragged into longstruggles in a Russian courts. Other companies that did not plan their introduction into the market properly find themselves struggling with imitators, simply because they did not register the patent on which their product or technology is based, at the right time in Russia.

Entry into the Russian market requires suitable consultation. Reproducing a strategy that was appropriate in the United States or in Europe can bring about complete failure in this interesting territory.

The Russian market holds abundant possibilities but is radically different from what an Israeli businessman is familiar with. An example of this large gap can be found in Russia's corporate law. For instance, a Russian company is not required to appoint a board of directors, but is required to submit various period reports and to appoint a CEO. The CEO is called General Director and is a single manager de facto with unlimited signature rights; the effective control, however, is determined by the holdings of the shareholders.

There is indeed a new corporate law in Russia which enables the creation of control and monitoring mechanisms such as a board of directors, veto rights and joint signature rights. However, one must be familiar with the law to propose these mechanisms. Businessmen and government companies have yet to assimilate the possibilities of the new legislation, and they conduct themselves in the methods familiar to them from time immemorial. Therefore, when creating a joint company with a local partner, one must be very clear in explaining what is required of the joint company, in order to create for the Israeli company a sense of security and transparency in the management of finances, for instance, or in the commercializing of the product in the local market. An inability to properly present the mechanism that Israelis are seeking to add to the Articles of Association or to the contract may be interpreted as lack of faith and even an insult to the Russian side.

A local branch or rep office can save time and money, but only if the limitations of such a structure are known in advance. For instance, rep office of a certain type cannot engage in transactions at all-a branch is considered the long arm of the Israeli company and exposes it in fact to liability for activity in the local market, and so on. This will eventually cause an enormous waste of resources and especially money.

Another difference that is important to note regarding the Russian market is that contracts will almost always be written in Russian and in English. One reason for this is the oversight on foreign currency, and another is lack of fluency in English among older businessmen. It may seem insignificant, but this issue has important consequences for instance, a Russian bank will not transfer money abroad without approval of the agreement at the base of the payment, and therefore a proper translation of the parties' agreement is essential and should be given serious attention. In addition, it is important that an attorney familiar with both languages examine it prior to its signature.

The language barrier is relatively easy to overcome, however there are cultural differences as well. Businessmen who turn to the Russian market must take into consideration that the initial model they thought of will, for the most part, have to change. In order to succeed, they must present flexibility, creativity and willingness to deviate from familiar work patterns on occasion, as Russian negotiation methods are completely different from European and American negotiation methods. The Russian market is indeed different from Western markets, but it also holds many possibilities for Israeli companies that have a product with a true added value to the local economy.

Thus, Russia and other Eastern Bloc countries, such as Kazakhstan, offer economic subsidies and significant tax relief in order to attract the right companies to operate within their territories. They actively create mechanisms to encourage Western companies and external investors to operate within their territories and to develop the local economy by agricultural development, job creation and the accumulation of knowledge.

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