2015

International Business 701

Hammon, Kyle

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Samsung in Russia

Kyle Hammon

International Business 701

4/30/2015

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Maps of Russia

Federal Districts in Russia. Retrieved from The Moscow Times (2015).

Map of Russia with surrounding countries. Retrieved from CIA (2015).

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Introduction

Russia is one of the world’s biggest emerging markets. Because of this, many companies are

attempting to set up operations in the Russian market. Samsung Electronics is a South Korean company

with many subsidiaries around the world. Samsung has been involved in the Russian market for around

20 years and is one of the oldest Western-allied companies in the country. This gives Samsung a

competitive edge and a better understanding of business customs and the Russian market. Samsung is

always in the process of pursuing ventures in Russia. There are, however, several opportunities that

Samsung could take in the market that would further improve their position and protect themselves

from the wildly fluctuating Russian economy.

Background of Samsung Electronics

Samsung Group has several subsidiaries ranging from medical care equipment and heavy

machinery to finance services and chemical manufacturing. The flagship company owned by Samsung is

Samsung Electronics. Samsung Electronics is a South Korean international company founded in 1969

that deals in semiconductors. As of May 2014, Samsung’s market cap is valued to be $186.47 billion.

Samsung has three branches of products: Consumer Electronics (CE), which includes products like

washing machines, televisions, monitors, refrigerators, and others; Information Technology & Mobile

Communications (IM), which includes the very successful Samsung Galaxy cellular phone line of devices,

as well as cameras, computers, and other communication systems; and Device Solutions, which includes

computer memory, integrated circuits, LEDs, and other components (Forbes, 2015).

The International Division

The CEO of Samsung Electronics Global is Dr. Oh-Hyun Kwon who has been with Samsung since

1985 and aided in the development of several products that has helped Samsung Electronics rapid

advancement in semiconductor design (Samsung, 2015a). Samsung Global is considered to be the same

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as Samsung, as the global part of the company is built into it. Samsung’s structure is set up as an

international area structure, so they set up very competitively in the international market. Samsung

Electronics currently has sales networks operating in North America, Asia, Middle East, Europe, and

South America, including in USA and Russia (Samsung, 2015b).

Topography of Russia

Russia contains plains, mountains, forests, and tundra across the country. Despite its large size,

most of Russia’s land is not arable because it is too far north. This forces Russia to rely a great deal on

outside sources of food to feed its population (Advameg, 2015). Development is halted in many areas of

Russia due to the existence of permafrost, volcanic activity, earthquakes, and flooding (CIA, 2015).

Because of many of these reasons, most of Russia’s population stays around the cities, especially

Moscow and St. Petersburg. Since a large portion of the population stays in the main cities, it may be

more attractive to set up headquarters in those cities.

Russia’s average population is also aging and on the decline. What was 149 million people in

1990 is 144 million today (Chamie, 2014). The results of an aging and declining population may make

Russia less attractive for new, high-tech business.

As with many transitional economies, Russia needs to foster managerial talent. Since Russia had

been a centrally planned economy, it has a lot of catching up to do to get workers and managers that

can work well in a market economy (Wild, 2012). Due to much of the workforce in Russia being

unskilled, there is a higher need for ethnocentric human resources practices. Having to use these

practices make it more expensive to open operations in Russia.

There are few free trade zones in Russia, as the government is extremely selective of the

countries that they want to freely trade with. There is a free trade zone near the Suez Canal that is

intended for free trade between Egypt and Russia, as well as other zones that are still being worked on

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intended to open free trade between Russia and the other former Soviet states (Russia Today, 2015).

There is also a World Trade Center located in Moscow that may help international companies enter the

market (World Trade Center Moscow, 2006).

The Russian Economy

The Russian government still has heavy influences from its Soviet past. After the dissolution of

the Soviet Union, the objective was to transform Russia into a mixed market economy. This objective

has stalled over time, however, and has resulted in a system that has only been partially reformed. An

overwhelmingly high concentration of wealth is centralized in the hands of Russian officials; meanwhile,

the rest of the country’s populace is very poor (CIA). Most industries in Russia have been privatized with

the notable exceptions of energy and defense-related industries. Property rights are overall weak and

the private sector is extremely susceptible to government interference.

After over seven (7) decades of Soviet rule, the Russian economy still has heavy government

interference. However, in the past 23 years since the Soviet Union collapsed, Russia has made great

strides to become a more market and globally integrated economy rather than a centrally planned

economy (CIA). This leaning was due to protests and demands of the Soviet people, which ultimately

forced the breakup of the Soviet Union. These protests started quickly after the Soviet government

granted certain rights and freedoms to its repressed populace (such as freedom of speech) (The Cold

War Museum, 2015). After Russia started transitioning to a market economy, certain people had a leg

up over others. Members of the Communist Party as well as managers and supervisors under the old

system generally kept their elite status after the transition, leaving little room for other Russians to

make a better living. Due to this, much of the Russian population is very poor and is not able to afford

many luxuries—or even basic items (Wild).

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Although Russia has a declining population, there are still a massive 144 million people living

there, making Russia the 10th most populace in the world. With so many people living there, the GDP is

estimated at $3.6 trillion and is known as one of the BRICS countries (CIA). Being an emerging market,

Russia has the potential for huge economic growth.

Russia is a world leader in production and exporting of oil, natural gas, steel, and aluminum. Due

to the reliance on these types of exports, the Russian economy is very susceptible to swings as the prices

of these exports fluctuate (CIA). These swings can be dangerous to companies that are not expecting it

and results in companies that operate in Russia keeping a close eye on oil prices out of necessity to

predict the swings in the Russian economy. The Russian government has also been known to heavily

interfere in the private sector, which can make the investment climate uneasy. The Russian government

has framed and arrested businesspeople in the past who they consider to be a threat to the state (Wild).

Russia has other stability issues as well. There have been political issues since the breakup of the Soviet

Union over boarders between Russia and the former Soviet republics, like with Georgia in 2008 and with

Ukraine in 2014. Being close to areas where terrorist groups reside can also cause issues if Russia does

not keep its nuclear arms under close security (Wild).

The current exchange rate between Russia and the US is approximately 62 Russian rubles to one

(1) US dollar. This number has increased dramatically over the past couple of years being as low as 30

Rubles to the Dollar in 2013 (CIA). The drastic fall of the ruble may mean that it is cheaper for foreign

investors to enter the economy, but it may be more difficult for already poor Russian consumers to be

able to afford their goods.

Russia exports more than it imports; its overall balance of payments in 2014 is a positive 59.5

billion US dollars (Bank of Russia, 2015). Russia’s balance of payments with the United States is a

positive 12.9 billion US dollars (Census, 2015). This is largely due to the many tariffs and trade

regulations in Russia. Telephone equipment has a 15% tariff, television sets have a 10% tariff, and many

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other consumer electronics have similarly high tariffs (Extreme Tracking, 2002). These tariffs can make it

difficult for companies to invest in Russia by importing their products for the Russian market. In many

cases, it can be more cost effective for companies to make their products in Russia using Russian

materials.

Business Customs in Russia

Russian businesses are often open form early morning to early evening (around 8pm). Some

may stay open later and most are either closed or will close early on Sundays. There is a midday hour-

long break in Russia called pereryv, which usually occurs around 1 or 2 in the afternoon. Several public

holidays occur throughout the year which may affect business hours (Visa Express, 2015). These include:

New Year’s Day (January 1)

Orthodox Christmas Day (January 7)

International Women’s Day (March 8)

International Labor Day (May 1 and 2)

Victory Day (May 9)

Russian Independence Day (June 12)

Day of Reconciliation and Accord/Formally known as Revolution Day (November 7)

Also to celebrate the spring, most Russian businesses shut down during the first half of May

(Visa Express). It is important to know these holidays, festivals, and customs in order to ensure that

meetings with Russian businesses won’t run into problems, as many may be busy or closed during these

times.

There are a lot of women in Russian business due to the equality values of the Soviet Union.

Despite these old values, however, many women in Russian business are not taken as seriously as their

male counterparts, and there are very few in senior management. Women are showered with attention

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and courtesies as part of the culture, but when it comes down to doing business, women are often seen

as inferior to their male colleagues (World Business Culture, 2013). Due to this, it may be better to have

male businessmen handle meetings with higher ups in Russian companies.

Businesses are very centralized in their management structure in Russia. It is often seen as a

waste of time to speak to middle managers or lower because they have little decision making ability. You

need to have what is referred to as svyasi, or friends in high places (Kwintessential, 2014). Managers are

very directive and give specific instructions for their subordinates. These mindsets come from the Soviet

era and are largely seen in older managers. Younger managers in Russia are more influenced by Western

management theory and aren’t generally as directive; however, they are usually low on the corporate

ladder (World Business Culture). Over time, it should be expected that Russian managers will become

less directive as the Soviet era managers retire and the post-Soviet era managers enter higher positions

in corporations. For the present time though, it is important to realize the directive and controlling

characteristics of Russian senior managers.

Business meetings are considered to be a very serious affair in Russia. It is important to be on

time, and shaking hands while keeping eye contact is appropriate when meeting (Foreign Translations,

2015). Because of the serious nature of the meetings, humor is often looked down upon during these

times. It is expected that your dress is as professional as your salary will allow. In order to gain credibility

(especially for foreign businesspeople), wearing expensive looking business professional clothes is

expected. Many meetings are meant to disseminate information. This is largely due to the directive

management style used in Russian business. In meetings not meant for negotiation, any attempts at

open debate are considered disrespectful (World Business Culture). High pressure talk can make you

look impatient and rude, as patience is very valued in Russian culture. It is also considered to be rude to

show the soles of your shoes in Russian culture. Meetings that are meant for negotiation are generally

between high level managers and are usually limited to just a couple of people. Throughout the duration

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of negotiation meetings, patience is further tested by people getting angry during negotiations, including

threats and walking out of the meeting in order to get more concessions—this is expected in

negotiations (Foreign Translations). These types of dramatic cultural differences in business practice are

what make Russian business confusing to foreigners, as things like pressure are considered rude, but

anger and threats are not.

In order to do business or work in teams, everyone involved has to get along. In Russian society

there is a general suspicion of strangers (World Business Culture). Considerable amounts of time are

required to establish personal relationships with business partners. A signal that you have established a

personal relationship in Russia is when the other party asks you for a favor (Kwintesential). In business

interactions, first names and patronymics (component of their father’s name) are used. It is acceptable

for foreigners to just use the first name (International Market Advisor, 2015).

When invited to a Russian home, it is important to bring a gift. If you are male and visiting, you

should bring flowers (but not flowers in even numbers or yellow flowers, which symbolize death and are

only used at funerals) (Morrissette, 2015). You should also not bring baby gifts until after the baby is

born, as it is seen as bad luck. You should also be prepared to have the gift initially declined (this is

considered polite), but you need to offer again for them to accept it. Dining is generally a casual affair,

with only a few things to keep in mind. You are not to begin eating until invited by the host. Keep hands

visible, but do not rest your elbows on the table, and leave a small amount of food on your plate to

signify that the host has provided ample hospitality (Kwintessential).

Transportation in Russia is comprised of mostly railways. For citizens, both railways and cars are

used. Cars are generally only used by those who live outside of the cities that they work in. The rest of

populace uses railway and other public transportation to get around (A. Phillips, personal

communication, April 2015). For economic units, nine tenths of all transportation for raw materials

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(except for oil, which is primarily transported through pipelines) runs through the railway systems

(Riasanovsky, 2015).

Samsung in Russia

Samsung is currently heavily involved in the Russian market. Holding 5 subsidiaries in the region

and significant amounts of direct foreign investment in the country, Samsung sells a wide range of

electronics in the Russian market, including TVs, smartphones, microwaves, and other home appliances.

Samsung also has a TV production facility near Moscow that produces around four million TVs every

year (Kyung-Don, 2014). Samsung is also considering Russia to be one of the first places for them to

launch a smartphone that runs a new operating system—a risky venture. The reason that they are

considering Russia is because Russia is the eighth largest cell phone market in the world (Riknӓs, 2014)

Samsung was first involved in the Russian market in the early 90s when they entered the market to hire

the cheap, post-Soviet, scientists in the region for R&D (Shaughnessy, 2013). This has created a

relationship with Russia being one of the first Western-allied companies to invest in the former Soviet

Union.

The smartphone market is one of Samsung’s largest concentrations. The smartphone market in

Russia is rapidly increasing, catching up to many developed countries. In Russia, Samsung holds about

half of the total smartphone market, way ahead of its closest rival, Apple (Tax, 2013).

What Samsung Can Do Better

While Samsung has had great success in the Russian market, there are still opportunities for the

company to further improve its position.

While Russia has seen strong growth over the past several years in the consumer electronics

industry, that growth is starting to slow. This should be worrying to Samsung, being a large consumer

electronics manufacturer (BMI Research, 2015). The recent inflation of the ruble may be the reason that

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many industries, including consumer electronics, are slowing. As prices go up, fewer Russians are able to

afford products that may be considered luxury, such as high end telephones and large kitchen

appliances. With the potential decline in sales, this could lead to a lot of financial hardship, especially

with the four million TVs that Samsung manufactures every year in the country. In order to fix this

problem, Samsung should be looking into the sectors of the Russian economy that are enjoying high

growth, such as manufacturing, engineering, and steel (Lossan, 2014). Instead of marketing

smartphones directly to consumers, Samsung may want to consider marketing their smartphones to

executives and businesspeople working in these sectors of the economy. People working in these

industries are being paid high wages, and may find Samsung’s smartphones to be a strong productivity

tool.

Another problem that Samsung faces in Russia is the lack of powerful cellular networks outside

of the large cities (Open Signal, 2015). Due to the extreme deficit of 4G cellular signals in Russia, many of

the high end smartphones that Samsung sells are not able to be used to their full potential. Samsung

may want to consider partnering with a Russian cellular company, such as Rostelecom, the only Russian

cellular company that offers service beyond 3G. By doing this, Samsung can increase the range of

cellular networks in Russia and therefore make their phone’s abilities more apparent. Expanding Russia’s

cellular networks may also be recognized by the government as a service to the country. This could

result in Samsung being given tax breaks from the extremely high tariffs, giving a serious advantage over

its competitors.

Another thing that Samsung should consider is analyzing the market further, which could be

done with the help of the World Trade Center of Moscow. As the population of Russia ages, there will be

fewer people interested in the advanced technology that Samsung offers. From a quick look on Samsung

Russia’s website, it is apparent that Samsung carries some extent of a global marketing approach. If

Samsung were able to appeal to an older market, they may realize more profits as nearly half of all

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Russians are between the ages 25 and 54 (CIA). At the same time, Samsung may be able to do this better

than other tech companies, since they have been in Russia since shortly after the Soviet Union collapse

—establishing trust with the Russians who have seen the company around for over 20 years—not an

easy feat due to the suspicion of outsiders that exists in Russian society.

Problems Samsung Faces in Russia

Potentially, one of the biggest issues that Samsung may face at times in Russia is interactions

with the Russian government. With the government having a history of pestering privately held

businesses, this is always a risk when doing business in the country. In order to avoid potential issues

with the government, it is advised that Samsung stay out of Russian affairs to avoid being labelled as a

threat to the state. If Samsung were ever to be labeled as a threat to the Russian government, there

could be potentially catastrophic consequences for the company.

Samsung also faces obstacles revolving around the weak ruble. Since Samsung is already

established in Russia, it poses problems to be able to actually sell their expensive, foreign products to

people in Russia—especially since a large portion of the populace is considered to be poor. During this

period of time though, it will be easier for Samsung to keep its Russian investments afloat with foreign

money.

Compatibilities with Russia

Being a Korean company, some business practices in Russia aren’t totally foreign to Samsung.

The hierarchical structure of business in Russia is very similar to the structures of Korean companies. In

Korea, it is also important to be on time for meetings and to build relationships with business partners

(K4E Consulting, 2015). Because of many of the similarities between Russia and Korea in terms of

business customs and etiquette, it may be easier for companies such as Samsung to adjust to the

Russian business world than for an American or more Western business. The most difficult adjustment

for a Korean business to make in Russia would have to be dealing with the expectation of argument in

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negotiations. In Korea it is extremely important to save face and not attack business partners, while in

Russia language that would be interpreted as doing so in Korea is expected in negotiations (K4E

Consulting).

Summary

Despite Samsung already being very successful in the Russian market, it is important that

Samsung continues to adapt to the Russian market. Because of the declining ruble and the lack of overall

wealth in the main population of Russia, Samsung should be focusing on more wealthy people involved

with the high growth sectors of the economy. Samsung should also attempt to partner with Rostelecom

to expand the 4G networks available in Russia in order to improve the usefulness of Samsung’s

smartphones. Samsung also needs to be researching on how to appeal to an older market due to the

ever aging Russian population. By adapting to these market situations, Samsung can continue its

dominance in Russia as a consumer electronics company.

Conclusion

Samsung has done a very good job in the Russian market, and as long as it continues to adapt to

the market, it will continue to do so. Samsung has demonstrated a strong understanding of Russian

business after being there for longer than most international companies. Russia is stalling in its

transition from a centrally planned economy to a market economy, and it results in stability issues with

the government interfering in the private sector of the economy which can make it difficult for

international companies to work in Russia. Samsung has overcome many of these obstacles to become

successful in the region, Samsung can continue to improve its situation in the country by keeping a close

eye on the changes in the economy, political system, and changing attitudes in Russia by seeking the

most promising market segments and seeking ventures that will make their products more attractive to

Russian consumers.

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