Foreign companies in Russia: How to adapt business to local conditions

Foreign companies in Russia need to adapt their work to build a management system that meets the interests of both headquarters abroad and offices in Russia.

The Russian branches of foreign companies can successfully survive in difficult economic circumstances only if they are able to demonstrate good business performance on the background of high risks. To do this, they need to not only attract customers but also to report to the parent headquarters in full compliance with the KPIs which are set globally.

Most often, the parent structure “moves down” their own established rules, business processes and information systems. They logically assume that this is the way to ensure continuity, preservation of the overall development strategy and resource saving. In some cases, however, which are primarily the functions of accounting, control and reporting, such a practice does not work, because there is too much of a difference in legislation and the requirements of market regulators.

When opening a representative office within the European Union, where there is a unified system of accounting and finance, usually there are no problems with setting the financial statements. Working in the Russian market however, requires considerable work on adaptation. There is need to not only understand the local market characteristics and legal requirements, but also be able to build up a management and reporting system that will meet the interests of both the headquarters abroad, and the local unit.

With rapidly changing legislation the main difficulty for companies is parallel maintaining of accounting, management and tax accounting. Even residents of Russia are faced with the complexities of parallel accounting and tax accounting.

The company headquarters will also require accounting according to the local standards from the representative office (European standard of IFRS or US GAAP, depending on the head office location). While Russian accounting standards are focused primarily on particularly monitoring tax bodies, the GAAP and IFRS standards are designed for users who have invested or want to invest in the company. To cover all the specific accounting and reporting procedures in its regional Russian office a foreign company may act in two ways.

The first is to get rid of accounting and pass this function to a local outsourcing company. At the end of 2015 the Russian Central Bank had confirmed the need to remove a number of barriers to the transfer of accompanying business operations, including accounting, financial reporting and disclosure, to the companies who are specialized in it. That decision, in turn, further spurred the development of the Russian market of services in the field of consulting and accounting outsourcing.

The second way is to adjust the accounting information system of the parent company to the requirements of the legislation and normative legal regulation of Russia. As a result, the Russian office organizes a functional IT solution which in this case allows keeping the concept of a global office and modifying it under the local legal requirements. In such a system one can not only consolidate reporting both for Russian regulators and for the parent headquarters simultaneously, but also monitor it online, to check reports according to Russian and international accounting standards, making quick adjustments.

Each of these approaches has advantages and disadvantages. Some of the major outsourcing disadvantages are opacity to management, reliance on external contractors and high risk of leaks of important corporate information. On the other hand, at the roll-out of accounting information system in the Russian realities, companies often face the problem of the uncontrolled increase in time resources and cost of such a project. This usually occurs because of an incorrect assessment of the scope and complexity of the necessary changes and banal communication problems.

Evgeniy Rodnyanskiy is Head of the Department of Microsoft Dynamics AX, Navicon