Cracking the Russian market

In his famous radio speech from October 1939, Winston Churchill, then UK First Lord of the Admiralty, observed: “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma: but perhaps there is a key. That key is Russian national interest.” This oft-quoted remark reflected the political situation of that time, and present-day Russia is certainly a different country than Soviet Russia back then. More than 70 years later, it may no longer be such an enigma.

But as many multinational businesses have come to learn over the past 20 years, Russia continues to be a special market requiring an appropriate localized approach to succeed. In Russia, the potential rewards are high, but so are the risks. Many foreign companies have come across numerous riddles, run into many enigmas, and encountered no shortage of mysteries when operating in the attractive Russian market. But perhaps there is a key. Russia has benefited considerably from being included in the widely-used acronym BRIC, which also encompasses Brazil, India and China, and the associated publicity that followed.

Coined by chief economist for Goldman Sachs Jim O’Neill back in 2001, the prediction behind the acronym was that these four up-and-coming countries would overtake the six largest Western economies by 2041. This prediction was later updated to 2039 and now 2032. It would raise few eyebrows today, but at that time was a bold statement.

For some, this is just pure hype revolving around a marketing acronym that has taken on a life of its own, but it has come at the time when Western companies have increasingly woken up to the fact that the next two billion middle-class consumers – and the growth that comes with them – will be found in these emerging countries.

The facts of the case
Nevertheless, it has always been a mistake to apply the same approach to all four countries, and Russia in particular stands out. What the four BRIC countries initially had in common were underdeveloped economies with the potential for fast growth, large populations and some form of openness to the world. But the differences are large and numerous.

For one, with a shrinking population Russia faces demographic issues. While China and India boast over one billion populations and relatively fast population growth rates (some 1.41% for India and 66% for China annually), Russia’s, at some 142 million, has been shrinking by some 700,000 annually. With this being one of Russian government’s priorities, in 2009 the country recorded its first – nominal – population growth in 15 years.

Yet this is largely due to the number of people born in the 1980s now arriving at childbearing age. This wave is unlikely to turn into a long-term population growth trend, when the call of duty falls on the next, much smaller generation, born in the turbulent 1990s after the breakup of the Soviet Union. In this sense, Russia follows the same pattern as much of the developed world, only the development is currently much more pronounced, on par with its neighbor Ukraine in this regard.

This means that much of the upcoming economic growth in Russia will be driven by rising income levels for Russian consumers and the economy as such, rather than growth in their sheer number, which is such a strong factor in India or China. For instance, over the past ten years, GDP per capita in Russia has almost doubled and is now roughly four times that of China.

Combined with the current life expectancy of only 60 years for Russian men today, one of the lowest in the world, it also means that from the marketing perspective, different age groups for consumers have very different dynamics and aspirations.

Another impact is on the size and structure of the workforce. Whatever the long-term population trend may look like, the working-age population is set to decline considerably in the coming years. Estimates are for the labor force in Russia to shrink by eight million over the next seven years.

While China has turned into a manufacturing powerhouse and India into a skill-intensive services hub, Russia’s economy has grown through its exports of natural resources. Oil, gas, metals and other raw materials constitute about 80% of Russia’s exports. This makes the Russian economy highly dependent on the price fluctuations of natural resources, especially oil. Their growth has fueled much of Russia’s growth and development over the past decade, but also contributed to the almost 8% fall in GDP in 2009.

In fact, Russia was the only BRIC country whose economy plunged during the credit crisis, leading many, including several bankers at Goldman Sachs, to start reconsidering Russia’s place in this virtual grouping. Until Russia’s economy diversifies further, this dependency on raw materials is perhaps the single biggest risk factor in Russia’s development.

Another thing that sets Russia apart from the rest of the world is the fact that it continues to be the only large economy outside the World Trade Organization (WTO). Russia had been negotiating on and off to join the WTO for 16 years, before deciding in 2009 to re-apply as part of a customs union with Kazakhstan and Belarus. Since then, the countries announced they would resume their separate (but now harmonized) applications for membership, but if and when these negotiations will be finalized is uncertain.

If and when Russia joins WTO, this will facilitate access to the Russian market for foreign companies considerably, through lower tariffs and the inability to raise tariffs arbitrarily, as Russia did only recently with car imports.

Importance of the Russian market
The bottom line is that Russia continues to present tremendous growth potential. This is because of the still rather low levels of penetration for many goods and services, similar to India or China. In many cases, these are much less than 50% of what they are in Western Europe. For instance, only some 20% of people own a car. Coupled with the relative size of the population, Russia already represents the largest market in Europe for many products and services, including mobile subscribers.

So it is no surprise that over the past ten years, Russian has been constantly rising in importance as a target language. For several global companies, it has become their tier-one language, on par with say German or Japanese.

The online world illustrates well the current status and growth opportunities of the Russian market. Russia is one of the few countries in the world where Google does not currently occupy the top spot among the most visited sites or search engines in Russia. The market is dominated by the local search engine Yandex (Яндекс), followed by the local free e-mail service Почта@ and the local social network V Kontakte The success of Yandex is to a large extent due to the fact that its search algorithms better understand Russian word inflections, grammar and morphology.

Google was able to increase its market share in Russia significantly in 2006, after it hired Russian engineers to help improve the engine’s handling of Russian-language searches, but continues to lag behind Yandex in popularity.

Globally, Yandex also continues to achieve considerable gains, for instance growing 91% to 1.9 billion searches in December 2009, year-on-year. In comparison, Google sites achieved a 58% increase in search query volume, and Yahoo! sites ranked second with an increase of 13%, followed by Chinese search engine Baidu (up 79), according to the marketing research company comScore, Inc. This was behind the decision that Mozilla made in 2009 to abandon its long-standing partnership with Google for Russia and set up instead Russia’s Yandex as the default search engine on the Russian versions of Firefox. This is all the more remarkable given that globally, the partnership with Google accounts for the vast majority of Mozilla’s revenues.

At the moment, Russia has one of the lowest rates of internet penetration in Europe. At some 149 in 2008, it is much less than the 50%+ usual in most Western European countries, with The Netherlands being at the top with 82% penetration.

However, Russia ranks as the fastest-growing internet audience in Europe. In 2008, it was up 27% to 17.5 million visitors, followed by France, Spain and Ireland, according to comScore. Among the top ten global search markets, Russia posted the highest gains in 2009, growing 920 to 3.3 billion

How to succeed in Russia
A strong local presence is a requisite. his is what made Microsoft so successful in Russia. It opened its first office there in 1992, as one of the first multinationals to have a local presence. The company has established relationships with the local industry, signed up 11,000 local partner companies, and established offices in 34 cities throughout the country, in addition to ten Microsoft Innovation Centers. The company now plans to double its Russian sales – already on par with those in other European markets – in the next three years. The Russian office has been recognized as Microsoft’s best subsidiary in 2006 as well as 2007.

But companies also need to adapt to succeed in Russia. When the Russian market opened up in the early 1990s, Western goods, for so long considered precious and generally unavailable in the country, were warmly welcomed and accepted. This often allowed multinationals to price their products at a premium compared with the more competitive Western markets. In many cases, they also had to position their products as luxury goods, different from elsewhere.

This brought revenues but meant working a smaller slice of the market. When aiming for the mid-market, the competition from local companies is much stronger, and the simple transfer of products that work in the West to Russia is more problematic.

The early days when brand and country of origin alone were a guarantee of success are gone. Since then, local Russian competition has evolved and matured in many industries. And in many cases, it is looking to expand glob-ally. One shining example is Kaspersky Lab, the Russian antivirus and security software company. With a presence in 28 countries, the company has made it into the top four in the security software segment and grew 56% in 2009 alone.

Interestingly, Kaspersky maintains a strong focus on emerging markets, for which it provides customized software packages and pricing that reflects the potential of these markets.

Another contributor is the perhaps not surprising affinity Russian consumers have for their national brands and products. The key for global companies is to adapt to the local culture and to strike the right balance between the international aspects and the local relevance. In general, Russian consumers appreciate the respect they receive and the efforts foreign companies take to localize their approach and products to their cultural expectations.

At the same time, it is important to stress that the long-established Western brands do continue to have cachet on the local market. As anywhere else, buying the right brands suggests sophistication and wealth and is a powerful status symbol, especially with consumer goods.

What makes operating in Russia different is also the local perception of partner-ships. Long-term partnerships are not easy to come by, and the concept of “win-win” does not come here naturally either. Rather than partner-ships, relations between businesses are based on mutual dependence. However, once the dependence stops being mutual, the other party is expected to submit.

Similarly, Russians tend to live by the day, without much thought of the morrow. This means they are more ready to spend now, rather than save for the future. This is in stark contrast to China, for instance, where households tend to build large savings. It is clear that for foreign marketers, a better localization level and, to a larger extent, in-country language support may result in substantial increase in their market share.

Contrary to common wisdom, Russian consumers are very sophisticated and demanding, with high requirements for quality and cultural appropriateness of the local product. In this regard, their quality expectations are comparable with those seen in France, for instance. One practical implication of this for localization is the pressing need to establish clear style guides and quality guidelines and to involve in-country reviewers early on. Given the size, importance and specific nature of the Russian market, Russian offices of multinational companies frequently tend to have a large say in the translation and localization process.

Russian localization market
The Russian localization market is not as large as it actually could be. That is, there is ample room for localized products but relatively few vendors who can offer quality localization services. The major problem is that existing localization vendors are rather small to medium-sized companies that employ few in-house translators.

Much Russian localization today is sourced via global multilingual ISPs, yet only a few of them have a physical presence in Russia. They often rely on the local providers. Given the relatively low number of local or regional providers, it is fair to say they don’t face the Same level of competition as is the case in other countries, considering the size of the market. For their part, they are mostly relying on freelance translators which may result in unstable quality (could be really good, could be really bad). Many Russian freelance translators still lack a solid knowledge of both source and target languages, and if freelance translators are used, their output needs to be checked and double-checked to ensure it is error-free.

As the Russian economy has picked up over the past decade, local providers have seen their production costs rise constantly and considerably. This applies to the cost of labor as well as the general costs of doing business in Russia. Moscow, for instance, was the world’s most expensive city in which to live during 2008, according to the Worldwide Cost of Living survey conducted by the international consulting firm Mercer. It dropped to number 3 in 2009, behind Tokyo and Osaka, but is still well ahead of London, Zurich or Shanghai.

The independent Russian localization professional Denis Volkov states that Russian users may be divided into two major categories: those who prefer original nonlocalized versions (because they are less ambiguous), and those who don’t feel comfortable with English and thus need a localized version. In IT, the first category is still quite numerous (mostly people in their 30s-40s, who started using nonlocalized computers). For the second category, a medium level of localization would be acceptable. Even if the user interface is not localized, a simple “how to” manual in Russian may be enough.

For the non-IT market, localization is sometimes limited to a legally required minimum. It is forbidden to sell a product if it’s not accompanied by a Russian-language description and/or documentation (as specified by the Consumer Protection Rights Act or the Copyright Act).

Developers must take into account the fact that Russian generally employs longer words and phrases than English (up to 30%), uses declinations and has a flexible word order. This may be critical for companies that develop products with space restrictions in the user interface (UI). If the space allowed in the UI is limited, abbreviated translations may look ugly and incomprehensible. If UI strings are highly concatenated, this may result in grammar errors in translation, since the same source part may be translated differently depending on actual context.

There are three discernable phases in the development of the Russian localization market. During Phase 1, roughly the second half of the 1990s – starting with the first localization of the Microsoft Windows OS and later Microsoft Office into Russian – many Western businesses came to realize the potential of the Russian market and became aware of customers’ requirements for local content. This phase was characterized by large volumes for translation and the emergence of a large number of companies offering Russian translation services, many of them small local companies lacking business maturity. This was a learning stage for both clients and service providers in terms of Russian localization, and a large number of companies on both sides also “burnt their fingers” during this phase.

Phase 2 followed the financial collapse and economic downturn of the Russian economy in August 1998, when the Russian currency was devaluated fourfold.

This phase saw a dramatic decrease in demand. Some clients withdrew from the Russian market; some opted not to localize their product in Russian for one or two releases; and some maintained their existing local presence, especially the larger IT companies.

Starting sometime during 2001-2002, Phase 3 began, set against the background of the overall growth of the Russian economy and characterized by an increased demand from both existing and new clients, who have started to explore the Russian market. During this period, the overall Russian localization market has matured.

Multinational companies can use products localized into Russian to also enter some of the neighboring markets. There is a large Russian-speaking population in con-tries such as Ukraine, Belarus, Kazakhstan and Kyrgyzstan. These users wil readily use Russian localized products and would often prefer them over local/ national localizations. These products may be used as they are produced for the Russian market and do not require further customization, since the Russian language is standardized. Even if there are some regionalisms in these countries, this doesn’t affect basic vocabulary and grammar.

Native users of these countries who do not speak English may also prefer Russian-localized versions if no versions in their native languages are available. Russian was taught at school in all ex-USSR republics and to a reasonably good level, especially in larger cities, so people in their 30s-40s-50s may feel rather comfortable using Russian-localized versions.

According to Volkov, Russian terminology is regarded by some as “awkward” because it is less concrete and more ambiguous. Different English terms may be translated with the same Russian word; some concepts are hard to be translated in a concise way, only longer descriptive translations are possible. This results in increased use of anglicisms, first of all as part of IT slang, which gradually infiltrates into standardized language.

Even companies such as Microsoft that care about language quality have switched from “original” Russian terms used until recently to their anglicized, slang counterparts. For example, browser, formerly обозреватель, is now браузер, a transliteration into Cvrillic of the English word.

Another thing to be aware of is the use of descriptors, which is preferred and recommended in Russian, sometimes being the only way to grammatically link untranslated term/product or company names to the rest of a phrase. Translators tend to omit descriptors as soon as they are not present in the source. This is more tolerated by end users than by the clients who want their products to be referred to correctlv.

Over the past several years, Russia has come a long way towards re-establishing itself as a major force in the global economy. At the same time, much hangs on Russia striving to carve out its special, distinct place in the global scheme of things. To succeed in Russia, it is important to strike the right balance between the local and the global, position your product/ser-vice smartly, consider the local market specifics, and take a realistic, long-term perspective based on patience and perseverance.