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Severe competition in different areas of business has made many companies search for alternative markets internationally. However, the latter increase the risk for business operations. The first question asked by global company’s CEO includes the acquaintance with the legislative base of a new country. The one should aim to avoid problems of distribution to new customers, as well as eliminate threats associated with brand building. This paper discusses political risks at global markets and provides examples of doing business in such country as Russia.
Definition of a Political Risk and Its Examples
A political risk may be defined as the probability of the company to have financial problems at a new market (McKellar 2). It is important to realize that a new place presupposes new rules of economic game. For example, the current government may introduce laws, and an enterprise may fail to follow them. Such behavior will result in financial punishment and unplanned expenses. Thus, the company must make its interests comply with the governmental policy and find mutual strategies of development.
Today’s business environment means first of all dealing with different people. Persons of various nationalities differ in their mentality and values, which present a certain form of risk. Each CEO understands that the importance of company’s success directly depends on the happiness of its employees. In order to unite all workers under one vision and mission, the one must learn new mindset. Moreover, various countries have own social organizations, which protect employees’ rights and dictate strict rules to the employer (McKellar 5).
The major company’s expenses include workers’ wages. In line with this, global business involves accounting procedures that are more complicated. Since the legislation of the chosen country includes laws determining minimum and maximal salaries, company’s CEO is strictly subjected to these rules and is entitled to pay the fixed amount at the right date. This is another type of political risks to firms in the international business environment.
Predictors of Risks
The major predictors of political risks may be mostly found at emerging markets, where the general situation is unstable (McKellar 9). Although companies of all scales may find many opportunities in these places, the possibility of going bankrupt is still high. Another indicator arising in the unknown environment includes the level of crime. For example, if the country is known for constant terrorism actions, it means that the enterprise will have difficulties to compose any action plan.
Managing Political Risks
Experienced CEOs realize that risk is always present in business. They also understand that its avoidance is developed with experience. However, it does not mean that a new market may be entered without any calculations. Taking the first step, the manager must analyze available data on the politics of the chosen country. Then, he or she must be able to explain the political situation and make the future forecast. As an option, the CEO may acquire political insurance at specialized companies, as well as visit firms that deal with this kind of risk on a daily basis (Moran, West, and Geral-Keith 10). Besides, the global enterprise may consider different types of financing not to take a big credit, but to split expenses under conditions of uncertainty (Moran, West, and Geral-Keith 18).
Risks of Doing Business in Russia
Russia belongs to the category of emerging markets and has a great potential for different investors. Many global companies try to get access to the Russian market and win new customer base. The country is known to have a high level of corruption, political unrest, as well as an unclear policy of taxation (IBP, Inc. 38). Thus, businessmen must have a clear plan of entering this difficult, but promising market. The currency problem must be considered as one of the major issues due to the constant risk of its devaluation (Gaspar et al. 148).
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The CEO may hire an experienced lawyer, preferably of Russian nationality, who is familiar with the local constitution and realizes all important tendencies of administrative pressure (Reuvid 149). However, the risk of a failure remains high, but all directors know that it means a greater income. Irrespective of the business area, the entrepreneur must understand that Russia actively participates in oil business, which has a big impact on the overall situation in the country (IBP, Inc. 43). On the other hand, the Russian population creates almost no limits for active products distribution due to a significant territory.
The second law of doing business in Russia involves the consideration of people’s wages. Russian citizens earn different sums of money depending on their residential area. Moreover, their salary is directly influenced by constantly changing currencies. At the same time, the country has both very rich and very poor people who have absolutely different life styles and spending potential. All of these factors will influence the formation of the company’s pricing policy.
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After the USSR failure, the country tends to be more open to foreign markets. On the other hand, it has not much experience in global collaboration, which can result in some misunderstanding during business negotiations. Nevertheless, Russian business people realize the potential of successful business trade. In any case, Russia is a good example of a constantly changing business environment and reflects all possible problems, which may attack global business.
Political risks are impossible to avoid, because each country has specific regulations. Nevertheless, all businessmen must consider possible return before taking them. An unstable business environment is present in many countries of the world, but it does not always mean that people lose their purchasing potential. A wise business plan can help to avoid unnecessary expenses and lead a global company to success.
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