Managing Informal Business Practices in Russia: The Experience of Foreign Companies

Abstract

Elena Denisova-Schmidt, MBA - Doctor of Philosophy, Lecturer, University of St. Gallen (Switzerland); Edmond J. Safra Network Fellow, Harvard University (USA). Address: University of St. Gallen, Gatterstr, 3, 9010 St. Gallen, Switzerland. E-mail: elena.denisova-schmidt@unisg.ch
Olena Kryzhko - Doctor of Philosophy, Strategy and Business Development Manager, Siemens, Mobility Customer Services Address: Siemens, Sieboldstr. 16, 91052 Erlangen, Germany. E-mail: olena.kryzhko@ siemens.com

This article discusses how foreign companies deal with informal practices while operating in Russia. Informal practices encompass all activities which take place outside of formal structures and/or complement them. Such activities constitute one of the main challenges for foreign companies doing business in the Russian environment. To demonstrate the phenomenon of informality from a foreign company’s point of view, we conducted 42 in-depth interviews with German and Russian managers and CEOs. These interviews revealed the typical informal practices which occur in companies’ internal affairs, in relations with external partners and suppliers, and in dealing with authorities. Through an analysis of real-life examples, we show not only what kinds of informal practices foreign companies might be faced with, but also what strategies they can use to manage this informality. We conclude that leadership by example, judicial independence, effective control, transparency, outsourcing, a strong corporate culture, and a leveraging of the cultural context are the main strategies for foreign enterprises to mitigate informality in the Russian business environment.