The Trick To Succeeding In Russia

Believe it or not, 713 foreign owned companies set up shop in Russia in July. But that's second only to the 719 foreign owned businesses that registered in the country in April, according to the Federal State Statistics Service.

Despite being known as the Wild East, where the rule of law comes with a wink and a smirk, new foreign owned enterprises are trying their luck, economic sanctions and all.

The new enterprise registrations, released by the government in September, does not say how many of those companies shut down, or even who owns them. But after speaking to a few companies that have been doing business here for years now, one variable stands out. The best way to grow a foreign enterprise in Russia is to partner with local authorities.

Whether that is the local government, its lenders, or state-owned enterprises, success in Russia is largely dependent on the foreign firms' relationship with the true power behind the throne.

Maurizio Patarnello, the CEO of Nestlé Russia, has over $5 billion invested in 11 factories employing 10,000 people. "We have strong relationships with the local governments," he said during an investor conference in Moscow last week run by Russian investment bank VTB Capital.

"If you want to stay in business in Russia, you have to have strong relationships with local and regional governments," said Antonio Linares, director of the Roca Group, a Spanish multinational manufacturer of bathroom fixtures. "That relationship was very important for us when we first arrived ten years ago," Linares told FORBES on the sidelines of VTB's Russia Calling, which concluded in Moscow on Thursday.

Like Nestlé, Roca is investing in Russia and incorporated in Russia as well. They're building a 13,000 square foot warehouse in the east. "We have never had big difficulties moving forward with our business plans because we feel we have support from the government," Linares told a gathering of some 1,500 executives and investors in Moscow last week.

U.S. multinationals are no stranger to Russia either. Boeing has some of their biggest factories in Russia. Since 1992, Boeing has worked with the Russian space industry as a partner and contractor to the leading Russian space enterprises — Rocket and Space Corporation and the Khrunichev Research and Production

Space Center — on the world's largest international space programs.

ExxonMobil is in the Kara Sea with its partner Rosneft . It's $700 million joint venture with the state-owned Russian energy giant is currently on pause due to sanctions.

Marco Tronchetti Provera, the CEO of tire manufacturer Pirelli & C . S.p.A, also has a deal with Rosneft. The Italian company's short five year stint in Russia has been made all the more lucrative because of the government. Rosneft owns 15% of Pirelli through a holding company.

"If you have very good partners within the national and regional government, then that’s great," said Michael Reynal, an American portfolio manager at RS Investments out of Des Moines. Reynal was in Moscow last week. "What’s interesting is that you're not seeing domestic players competing in the market against Pirelli. For example, where is Bridgestone ? They're in Russia, but you don’t see them investing that much because they don’t have the government in their corner."

Despite Russia's reputation as being a non-competitive, monopolistic economy, there were over 21,300 foreign capital enterprises operating in Russia by the end of the second quarter. That's down from the 23,565 foreign firms reportedly in Russia in the second quarter last year, according to CEIC data.

U.S. companies invested $1.18 billion in Russia in 2013, nearly double the $667.2 million recorded in 2012, CEIC data showed.

For Russia-bound businesses it's, "We are from the government, and we are here to help you."

"We still have investors coming to Russia from around the world in spite of a complicated political environment," said Vladimir Putin in his conference speech. "Our strategic policy is to make this an open economy, raise living standards, and create modern jobs."

The government will be shedding some of its assets next year in privatization plans, in hopes to attract foreign capital as well as a growing number of wealthy Russians with money abroad.

Russia privatized 136 companies last year, the lowest number in 10 years. Over 211 state-owned companies were sold in 2011 and 2012, according to CEIC.

"Becoming cozy with authorities in Russia is not much different than what we've found in Spain," said Linares. "We consider ourselves a Russian company here, not a Spanish one. We're where we need to be."