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					Ernst & Young in Moscow




             Katie Baioni
           Patrick Farragher
           Jeremy Whitmer

              May 1, 2008




   Transitioning and Emerging Market Field Study: Russia [Moscow]

               Fisher College of Business, The Ohio State Univeristy

                                    MBA 808, Winter Quarter 2008
Ernst & Young Overview

       Ernst & Young is one of the largest private professional services firms in the world,

supporting companies across all industries and specializing in a broad range of organizational and

business issues. The company is a global provider of many specialized services, including audit, tax,

business risk, technology and security risk, transaction advisory, and human capital. Ernst & Young

is the result of the 1989 merger of two firms, Arthur Young and Ernst & Whinney, and currently

employs 130,000 professionals operating in 140 countries. Forbes magazine ranks Ernst & Young

as the 7th largest private company in the United States (www.forbes.com) and is included as one of

the Big Four accounting firms, along with PriceWaterhouseCoopers, KPMG and Deloitte Touche

Tohmatsu. Ernst & Young places a strong emphasis on talent and quality work as it continues to

focus on the business strategy, “Have the best people. Provide the best quality. Success follows,”

and operates under the mantra, “Quality in everything we do” (www.ey.com).

       Reflecting its global vision, Ernst & Young has dispersed its worldwide operations base into

two locations: London and New York. It has the highest revenues of the Big Four, with international

revenue accounting for 65% of its overall revenues. In 2007, Ernst & Young reported $21.16 billion

in revenues, representing a year-on-year increase of $2.7 billion and a growth rate of 15%. E&Y

believes that the goal for the global market is to sustain “profitable growth and reputation in today’s

global and competitive market.” This means “addressing increasingly complex issues such as

margin squeeze, entry into new markets, brand erosion, new regulatory requirements and an

understanding of the social and environmental impacts” (http://www.ey.com/global/content.nsf/

International/Consumer_Products_Overview).

       Ernst & Young currently operates thirteen Global Industry Centers, representing half of the

industries served. These centers are focused on linking professionals in the firm to facilitate

collaboration and knowledge sharing while providing specific services for industries on a country-

by-country basis. However, the firm is currently undergoing a reorganization process focused on
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globalization. Each E&Y member country is now part of one of seven geographic areas in order to

meet the demands of its highly complex, global clients. Figure 1 shows how Ernst & Young has

organized its global operations and exhibits the growth of the defined geographic areas in 2007.




            Geographic Area                             People        Revenue     Growth


            United States                               40,635        $9,019M      10%


            Northern Europe, Middle East, India         25,581        $4,080M      22%
            & Africa

            Central & Eastern Europe                    17,882        $3,297M      16%


            Continental Western Europe                  13,254        $2,255M      17%


            Far East                                    17,780        $1,010M      27%


            Oceania                                     4,723         $718M        16%


            Japan                                       4,480         $725M        21%


                    Figure 1: Growth in terms of Geographic Areas (www.ey.com)




Ernst & Young has seen more than 30% growth in countries where they have made strategic

investments, specifically in such areas as China, India and Russia.




                                                                         Baioni, Farragher, Whitmer   2
Russian Market Overview

       In order to understand the steady growth that Ernst & Young has had in these areas,

particularly in Russia, the region and the rapid growth of the Russian economy must be discussed.

Russia is the largest country in the world in terms of land area, covering 17 million square

kilometers. It stretches across the continents of Europe and Asia, bordering Poland, the Ukraine,

Belarus and the Baltic countries (Estonia, Latvia, and Lithuania) to the west; Norway and Finland to

the northwest; Georgia, Kazakhstan, Azerbaijan to the southwest, and Mongolia, North Korea, and

China to the southeast. High oil prices have vastly expanded the Russian economy as well as fueled

a domestic consumption surge, as seen in most retail and organizational sectors. Figure 2 shows the

GPD growth from 2002 to 2007, in billions of Rubles. It displays the GDP growth in market prices,

the steady rise since 2002 and the annual growth rate (www.gks.ru).




                               Figure 2: GDP growth in 2002 – 2007

       The Russia Trading System, the Russian version of a stock exchange, lists leading Russian

securities. It is a domestic source of capital available to Russian companies. Figure 3 shows the

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Russian Trading System index from 2006 and the increase through 2008. Note that the trend is

positive.




                  Figure 3: Russian Trading System Index from 2006 (www.ey.com)



The main factors that affect business in Russia include:

      Political risk: country development after presidential elections is not fully understood or
       clear.
      Economic risk: high dependence on the global oil prices, high “dollarization” of the economy
      Legal risk: no “case law”, objectivity of courts in regions may be questionable
      Tax risk: introduction of new Tax Code granting more favorable tax rules and constant
       rumors on tightening tax legislation
      Operational risk: significant bureaucracy complexity, availability of production resources
       (gas, electricity) is limited and quoted in some regions, lack of qualified personnel in some
       regions, high and rapidly growing real estate prices
      Security risk: perception of “fraud” in Russia historically differs from western countries
       Characteristics of Russian companies help one to understand the corporate and emerging

market environment compared to more developed markets. One difference compared to Western

economies is that many companies are owned and managed by the same people. Another difference

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is that the legal environment is not yet fully developed and is often inconsistently applied,

contributing to corruption in the market. Also, as companies focus their efforts on execution and

rapid growth, there is often poor corporate governance and risk awareness. A common problem in

this area includes a tendency toward underdeveloped boards of directors, in terms of sufficient

number of independent directors and their involvement in Russian market activities. Many Russian

companies do not have an audit committee and therefore there are undeveloped risk management

and internal audit functions. The absence of audit committees and risk management increases the

risks of fraud and unethical business practices. Poor commodity and market risk management in the

non-financial sector are common characteristics of Russian companies. Furthermore, as shown in

Figure 4, Russia was listed as one of the lower-ranking countries (143 of 179) in the world on the

Global Corruption Perceptions Index in 2007 (www.transparency.org).




                               Figure 4: Corruption Perceptions Index 2007

       The involvement of government authorities has also had an impact on the climate regarding

business relations. There is a lack of security in many of the dealings and business owners feel as

though, according to E&Y Russia COO Phillip Turowski, they have to get on “the right side of the
                                                                          Baioni, Farragher, Whitmer   5
right deal.” This means that business professionals feel pressured to positively align themselves

with appropriate governmental authorities in order to accomplish what they require. Many times, this

positive alignment takes the form of bribery or monetary “donations”. For example, a business

owner may make a significant donation to a particular local inspector in order to obtain a building

permit for a new facility. Otherwise, the owner risks significant delays to the project due to

governmental processing and red tape. This is a result of significant involvement of regulatory

authorities in the operations of the commercial enterprises, such as issuing licenses, certifications

and other permissions. High regulation of certain industries, such as banking, financial markets and

other professional service industries has provided opportunities for ubiquitous government

requirements. Several industries are required to submit regular reports to various unrelated

authorities, including financial, tax and statistical organizations. The government has begun to put

severe consequences of non-compliance with the regulators’ requirements including fines, licenses

revocation and liquidation of goods. Such measures provide additional reasons for businesses to

attempt to circumvent these requirements by aligning with the right people in any way possible. As

a result, there is still a large amount of coercion and bribery that takes place between Russian

government officials and business owners.

       As a result of these issues there are many hesitations about doing business within Russia due

to the high potential for fraud. According to Ivan Ryutov, Senior Manager in the Moscow office of

E&Y Russia, in 2007 there were approximately 11,616 cases of bribery and approximately 1,788

cases of commercial corruption (2007 MVD statistics). However, there seems to be changes to this

negative situation. Ryutov states, “In general, there were no rules at all – now companies are

starting to do business with customers with ethical standards and they have to start changing.”

Although there is no current Foreign Corrupt Policy Act (FCPA) adopted in the Russian Federation,

Western organizations, such as Ernst & Young, have worked hard to develop an understanding of

these compliance requirements with its customers. Many companies are beginning to participate in
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international audits to mitigate tax auditing, so there has been a boom in the auditing business. The

influence of Western culture and the implementation of the Sarbanes-Oxley Act has given Russian

companies a reason to practice anti-fraud and protection practices. With Russian economy emerging

as a successful market for international goods, the impact and amount of these corrupt practices is

seeing a downward trend.



Ernst & Young’s Operations in Russia

       As Russia has continued to emerge on to the global scene, the presence of worldwide

companies located within the region has grown significantly. Since the devaluation of the Ruble and

the subsequent stabilization of the Russian economy, foreign direct investment in Russia has become

increasingly interesting to international companies. However, for the reasons previously mentioned,

the country is clearly not as stable as most Western nations. Therefore, the way in which business is

conducted in Russia is fairly complex. Ernst & Young, having a presence in Moscow for over 18

years, is uniquely positioned to provide significant insight into business operations in the Russian

economy.

       Ernst & Young first moved into Russia in 1989, following many of the company’s

multinational clients as they moved into the emerging market. The operations started small, as the

company initially had only one expert located in Moscow, housed in a one-room office. As time

progressed and the needs of Ernst & Young’s clients grew, so did the company’s presence in

Moscow and in Russia in general. The company took a big step in 2002 when Ernst & Young

combined with the Arthur Andersen practice to grow to 930 employees in Russia. By 2003 the

Moscow office employed 1000 employees, quite the increase from the company’s modest start 14

years earlier. Currently, the Moscow office of Ernst & Young has 3,500 employees. Figure 5 shows

a brief timeline of Ernst & Young’s history in Russia.


                                                                         Baioni, Farragher, Whitmer     7
           1989      Moscow office opens in Okobank building – Dobryninskaya st., 7

                     Beginning of audit and tax projects


           1992      St. Petersburg office opens


           1995      Corporate Finance practice begins

                     Russian practice staff grows to 200


           2000      Legal practice begins operations


           2002      Russian practice staff grows to 350

                     Combination of Ernst & Young and Andersen practices in Russia and

                     the CIS Russian practice expands to 930 employees

                     Novosibirsk office added to Russian practice

                     Yuzhno-Sakhalinsk office opens


           2003      Moscow office moves its 1000-employee Moscow practice from the

                     two former Ernst & Young and Andersen offices to its one new

                     location at Sadovnicheskaya nab., 77

                     Russian practice grows to 1100 employees


           2004      Ekaterinburg office opening


           2007      Togliatti office opening


                  Figure 5: Timeline of Ernst & Young in Russia (www.ey.com)



Employee Base



                                                                         Baioni, Farragher, Whitmer   8
       Today, the majority of workers that are staffed in the Moscow office of Ernst & Young are

Russian nationals. This fits Ernst & Young’s strategy of expanding its services to Russian domestic

firms. The company seeks to recruit interns and young professionals to work in the various

departments. According to Ivan Sorokin, HR Specialist at E&Y in Moscow, approximately 60% of

the employees in the firm are women. He attributed this to traditional roles in Russia, as educated

women typically pursue careers in economics, while men look for jobs in engineering.

       The company still maintains a strong ex-patriot base, as employees from all over the world

are needed to work with the many multinationals that Ernst & Young serves in Moscow. These

companies are looking for expertise in the local markets, as well as assistance with fraud detection.

Ernst & Young has workers from Great Britain, Canada, Germany, Japan, France, Australia,

Switzerland, the United States, the Netherlands and other countries who operate in Russia to

maintain a large international body of knowledge.


Services

       Currently, Ernst & Young specializes in three main areas in their Russian operations: IPO

process support, tax savings advice and transactions advisory service. The IPO support function

provides support both to companies that are wishing invest in the market as well as companies

seeking to raise funds by going public. Tax advice is available to help companies on corporate tax,

tax-efficient structuring and tax optimization. The transactions advisory service helps companies in

all aspects of doing business in Russia, and specializes in helping firms to perform valuations of

investment projects. In addition, there is expertise in assurance in the firm’s portfolio of services.

The assurance group helps firms improve their corporate governance and transparency as well as

implement strong financial controls.

       The Fraud Detection area is currently one of the more profitable areas within Ernst &

Young’s Moscow operations, as multinational employers are on the lookout for Russian-national

                                                                           Baioni, Farragher, Whitmer    9
employees who may be taking advantage of lax oversight to steal from the company. As more

multinational companies wish to expand into Russia, it is likely that this business will continue to

grow as companies look to make sure that they’re protected from fraud.

       Ernst & Young’s mix of services in Russia correlates with its worldwide operations. The

majority of business comes from its audit services, consisting of about 45% of all services provided

to clients. This can be attributed to the fact that audit was the first service provided in this market.

The tax preparation and transaction advisory/services offerings represent the majority of the rest

with 25% and 30% of the workload, respectively.



Current Business Landscape

       Ernst & Young works with a variety of Russian and multinational firms, although currently

the firm is working primarily with Russian owned companies. As these Russian companies establish

a presence in markets outside of their home territories, whether it is in consumer markets or in the

search for additional capital, Ernst & Young is able to provide expertise to the Russian firms as they

expand into countries where E&Y has a strongly established base. Ernst & Young’s multinational

clients are primarily interested in the fraud detection services; however these companies are also

looking for expertise in the local markets as well as tax help to make sure that they are minimizing

their tax expenses.

       Although the Moscow office is the company’s center of operations in the region, Ernst &

Young is present throughout the Commonwealth of Independent States (CIS). Currently, the tax and

accounting services are among the fastest growing businesses in the CIS region. Ernst & Young

employs more than 3700 professionals in fifteen offices through the CIS, six of which are located

within the Russian Federation. Figure 6 displays a map of where Ernst & Young has established

offices within the CIS, showing the geographic breadth of the company in the region.


                                                                            Baioni, Farragher, Whitmer 10
                Figure 6: Ernst & Young Locations in CIS countries (www.ey.com)


       Phillip Turowski, E&Y COO for the CIS, admitted that there are difficulties in dealing with

such a diverse region, as he stated, “with seven countries, seven currencies, seven cultures – two of

them at war– it’s a nightmare.” Due to its massive footprint, excellent reputation, and diversity of

product offerings, the firm holds the leading market position in the area. E&Y audits thirteen of the

49 top Russian companies listed in the FT’s 100 Top Eastern European Companies rating, and also

audits seven of the nine US-listed CIS companies, including 78% of Russia-based companies listed

with the US SEC. All together, Ernst & Young provides its unique, multidisciplinary and

specialized services to more than 2000 clients in the CIS.




                                                                         Baioni, Farragher, Whitmer 11
Growth Opportunities

       As the Russian market matures, the need for Ernst and Young’s services is becoming more

and more prevalent. The opportunities available in a free market economy are driving a higher

interest in IPOs. With little experience in this type of work available in the general business

populace, E&Y is well positioned to capitalize upon the emerging importance of this field. By

leveraging their vast experience with IPOs in worldwide markets, E&Y presents a strong value

proposition with particular attention to compliance requirements. Since 1996, E&Y has assisted in

raising more than $18 billion of capital via IPOs of CIS companies.

       This interaction with international entities has had the positive side affect of softening the

Russian business attitude toward corporate governance. As a remnant of the Soviet Era and the

troubled early 1990s, the Russian businesses traditionally view such governance as merely

obligatory requirements. With exposure to such international trade entities as the London Stock

Exchange, effective corporate governance is finally being seen as a value added activity. E&Y can

provide further understanding of the necessity for corporate governance standards. Furthermore,

Russian companies will need to be more transparent as pressures from international organizations

mount. Foreign partners and investors have come to expect such transparency as the norm for

international business transactions. Russia’s current worldwide reputation for corruption and fraud

creates an almost mandatory requirement for local companies to prove legitimacy to outside

investors. By working with E&Y, a Russian company can benefit from excellent service in terms of

accounting and transparency. In addition, the partnership provides assurance of international

accounting standards, presents a clear commitment to ethical business practices and gives the

company legitimacy by being a client of a Big Four firm.

       Improvements in the local economy, increasing foreign direct investment and high oil and

gas prices have resulted in Russian companies experiencing exponential growth. As the companies

gain more assets, the interest in preserving and protecting those assets increases as well. Russian
                                                                          Baioni, Farragher, Whitmer 12
companies are beginning to become highly involved with risk awareness and control. Once again,

these are areas in which E&Y is well versed and has the ability to provide high valued services. A

specific area of focus for E&Y in the current environment is interaction with high level initiatives

against corruption and fraud. Although initially opposed to offering such services due to personal

risk and limited market viability, the Fraud Investigation and Dispute Services department of E&Y

Russia was opened in 2005. Initially starting with only a handful of individuals, this service now

employs 15 dedicated E&Y professionals providing compliance audits for international clients and

anti-fraud measurements for local Russian corporations.

       Specific attention has been given to anti-bribery measures, both with commercial partners

and government officials. As mentioned previously, bribery has been seen as the normal way of

doing business. Procurement departments regularly accepted gifts from suppliers while donations to

government officials allowed for faster processing of forms and permits. E&Y’s most important

impact in this area has been their heavy involvement with the implementation of the Foreign Corrupt

Policies Act (FCPA) throughout the Russian Federation. Whereas two years ago there were no

policies governing corporate bribery, current laws place restrictions on the monetary value of gifts.

By communicating the downside of such influence measures, the FCPA had a significant impact on

business relations in the country. Companies understand that funds can be employed in more

profitable ways and that foreign investors do not want to do business with companies involved in

such tactics. As such, E&Y has almost built the market for fraud investigation and now can

capitalize upon the enforcement of these international standards.




                                                                         Baioni, Farragher, Whitmer 13
Challenges Facing E&Y

        With such wide opportunities available, many challenges contest E&Y’s efforts to provide

corporate governance improvement, IPO advisory, tax system changes and anti-fraud program

implementation. All of these services require that the client be open with their internal data and be

willing to share with E&Y. This method of business is contrary to standard Russian operations. A

general distrust of those outside a span of control is still common. E&Y is therefore forced into

coaching their clients into a paradigm shift. Not only does the firm need to perform their services

accurately and to their internally high standard, they much engage in the change management

necessary to obtain the requisite information. Although clearly outside of the global company’s

primary activities, it is necessary for them to build this type of facilitation into a core strength as the

Russian economy continues to evolve.

        An additional challenge exists with regards to standards in the accounting practice. The

Russian Federation has only just begun developing an accounting standardization group with

regulatory oversight of this activity. This initiative, which started two years ago, has not collected

any statistics to determine transparency and compliance acceptance. Furthermore, there is no body

of legislators organized with the proper skills to develop such a structure. The Russian government

does not have the facility to sustain this effort and, thus, it remains a barrier for Russian companies

seeking to enter the US market. The challenge for E&Y is to establish standards where none exist.

There is no legal basis in the Russian Federation for the firm to force its clients to comply. The

consulting business has to be based on international specifications and can only succeed if a local

company is truly committed to the effort. E&Y faces big challenges in getting local firms to reach

that amount of dedication and overcome local bias against such standards.

        Due to unique employment practices and laws, human resource operations in the Russian

Federation are unique for E&Y. The level of education amongst Russians is very high, a credit to

the large number of good schools and universities in the country. The policies that are mandated are
                                                                             Baioni, Farragher, Whitmer 14
very rigid and reminiscent of Soviet times. A newly hired employee has a three-month grace period

of performance review. After this time, it is very difficult for the corporation to fire the individual.

Poor performance is not a legal basis for removing someone from an organization. In addition, there

are limits on the number of foreign employees a company can hire and bring into the country to

work. The issue is compounded by the difficulty of obtaining a proper work visa for any significant

length of time. The culminating effect of these measures is a war for talent caused by the limitation

of selecting primarily from the general Russian populace. All companies operating in the region are

competing for a limited supply of highly qualified individuals. The selection process must be very

thorough to ensure that someone hired on truly has the proper skills to maintain a high quality

service. Furthermore, the best employees must be fully engaged with E&Y and content in their

position in order to retain them. Although E&Y can leverage its highly regarded reputation to attract

good candidates, it cannot merely address this issue with passive attention. Actively managing this

talent competition is essential to E&Y holding its position of high status in the local industry.

         Although it is the market leader, E&Y faces increasing competition in the Russian

Federation. All Big Four accounting firms have a strong presence in the area and also have their CIS

headquarters stationed in Moscow. In fact, the PriceWaterhouseCoopers building is almost directly

across the street from the E&Y center of operations. There are several external factors that are

affecting the Big Four, such as PWC litigation with tax authorities. Local firms do not yet pose

much of a threat, but might begin to show as strong competitors as the accounting services industry

grows.

         However, companies are ready to pay well for the services they require. Those whose

ambitions include going into overseas markets must be willing to be transparent; not only to E&Y,

but to individuals in other countries. With the strict regulations starting to go into effect, Russian

companies must begin to conform or risk government penalties. By focusing on their core strengths


                                                                           Baioni, Farragher, Whitmer 15
and bringing the right people into the organization, Ernst & Young stands to continue its market

leading position and create profit.



Current Strategy

       Ernst & Young currently offers a wide breadth of services with the bulk of its business

coming from helping domestic companies as they emerge on the world scene. Although the

company initially came to Russia to support its international clients who were opening facilities in

Russia, E&Y has found that greater growth is possible by pursuing domestic clients. This strategy

has served the firm well thus far, as it holds a leading market position against its primarily

international competition. While Ernst & Young offers a wide breadth of services to its customers,

two key components of the company’s business in Russia are the fraud detection unit and assisting

companies as they prepare to raise funds in international markets. Both of these businesses have

been served well by the emergence of Russia in the world economic scene, as companies look to

adopt Western standards and practices.

       Ernst & Young’s fraud detection unit has seen a great deal of growth which is largely driven

by the comprehensiveness of the services that the company offers its clients. Initially, the company

specialized in the literal aspect of fraud detection, meaning that it worked to detect instances where

the company may have been compromised and perhaps identified a course of action to deal with the

issue. Now the company offers a much more pro-active solution, as it looks to offer its clients

solutions to detect possible fraud such as setting up a hotline for whistle blowers within the firm.

Ernst & Young is progressive in offering these kinds of solutions to its clients, as services such as

the hotline were unheard of in Russia prior to Ernst & Young introducing them. In this the

advantage of Ernst & Young’s size and scope can be seen, as the breadth of services that the

company provides internationally allows the company to provide a complete solution that smaller

competitors may not be able to offer.
                                                                           Baioni, Farragher, Whitmer 16
       Helping Russian companies go through IPO’s in foreign markets has also been a strong suit

of Ernst & Young’s efforts in Russia. This portion of the business consists of two main parts: first,

Ernst & Young has to work with the client to help the company to get its financial reporting and

corporate governance in line with the expectations of the foreign capital markets. Next, it must help

the client to navigate the IPO process and help to secure an investment bank that will underwrite the

IPO in a foreign market.

       Helping the Russian companies to bring their reporting and governance to western standards

presents the bulk of the work in bringing a Russian firm to an IPO. Traditionally, Russian firms

have not had to follow strict reporting practices, and rules regarding corporate governance were

nearly non-existent. However, western investors and regulatory agencies require that certain

standards be met in order to raise capital, thus Ernst & Young must work with its clients to help

bring the reporting and governance in line with expectations. This is particularly true if a company

wishes to raise capital in American markets, as the requirements brought on by Sarbanes-Oxley

mean that a company must work a great deal in order to bring its reporting in line with requirements.

In fact, these requirements are leading many Russian firms to eschew going through an IPO in New

York in favor of pursuing capital in London or Frankfurt.

       Once the client’s reporting and governance are brought in line with expectations, Ernst &

Young must work with the client to navigate the IPO process. Although most of the work of finding

interested investors and of setting the initial offer price is done by a contracted investment bank,

Ernst & Young must still work with its client to identify an investment bank that will look out for the

client’s best interests and make sure that the offering is fully subscribed. Ernst & Young also works

with companies that are seeking to raise capital in domestic markets as well, although the size of the

domestic market is often too small for Russian companies that are seeking large sums of capital. In

addition, for many companies it is important to be listed on foreign exchanges as a matter of

reputation and to build an international presence.
                                                                          Baioni, Farragher, Whitmer 17
       Ernst & Young’s strategy of catering to domestic clients while offering western services

provides many challenges with regards to human resources. On one hand, the company requires

employees who are knowledgeable in western business practices. However, since the company is

works with domestic clients, this requires employees with a deep understanding of local business

practice, an understanding which likely requires a Russian employee. Thus, in order for Ernst &

Young’s strategy to be successful they must work hard to compete against other companies that are

chasing after the same scarce labor market resources. This is an ongoing challenge for Ernst &

Young, as they must fight against their competitors to keep their talent in the company as well as to

attract new employees. E&Y focuses its retention efforts on offering educational advancement to its

employees and opportunities to visit western countries.



Outlook for the Future

       Ernst & Young is positioned to take advantage of the many opportunities in the Russian

market, as the macro trends seen in the economy will lead to a strong business environment not only

for the Russian firms themselves, but for the firms that provide services to these firms as well.

       One trend that will impact Ernst & Young moving forward is the emergence of the Russian

stock market. Currently, in order to secure large sums of capital, Russian firms are forced to go to

foreign markets in order to secure the capital they require. However, as the Russian economy

becomes more financially mature, firms should be able to raise funds domestically, which is likely a

more attractive proposition as it will likely be cheaper and provide less exposure to currency risk.

This could create a large market for support services within the Russian economy, as domestic

investment banks will be needed to guide companies through the IPO process, as well as Russian

firms that will be able to provide due diligence services and navigate companies through the Russian

regulations. This could provide a great deal of opportunity for Ernst & Young. However, they will

have to work to build superior expertise in dealing with Russia’s domestic capital markets. In
                                                                          Baioni, Farragher, Whitmer 18
addition, the emergence of the Russian stock market could provide the opportunity for Ernst &

Young to provide services to foreign investors, as they can use their knowledge of the Russian

market to provide due diligence services for foreign investors who wish to invest in the Russian

stock market.

       Another trend that will impact Ernst & Young’s business is the movement of the Russian

government towards greater oversight of companies. This could lead to a tightening of reporting

requirements, as well as a potential change in tax laws for companies. Both of these changes would

lead to a greater demand for Ernst & Young’s services, as the company will be able to provide

consulting services to deal with these new requirements.

       As high returns continue to be realized by multinational firms who choose to invest in

Russia, it is likely that the market will continue to attract new participants. As these firms move in,

they will require the services of companies such as Ernst & Young for assessment of the local

market as well as helping with tax and governance issues. Ernst & Young needs to stay positioned

to assist multinational firms that are looking to do business in Russia, by maintaining its leading

position in tax help as well as helping companies acclimate to the Russian market. In terms of

staffing requirements, this will likely lead to additional requirements for ex-pats who are familiar

with the firms as well as native employees who have a better working knowledge of doing business

in Russia.

       Finally, there is the potential impact of Russia being accepted into the World Trade

Organization. If this would to occur, it would open up the economy to the rest of the world

substantially, and thus Ernst & Young’s global expertise would be in great demand. Companies that

have a strong international brand would be at an advantage, as Russian firms would rely on their

international expertise as they looked to expand abroad.

       Each of these trends bodes well for Ernst & Young in the future. The company’s

international brand as well as the company’s expertise will put it in a strong position as Russian
                                                                          Baioni, Farragher, Whitmer 19
firms seek help in capitalizing on Russia’s emergence as an international economic power. Moving

forward, Ernst & Young’s primary challenges will be in continuing to attract the somewhat sparsely

available talent needed as well as maintaining a leading position against its strong international

competitors. In addition, Ernst & Young must be on the lookout for local firms that may wish to

move into the business, ones who may have an inherent advantage in attracting talent in some of the

opportunities that they can provide.

       Another key point looking ahead is expansion into other markets in the Russian Federation.

Currently, Ernst & Young does have offices in the CIS outside of Moscow, but the bulk of the firm’s

efforts are centered on the city. Moving forward, Ernst & Young may wish to work to engage

clients outside of Moscow, as the growth seen in the capital city may work its way throughout the

country. In this case, there is a good chance that Ernst & Young could capture something of a first

mover advantage by being the first large international consulting firm to establish a presence in some

regions. This expansion could initially be led from the Moscow office, but as the offices expand

greater autonomy could be passed to the new offices. This would allow the new offices to react

quickly to local changes.




                                                                          Baioni, Farragher, Whitmer 20
Sources:



“Ernst & Young.” February 2008. www.ey.com

http://www.ey.com/global/content.nsf/International/Home

http://www.ey.com/global/content.nsf/International/About_EY

http://www.ey.com/global/content.nsf/resources/Global_Review_07/$file/GR07_home.html

http://www.ey.com/global/content.nsf/resources/Global_Review_07/$file/GR07_home.html



“Forbes Magazine.” November 2007. www.forbes.com

http://www.forbes.com/2007/11/08/largest-private-companies-biz-privates07-

cx_sr_1108private_land.html



“CNNmoney.com” February 4, 2008. www.fortune.com

http://money.cnn.com/magazines/fortune/bestcompanies/2008/full_list/



http://www.transparency.org/ April 26, 2008




                                                                       Baioni, Farragher, Whitmer 21

				
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