This article makes a contribution to the state of knowledge on franchising in Russia by analyzing Russia as a target market for international franchising entrepreneurship. First, past research and literature on franchising in Russia and other emerging markets is reviewed. The country's franchising environment is examined in relation to five environmental factors: (1) demographics, (2) economy, (3) social and political environment, (4) culture, and (5) legislation. Some preliminary information on a major franchising system in Russia is presented. A complete SWOT (strengths, weaknesses, opportunities, and threats) analysis for international franchising in Russia is provided in the conclusion section. The article provides an up-to-date overview of Russian franchise environment, integrating research on the topic and collecting some primary information on the ground in Russia.

On a purchasing power parity basis, the average annual income for all income classes reaches about 7,500 USD (The Economist 2004). The purchasing power parity income per capita is a lot higher in Russia than the one calculated using exchange rates because the cost of living in Russia is in general much lower than the one in the United States of America for example.

The initial investments required to set up a franchise business can be rather considerable for small Russian businesses. One way to attract new franchisees is to establish financial arrangements with banks in order to increase the inflow of new requests for franchise agreements with them. For example, Rostic International has signed an agreement with Small Business Credit Bank, which opens two-year credit lines for Rostic's franchisees. Investments required to buy a western franchise are usually higher than a domestic one. Therefore, franchisors willing to expand through franchising in Russia should consider similar arrangements with reliable financial institutions (Sarkisov 2002).

Franchising is a relatively new phenomenon in Russia. The word franchising does not exist in the Russian language, but efforts are being made to educate the public, business and governmental audiences (Alon and Toncar 1999). There are several associations in Russia promoting franchising. The Russian Franchise Association, RFA, was established in 1997 as a non-profit organization. The RFA promotes franchising as a business concept and lobbies for the amendment of the Civil Code. Association members include franchisors, franchisees, and government agencies, business support organizations, non-government funds, banks, accounting firms and consultants (Sarkisov 2002).

Franchising in Russia is becoming more attractive because of the high demand for Western products, the establishment of a local franchising community and educational directives (Zeidman 1995). Demand for Western products is healthy in Russia, fueling the growth in foreign investments (Alon and Toncar 1999). According to Sarkisov (2002), U.S. franchisors are more popular than other foreign brands, because of the perception that USA is the "motherland of franchising". Besides the increase in local consumption, the growing tourist sector creates opportunities for franchisors especially in the hotel and motel sector (Alon and Toncar 1999).

Russian society can be rather contradictory. The recent economic stabilization presents Russia as an attractive investment target for international franchisors. A large consumer market with growing income rate is an appealing target market for any company searching for growth. Furthermore, the market is still relatively untapped, the demand for western products is evident and the population is rather concentrated. In addition, several organizations are promoting and supporting the growth of franchising.

The political and economic risk is omnipresent in the country. Legal, political and economic institutions are inter-linked and corruption is rather common. Many Russian citizens are unhappy with the way national wealth was distributed during the privatization of national conglomerates. The gap between the rich and the poor is widening. The rich oligarchs are hated and government actions are mistrusted. Social differences and instabilities will affect the entrepreneurial atmosphere in Russia.

In addition to the instability of the society, there are certain impediments, which are specifically related to franchising in Russia. In spite of the legislation concerning the protection of intellectual property rights, practice has shown that franchisors face it as a challenge. Russian legislative bodies are rather corrupted and there is no guarantee that court decisions will be enforced in real business life. Also, the law on commercial concession is regarded as an entry barrier for foreign franchisors. The code includes parts that clearly restrict franchise practices. Especially the article that allows the franchisee to renew the franchise agreement under the same terms is very restricting and unjustified from a franchisor point of view. Another major shortcoming of the law is the part that sets the franchisor subsidiarily liable for claims filed against the franchisee. This statement contradicts the main principle of the franchise system, the independence of franchisee as an entrepreneur. Nevertheless, it should be noted that some parts of the law, commonly regarded as obstacles for franchising in Russia, could be overlooked by stating the issues in the franchise agreements. In some parts the law gives an opportunity to agree otherwise by stating, "unless provided otherwise in the contract". Furthermore, companies like Kodak avoid the law by using an agreement of "quality control services", even though their operation clearly is franchising. Finally, there is no indication that franchisors would have faced problems related to the legislation. In summary, franchising has potential for growth in Russia, but the environment is still difficult to navigate and requires either a good partner or deep pockets in order succeed.