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Building castles of popcorn.

"In order to do business in Russia, one has to live there" says Tom Barnes. He ought to know. After almost a quarter-century in the construction business in Whitehorse, Yukon Territory, Barnes opened his own business in Magadan, in Russia's Far East, more than a year ago--selling popcorn.

In February 1992, Barnes sold his construction company, chartered a Russian AN-12 cargo plane in Anchorage, and loaded his household -- his wife, four children, a huge Ford truck and 10,000 pounds of popcorn -- into the plane. They flew across the Bering Strait to Magadan, the former capital of Stalin's labor camps.

Before taking such a risky step, Barnes had been to Magadan twice with the Rotary Club. It seemed to him that getting into business in post-communist Russia wasn't the scary prospect most people in the West thought it was.

But what made a successful Canadian businessman take the plunge?

"Some sort of mystery of the soul led me to do it," Barnes says. "The other reason, of course, lies in a typical feature of the Northern character, that being a deeply-rooted longing for adventure. It is a peculiar feature of all Northerners, no matter what part of the northern world they live in."

Even as his plane landed, Barnes didn't know exactly what he would end up doing in Russia. "But I had a sort of feeling that if I were able to set up selling popcorn, then I could survive in Magadan," he says.

Barnes got his first good advice on how to do business in Russia from the pilot who flew his family from Anchorage. "Don't try to throw yourself into our business. Don't try to get any partners right away," the pilot said. "Just keep your eyes open, look around, and try first to get the feel of Russian life, and only then proceed with actual business undertakings."

Barnes spent three months looking around until he began to figure out the basic differences between the way business is usually done in North America and the way things are done in Russia.

"I think that the difference is essentially in basic business principles," Barnes said. "And now it is absolutely clear to me that one has to live in Russia to do business over here. I had to come over and settle in Russia to come to that realization."

It took Barnes a year to get his company founded on Russian grounds. He had to get through Magadan's local government bureaucracy, the Russian banking structures, and all the same sorts of difficulties Russian entrepreneurs encounter in trying to start private businesses.

But now Barnes is the owner of one of Magadan's many new private companies, the Magadan Trading Co., legally registered as a Russian business. Barnes says if we were to draw analogies, then his Russian company would be, by Western standards, a proprietorship with limited liability.

"We've made up our minds to produce and sell food products that are not traditional for Russia. The first step: popcorn. As our network of small stores grows, we will be expanding and diversifying the supply of our products. Our future products might include hot dogs, french fries and various chips," he says.

To accomplish this goal, Barnes plans to create a dense network of trading centers. "Eventually these small stores will become our branch firms," he says. People who are working with them will be able to buy these small firms, together with all of the equipment needed to operate the firm. These people will continue working with the original firm as partners. The main company will be engaged in dealing with more strategic problems -- investing in development of the network, buying equipment, raw materials and advertising.

Right now, Barnes has two stores selling popcorn, both in Magadan's most crowded areas. In the near future, he hopes to open 10 more stores and expand beyond Magadan's city limits. His Russian employees run the American-made popcorn machines and are paid a thousand rubles a day.

"I invested almost all the money I have in this deal," says Barnes. "I've spent about $70,000. The money, for the most part, was invested in equipment and raw materials. If I were to start all over again now, I would have to spend less than a quarter of what I've spent this time, taking into account the expertise I've gotten out of it now."

But Barnes' biggest problem, and the biggest problem facing all foreign business people, remains the inconvertibility of the ruble. So far, he is investing dollars into his business, but his returns are in rubles.

One of the ways to develop a small business in Russia is "to start developing a cottage industry," Barnes says. "We're planning to bring raw materials and equipment over here through contracts with foreign firms. Then we're planning to hire a labor force and produce partly-finished or finished products, which we'll sell to the United States or Third World countries. This kind of business is quite acceptable in Russia now."

2Other problems arising for Barnes' company can also be solved. "First and foremost is the slowness of the Russian bureaucracy. I became convinced it is better to go about your business without waiting for help from the governmental bureaucracy. It's preferable to make your own contacts with other local businesses, both private and state enterprises. It's always easier to find common ground with them," Barnes says.

Another problem in Russia is protecting a business from racketeers, the so-called "mafia." Barnes says that so far the Russian authorities have not been able to provide protection, and this significantly increases the risk and expenses of small businesses.

On a more positive note, however, it doesn't usually cost much for a foreigner to start a business in Russia. To take the initial steps to get a business started, $10,000 is quite enough. To start the same kind of business in America, one would need more than $200,000, says Barnes.

"The best areas of investment in Russia today for small and average-sized businesses are in making food products, including products based on local agricultural raw materials, but processed using Western technologies," he says. Other good areas for investment are clothing production and housing construction.

"Russia is opening itself to a new life," Barnes says. "It will be a very short while before Russia makes its giant leap into a free economy."
COPYRIGHT 1993 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Magadan Trading Co.
Author:Timakov, Victor
Publication:Alaska Business Monthly
Date:Sep 1, 1993
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