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Business Russian-style.

How business is done in the land of Boris Yeltsin

MOSCOW - Russian openness in business has its own interpretation. Here in Moscow a whole set of business principles and procedures come into a deal. Some fit the streetsmart capitalism. Some don't. In a land where the mother language doesn't include the words "risk or profit" capitalism marches to a different drummer.

Sergei Michelson, the economic editor for the Nevsky Times, the largest circulation newspaper in St. Petersburg, explains how to find office space.

"If someone wants to find an office on Nevski Prospect (the main street in St. Petersburg) the bribe will be $10,000 (U.S.)," he says in a flat voice.

Some Canadian companies have plucked up courage and plunged into one of the most energetic but volatile marketplaces in the world. A 30-year-old Winnipeg construction company, F.W. Sawatzky, is among them. Sawatzky is renovating old buildings in Moscow providing much needed office space for large foreign companies moving into the country.

David Evans, the son of company owner Lorne Evans, runs the Sawatzky operations in Moscow through a joint-venture firm, Swatstroi. His partner is Glavspetstroy, the Ministry of Special Construction. Glavspetstroy is a government firm, based in Moscow, that employs 120,000 people throughout the former U.S.S.R. building the drab multi-family apartment buildings which are accommodation for the majority of Russians.

Evans has lived in Russia for two years. When he first arrived he was shocked at the condition of the country.

"I was surprised at just what a mess this country was in -- it's a garbage can. This system has completely flattened the capacity to get anything done. Russia is a nation of preventers -- that thinking still exists," he says.

The children in this city of 10 million people have never lived in a single-family home. Any homes in the countryside shelter several families in cramped conditions. And whether you live in a city state-owned apartment or house in the countryside there is no tapped hot water. If you want it you heat it yourself. In St. Petersburg, the centrally controlled gas heat was turned on only three times last year on the coldest days. It is a country where what Canadians take for granted doesn't exist.

In this primitive environment, Evans gives credit to the value of his Russian partnership in getting things done.

"Without a good joint-venture partner here you can't get sewer, electrical, heat or (building) permits -- you die in the dark," he says.

Yet, for all this, the business potential for Swatstroi in Moscow is huge because of an estimated 26,000 decrepit buildings which could benefit from Swatstroi's attention. Evans says that to get office space a firm has to join a waiting list that's growing longer by the day. Once at the head of the list, be prepared to pay -- a lot.

For comfortable western-style office space in Moscow, the current charge is $80 (U.S.) per square foot annually. The entire rent for the first three years is payable in advance then the renter waits while the contractor uses the money to renovate the property. Pent up demand for space has resulted in plenty of work for joint ventures like Swatstroi. To date, the Winnipeg/Russian firm has renovated three buildings and leased them to heavy corporate hitters like Marathon Oil, world-wide accountancy giant Arthur Anderson and two international law firms. General Electric snapped up one of the smaller Swatstroi projects. Evans even brought in mobile prefab office units, the kind more often seen on hydro camp worksites in northern Manitoba and offered them on one year leases. They were devoured.

Now, Swatstroi is working on Pushkinskaya, a former hotel which belonged to the Moscow police department. It is due to be finished February 1st and is destined to be the jewel in the rental portfolio. The prime draw is the location -- a golf shot from the office of Boris Yeltsin, the bureaucracy of the Russian parliament and fixers behind the high-walled Kremlin on Red Square.

The reason western firms like F.W. Sawatzky are thriving is because Russian office space, if it were available, just doesn't cut it. For 70 years Soviets have been content with telephones that do not work, toilets that don't flush, non-existent heating, long hallways, and tiny elevators in which there are no lights. No matter how much a foreign company feels the need to be in Moscow, and many do these days, it's unlikely they will be willing to plunk down an inflated sum -- in hard currency only -- to rent such dumps. It is bad for their image.

Unlike some other western construction firms, Swatstroi uses Russian labour and materials, with one exception. Paint, wallpaper, carpets, and lighting are all imported; the steel beams, dry-wall, cement and wiring and other skeletal components are Russian.

Nonetheless, through the strength of a good joint-venture partner, the Winnipeg firm is busy and profitable. Being a private firm means Sawatzky does not reveal its profits, however, Evans points out that even if he was free to discuss margins, it is impossible. After several years of debate, the government has still not figured out what corporate tax it will levy on foreign firms. The result is that Swatstroi earnings sit in a bank awaiting the tax bite.

Most western firms are in the same position and they fear that bite will be large. Much of the Russian economy is underground -- the black market -- and, not surprisingly, few taxes are collected on such transactions. As a result, a disproportionate tax burden is placed on foreign companies that keep records which can be checked. And the government is hungry for cash.

Dr. Karonina Helen, an economist with the Institute of Conversion N.W. Branch, in St. Petersburg, is pessimistic about the future.

"There are no rules to this game and the government is unpredictable," she says. "It only wants the tax revenue." Helen's job is to help factories which have made military goods for decades, change over to consumer production. In St. Petersburg, population 6 million, there is enough work to keep her occupied for a long time. Until recently, military production kept 80 per cent of the city's factories busy. Part of the problem she encounters when dealing with factory managers is the lack of basic education in business concepts. A primary stumbling block is the Russian language -- it has no words for 'risk', 'profit', 'businessman', 'capital' or 'market'.

Furthermore, foreigners and entrepreneurial Russians are reluctant to invest heavily since the question of who can own what is still not settled.

Newspaper editor Michelson says that's a problem for investors. "A new law about land ownership is supposed to be included in the new constitution, but Parliament is totally against private land ownership and is trying to slow it down," he says.

In this unstable world of bribery, crumbling infrastructure and a bruised and battered people struggling for survival, some Canadian firms have jumped into the fray successfully.

Canadian Andrew Ivanyi works for one such business. The Moscow Aerostar Hotel is a joint venture between IMP (Group) Ltd., a Halifax-based company, and Aeroflot Soviet Airlines, the national airline of the former USSR.

Ivanyi leans back in his chair in his spacious corner office of the 417-room hotel he manages a short distance from the Kremlin. He responds to a question about who stays at his hotel, the Moscow Aerostar.

"Everyone from diplomats to arms dealers," he drawls in an acquired British accent. The caution of this well-traveled, career hotelier is part of the code of confidentiality offered the international business traveler.

The Aerostar is a sumptuous structure in which Canadians have invested. The rates start at $205 (U.S.) plus a new 28 per cent state tax for a single room. The hotel was started for the 1980 Olympics, but left unfinished for nearly a decade, a result of the U.S. withdrawal from the games because of the U.S.S.R.'s invasion of Afghanistan. Canadians took over the project in a joint venture deal in 1989 and are now reaping the benefits of their foreign investment.

And what an investment it is. Since the Aerostar opened in March 1992, the hotel has been running at an 80 per cent occupancy rate which would make most hoteliers in Canada drool. By comparison recent occupancy rates in Ottawa averaged just 57 per cent.

And the presence of Canadian investment in the hotel is obvious to every guest. Canada's bold, simple, red and white flag, flutters on a pole outside the hotel. It is one of the few Canadian flags flying in the Russian capital.

Despite doing a booming business, the hotel is in a spot of trouble; in fact, it's suing the city government. On August 3, a 28 per cent tax was levied on all hotel rooms owned by foreign companies. It was a massive, overnight hike from the previous rate of just five per cent.

Ivanyi, who previously managed a Holiday Inn in downtown Toronto, doesn't have a problem with taxes if they are applied evenly. His concern is that the Aerostar is the only hotel -- out of nine in Moscow catering to foreigners -- which is charging the room tax. A source, who asked not to be named, claimed the other hotels are tax-free because "they know who to pay-off in the government."

Business can be difficult in Russia.

Lorne Evans knows that. Yet, F.W. Sawatzky has become a model for Canadian-Russian co-operation. But it wasn't easy. Evans first went to Russia in 1989 but the trip was a flop. The idea he was chasing after -- building a resort for foreigners near Moscow -- mushroomed to become a signed protocol to erect a chain of hotels from the north to the south of the country. When Evans got back to Canada, he says reality set in. What seemed feasible in Russia looked foolish in his office. He was even afraid to approach his bank with the idea.

Evans hung on to find success. He has made the long, tiring journey a dozen times to take part in this struggling new market-driven economy. He plans to make this trip many more times digging deeper the profitable roots for his company.
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Title Annotation:conducting business in Russia
Author:Ryan, Bramwell
Publication:Manitoba Business
Date:Jan 1, 1993
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