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Russia: it's not business as usual.

It's Not Business as Usual

Imagine you want to start a business. You have a good idea, product, or service, and there is a market for it. However, you need capital to get started. Your bank has none, nor does it have any idea how to lend it to you if it did. Your government is bankrupt and looking for its own lines of credit. Laws change weekly, if not daily. Last, but not least, your customer, who desperately wants what you have to sell, can't afford it today and won't be able to tomorrow. Even if he could, he has no way to reach you and you have no reliable way to transport your product to him.

Doing Business . . . without Basics

These and inumerable other problems face the fledgling Russian business. And western business as well. Joint ventures and western entries into the Russian marketplace are happening. But the obstacles are formidable, the wait for profits is long, and the physical arrangements are uncomfortable and sometimes impossible. According to Al Walling, the manager of Huntsman Chemical's operation in Moscow, "Foreign business will encounter uncertain travel, unusual conditions, lower standards, and frustrations at every turn."

To begin with, communications capabilities are far behind western standards. It is often difficult to get a clear telephone line across Moscow. Party lines, interference, and busy signals are common. No Russian city, including Moscow, has now or ever has had telephone books. There are private books which are rarely complete or up to date.

In addition, 70 years of communism have instilled an entirely different idea of the work ethic than private enterprise is used to. Walling says, "You can't depend on getting anything done on time. You've just got to do business the Russian way. Once you understand that it gets a little easier."

Basic Infrastructures Don't Exist

Transportation of goods or raw materials cannot depend, at this stage, on Russian trucks, trains, or planes. Aeroflot is grounded in almost all domestic routes because of lack of fuel. It is questionable whether Russian trains will be able to cross borders until they can pay rail taxes in foreign countries. Trucking companies are unreliable. McDonald's provides its own trucks for its one franchise in Moscow, bringing its own beef and produce into the city. Huntsman Chemical also uses its own trucks to bring raw material from Ukraine. There are some western trucking companies, from Finland, Germany, etc., but they are few and far between. Just as the food distribution system in Moscow has been utterly destroyed, distribution of any product is erratic at best. And the situation in Moscow is much better than anywhere else in the country.

Most important is the difficulty in converting ruble profits. Until the ruble becomes convertible, the only way to get profits out of the country is in trade for Russian goods, or in the many hotel and restaurant joint ventures in which a foreign enterprise develops the property and handles ruble transactions on one side of the restaurant and foreign currency on the other. Presumably the hard currency side makes profits for both. There are also several hard currency grocery stores, run by the Finns, Irish, Germans, and Italians. Food is imported into Russia and sold in the stores for dollars or with credit cards. They are expensive but do provide goods that cannot be found any other way.

Natural Resources Are Promising

Probably more profitable in the long run is to invest in oil, gas, coal, and other natural resources which can be transported out. Russia is rich in natural resources and could eventually provide much of what the West needs. In the meantime, many western companies are preparing for that day. Paul Dougan, manager of corporate development of Equity Oil in Salt Lake City, spent two weeks in Moscow and Siberia looking at joint venture oil exploration. A protocol just signed with the Russian Institutes of Geology and Geophysics provides Symskaya Exploration Inc., a newly formed partnership between Equity and Coastline Exploration Inc., with the opportunity to purchase data that covers 11 million acres in Siberia. Equity will then have the right to select 10 percent of this area for exploration, development and production. The specific terms and conditions are being negotiated. Dougan agrees the chaos that exists now presents many challenges. "You have to assume it is a mess but that you can cope with it. A |can do' attitude is a must. Common sense says you have to expose as little money as you can now, but now is the right time. They might not need us five years from now."

Vil Kikot, counsel to the Russian Parliament, has worked with attorneys in the firm of Parsons Behle and Latimer. In a telephone interview he stated that the possibilities for collaboration in natural resources has improved considerably in the last two months. "The legislative situation is much better now and new laws will be adopted and published in the next five or six months that will create a new legal situation which will be positive and good for the currency situation," Kikot said.

At present, large or cheap credit lines are not available and it is hoped that the shock impact of price increases will not produce dramatic shortfalls in hard currency because of reduced foreign investment. He agrees with Dougan that waiting too long would not be beneficial. "Start preparing now so you will be ready to move at the right time."

Preparation Is a Necessity

Preparation is the key according to the Moscow office of the law firm Le Boeuf, Lamb, Leiby and McCrae. New laws are published weekly, and the new laws are updated almost as often. The transition from the communist system to a free market has unleashed a frenzy of new tax laws, regulations, and decrees that frustrate even the most informed attorneys and accountants. Walling adds that "finding the right people to deal with is difficult. Everything depends on who you know to get things done and that changes all the time."

On the plus side are the business successes that can and will flourish over the long term. Russia needs everything and has tremendous undeveloped resources. The Russian people are eager and willing to learn. Many, particularly the young, have embraced the free enterprise system with open arms. Ilya, a 28-year-old Russian, was a confirmed socialist four years ago. Today he works for US West and proudly talks of their plans to build satellite systems, cellular networks, and fiber optics. But most Russians have no background in economics and know little about how the West has operated in the last 70 years. It is like learning a new language. First one must learn the alphabet, then the vocabulary, then the nuances of the system. It will take time, with misunderstandings, delays, and unfulfilled expectations along the way. But the Russians have never dishonored a commercial contract since 1917, and one wouldn't expect them to start now.

Other Utah companies are involved in Russian or Eastern European ventures. Flexibility, protection of assets, and an awareness of the everchanging, transitional nature of the system and of government entities is a necessity. It won't change soon, but the possibilities for profitible ventures exist and will continue to arise.

PHOTO : Utah's Equity Oil is exploring joint ventures in Russia.
COPYRIGHT 1992 Olympus Publishing Co.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:observations on Russian business climate and opportunities for Utah companies to do business in Russia
Author:Hillis, Kathy
Publication:Utah Business
Date:Mar 1, 1992
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