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Russia: taking a closer look.

Even though a land of turmoil and uncertainty, Russia holds big promise for American investors. Yet, Americans are wary of developing business ties in Russia. In this article, Steve R. Smirnoff, special assistant on international relations to the mayor of Anchorage, Alaska explores the issues and the perceptions on both sides.

Russian President Boris Yeltsin has changed the focus of what had been a campaign for monetary aid from the West, to a push for trade with the West. This emphasis should be good news to the United States. However, the recent history of the two countries in this area shows Americans wary of business relationships with the Russians. Despite many trade missions and promising speeches, only marginal progress is being made toward reaching a common ground and agreeing on how to do business. But both sides need to act rapidly if the positive climate of developing business ties between East and West are to continue and expand.

The recent lackluster performance by the central Russian government in repaying international bank loans is causing American legislators in Washington to look very carefully at any future infusion of capital by the U.S. Export-Import Bank. In a recent public statement, Arizona Representative Jon Kyl said that he plans to introduce legislation soon which will effectively bar the Export-Import Bank from underwriting future Russian loans to purchase U.S. oil field equipment and services until such time that the Russian government pays its huge debt to the Department of Agriculture's Commodity Credit Corporation. If passed, the most active area of current business ties between Russia and the United States could be crippled.

For the first time since the ice curtain was lifted by former President Michael Gorbachev, reality seems to be setting in. The euphoria and promises of yesterday are giving way to a careful look at just what the Russian effort at converting to a market economy has meant to the Russian people. There are very strong indications that Ruslan Khasbulatov and other conservative-leaning members of the Russian Parliament, are gaining public support in opposing market reforms set forth by President Boris Yeltsin. But even though time is short, it appears that the long-term benefits of productive trade are clearly understood by all factions of the evolving nation.

The process of planning to do business with Russia has been an evolutionary one. It started with the giddy euphoria brought on by visions of a new market of 250 million consumers, unlimited potential and, possibly, great profits. Euphoria has quickly given way to reality and a realization that market penetration will not be as easy as first envisioned and that substantial barriers exist. Today, the American business community is hesitating about linkages as it analyzes the benefits of doing business with Russia and evaluates the very real pitfalls which can and have resulted in tragic financial consequences. The previously unthinkable question is being asked across corporate America: Do we want to do business in Russia considering the major problems which face Western interests?

Understanding Russia's System

"One of the biggest problems American business people continue to face is their failure to understand how business is conducted in Russia. Even though our way may be better, it is not the only way and we absolutely must make an effort to see matters from the Russian perspective," explains Jerry Rohan, computer information specialist in Earnst & Young's San Francisco office. "If we are to succeed, we absolutely must understand the Russian value system and accept that there are different points of view and reference employed by our potential business associates".

This very excellent advice could have prevented any number of problems which have plagued American enterprises that attempted to work with Russian interests. Be that as it may, the facts are that many American companies wish they would never have entered into agreements with Russian partners, and are now looking at ways of gracefully extricating themselves from what they view is a no-win situation. The Russians, on the other hand, are growing weary of American intransigence and what they perceive as a lack of immediate commitment of funds and manpower. States a high level trade official who wishes to remain anonymous: "Americans talk a big game but when the time comes to put up their fair share, all of a sudden things come to a complete stop."

Many barriers to conducting business in and with Russia are well-known: wildly fluctuating and non-convertible ruble, hazy and often ambiguous tax laws, capricious regulations governing repatriation of profits, political instability of local and national governments, and lack of sophistication by the Russian partner or client. There are others that may be more vexing: the presence of what is loosely referred to as the Russian Mafia, and the rapid rise in the number of corrupt officials who are demanding bribes in order to facilitate the conduct of normal business.

Organized Crime Denied

The Russian authorities do not deny the presence of a criminal element, but categorically deny the existence of an organized national criminal organization operating in their country. "These are groups of hooligans and undesirable who are taking advantage of the turmoil now present in Russia," explains Gennadi Katkov, general director of the Russia Association for Business Cooperation with countries of the Pacific Rim. "The Mafia is, after all, much bigger and better organized in the United States," he adds with a chuckle. However, other highly placed Russian officials corroborate the existence of organized crime and tie it in with the loosely knit criminal elements from the southern Russian republics, especially Georgia and Armenia. At the moment the Russians, and not foreigners, seem to be the victims of such traditional enterprises as prostitution, drugs, pornography and the payment of protection money.

Bribery, however, very much involves foreigners attempting to do business in Russia and is becoming the rule rather than the exception. U.S. federal regulations pertaining to giving bribes are stringent and quite clear. The Foreign Corrupt Practices Act strictly prohibits giving bribes to foreign officials in order to obtain business.

Even though these strict regulations are well known to Russian officials, cases of Russian bureaucrats demanding payment up front in order to be given access to the appropriate agencies, licenses, banks and so on are on the rise.

The demand for bribes seems to have its roots in the nation's desperate need for foreign currency, and for people to survive in an economy which is out of control. Western observers add that the entire moral fiber of the country is in danger of total collapse. "Some Russians, including those in high places, have totally lost sight of what is right and what is wrong," says a Western business executive. "Desperation will do that to a society."

Russian officials traveling to the United States as members of trade delegations lecture Americans that demands for bribes are an aberration and should not to be tolerated. "Just say no and walk away" recommends Pavel Morozov, deputy general director of ACFES, a multifaceted company with interests in shipping, tourism, ship building and general trade. Morozov explains that there is no reason to pay bribes even though they are demanded. "What American business people need to do is to get themselves a well-connected Russian partner or assistant and begin their contact through local governments. Don't go directly to the factory. Go and see the governor and have his office arrange appointments for you," he says. Excellent advice, but one sometimes hard to follow in a real world.

Look for a Russian Partner

The need to select a knowledgeable Russian partner, however, is a recommendation that is repeated over and over and one which should be followed. A well-connected Russian partner who understands your goals and limitations, and who comes highly recommended by a reliable source, is a priceless resource. Most Americans have learned the hard way that locals know things that most newcomers have no way of knowing or understanding. If you get a Russian partner who understands the Western way of doing business, or at least is willing to learn, you are miles ahead of the competition.

How does one obtain a good, reliable Russian partner? Research, research and more research. There is an old Russian proverb which states: "Trust, but verify." Excellent recommendation in your search for the right partner. Talk to people, ask for recommendations, request credentials and letters of recommendation from previous business contacts. Ask more questions. Do a dry run. Begin with a small task and evaluate the performance. Get to know your Russian partner socially, as well.

Another major problem affecting Russian business relationships are the constantly changing laws governing foreign enterprises. These include property and land ownership, taxes, and expatriation of profits. But, even though the ever changing legal framework poses significant problems and requires competent Russian legal interpretation, some basics have not changed. Explains Victor Spassky, commercial consul of the Russian Federation's consular offices in San Francisco, "There is a misconception in the United States that there are no laws in the Russian Federation regulating international trade and commerce, and that anything goes. That is not true. The existing Foreign Investment Law as approved by the central government in 1991 clearly lays out the framework within which American business interest must operate."

Whether any laws in Russia today are clear is a debatable point, but it goes without saying that knowledgeable American legal counsel must be retained before entering into any official contractual arrangements with Russian enterprises. According to John Fruth, computer information system specialist with the San Francisco law firm of Baker & McKenzie, an American business which has an attorney who specializes in Russian law and has access to Russian associates, can save not only substantial amounts of money in the long run, but can also avoid frustrating delays and future misunderstandings between partners.

The New Realities

There can be little argument that in the last twelve months the international business community has seen Russia in quite a different light. Gone are the visions of unimpeded trade, vast new markets, and large profits. Enter the reality of a new Russia operated by the old guard.

Since the heyday of glasnost and perestroika things have changed, and at the same time have remained the same. Commissars of yesterday have changed their hats which today read capitalist businessman. Lip service is given to change while the same old methods are being applied in dealing with the West. Political leaders of the right are pressuring the government to return to the days of pre-perestroika. A disillusioned, confused population is not at all certain that the call should not be heeded. At least then, the people on the street say, food was available and prices were 'normal.'

Still, this would be a bad time to quit attempting to conduct business with Russia. All of us have learned that the dream of instant conversion from communism to capitalism was too good to be true. Now comes the time to set a realistic course and commit to the long haul. Certainly, many of today's problems will continue to present barriers, but with persistence they will be overcome.

The bottom line is this: There is a huge consumer group waiting in Russia to be supplied with goods. From medicines to make-up, from clothes to cars, the pent up demand is there and will eventually be met. Whether it is the American business community that supplies these goods or some other nation with more perseverance and patience remains to be seen.

STEVE R. SMIRNOFF, APR, is the special assistant on international relations to Anchorage, Alaska Mayor Tom Fink. Smirnoff, who is fluent in Russian, travels to Russia frequently and was cited by the Alaska State Legislature for his pioneer work with enterprises of the Russian Far East. Mr. Smirnoff has widely lectured and written about the emerging Russia, and is currently developing a series of seminars on how to effectively conduct business with the Russians.
COPYRIGHT 1993 California State University, Los Angeles
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:business prospects in Russia
Author:Smirnoff, Steve R.
Publication:Business Forum
Date:Jun 22, 1993
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