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Western security ventures East.

AS THE COMMONWEALTH OF Independent States (CIS) struggles to create a free market economy, it will have to develop not only new systems but also new concepts. The word profit, for instance, has no Russian counterpart, and white-collar crime is considered by some to be simply shrewd business. Creating private sector security in such an environment is challenging but essential if private enterprise is to flourish.

The Ukrainians are beginning to confront these issues. In May 1991 a group of Ukrainians from Kharkiv, the second largest city in the Ukraine, came to Cincinnati, Ohio, as part of a friendship exchange program. That visit piqued my interest in security opportunities in the CIS, and I began discussions with two of the Ukrainians who were interested in developing a joint venture to establish a private sector security and loss prevention business in the Ukraine. One of the Ukrainians was a former KGB colonel and the other is a deputy director of what Ukrainians call a non-governmental agency, which is similar to a think tank in the United States.

The nongovernmental agency the deputy director belongs to or a similarly structured enterprise will serve as the hub of our joint venture. It will advise companies and the government regarding criteria for public and private security, including such issues as audit controls, workplace safety, access controls, and white-collar crime.

Since Western systems can serve as a model, my two Ukrainian associates returned to the United States in January 1993. They visited public and private security professionals in Cincinnati. They toured security operations at several businesses, including General Electric and Procter & Gamble, and met with public security authorities, including the Bureau of Identification and Investigations for the state of Ohio, a local prosecutor, and a white-collar crime specialist.

The Ukrainians also met with Ohio police officers and visited a training academy used by both public and private security officers. It was evident from these meetings that policies and procedures Americans consider to be normal operating business are new to Ukrainians, at least in part because they are not accustomed to thinking of businesses as victims of workplace crime. In their past, the state owned everything and only the state could be a victim.

The Ukrainians are very interested in attracting foreign companies to their country. In that regard, we discussed the need for background checks of such firms. Before a company would be allowed to operate in the Ukraine, the joint venture operation would determine whether the firm was a legitimate business and whether its principal officers and owners had good reputations. If successful, this arrangement may serve as a prototype for other regions in the CIS to follow.

THE UKRAINIANS' TRIPS AND MY OWN subsequent visits as part of a friendship delegation to Kharkiv, Moscow, St. Petersburg, and Kiev revealed both the possibilities and the inherent pitfalls of trying to conduct business in the CIS. Perhaps the first mental roadblock that many Westerners face is that they may have to deal with the former party elite. These ex-communists have different titles now--the former KGB officer with whom the joint venture is being negotiated is now a colonel in the Ukrainian Security Services--but their history is no secret. Does this make them poor contacts? Not necessarily.

Many members of the elite have reevaluated their priorities. One of the new priorities is to assist in developing a private sector that can do business on a worldwide level. They believe that the KGB no longer exists and that its approach to security is no longer acceptable. Helping to translate this monumental change in attitude into concrete developments can be rewarding in every sense of the word.

A more serious impediment to doing business in the CIS is the restriction on exporting profits. Work done within the CIS is compensated in local currency. In my case, consulting services have been paid in rubles. Some companies set up elaborate import-export relationships to transfer these earnings to their own headquarter countries.

I was able to use the funds to pay for the U.S. visits of my Ukrainian associates. We will also be able to alleviate the problem in part by charging fees directly to the non-CIS companies whose backgrounds we are checking and requiring that they pay in hard currency. A more comprehensive long-term solution will, however, have to be found for work done in the CIS.

Another problem is the absence of private security experience in the CIS. Acting as a consultant, I had an opportunity to meet with numerous business and government representatives in the CIS. In discussions with Kharkiv's chief of police, it became obvious that a basic private sector security and loss prevention effort is virtually nonexistent. He explained the problem as one of simply "not knowing what to look for" when it came to private sector criminality.

The chief also had a difficult time understanding Western laws dealing with white-collar crime and private-sector liability cases. The thought of a company handling a case of internal fraud or theft outside of the criminal justice system, with civil penalties for instance, was new to him, and civil suits for personal injuries, product liability, medical malpractice, and intentional torts were totally inconceivable.

Retail business in the CIS is still dependent on state-owned and -operated retail establishments. A few small independent retail operations exist, offering mostly homegrown products--produce, bread, and some meat or fish. Foreigners, however, can purchase merchandise from hard currency stores called beryozkas or kashtans, which have better inventory but higher prices than most Russians and Ukrainians can afford.

The economy is still in critical condition, and inflation is rising daily. Unfortunately, when the economy is in decline and money is tight, people do whatever is necessary to put food on the table.

The reduction of military forces in the CIS has added to the problem. Suddenly, six million soldiers became unemployed. The reduction in the defense budget has also resulted in additional unemployment in defense-related industries; and the government, the largest employer, is virtually out of business.

Crime in the CIS is on the rise, and not just crimes promulgated by necessity. The CIS is also experiencing criminal activity motivated by opportunity and greed. While this might be called organized crime, it is not like the organized crime syndicate in the United States. Russians and Ukrainians often refer to any group of people committing crimes as the Mafia, but three men standing on a corner selling fur hats and matroyska dolls to tourists are not a syndicate, although they may represent the initial stage of organized crime activity.

Undeniably, the black market is flourishing in the CIS. Technically, the black market is illegal, but it is tolerated by law enforcement. Severe shortages exist in the state-operated stores, and the small mom-and-pop retail operations are limited. If people have enough hard currency, however, they can buy whatever they want on the black market. Consequently, people see the black market as their only alternative, and they consider it to be an exercise in the first principle of private sector free enterprise--fulfilling the supply-and-demand theory.

The CIS has also experienced the second stage of organized crime--the protection racket. If a person is engaged in an illegal business, he or she cannot go to the police for protection; that individual is forced to hire private protection. The protection is usually offered by the people from whom the victims should be protected. The problem has been escalated by influence from outside of the CIS and the relaxation of regulations for citizens, tourists, and immigrants.

In addition to internal disorganization, many of the individual countries that make up the CIS are in conflict with each other regarding such issues as shared resources. The poor relationship between the Federation of Russia and the Ukraine is a classic example. Under the former government, Russia was in control of the petro-chemical industry, and the Ukraine was the major food source for the Soviet Union. The situation remains the same, except the two countries have not been able to negotiate a viable trade agreement. The result is Russians are driving around in their automobiles hungry and Ukrainians are on foot with full stomachs. This situation allows the black market to thrive.

I witnessed another example of this infighting one evening in the Ukrainian forest where an enterprising young man was selling gasoline. He had access to a tanker truck that he drove into Russia three times a week. He smuggled gas across the frontier for sale to the Ukrainians. The long line of customers included a number of uniformed police officers and military personnel. His problem was not the police but the hijackers and bandits along the way.

The independent governments are individually venturing into the world market at a slow pace. In the Federation of Russia, which is the world's focal point with regard to the CIS, there is political and ethnic strife. In the Baltic republics, free enterprise is secondary to armed conflict, and the Asian republics are closely allied with Chinese and Asian nations. These factors deter Western business.

In the Ukraine, a strange mixture of old-world ethics and culture and high technology may also confuse Westerners. An understanding, if not an appreciation, of this mixture becomes important when conducting business in the Ukraine.

My experience in an ice cream store in downtown Kharkiv one evening illustrates the point. The ice cream (which is handmade and quite good) is sold by the gram. The lady behind the counter carefully scooped it into a dish where it was weighed on a sophisticated digital electronic scale. She then calculated the price of the meticulously weighed ice cream on an abacus, flipping the tiny balls back and forth and coming up with the correct price as deftly as the computerized scale came up with the weight. The technological contrast was startling.

THE PEOPLE THROUGHOUT THE CIS MUST live with uncertainty, not knowing if the same government will remain in power from one day to the next. In the interim, inflation is running wild, industry has come to a halt, and consumer goods are less available. Until recently, the Ukraine was printing coupons to replace the Russian ruble as currency. During the first year of independence, the coupons were printed without serial numbers.

Despite these problems, many opportunities exist for Western companies to succeed in the CIS. Government officials are willing to work with any company that will start small and grow within the CIS, using the country's natural and personnel resources for its development.

Opportunities abound for such ventures because basic technology in the CIS is twenty years behind the West. The food production industry offers a good example. In the Ukraine, crops are rotting in the fields because no private processing, packaging, or shipping facilities are available. In Moscow, the big news was that someone had introduced the plastic bag to bakery shops, increasing the shelf life of bread. The discovery was applauded as a major breakthrough in retailing. Many problems are just as simple to solve.

Foreign businesses, although anxious to take advantage of a large new market, are reluctant to invest in the CIS for many of the reasons already stated. Some business executives also believe that they will have to bribe existing or former government officials or otherwise bow to corruption. My own experience in this region suggests that, contrary to popular opinion, many of the illegal or unethical private sector activities are instigated by the investor's willingness, rather than the government's insistence.

Government officials contend that business can operate above board as long as it is mutually beneficial to the investor and the country. Many foreign companies, especially American companies, can succeed in the CIS. Those that are successful will also find that the relationship may create a potential backdoor opportunity into Western European markets.

Joseph M. Dee is a partner of J. M. Dee & Associates in Cincinnati, Ohio. He is a member of ASIS.
COPYRIGHT 1993 American Society for Industrial Security
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:International Security
Author:Dee, Joseph M.
Publication:Security Management
Date:Apr 1, 1993
Words:1985
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