RUSSIA: Doing business with the bear.

RUSSIA: Doing business with the bear. - In late 1989, on a winter's day that had most of Britain wrapped round a warm drink, Wyn Jones, a strong-headed Welshman, flew to Russia. As chairman of the family-owned Mono Equipment Ltd, Jones had decided that R

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Last Updated: 31 Aug 2010

In late 1989, on a winter's day that had most of Britain wrapped round a warm drink, Wyn Jones, a strong-headed Welshman, flew to Russia. As chairman of the family-owned Mono Equipment Ltd, Jones had decided that Russia was the next big market for his bakery equipment. Back at home his fellow managers were wringing their hands, incredulous that their boss should want to tackle such a chaotic market.

But Jones was adamant. "All our competition was in western Europe, so to succeed there would have been very hard work," he explains. "In eastern Europe we are on an equal footing." The occasion of this first visit was the opening of a trade exhibition in Moscow for western food processing equipment. "I didn't speak Russian, so I was wondering, 'How are we going to get over what we do?' We decided to have one of our machines set up producing cakes on the site - and we had television and Moscow council members and everybody coming round to see it." Impressed with this piece of compact western wizardry, a number of Russian enterprises quickly signed up to buy the machines to help feed their workers.

Jones was encouraged and returned to Russia several times more. then one evening, he was invited to dinner at the home of his interpreter. Jones hit it off famously with her English-speaking husband, a film distributor, and before long the two had agreed to set up a joint venture to sell Mono's bakery machines.

Mono now is setting up a demonstration plant in a Moscow supermarket to sell both bread and the machines. With the city's population of over nine million currently serviced by some 60 bakeries, Jones is optimistic he can start up a dozen more. "Moscow and the regional councils are very very keen. They're offering us property all over the place - for free."

Jones's story of success in Russia is but one of many not being widely told in the West. Rather we are barraged with horror stories about this once ominous empire to the East. Regularly, we hear about the corruption and racketeers, the haphazard politics and crumbling economics, and endless tales of business incompetence that are as funny as they are sad. But it is a mistake to judge Russia hastily. Business opportunities come in many guises. And this huge nation with its minerals, industry, science and land and a hungry market of near 150 million people, could be one of the next engines of growth for the West. What we are witnessing is the opening up of the largest and richest marketplace seen in 200 years. Britain cannot afford to ignore it.

Britain's biggest companies know it: some 125 UK joint ventures are operating in Russia, involving groups like Cable and Wireless, Wellcome, GEC and Littlewoods. Yet our commitment is still trailing that of our competitors. About 1,200 joint ventures in total are now under way in Russia, with the leading players in order being the Americans, Germans, Finns, Austrians and the Italians. The British fall a rather humble sixth. This should not be so. For although doing business in Russia is difficult, it is feasible - and it can be lucrative. Why do we not hear it that way?

"I submit to you the following," says Bill Potvin, managing partner of Russian-American accounting firm DRT Inaudit. "The businessman making the 300% return in his first six months is not calling up Management Today to advertise the fact. Yes, it is very much harder to do business here, but there are many people doing very well."

It is a Monday holiday and Potvin is pottering about in his Moscow dacha, tailed faithfully by his dog, KGB. An American, Potvin compares Russia today with his own country in the 1870s and 1880s - as he puts it, "the days of the Morgans, the Fisks and the Rockefellers." There are many parallels. Like the young America then, he says, Russia has a nascent legal system, its business is dominated by opportunism and raw power, and "the potential for profit and value added by the injection of capital is enormous".

Potvin's enthusiasm can be found repeated by many of the western companies who have set up office in the drab streets of Moscow. There is a widespread view among them too, that if one is to tackle the place at all, the time to be there is now. It can take a year or two to find your feet in a country where even an official phone directory can't be found. Wages are still low, and competition is still scant. And, as UK computer firm ICL's Moscow-based John Connor says, if you are wanting a local partner "the cream of the Russian entrepreneurs, who have shaken themselves out of the State system, are now hunting for these relationships."

The journey into Russia for those who decide to suss it out for themselves often begins at the doors of the Department of Trade and Industry, the Confederation of British Industry, the London Chamber of Commerce or the British-Soviet Chamber of Commerce. A few quiet inquiries in these corners can alone be sufficient to make potential advisers - Western and Russian - leap out of the woodwork. The services of such consultants, accountants and lawyers can indeed be valuable, if a little costly. But, as Price Waterhouse Moscow's Barbara Duvoisin says, take heed. The Russian investment scene is riddled with opportunists and it is essential to make a thorough check of the history and authority of every person one deals with.

When doing the initial research at home, as Jack Barbanel, chairman of US consultancy The East-West Trade and Commerce Group, advises, "Ask lots of questions, try to develop a focus on the area you are interested in and then literally pack up your cases and come and look."

The first look often is not encouraging. Barbara Duvoisin arrived in Moscow to find her prestigious company had to cram its team into two rooms in a ramshackle house in the middle of a construction site until their new building went up. Office space in Moscow, she grimaces, is like gold dust. For the businessman, who arrives as Wyn Jones did, with no more than a hotel room to work out of it can be even bleaker. The bath tub plug may not have been pocketed by the last visitor, but unless you have brought your own answering machine, how do you receive calls when you are out all day trying to find the fellow who didn't show up for the last three appointments?

However one does get by initially, whether with the help of a Moscow-based consultant or aided by one of the many institutions that assist Western investors (the Chambers of Commerce, the Centre for Foreign Investment, Business International, the Russian-American University, to name a few), the first important step is to get some credible contacts on your side. As the globetrotting Dr Rair Simonyan, chief executive of the Centre for Foreign Investment and Privatisation, explains, "What you see on the surface may be a lot of people concerned with their own problems and a lot of links broken, but the old boy networks are still working. A lot depends on personal contacts. In many cases people will prefer to do something for you as a person, even if it is more profitable to do it somewhere else."

UK health sciences group Amersham International showed how easy it can be if you get the right contacts from day one. Three years ago Amersham's USSR regional director, Bruce Beharrell, joined a trade mission led by the then health secretary Kenneth Clarke. He was introduced to Professor Eugene Chazov, then the Soviet minister of health, who showed great interest in seeing Amersham work with the USSR Cardiology Research Centre. "We spent 18 months getting a business plan together - partly to see if we had got it right and partly as a training for our Russian partners. I think by the end of it all we were extremely expert." Beharrell smiles wearily.

Typical of many joint ventures, Amersham's input into the ensuing "Amercard" deal was know-how and some new equipment valued at £250,000, while the Russians provided scientists and a laboratory. (Commonly Russian joint ventures do not require a large input of cash by the Western partners.) The initial aim was for Amercard to sell Amersham's patented diagnostic kits and then, in time, to research and produce new medical products. When it came to registering the venture officially, the notorious Russian bureaucracy was felled in one swoop. The paperwork, says one of Beharrell's well-contacted Russian colleagues, went through in 10 days "with a little help from our friends". He will reveal no more.

Up to that point Beharrell was pleased with their progress, particularly as Russian government backing for the new venture had led to an immediate £3.5 million order for diagnostic kits for Russian hospitals. But then, on the big day of the signing of the deal, Beharrell recalls, "At the last moment they put in some additional clauses and expected us to agree." He refused and the Russians backed down. Once the venture was under way, Beharrell minimised any problems arising from the Russian's lack of experience by having a team in London "shadow" the Russian technicians and financial managers. The business now is running successfully with 55 clients already in place. Says Beharrell, "We are extremely well placed in reaching customers."

That joint venture is being followed by another which will convert a once top-secret nuclear facility in the Urals to the manufacture of radioactive isotopes for medical and industrial purposes. The prospects for sales are excellent. Political contacts, obviously, are indeed a big help, but even the businessman who wins the trust of a single credible Russian industrialist will find a whole web of new contacts open up. The key is that that first important person should be poriaditchnyi (everything is in order). As Jack Barbanel warns, "There are different levels of business and you can get bogged down at a level where you get told that you have to pay off people and no one knows anything, but that's not really the case. You have probably started with the wrong person."

Such a caution may be disturbing but it is a mistake to think of Russia as a lawless place or of her businessmen as universally ignorant of proper business practices. True, there is corruption, there are protection rackets, and there are factories at a near standstill, run by managers waiting for someone to tell them what to do. But there is also a tremendous spirit of entrepreneurship that has arisen out of the sudden dearth of State funding. Some of these are cowboys but many, too, are proper businessmen who understand what trust is about and who would slam the door in your face if you winked the wrong way.

Klim Schogenov, president of joint stock company Technoelectromash, is just such a businessman. His consortium of test equipment makers have formed three Western joint ventures and raised production by 30% in a year when the ex-Soviet Union's GNP shrank by 13%. Schogenov himself has diversified his machine tools factory, sacked workers who didn't work, and delivered an eight-fold return to his German partners in just one year. The big smiling industrialist, a well respected figure in the Caucasus, says he learned to run a business during a visit to Germany in 1988. There are many more of his type.

For the company that gets serious about Russia, there are now a series of legal forms that can be used to set up: the representative office, the joint venture, the shareholding company, the 100% subsidiary or - though the rules are yet to be set - taking part in the privatisation of a Russian enterprise. Joint ventures can offer local contacts and office space; the 100% subsidiary means 100% control of decision-making and the rate and quality of output. Numerous broken marriages are making the latter more popular, though most firms still opt for the joint venture. A well-versed accountant can best advise on the choice.

Trying to find the right partner, should that be the preference, can be unnervingly like walking into a Dostoyevsky novel. Says Jack Barbanel, "In Russia, business is still an art form. It's a lot of human relations, sometimes drinking a lot of vodka, talking about family, and sympathising with their problems and talking about your own. That's how trust developed - and credibility. They don't put too much credence in a 200-page legal document." Ninety per cent of the Russians seeking a joint venture generally can be dismissed in short order, and even those who remain may hand over just one modest page describing their business. What they have may nonetheless be valuable. One can only look, talk, and see if a common interest can be found. Negotiations can take months, even years - running through the initial memorandum of interest, invitations back and fourth, a feasibility study and then the legal registration. The last is still a headache - but becoming less so.

As Linguaphone, the UK language instruction company, would testify, getting set up, unfortunately, is only the start of the hurdles. Poking about for a spare chair in the two cramped rooms provided by his partners, Moscow News, Linguaphone's business development director Chris Dick sighs, "The problem is simply to get the money. Even if a customer has agreed to pay, the problem is to get it into our account."

Most of the trouble is a hangover from the shutdown of Vnesheconombank last year. This Russian State bank, until recently, was the sole holder of all foreign currency bank accounts, Since it closed its doors, thousands of people have been unable to get their money out. As Linguaphone has so far been selling its courses for hard currency, rather than roubles, it has found many of its customers unable to pay. Since January, the joint venture has made the equivalent of 12 million roubles ($US110,000) in sales. Ten million is still floating in the banking void. Even as we spoke, Chris Dick was about to visit one of the new commercial banks to see if he could deal instead through them. (You can if they have a hard currency licence.)

It took well over two years of effort before Linguaphone saw any income, but now Chris Dick reports considerable success in making sales, particularly with direct mail and radio advertising. Even getting the goods out to the customers has been little problem as the Russians - not trusting the postal system themselves - will train in from miles away to pick them up. It has, however, been an enlightening experience teaching the Russian staff to sell. "They phone up somebody and say, 'Do you want to buy a course?'. The person tells them 'No, mind your own business'. And so they hang up," explains Chris Dick rolling his eyes. The idea that "no" does not necessarily mean "no", is a subtlety that eludes the ordinary Russian.

Over on Kutuzovski Prospect, Pizza Moscow, a joint venture of Pepsico's Pizza Hut and Moscow City Council, is suffering money problems of another kind. Still sporting a queue at its roubles entrance, the sprawling restaurant can brag the highest turnover of any Pizza Hut in the world. It is also suffering a considerable loss. General director Alexander Antoniadi, a veteran of the State restaurant system, lays the blame squarely on the tax system: Russia has a 32% profits tax, but an exorbitant VAT of 28%, plus payroll, and other taxes. There is also 30% per month inflation to cope with. "We're trying not to think about profit," moans Antoniadi. Aside from hiding your profits overseas (which is highly illegal but widely practised) there is little one can do except wait for the politicians to realise that the oppressive taxes cannot go on. Government officials do hint some relief is en route.

And what about the rude Cossack-style service we hear so much about? Sany Antoniadi, "If you pay them for it, even somebody who doesn't want to smile will smile." At $40 a month for a pretty red-striped waitress, the extra pay hardly breaks Pepsico.

Clearly there are problems in trying to buy and sell goods for cash in a country that still thinks in terms of swapping commodities. The trick, of course, is to do the same yourself. Russian enterprises may lack dollars or even roubles, but they always have something to trade. Rank Xerox, an importer of office machines for over 30 years, is a veteran of the bartering scene. Sitting in his "war room" overshadowed by two huge ex-Soviet Union maps, Bob Agee reports that business has been brisk even in these tough times, though he has had to trade in everything from cotton to goats' horns to make a sale.

To find a western buyer for the Russian goods he often uses the many middlemen specialising in this. Sometimes there are too many. "I remember we were introduced to one deal by a man who then took us to a man, who took us to a man, who took us to a man who then introduced us to the principal." He adds, "You have to sort out the wheat from the chaff. Of 100 barter deals offered, 10 are real (that is, they can deliver the goods). We won't do a barter deal for less than $250,000 because of the time and effort involved."

Agee's staff still smile over an incident of some years ago when a Rank Xerox executive was confronted in Khazakhstan by a local tribesman with a hunting falcon on each arm. The man wanted a swap for a photocopier. He was turned down.

Rank Xerox contracts local or Western trucking companies to deliver its equipment across the 11 time zones of the ex-Soviet Union. But Agee warns, "You need someone who knows the country. Don't just go for price or else you may find your product arriving smashed to bits."

The company has also been successful at selling their equipment for roubles and then sending someone down to a licensed bank "auction" where the roubles can be exchanged for dollars. It is common to hear other companies complain that they cannot always get enough cash exchanged at the auctions. But Agee says, "You have to know the people in the bank and make sure your application is at the top of the pile." In theory you can exchange roubles to take home as hard cash profits, but in practice it seems the only dollars made available are those needed to purchase western supplies. In any case, even if one builds up a mountain of rouble profits, it need not be a great problem, as these can be invested locally. Property leases and local technology particularly are expected to show lucrative returns.

At ICL's Moscow office on dusty, treelined Vavilova Street, general manager John Connor is also pleased with his sales. He describes their first joint venture, Marine Computer Systems, which imports and sells ICL computers, as an outstanding success. "It's in its fourth year and has been profitable from year one," he says. Yet even this well-travelled group has not escaped the ubiquitous cultural problems. First there was the need to train his Russian managers in the mysteries of accounting. "It started out as a black hole, but we are gradually getting to a western style." One appreciates the size of the task when you ask Connor about he sets his prices. "With difficulty," he replies. "You have a cost base in dollars and pounds and roubles." So does he use the current exchange rate of the ever-fickle rouble to calculate his costs? "Which rate?" His exasperation is plain. "I know of six."

Another challenge arose when it was discovered that the initial Russian management - now replaced - had its own notion of how to run a business. "There were too many deals behind the bike shed and a scruffiness that became unacceptable," frowns Connor. Apparently when the former management had difficulty making a sale, their solution was to cut the price and then sling in a few cheap parts for expensive ones. Connor quickly sacked these lateral thinkers and now keeps close tabs on the sales side. ICL now plans a second £1 million joint venture to manufacture mainframes locally.

Of all the complications that the western businessman has to cope with in Russia, the worst by far is the chameleon character of the legal system. Even as we go to press, a whole raft of new initiatives are mooted, with no certainty that any of them will work. Unfortunately, in Britain no form of private or government-backed insurance to protect insurers against legal upheavals is yet available. Prime Minister John Major this year announced a £280 million package to include both guarantees of payment for British goods exported to Russia and investment insurance against political risk. However, this is still subject to Russia meeting certain criteria, including getting IMF approval for its economic programme. On top of this legal uncertainty, there is the sliding economy to cope with. GNP is predicted to go down by at least 10-15% this year.

The man bequeathed the job of attracting investors, Leonid Grigoriev, chairman of the Committee for Foreign Investment, readily concedes the problems, but by year end, he says, he hopes to see in place that most critical factor for investors: legal stability. One cannot help but notice that he grimaces as he says it. Predicting events, he admits dolefully, is not a Russian strength. The West can only take heart that, encouraged by the IMF's promised $25 billion, Russia has resolved to act quickly on two matters critical for a market economy - the privatisation of State enterprises and making the rouble convertible to foreign currencies.

The fact that some companies have succeeded without such things being in place, makes their achievement more remarkable. It proves too the fallacy of the enduring myth - often heard mumbled in a Moscow bar - that it is "impossible to do business with these people". The building blocks for a business, if unfamiliar in their shape, are indeed there. The western businessman need only be open-minded, adaptable, patient and careful. A sense of humour also helps.

Seeing a return may take six months or three years, but either way the competent business with its eye on the next century can feel confident (bar a major catastrophe) of being the beneficiary of a huge and thriving marketplace. In Russia today, this image may seem far from reality. But as Alexander Pavljukoi, secretary of the Presidential Council for Entrepreneurs, says, "We call this country, a country of miracles." History would not deny it.

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