Doing Business in the Former Soviet Bloc and Russia Today
Curtis H. Englert
Curtis H. Englert, General Manager, All Freight Int'l, 2121 Corporate Sq. Blvd, Suite 118, Jacksonville, Florida 32216, 904-7210234, firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. Global village, this term has never been truer than with in the last decade. As companies grow, they grow beyond the borders of their own country. The question is to where to expand? In order to move into a new market, an unexplored market, and a market that could put a company on the Fortune 500 list, a company could only want to expand into Russia. To expand into Russia, a company not needs to understand the business world; it must also understand the cultural environment of that world.
Credentials. Curtis H. Englert:
- Three years in Eastern Europe. From the end of 1993 to the beginning of 1997, I worked in various capacities for Voerman International, based out of The Netherlands.
- These work capacities took me to Moscow, St Petersburg, Nizhney Vartask (Siberia), Kiev, Ukraine, and Prague, Czech Republic.
- In Moscow, I was responsible for establishing a new office; this entailed going through all the Communism and Capitalism red tape. Administration, human resource, sales, operations and management must be in full swing once legalized.
- Ukraine and Czech Republic, included overseeing satellite offices from Moscow with direct assistance given by sales.
- At the end of the three years, the Moscow office had three full-time and two part-time trucks for distribution, twelve crewmembers, sales staff of three, and an office staff of nine.
Types of Companies. To legally operate in Russia a company must be one of the following: Russian company, Joint Venture, Accredited office, or a Representative office.
- A Russian company is a very difficult route to take. This type of company is completely subject to the Russian Government, which can be as erratic as the direction of the wind. The Russian economy epitomizes uncertainty. Unfortunately, in some instances a company does not have a choice as to whether be a Russian company or not. If you plan on performing an actual service, such as manual labor, then you must be a Russian company or a joint venture.
- A joint venture is a partnership with a Russian company, owned by a Russian. It is unfortunate that the majority of Russian companies able to go into a partnership are either controlled by the government or by the Mafia. The small, honest, Russian companies that would be ideal are just that, too small. A certain criteria must be met in order for the government to approve a joint venture. That criterion entails one simple element, money. The best example of a joint venture was the first one by an American company and is probably the most famous. Paul Tatum was a pioneer of American business in Russia. He opened up the Radisson Slavyanskiya Hotel. In order to take on a project like this and build a world class hotel with a Business Center, Mr. Tatum needed a partner. His partner was a successful Russian real-estate company; however, the Ukrainian Mafia owned it. After approximately ten years in operation, the Mafia decided it was time for the American Company to pull out and hand it over to them completely. It got to the point where Mr. Tatum had nineteen bodyguards around him at all times. The odd thing was that when he was gunned down by machine gun, none of the bodyguards were injured.
- An accredited company is by far the most common operation by foreign business in Russia. An office can be opened up with foreigners managing it and with Russians working in it. One draw back is that manual labor can not be preformed. A perfect example is a travel agency. There is no actual labor. All work is being done in the name of the head office. Sales can be done but a Russian company must perform the work. The office that Voerman International opened up was an accredited office and this section will be explained in further detail.
- A representative office is the simplest way of doing business in Russia. It is realized by choosing a company through which you export / import your goods / service. Unfortunately there is absolutely no legal grounds for this interest. This is a basic form of a joint venture; know that the entire responsibility is left up to your partner in Russia. A great deal of trust must be present in order for this to work.
Accredited Office. In a fully developed country, usually the red tape must be finalized before operation; however, Russia is one place where you need to be able to run before you can crawl. An office has to be basically set up prior to the start of the accreditation (legalization) process. Set up as an accredited office took one full year to finalize and almost $10,000, which does not include the fee of lawyers' assistance.
Since Voerman was an Import/ Export, and Distribution Company, we only partially qualified as an accredited office. We could set up the logistics, but not actually do the work. To rely on a Russian company to carry out a "Western" type of service was unthinkable. Therefore, when we first began operating in Russia, we took that first year of hiatus and hired one Russian truck driver and fronted the money to make him a "Russian company". As far as the government was concerned he was just another Russian that wanted to be called a "Business Man." As for the truck driver, he did not care because he was earning good money. This allowed us to have total control over the service. It entailed having double the paperwork. We literally had to invoice ourselves for services rendered; so as far as the paperwork was concerned, it was two totally separate companies. For the first two years, we kept two Dutch foremen in Russia at all times to ensure that the Russian crewmembers kept up the same level of service. Manipulation, was probably the biggest benefit in entering such an unstable market. With all the chaos it was virtually impossible to have the proper checks and balances allowing companies to bend and flourish just as much as those plundering and stealing. To abide by the rules completely and unconditionally would be a sure way to fail. Adaptability and improvisation are two key elements needed for success.
Transportation. In the early nineties the only sure means of getting goods into Russia was by truck from Europe. Shipping via container into St Petersburg was a game of Russian Roulette. About five out of ten containers were just lost. Via rail was not very efficient because the cars would be switched incorrectly or just misplaced in some yard because a single train can not make a direct connection. The road was the best means, going right through Eastern Europe or White Russia, which are the Baltic States and Belarus. Going through White Russia portrays a scene from a Mad Max Movie. Trucks would have steel pipes about six inches in diameter as a grill. Gypsies or Mafioso thugs would put barrels or concrete blocks in the road to try to stop the trucks and highjack the cargo, whether electronics, cigarettes, steel, wood or whatever. The truck drivers considered themselves lucky when it was only objects in the road because sometimes the gangs would stand in the road themselves. The drivers would just hope that they would move out of the way in time. If they stopped, their cargo would surely be taken and most likely their life as well.
Shipping into Russia has gotten a lot easier now in comparison but, all should still take into account the Boy Scout motto, "Always be Prepared!"
The means of transportation are now as wide spread as shipping into Europe. They still truck across from Europe but it is not very time efficient or cost effective. The dangers have lessened considerably. Shipping into the Port of St Petersburg has increased at a dramatic rate. The key here is to have a reliable customs agent with proven experience, and you can be assured that this will not be the cheapest one. Rail has been the slowest to progress. There are too many occasions requiring the cars to be switched because one train still can not make a direct connection. To this day, I can not tell you who is the Russian Rail Company. When needed, we would just contact Sealand or Maersk. One of the most feasible modes of transport that we utilized was to have the majority of all imports shipped into Rotterdam and from there we would co-load all shipments into one trailer and then truck it into Russia. We did not truck the normal route as a direct route but we sent it from Europe up through Finland and then down through Helsinki - St Petersburg and then to Moscow. To make this cost effective we would load the trailer on one of the many ferries without a tractor and then a tractor would pick it up at the other end.
Anyone that is in the field of transportation will be able to arrange to have your cargo shipped into Europe or Russia, but will they know what to do once it gets there? Probably not. As for Europe, you will be able to speak in English to an agent and you will be fine. In Russia, there is not only a cultural difference and a language difference but to make it worse, the law changes day by day, and hopefully the particular customs agent is following the law and not executing something offhand. This is still an area where if a single person wakes up on the wrong side of the bed or does not like you personally, then you can be in serious trouble because they can impose a duty of 1 ECU per kilogram or 63% of the declared value.
There are enough big obstacles to change anyone's mind about doing business in Russia, but if you are able to get through or around these then you have a very good chance of a large profit. There is a huge demand for almost any product or service, Moscow alone has a population of over 14 million, and believe it or not money is not a problem. In one instance, we imported 1000 pounds of silk ties for a Dutch college. A tie weighs approximately a quarter pound each so he had approximately 4000 ties. He went through all the hassle of customs and everything and was really excited to sell his ties at retail for $10 each and make a nice profit. Well he had a very hard time selling them and only actually sold a few. With all of his frustration he ended up selling all of them to a wholesaler (Mafia group) for $8 each with a little profit. He later learned that this wholesaler was selling the ties for $100 each with no problem at all. The Russian market does not really care about what something looks like or how practical it is. The only thing that matters is how much it costs because the phrase, "Be better than the Jones's" is very true.
Living in Russia. Working in Russia was great, as an expatriate (expat) you usually have a driver and maid paid by the company. Your rent is also included and for a two bedroom flat, 1300 sqft, the cost would be from $2000 to $5000 per month, depending if it is in a secured building or not. Lesser apartments run $2000; you had to take a Russian apartment and totally renovate. In most cases, two Russian families would rent out one apartment and then share the other apt together. There would be about 5-8 people living in a three room apt. Almost all apartments have a steel door on the outside, 3-5 inches thick. Generally the spouse of an expat would have the hardest time adapting to living in Russia. The expat would work 10 - 12 hours per day, dealing with mostly foreigners all day in English. The spouse would have to actually live in and adapt to the Russian customs because he / she would be the one that had a "daily" life. There were several instances where an expat would be in Moscow for three months prior to the family arriving. Once the family arrived, it would be such a shock that the spouse would refuse to stay, turn around and leave even before their personal goods would arrive. In these instances the blame could be completely put upon the Company for not properly teaching the family about culture shock.
The Russian people themselves are actually very good people. At first the older Russians had resentment for me as a young foreigner because it was my personal fault for the death of Mother Russia. You would actually feel sorry for the older ones because their whole lives were based on one particular system and the government was going to take care of those that relied on it. Now these people are living on their pensions which is about $10-$20 per month and this is to feed the entire family. This is basically the cause behind the black market. Older Russians would sit on corners selling food or crafts. As for the young Russians, these are the people that are bringing the country out of the darkness. They have realized that they must have a solid foreign language such as English, French, German, Spanish, etc. In the past the government would appoint a language for a Russian to learn. This could be from Swahili to Iranian; the reason for this was so that the Communist government would have some sort of ability to control all parts of the world.
Alcoholism is still a major factor influencing the working force. Mickeal Gorbechev is perceived as a great leader in the eyes of foreigners, but as for Russians, they hate him because he made a prohibition on Vodka in order to control the alcoholism. At one time, it was believe that 90% of all Russian men were alcoholics. As this number has decreases, the middle class increases.
Living and working in Russia is anything but boring. Russia can be defined in two words: Exciting and Profitable. It is a continuously changing market where anything can happen. If you have determination, patience and money to ride the wave, then Russia is a place to make an enormous profit.