From Russia--With Red Tape : The Old U.S.S.R. Remains an Investor’s Nightmare

Tim Kennedy sells potato chips . . . in Russia. Peanuts too. And popcorn.

Walk into a hard-currency supermarket in Moscow and there they are: “Tim & Alex’s Seattle-Style Snacks.”

Kennedy, the president of Tim’s Cascade Potato Chips, one of the better-known brands in the Pacific Northwest, has got a chip factory in Estonia. And he has branched out into selling Russian-grown fresh vegetables as well--though he had to buy a radon meter to persuade leery customers that the veggies were not contaminated by the long-lasting effects of the Chernobyl nuclear accident.

Like thousands of Americans--and many thousands more from Europe and the Far East--Kennedy is looking at Russia and the other former Soviet republics as one of the last great mother lodes on earth. They are lands rich in oil, natural gas, timber, fisheries, gold, gems, minerals--and rich too in millions of people who could eventually make up one of the largest new markets in the world.

Kennedy, it happens, is one of the more enterprising pioneers.

His company is baking bread in Moscow. (The U.S. Embassy is one of his best customers.) When he had the opportunity to buy a large load of oak logs in Russia at bargain basement prices, he purchased a small saw mill, built in Indiana, and shipped it over. The plan is to rough-cut the timber and export it at a tidy profit.

He’s also thinking of manufacturing baby cribs in Moscow, then sending them to Scandinavia for the finish work.

“One thing I’d say is that you have to be flexible to be able to jump on things that may even be outside your area of expertise,” said Kennedy, 44.

“The constant state of flux over there,” he added, in a marked understatement, “is very interesting.”

Kennedy is betting that a profit can be made in these turbulent--not to mention insolvent--times in the former U.S.S.R. Others making similar bets range from coffee salesmen in Moscow to multinational consortiums seeking to develop a giant oil and gas field off Sakhalin Island in the Russian Far East.

But if opportunities are abundant in the former Soviet economies, those who plunge in also are finding all manner of difficulties: inefficiency, virtual ignorance about how business is conducted throughout much of the rest of the world, bribery, new rules and regulations imposed as if by whimsy, and questions about who actually has the power to cut deals.

It is not a place for the faint of heart.

The near-worthlessness of the Russian ruble makes doing business a formidable--and sometimes impossible--task. Barter in raw materials is often the only way of completing a transaction.

There are other problems as well. Traveling in some parts of the former Soviet republics is like stepping back in time, with living and working conditions that leave American businessmen shaking their heads. Scheduled commercial flights in the more remote areas are often grounded because of a scarcity of fuel; visitors tell stories of cooling their heels for days in cities many had never even heard of a few years back. Hotel accommodations in some cities have only recently begun inching their way toward First World standards.

Take, for instance, a travel tip offered by the Seattle-based Russian Far East Update newsletter about accommodations in the city of Khabarovsk, one of the largest urban areas in that sparsely-populated region: Stay at the Eye Surgery Hospital, which the newsletter says rents rooms for $50 a night. Besides being clean, “the ambience, among post-op patients wearing dark glasses, is camp.”

Or another pointer: Tick-borne encephalitis is a danger in the countryside, but be sure to bring your own syringes to be vaccinated against it.

Perhaps the most important axiom about doing business in the former Soviet republics is this: Get in on the ground floor, but don’t risk huge sums of money in the process.

“The whole thing could be a house of cards over there,” said James Kelly, vice president and general manager of Seattle’s N.C. Machinery Co., which has sold expensive heavy tractors to a Russian gold mining operation on a hard-currency only basis.

The preferred strategy for those now doing business with the former Soviets was perhaps best summed up by Robert Strauss, until recently the U.S. ambassador to Moscow: “If I were a young person with $100,000 to invest and wanted to try to run it to $10 million, I would take it to Russia. But if I had $10 million, I would still only take $100,000 to Russia.”

*

Determining the actual number of people who are trying to do business with the former Soviets is nearly impossible. Some companies don’t want publicity because they don’t want the competition to know what they are up to. Others have signed joint venture agreements with their former Soviet counterparts, but have done little more than that, waiting for the business climate to improve.

Americans generally are taking a much more cautious approach than Asians or Europeans.

“If I’ve heard it once, I’ve heard it a thousand times. They say, ‘We’re going to wait until the dust settles,’ ” said Arnie Sherman, a Washington-based consultant who has helped a number of businesses get started in the former Soviet republics.

Still, interest has become sufficiently intense that the U.S. Commerce Department last June opened the Business Information Service for the Newly Independent States to act as a clearinghouse for companies.

Director Linda Nemec said there are now 5,000 people on the service’s mailing list. Telephone inquiries are averaging about 850 a week--or about 20,000 total since the service was established.

Despite the low profiles being taken by American companies, profits are being made, Nemec said: “There are U.S. people making money. The quickest way to stop making money is to get some publicity.”

Perhaps, but her office issues advice and information in a cautionary tone. It has produced a 49-page booklet that outlines the obstacles of doing business with the new republics of the former Soviet Union, naming everything from high costs to erratic and sometimes nonexistent telecommunications.

Not all the hesitation is on the foreign investors’ part. Steven Crown, a Russian-speaking Seattle lawyer, said there is great skepticism in Russia about Americans coming in to “cut a fat hog,” as one businessman put it.

“There’s a real concern on the part of the Russians that the capitalists are coming in to rip off as much as they can,” Crown said.

*

Nowhere in the United States is interest in the former Soviet Union more evident than in Seattle, which sees itself as the West Coast hub for trade with the Russian Far East. It is a vast section of the world that went largely unseen by Westerners for the better part of a century--the site of the gulag as well as the setting for most of Russia’s natural wealth.

The Russians themselves opened a consulate in Seattle late last year, part of an agreement that put a U.S. counterpart in the one-time Soviet Navy base of Vladivostok. And last November, they chose the Pacific waters off Seattle as the splashdown point for an intercontinental ballistic missile--an exercise meant, among other things, to be an overture to more international trade.

Though the missile venture was seen by many as little more than a very expensive publicity gimmick, it did underscore the lengths the Russians were willing to go to punctuate their desire for better trade relations with the United States.

Still, those who have been dealing with the former Soviets say it is almost impossible to make a quick ruble--that there usually has to be a long-term investment of patient contacts before any money is earned.

“It just takes years,” said Sherman, the Washington consultant. “The inertia of the place makes it take that long.”

*

Ron Miller, an Anchorage, Alaska, lawyer who has done work with the Russians, said that while there is a gold-rush mentality about the former Soviet republics, most entrepreneurs are going to fail. Things most Americans take for granted--such as court and banking systems--simply don’t exist, he said.

“Most people I see in Russia, or those who want to go, shouldn’t be there at all,” Miller said.

“They don’t know about international trade, and Russia is not the place to start. You should be prepared to lose everything, so that if nothing comes of it, it’s like going to Reno.”

Doug Drum can offer one example of a seemingly good idea gone awry.

Drum, an Anchorage resident and owner of the Indian Valley Meat Co., hatched a plan to open a reindeer sausage factory in Russia, then take the horns of the animals and sell them in South Korea, where they are ground up and used as an aphrodisiac.

But Drum said he was cut out of the deal after his Russian partner and other officials were wined, dined and bribed with Rolexes by Koreans. Then, he said, the Russians dumped so much horn on the market that the price plummeted from $530,000 a ton to $70,000 a ton.

“It’s just stupidity,” he said. “They have completely destroyed the horn market over there.”

While most of this country’s attention has focused on Russia--Moscow, St. Petersburg and the Russian Far East--others have looked for opportunity elsewhere in the former Soviet Union.

Houston-based Edge Petroleum Co., for instance, has been working to start up drilling operations in Ukraine.

James Calloway, who is heading the project for Edge, said his company settled on Ukraine because it is more stable than Russia, its bureaucracy is more manageable and there is almost no competition.

“I’m shocked so few people are paying any attention to the Ukraine. It is an incredibly strategic country,” Calloway said. “Everybody is rushing to Moscow, but no one is in Kiev.”

That said, Calloway issued the kind of warning that has become common among those who have tried their hand at doing business with the former Soviet republics.

“This,” he said, “is not something to rush into--unless you are a fool.”

Why It’s So Difficult to Do Business in Russia

1. It’s hard to tell what’s legal. Laws constantly change, often conflict and are unevenly enforced.

2. Tax rates change suddenly and arbitarily.

3. Confusion reigns over who owns or controls property--particularly natural resources.

4. Hard currency is scarce, and local currency can’t be converted.

5. Poor facilities and an ailing transportation system hamper cargo shipments.

6. Phones often don’t work.

7. Russian business people know little about market economics, the role of profit, business procedures, accounting or business ethics.

8. It’s expensive to open and maintain an office.

9. Getting business visas to other regions is time consuming and difficult.

10. Uncle Sam isn’t helping; American ventures get little policy support or financial assistance from the U.S. government.

Source: International Trade Administration, U.S. Department of Commerce