When Doing Business in Russia, Be Prepared to Grease Some Palms
There’s nothing better than a good roof to protect you from the elements, as anyone doing business in Russia today will tell you.
A Russian “roof” will shelter you from arson, shakedowns, meddlesome bureaucrats, bribe-hungry tax officials--for a price, of course.
Beginning as overt gangsterism after the fall of communism, “roofs” today often are so-called security firms filled with ex-KGB agents who make it their business to help foreigners navigate Russia’s unique approach to a free market while keeping mobsters at bay.
“They are very business-like,” says Rick Grajirena, a Clearwater, Fla.-based consultant who has been doing business and arranging deals in Russia since the days of perestroika. “When you set up a company there, your ‘roof’ is not going to come in and demand 20% off the top. Until you get profitable, it’s generally no charge, and then it’s a small percentage of your profits.”
Grajirena, now a senior partner of Toronto-based consulting firm CEER Group Inc., was careful not to discuss how much he pays his “roof.”
Establishing a company or a partnership in Russia is arguably among the riskiest ventures in international business today.
It’s a given that corruption is central to doing business in Russia and most foreign businesspeople working there will encounter it, says David Lewis, senior analyst and Russian expert for Control Risks Group, a Britain-based firm that advises companies on how to operate in complex business environments.
“Corruption is at all levels, in all areas of life,” he says. “It ranges from the traffic policeman who wants his $20 to the [government] minister who wants a fee for his signature on a particular project. It’s partly the result of having too much bureaucracy and too many rules and partly the result that most state employees are very badly paid.”
This systemic corruption has helped put the Russian economy in the tank. Indeed, Harvard’s highly regarded Center for International Development ranks Russia dead last on its annual world competitiveness index, citing its stunted legal system and poor infrastructure, for starters. It also lists the lack of trust in the government, fear of organized crime and lack of confidence in the police. Growth is projected to barely surpass 1% between now and 2008.
But, Grajirena says, learning to make your way through the bureaucratic web and outstretched hands of tainted officials can be worth it--if you’re willing to suspend normal business precepts and accept the idea that paying off one set of racketeers to ward off others is a valid tool in a place without a strong rule of law.
“I look at it as insurance more than paying graft,” Grajirena says. “It’s more to help [overcome] problems that you’re going to have.”
In the early 1990s, he set up one of the first companies to distribute American beer in Moscow. Persuading a nation of vodka drinkers to switch to Miller beer was the least of it, he soon found. Trying to operate strictly legally was the hard part. Getting beer shipments through customs without paying bribes, finding a suitable warehouse to store his product, ensuring that his Russian employees were free of mob connections--all proved frustrating, costly and eventually ruinous to his business.
Grajirena says he never paid a bribe, but that he did have to routinely fork over extra “fees” and “costs.”
Because so many Russians operate in the “gray” economy, dealing almost exclusively in dollars or deutsche marks, it is estimated that 10% to 15% of Moscow’s population of 12 million people can afford Western goods.
Today, Grajirena is working with an American physician to import and distribute a line of skin-care products through Russian dermatological clinics. He is also working with Santa Barbara-based Mentor Medical to sell breast implants.
Grajirena and his American partner set up a Russian company--with a Russian citizen as general director--to distribute their skin-care products. And to make sure they can get any profits out of Russia, their company also has an offshore branch office in the British Virgin Islands.
To arrange the offshore company, they hired a Russian lawyer to ensure that they were following the letter of the law. “The laws in Russia are so vague that the interpretation by a lawyer carries a lot of weight,” Grajirena says.
But in Russia, hiring a lawyer isn’t enough. It’s essential to check on the legitimacy of the person hired, and to vouchsafe their exact links to the underworld.
So Grajirena called on his “roof.”
“My ‘roof,’ who is also my landlord, has the ability to do background checks on people,” he says. “I’ll just leave it at that.”
It helps that his “roof” has ties to Russian law enforcement. CEER’s Moscow office is in the same building as the Russian Federal Security Service, or FSB, the post-Communist version of the KGB.
To build interest in his products, Grajirena and his partners recently held a seminar for Russian dermatologists and cosmeticians on the benefits of their skin cream. They also have advertised in Russian magazines. But Grajirena concedes that it’s difficult to operate “completely above board.
“At the airport, where you might have your products air-freighted in, there’s some little problem in your documentation. It’s not a big deal, but it allows some guy at customs to say, ‘Well, it’s going to cost you $1,500 to get this stuff out,’ Grajirena says. “He knows the value of the cargo is certainly a lot more than that and that ultimately you’ll pay it.
“Your ‘roof’ is there to help make sure that doesn’t happen.”
More serious issues arise when foreign firms don’t thoroughly check out their Russian employees, potential business partners, distributors and others.
“Most people you are going to run into are going to have some link to organized crime,” says Carl Genberg, Western regional director of business consulting firm Kroll Associates. “Not everyone is a criminal, but the reality is that everybody [over there] is paying protection money.
“I think it’s foolish for companies to try to establish their own intelligence networks,” Genberg says. “They’re much better off relying on somebody who lives in this world, who has trusted sources.”
“Over the last nine years, the situation [in Russia] has pretty much separated the wheat from the chaff,” Grajirena says. “There are some pretty reliable people that you can deal with.”
But at the root of any business dealing in Russia is a corrupt system that can easily ensnare well-intentioned foreigners.
“Everybody compares Russia to Chicago in the 1920s,” Grajirena says. “But the big difference is, Elliott Ness was a good guy, and there aren’t a lot of good guys in Russia today. And you’re not going to see that change overnight.”
The Times is interested in hearing about your experiences as a business traveler and as someone doing business in the international marketplace. Please contact us at global.savvy@latimes.com.
