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. Last Updated: 07/27/2016

Doing Business in Russia Again?!

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When asked, "Should American companies take another shot at doing business in Russia?", my initial reaction is: "Are you crazy?" Nevertheless, a little craziness may be in order.

Since I first considered the question, Presidents George W. Bush and Vladimir Putin had their summit meeting, added terrorists to their "most wanted lists," downsized our missile forces, upsized our oil commerce and generally became strategic pals in Texas. For good measure, Putin gave a live national interview in New York on National Public Radio. Some commentators considered it to be astonishingly candid and personal. Whatever happened to the "Evil Empire"?

In 1992, after many years of involvement with international trade, I was an eager participant in the first U.S. trade mission to Moscow sponsored by the U.S. Overseas Private Investment Corporation. Our group included some leading multinational companies and other medium-size businesses. We met with a wide range of U.S. and Russian officials including the experienced and savvy U.S. Ambassador Robert Strauss and Russia's young and brilliant prime minister, Yegor Gaidar.

When Strauss called on us to assist Gaidar's government and Russia with a rapid promotion of democracy and capitalism, the room was filled with excitement. Gaidar stressed the challenges and dangers that he and Russia faced. We didn't realize how soon he and his progressive policies would be eaten alive by the Russian wolves. As best I can recall, Strauss said: "Be practical. Don't start with complicated projects; just teach them how to run a sausage shop." The sophisticated executives in our group and those who followed us would have done well to pay closer attention.

We should have paid even more attention when a pioneering Moscow restauranteur from New Jersey raged about how his bank account had been "blocked" (i.e. had had money ripped off) -- and neither Russian nor U.S. officials could do a thing about it.

We should have listened to the American and Russian "experts" with more skepticism and less enthusiasm. We should have completely discounted all the nonsense about upcoming tax, judicial, accounting and land reforms, securities regulations and any notion of the rule of law.

In 1995, I took a sabbatical from the practice of law and fully committed myself to international trade. Ultimately, my activities took me back to Russia. A number of investors and I organized the RussianAmerican Finance Fund, which I ran in collaboration with a Russian partner.

RAFF focused on bringing private initiatives to the Russian healthcare system via model projects in the Urals (away from what were perceived as the more problematic environments of Moscow and St. Petersburg). Our undertakings included: distribution of high-quality international pharmaceuticals (leveraged by low-interest U.S. financing); sale and leasing of new and used medical, dental and municipal equipment; a computerized medical network linking our warehouse, drug stores, hospitals and medical institutions; privatized hospital departments that would help fund poor-quality "free" services in the hospitals; as well as many pro bono activities in which I and many others participated.

Well before the Russian crash in 1998, we felt the early stages of national infrastructure collapse. The healthcare system experienced catastrophic budget shortfalls as the government struggled with diminishing tax collections. Later, most of the Russian payment system broke down into barter operations, further defrauding the tax system. It is unimaginable to most Americans that truckloads of aspirin would be swapped for heavily discounted tax IOUs from one of Russia's main oil companies, which were traded for poultry, which in turn was bartered for lumber, in turn to be exchanged for lousy X-ray equipment from Kazakhstan. Moreover, many of these transactions involved regional electricity companies (which were owed money by virtually everyone) as intermediaries.

And so it came to pass that RAFF's model projects, touted by Americans and Russians alike, could not overcome the warnings given a few years before by Strauss, Gaidar and that intrepid restauranteur from New Jersey. Our strategy of dealing primarily with government institutions rather than private companies (and with no record of creditworthiness) afforded us little protection.

But, perhaps, a lot has changed in the intervening years. Business needs to be ever alert to evolving opportunities.

From the safe distance of my office and several years absence from Russia, it appears that Putin has tamed, at least temporarily, the Russian parliament. Many long-awaited tax and land reforms are proceeding, not the least of which is a 13 percent flat tax on personal income. Corporate profit taxes have been reduced as well. (I imagine that Russian tax reform was discussed around the Texas campfire by incredulous Republican fundamentalists, jealous at being trumped by reformed "Commies.")

Putin came to the United States without needing to prostrate himself to beg for IMF loans and financial support. In fact, Russia has been repaying some loans early, thanks to oil revenues and a growing economy. He has been making the right noises about what Russia must do to rebuild its pathetic infrastructure, about respect for the institutions that are necessary to attract serious international (and domestic) investment and about creating a workable relationship with the United States and NATO. For now, Putin is outmaneuvering the reactionary forces that would have his head for such words and deeds.

We can only hope that one of the outcomes of Sept. 11 is that Bush and Putin "looked deeply into each other's eyes and saw someone they can trust" beyond their honeymoon at the ranch. If so, the world should be a bit safer and many U.S. and multinational businesses may take another, very cautious look at doing business in Russia.

After all, Russia remains a huge country with vast natural resources, a somewhat recovering economy and a large population that still needs many things -- including a growing middle class. There is a Russia beyond Moscow and St. Petersburg that is desperate for a bigger piece of the action. The McDonald's restaurant chain, for example, clearly appreciates that fact and has been expanding into a number of second-tier Russian cities. Perhaps there are similar opportunities for other foreign companies.

Putin supports WTO membership, which could afford greater, albeit indirect, global economic stabilization. He also has a fundamental desire to restore Russia's national dignity. Such goals require reining in "robber baron capitalism," which has cheated many Russians out of their rightful inheritance. Honest commercial relationships with the United States and other countries can only help their cause and ours.

A final note of caution to Americans and other foreigners: If your company decides to go after a slice of the Russian market, beware of remaining cultural differences and do not attempt to keep up with Russian toasting and drinking. That can be a painful experience in and of itself.

Martin R. Snyder is vice chairman of the International Trade Practice Group at Wyatt, Tarrant & Combs in Lousville, Kentucky. He contributed this comment to The Moscow Times.