Doing business in Russia today is not like it was in the earliest, exciting, post–Cold War days. Nor is it the challenge that it was at the height of the Yeltsin era. Nonetheless, precautions necessary in other countries, such as conducting the necessary due diligence and providing for corporate—and personal—security, have to be considered and implemented.
Russia is no different from most foreign business venues: assumptions that apply to business practices in the United States may not hold true in Russia. A sound business strategy for operating in Russia and careful attention to the realities of the security situation are essential. Certain steps are important for establishing a presence in Russia and protecting a company’s interests, assets, and personnel.
Precautions When Establishing a Presence
It is highly recommended that a U.S. company serious about the market establish a physical presence in Russia through use of its own staff or a joint venture. When considering the options for doing business in Russia, with a fully staffed office or through a joint venture with a Russian company, it is generally preferable to use local resources that have knowledge of the language, bureaucracy, political system, culture and customs.
- Legal remedies for fraud, recovery of damages, or reimbursement on business losses as we know them in the United States do not exist in Russia. The U.S. judicial system provides unique recourse for both civil remedies and pursuit of criminal violations. Unfortunately, neither US/UK common law nor European civil law is the precise basis for the Russian system. Recovery of business losses incurred in doing business in Russia is extremely challenging; this makes preliminary investigations and evaluations all the more critical. In addition, the use of Russian legal counsel, whether or not affiliated with a major international law firm, may best address the ever-changing Russian legal system.
- The character of business in Moscow is not the same as that in St. Petersburg; business transactions in one oblast are not going to be identical to those in another oblast regarding issues ranging from infrastructure to site-specific government regulations. The ins and outs, the peculiarities and idiosyncrasies of a specific market, vary by region and even by specific city. Many resources are available to assist in developing a region-specific market strategy, from U.S. Embassy staff to Department of Commerce resources to local business associations and other resources.
- Due diligence investigations can assist in assessing the risk involved in any venture focused on Russia; such an investigation can determine whether a U.S. company will succeed or fail in Russia. The basic questions are: Are they who they say they are? and Can they do what they say they can do? The suggested due diligence will address the local agent, distributor, or joint venture partner, including the principals of any of these entities, as well as local subcontractors and suppliers. This means a review of background, credentials, and project-specific or industry-specific experience; checks on civil and criminal records; and some real input on personal and professional reputations. This is meaningful only through local, experienced professional contacts, who—in the new Russia—are typically drawn from former law enforcement or KGB personnel.
Precautions for Operating in Russia
All U.S. businesses operating in Russia should be concerned with the security of office staff and personnel, and the integrity and safeguarding of the company’s products or services.
- Background checks on employees and subcontractors working for your firm in Russia, whether domestic hires or expatriates living and working in Russia, are critical. Criminal statistics in Russia indicate that the vast majority of crime, particularly property crime—which can cripple a business venture—is committed by someone known to the victim. This includes employees and subcontractors. Background checks can uncover persons with criminal records or ties to organized crime, persons claiming false credentials (e.g., university degrees or inaccurate work experience), or applicants with other unsavory or undesirable characteristics.
- The laws governing intellectual property and proprietary information in Russia are improving, but much improvement is still needed. Basic precautions should be taken to protect these assets. A detailed inventory and analysis should be performed to prevent intangible assets from “walking out the door” and to prevent your company from suddenly losing ownership rights to a product or service. Suggested safeguards include taking measures to protect against external threats on IT operations (such as viruses and hacking) and internal threats on IT files (theft of trade secrets or competitive intelligence), and understanding the current laws and incremental revisions that exist regarding intellectual property.
- Crisis management plans for operating in Russia must address the classic concerns: (1) What do you want to protect, in terms of people, property, and operations? and, (2) What are your short and long-term goals? In the unique setting that is Russia today, these plans must go even further and address both potential terrorist threats and other possible political crises. These concerns may include Chechen operations directed at Russian interests that coincidentally strike innocent bystanders, as well as post-9/11 operations that target U.S. interests. In addition, President Putin has been aggressive in pursuing corruption and organized crime to the point that there may be backlash that causes local turmoil or political crisis.
- A thorough security analysis of proposed facilities, staff and operations in Russia is essential. The chosen administrative offices and warehouses must consider the usual “gates and guards.” But today’s Russia must also take into account personal security, such as movement of U.S. staff between hotels or residences and company offices. The appropriate security plans and provision for immediate access to necessary resources need to be created and rehearsed. It is recommended that a reputable local corporate security firm be contacted to provide sound advice in this area.
Operating a foreign business in Russia is safer now than it was in the recent past, but U.S. companies must still take extra precautions to prevent basic losses due to corruption, fraud, and security-related incidents. You can enter Russia, but success will be a challenge unless you ”play smart” and are well prepared.
Jeffrey S. Giddings is a Managing Director of Smith Brandon International (www.smithbrandon.com), based in Washington, D.C.
This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)