Can't You Feel Anything Odd About This Crisis?

Editorial

There is no government, no currency exchange rate. You can't get your money at a bank. But the country is not thunderstruck - not in the least! True, there is a certain sense of anxiety. Everybody is perplexed and keep asking one and the same question - 'What's coming on next?'. Long queues have formed at drugstores after the news came that two largest pharmaceutical companies had announced they quit all deliveries to Russia.

Yet there is no wailing, no tears - just some nervous giggling perhaps. We have not forgotten the queues yet, so this has not come as a blow. Neither is a constant fall of our national currency. God save us! - the whole country has been living like that for the last two years - so what? Only the owners of currency exchange offices seemed to be content - at that time, and they are, sure enough, quite happy now. Well, everyone should have his moments of joy, anyway.

On the other hand, following the logic of economics, which by the way, has to a certain extent caused this crisis, you'd think the so-called 'national producer' could benefit from the sinking ruble. Alas! - no. All lessons taught by the Centrobank proved to be futile. Heaps of new priceless kopecks have again been emitted whereas the population still sticks to 'conventional units'.

Even in regions where the barter exchange is in full swing and the most popular credit amounts to 12 rubles, the price for a bottle of the Osetin vodka, prices are reacting to the current changes in the dollar exchange rate just as briskly as in the Moscow boutiques.

Billions of dollars spent by the Centrobank in its attempts to support the ruble seem to have vanished into thin air. Yet, it's just what it seems to be. This money has certainly been accumulated on accounts belonging, according to a fair number of stock analysts, mostly to our own, Russian-bred Georges Soroses.

So, monetarism and 'hot-money' games have resulted in a crisis which is perfectly natural in a young and fully speculative stock market. The crisis is there. Yet, could we call it a collapse? The answer is YES, providing we base our conclusion on official figures of the debt and the budget deficit. However there is a different outlook showing the whole thing as a vigorous and long- anticipated shake-up, - but no tragedy. It is based on a well-known truth - not the life-goes-on-type, but just as self-evident: at least 50% of our economy, or maybe even 75%, operate on laws, very different from those studied by the Wall Street analysts.

Deep in the shadow, there are no Federal Loan Bonds or T -Bills, or budget deficit, or payment crises. What we mean is not only the MAFIA, or bank clerks who get their salary through insurance and deposits, but also public markets where cash registers exist to be generally regarded at 'something-can- always-be-done-about-it' angle , an attitude which has virtually affected everybody in this country - it can be wood-cutters getting their wages in boards, or the population in the regions, long accustomed to trading a bag of oats for a pair of wellingtons

The 6th Annual US-Russia Business Council Meeting in Chicago, Thursday, October 1, 1998

Managing Operations in the Current Crisis

Remarks by Peter B. Necarsulmer Chairman & CEO, The PBN Company Chairman, C.I.S. Strategies, Ltd.

What could be the relevance of this lemon (I am holding) to a discussion of the operational impacts of the current financial crisis in Russia? If you like a twist in your martini or a squeeze in your vodka and tonic, it can be meaningful indeed. Especially when you consider the price of lemons in Moscow today.

I won't keep you in suspense. Two days ago, one lemon cost THREE-DOLLARS AND FIFTY-CENTS at Seven Continents, one of the more popular full-service supermarkets in central Moscow.

Like many in Moscow today, a key element of my daily anti-crisis operations program is the consumption of a cocktail or two when the work day ends at 10 or 11 at night. So, confronted last Monday with this outrageous and astronomical price for a single lemon, I had to make a crisis decision which, in approach, is really no different than dozens of other operational decisions about banking, employee relations or currency exchange which confront my business and the businesses of my American and European clients each and every day. I could take the easy way and acquiesce in this supermarket blackmail.

I could simply pay the ridiculous price and get on with the cocktails. Alternatively, I could take the other easy road--throw the lemon back, use my ever-growing vocabulary of Russian slang and promise myself to return to Safeway and America as soon as possible, never to return to Russia. Or, I could take a third way. Calm myself, walk two blocks to a neighborhood Russian produce store, and buy an entire kilo of the exact same lemons for the dollar equivalent of A DOLLAR TWENTY-FIVE. That's what I did. And the cocktails that night were even more satisfying for this little bit of extra effort.

In fact my lemon experience of several days ago is a good analogy for our discussion of Russia in crisis. In terms of daily operational impacts for long-term players in Russia, there exists, or shortly will exist, a practical solution for the vast majority of day-to-day operational questions.

Doug Davidson's description today of Boeing's steady and studied step-by-step approach to dealing with its banking, employment and salary payments issues is an excellent example. In fact, there are several dozen mid-sized banks operating today that are safe and efficient providers of all essential banking services. There are numerous legal methods from personal to passport accounts which allow transfers into Russia of hard currency. And, it goes without saying, that there is a larger pool of highly motivated and highly skilled labor on the market today than at any time in recent years.

Yes, the larger banking system has been decimated and yes inflation is beginning to rage. But is Russia now just a lemon? I don't think so. Are foreign investors and commercial agents really so bad off after all?

A little bit of memory goes a long way.

The level of panic and anxiety among players in Russia is inversely proportional to their national origin and length of residency. There is a stark gap between the panic factor among Russians and foreigners--Russians know Russia has been around for 1,000 years and will be here for a 1,000 more to come. They have staying power and they have witnessed a 1,000 times worse than today's realities.

So too, foreign businessmen. In the late eighties and early nineties, the major concerns were receiving and placing phone calls, sending a fax, making a photocopy, finding medical care, securing a hotel room with an acceptable resident population of cock-roaches. We take all of this for granted today.

My point is that a dollop of nostalgia puts today's operational troubles in context. The hassles associated with cash rather than credit card transactions, shortages of imported Oscar Meyer wieners and Charmin toilet paper can be taken in stride. These are technical problems which will and are being solved.

More compelling are the memories of the August 1991 coup and the 1993 storming of the White House. Likely traffic jams and work stoppages anticipated for next week's October 7 manifestations can hardly be compared with the trepidation and white knuckle fear occasioned by tank missiles flying overhead, snipers shooting randomly from roof tops and friends literally bleeding to death in your arms.

The fact is, today it is still business as usual for us and most of our clients.

Of course, some have closed their doors either literally or figuratively--especially our friends in the capital markets. But the serious players whom we know and work with personally like Boeing, Coca-Cola, Philip Morris, Mary Kay, Chevron, Polaroid and Diageo are in the market to stay. And they want you to know that.

The reasons are simple. The fundamentals which drew them and you to the Russian market remain largely unchanged. In so many respects, realities are far superior today than only five years ago.

1. 150 million consumers are still in place, the vast majority with a heightened level of demand, sophistication and knowledge.
2. Russia's highly educated and cost-effective work force is still in place.
3. The Federation's untold and largely untapped natural resources are= still in and on the ground.
4. While the Ruble may be a shadow of its former self, Russia's technical and scientific greatness is not diminished in the least.
5. And to these fundamentals, we may add a number of factors mentioned so correctly by Dan Yergin in his remarks earlier in the day....
6. A constitution--however flawed--and constitutional framework which are intact and respected.
7. A committed constituency of unreconstructed capitalists and free- marketeers.
8. Tens of millions of anti-communists.
9. Government structures that, no matter how corrupt, are more technically and professionally capable today than at any previous time.
10. A functioning telecommunications infrastructure.
11. A functioning construction industry.
12. Warehousing and distribution facilities.
13. Air transportation and mobility.
14. Roads and highways.
15. And the list goes on.

I am not going to stand here and be an apologist for Russia. Nor am I going to minimize the current difficulties. No one should minimize the near total destruction of the banking and monetary systems. More important, perhaps, is the bankruptcy of Russia's credibility in the world, especially in the financial markets. Russia's lack of credibility not only reflects but sustains the current economic crisis for Russia itself, and for all of us who do business there. And, among outsiders, this credibility gap is greatest for America and American businessmen who, rightly or wrongly, are tarred to a measurable degree by the Russian public and political leadership with major responsibility for the meltdown.

Nevertheless, the central point is that there is an opportunity for turning the lemon which is Russia today into lemonade. And nowhere is this more true than in governmental policy-making.

The message to each and every operating company represented here today is, DO NOT BECOME SO PRE-OCCUPIED WITH DAY-TO-DAY OPERATIONAL MATTERS THAT YOU MISS THIS UNIQUE OPPORTUNITY. Responding effectively in government relations terms to the operational crisis means, in significant part....

ONE....Redefining your company in the eyes and ears of government at the federal and regional level. Most important, let the policy-makers know you are staying, not running from the market.

TWO....Clarifying your strategic business objectives and aligning them with the priorities of the new government--about which I will speak more in a moment.

AND, THREE, Becoming actively engaged in the decision-making process and influencing outcomes, not sitting back and waiting for governmental decrees, Duma votes and IMF negotiations.

All of the critical laws defining social and economic relations in Russia are now back on the table. The next three-to-six months will be a period of opportunity for you to help define outcomes on the issues that matter most---precisely the issues which have been defined year in and year out by this Council and its members as key impediments to business development in the Russian Federation.

1. The tax system.
2. Customs, tariff and duty regimes.
3. The banking system.
4. The monetary system.
5. Labor laws.
6. Foreign investment.
7. Production sharing agreements.
8. Intellectual property.
9. Alcohol and tobacco production and distribution.
10. The bankruptcy laws.
11. Possibly even laws on private property.

Of course, formal RF governmental policy is yet to be defined.7And it was not defined in the 'policy emission' which emerged this afternoon from Mr. Maslyukov only to be clarified as not the Government's policy only one hour later by Mr. Primakov in a television interview. However, the priorities of this Government are rather clear. Defining your companies' governmental affairs strategies both for this period of crisis and over the longer term must take these priorities into account.

It's Russia First from this point forward....not Washington and not the West.

There is a realignment of true north on Russia's geopolitical and economic policy compass away from the US and the IMF toward internal considerations such as payment of pension and wage arrears, and toward Europe, particularly in light of the ascendancy of Tony Blair in Britain, and the continuing and overarching importance of Germany to Russia.

Primakov, Yeltsin and the entire Government are extremely sensitive to the needs and priorities of the governors and the regions--which is both a political and an economic imperative for the new Government.

1. Domestic producers are first in line, especially the military/industrial complex, agriculture sector and natural resources.
2. Revenue generation of any kind is the order of the day--taxes, export currency sales, import duties, license and patent registration fees.
3. Direct foreign and domestic investment will be favored. Portfolio and speculative investors past and future will be shunned.
4. Fighting government corruption will be a priority.
5. Stopping the brain drain is also high on the list.

So what prescriptions and advice may be offered to foreign operating companies in Russia?

1) Be clear on your company's objectives. If you are staying, be clear on why you are staying and how you intend to do it--be prepared to communicate this to all key audiences, starting with your employees, suppliers and business partners; with your home offices; and, with the news media and government officials.

2) Don't stand in line outside of Mr. Primakov's office. In the federal government, seek out the senior level apparatchiks who always have and always will make 90% of the decisions...either by their commission or omission.

3) Go to the regions. Seek out members of the Council of the Federation. Work with individual Duma deputies representing specific regions. Work with regional compacts. Bear in mind that the most important economic and political dialectic in Russia over the past 8 years has come to pass--namely, the devolution of power away from the center to regional sources of political and economic authority. On this point, I could not agree more with Dan Yergin.

Again, go to the regions and study carefully those companies that have achieved the greatest success and replicate what they have done. Philip Morris, Caterpillar, Wrigley, and MARS. Coca-Cola. McDonald's. Pepsi.

4) Work with and support AmCham, the US-Russia Business Council, GCC. All of these organizations are active, effective and get results.

5) But also understand the limitations of American organizations in today's realities and a palpable decline in American influence. Work with the EU High Commission, European Business Club, German Business Club, commercial counselors of other G-7 countries and multinational forums such as WTO Working Groups, the Embassy Working Group. Work with domestic producers associations and the Russian Chamber of Commerce and Industry. If ever there was a time for coalition building and power in numbers, that time is now.

6) Learn the lesson once and for all. Handshakes mean nothing. Trips to the mountain top have extremely limited value. The government relations function needs to be institutionalized. Run your operation in Russia just as you do it in Washington, DC or in Brussels. Have the people in place. Retain the right specialists. Use industry associations. Be prepared to give in order to get. Remember that, as George Bush was fond of saying, half of life is showing up.

7) Match your corporate interests with Russian national and regional interests. Again, I point to those companies which have followed this most fundamental axiom. Boeing is an excellent example in its efforts to work with the Russian Space Agency, Tupalov, Ilyushin and numerous research and design institutes throughout Russia. Philip Morris' successes in the Leningradsky Raion is another case in point. Keep in mind the priorities of this new government and of regional governments--not simply the priorities of the IMF.

8) Find the ways to provide technical and other support to achieve priority federal objectives. This is not simply about relationship building--it's about realizing strategic business objectives. If you are in the alcohol business, roll up your sleeves and work with government on designing a monopoly system that keeps you in business. No matter what your economic sector, assist this new Government in developing its anti-corruption program.

Fine and good you say--but how can this be accomplished when the Government has yet to be confirmed? How can we do business with a Government that looks and acts more like Noah's Ark and the Tower of Babel than a functioning executive authority? Our view is that Primakov's is a transitional government with an historic mission....responsible first and foremost for delivering on a promise of political stability. To date, Mr. Primakov's track record is good.

What else can be said? A Primakov government appears to be one that is not and will not be beholden to the Oligarchs and which is, in fact, committed to real anti-corruption measures. If anyone can follow through on this promise, it is the former head of the special services--he knows who is who, and he knows where all the bodies lie. Mr. Primakov is a statesman and it is a fair guess that he will insist on statesmanship from this evolving government...no matter how long it lasts.

And, we think, it is much more important to keep our eyes focused not on the ministerial dance cards, but on the inner circles of trusted advisors that will be most accountable for implementing the Primakov agenda.

I hope you find some value in these modest recommendations on how to make good use of Russian citrus. In conclusion, I would like to leave you with one more thought. One of the Wall Street banking houses likes to say...'we make our money the old fashioned way, we earn it.' In fact, an awful lot of people were making money in Russia the quick and easy way--and some were literally stealing it. Those days are over.

From this point forward, money and business will be made by those in Russia who are prepared to earn it. It is a pleasure knowing that the members of the US-Russia Business Council have and will continue to practice business in just this way.

Peter B. Necarsulmer can be reached in Moscow at (7-095) 745-8700; in Washington, DC at (1-202) 466-6210; or, by e-mail: pbnpres@aol.com.