Invest in Russia?!

1999 > Russia

You’ll have better luck at the casinos!

December 29, 1998 Associated Press

Foreign Investment in Russia Drops

MOSCOW — Direct foreign investment in Russia plummeted this year to $2 billion,
half its level in 1997, an Economics Ministry official said Tuesday, quoted
by a news agency.

numbers reflected investors’ fears over the Russian economy, hit over the
past year by a currency devaluation and its worst recession since 1991, Vladimir
Yefimov said. “Unfortunately, this is a very small volume given the state
of our industry,” Yefimov told the ITAR-Tass news agency. By comparison,
foreign direct investments in Poland, the Czech Republic and Hungary will
total around $11.4 billion in 1998 — although their combined population
is less than half of Russia’s.

At least this construction site is working!

Direct foreign investment in Russia — that is, investment directly in companies,
as opposed to stocks or other financial instruments — reached $3.9 billion
in 1997 before collapsing this year. Yefimov predicted that direct investment
would climb back to $2.5 billion in 1999. Most Russian manufactures are
cash-starved and use obsolete equipment, producing goods that often fail
to compete with more expensive imports.

7 Jul 1999, Johnson’s Russia List

Entreprenuer 2

By Tom White

The aspiring entreprenuer in Russia has to first come to grips with the need
to overcome the the language obstacle. If the entreprenuer is successful
in designing a system of interpreters to work with, while avoiding the problems
discussed in the previous article, then the next step is feasibility of the
idea. The intitiation of the feasibility study presupposes that the businessman
has identified and verified the existance of an unsatisfied level of demand
which would support the venture.

Any entreprenuer approaching a business venture in Russia should begin with
a feasibility study. In terms of western business the idea of a feasibility
study is not new. However, when western ideas are applied to the Russian
business system there are outcomes that will be surprising. The Russian business
system is a legendary myriad of bureaucracy, graft, conspiracy, apathy, and
patriotic egotism. The first thing the businessman in Russia must realise
is that everything is regulated by some form of government organization.
It is very easy to discover that the simplest of products, in the west, is
impossible to market in Russia without going through a two year, or more,
period for licensing. The entreprenuer must identify and isolate the associated
costs, including time expended, of each level of approval.

There are requirements for testing that must be adhered to for consumer products.
Do not let the testing requirement seem reminiscent of Underwriter Laboratories.
The Russians have their own set of standards for every product imaginable.
These hurdles are complicated by the difference in the philosophical base
from which the stantards are drawn. They also have a different testing office
for each form of product. Just discovering which office should do the testing
for a new product will be a guantlet of bureaucratic shuffling for the novice
businessman in Russia.

There is no substitute for doing your home work. If there appears to be an
opening in the Russian market there is a reason that it exists. Sometimes
the reason is the bureaucracy is too deep to wade through. At other times
the Russians may not perceive a need for the product. Still it is possible
that a product does not exist on the Russian market simply because Russians
do not understand the market for it. It is also possible that Russians understand
there is a demand for a product but refuse to produce it because it is not
“Russian style”. The entreprenuer must spent time in Russia sorting out the
reasons the proposed product does not exist. I would recommend enough time
in Russia to come to a verifiable conclusion. Certainly the novice businessman
should reach these conclusions based on previous business experience and
not the advice of Russian consultants. Russian consultants live by the same
set of standards as interpreters when dealing with westerners. Relying on
Russian consultants to do a feasibility study is like walking into a dark
alley, with money hanging out of your pockets, somewhere in Harlem. The results
of such a naive action are extremely predictible.

Should the businessman decide that a viable market exists for a new product,
in Russia, the next task is to construct a “manufacture or import” decision.
This investigation is just another step in the feasibility study. Manufacturing
in Russia is vastly different than in the West. In many areas that are
computerized and mechanized in the West their Russian conterparts are still
cottage industries. The raw materials distribution system is also different.
If the businessman wishes to produce in Russia the costs of combining the
resources and achieving the completion of a product must be weighed against
the western cost and the tax imposed on importing. The businessman must be
careful in this analysis to discover the “Hidden” costs that will arise.
The hidden costs being those that insure the job is accepted and completed
at the differing levels of production. This will certainly mean candy for
the secretaries, dinner for the executives, and several cases of vodka. Depending
on the people that you chose for production it may mean even more costly
sorts of gratuities. However the cost of these things may pale by comparison
to a 52% cost to bring the product across the border from the west.

Another critical factor in the feasibility study is the determination of
whether a distribution system exists for the product. The way products reach
the market in Russia is as different as the way they get created. The final
market for a consumer product may be in a kiosk, a government operated department
store, or any number of alternatives in between. The new product in the market
may not fit well, or at all, into the regular distribution channels in Russia.
The establishment of a new distribution channel will defeat most new product
ideas. Acceptance of the product in the established channels will be a key
to reaching the market. Again in the distribution channel there will be “Hidden”
costs. They will likely be as important to eventual success as they were
in the production stage.

If it the conclusion of the businessman that the feasibility study confirms
the new idea then work has just begun. At the conclusion of the feasibility
study not one item has been produced or imported nor does the entreprenuer
have the right to do so in Russia. A foreign individual does not have the
right to do business in Russia. It is at this stage that the entreprenuer
must form a company to operate in Russia. The formation of a company is a
subject unto itself and will be discussed in the next essay. If the entreprenuer
has come this far the road ahead will not level off.

An Open Letter to the Managers of All Russian Production Enterprises

from a Foreign Investment Banker in Moscow

It was, and will always be, the work of investment bankers to find those
with money to invest and to put it to work where it is most needed. It is
a sort-of law of finance that money seeks those who need it
mostùprincipally because those users are willing (and usually able)
to pay the most for it. In financial language this is called seeking the
highest “rate of return”.

People or institutions with money to lend or invest constantly search the
world for the best possible opportunities and they employ investment bankers
to do the looking for them. During the last twenty years we bankers have
found ourselves in the Middle East, in South America, the Pacific Rim, China,
and the Eastern European countries. Today we are here and Russia stands
dead-center on our financial maps because a lot of money is, or at least
was, poised and ready to come to work here!

fact during the last five years I’ve probably met about a thousand of you
and walked through not a few of your offices, warehouses and production
facilities. But, because of the years and because much less has happened
than you or I might have wished for, I’m now going to tell you some of the
reasons that I think are causing thisùreasons which I believe rest
squarely on our shoulders, and reasons we have the ability to change for
our mutual benefit. Here’s what I think:

To those of you: fine, don’t waste my time, I won’t waste yours.

it has ever worked and it never will. Sometimes governments have money to
give to industry, but they don’t ever have as much as you need, and they’ll
never have as much as the world’s “capital markets”, whose primary job it
is to get involved with you. Let’s leave government to the defence of the
nation, infrastructure and the care of pensioners. You can have my capital
markets’ money to use for building better products (replacing all the things
being imported today seems like a good place to start) or to sell overseas.
If you want professionals with experience to help youùgoodùtake
my investors’ money and/or potentially their management skillsùbut
pay it back to them on time and with interest! Bankers don’t give money away,

IN A WEEK OR TWO. Wrong. Business plans take considerable amounts of time
to prepare. If you’re unfamiliar with the complete process, let professionals
help you.

AND NOW YOU DON’T WANT TO DO ANOTHER. A business plan intended for a financing
must be written specifically for that purpose and it is often quite different
from a standard business plan. Few enterprise managers can write such plans,
even with the Western-designed guides in circulation and so popular in Russia
today. Let finance professionals do this job for you and make sure they intend
to continue with you to seek investment once the plan is finished. You can
and should spell this out contractually with your investment banker or business
consultant at the very beginning of his work.

cannot give us what you think we need to know. In this you don’t different
from enterprise managers around the world: few of them have the special skills
that a financier can bring! Like all managers everywhere, you are busy enough
running your company. Listen to what a good financial specialist asks of
you. You will never get your project financed if you give your financier
even 99% of his needs. In this game it’s 100% or nothing!

A good financial plan is like water flowing down-hill: it seeks its own very
logical path and it does not mean getting rid of everything you’re used to
doing today. Of course, the times call for change and this naturally creates
anxiety. It always has, new capitalism or not, and it always will. If you
are the head of your enterprise, you’re the head of the family…it’s up
to you to embrace change on behalf of all of your employees; we foreigners
won’t usually try to do this for you. I will not pretend, however, that new
plans can include all and everyone, but 9 times out of 10, the good financier
will leave you to your job.

Layoffs and down-sizing is sometimes necessary, but I for one, maintain that
your first job is to take care of as many people as you can always. You certainly
have the right to be suspicious of plans that create improvements only through
massive layoffs (a peculiar penchant and too often used technique in Western
factories). Try to find other ways firstùtake care of your
peopleùthey are your family and your greatest asset and they cannot
easily be replaced by machinery, even new machinery! We can all think of
examples (notably in South America and the Far East) where excess manpower
is an advantage, one that need not be replaced by technology. The case of
German management’s care and use of manpower is also worth understanding
and emulating.

things other than new equipment market planning, product development or salaries
for employees, count me out. You’re the father of your corporate entity:
act like a good one because it makes a difference to me.

WITHOUT BRINGING NEW INVESTMENT TO YOU. I don’t blame you. Get good advise
before letting go of your shares. The new capitalism has its rough edges
and this is one of them.

Wrong again! The amounts Russian industry needs will always require foreign
money; besides it’s cheaper! New Russian bankers will use money the same
as we all do and there will be no easier path with themùthey now belong
to the international financial system and they abide by its natural money
laws. They’ll ask of you the same painstakingly detailed business plans as
any banker anywhere.

being paid after investment is delivered is possible, but most of you are
not exactly in ideal circumstances. Make sure your investment banker has
access to the capital that he promises, but then find the money to allow
him to do his job. You’ll get what you pay forùpay nothing, most probably
that’s what you’ll get.

NEW INVESTMENT MONEY. Believe it or not that is unfortunately the feeling
many of us have in our dealings with you, and I’m sure I speak for Russian
as well as Western investment professionals. This comes about here in Russia
just as it does in the rest of the world. You, the enterprise manager, must
wonder how a few months of work on our part can result in the sometimes large
fees you may pay us. Let’s leave that for another day, but simply stated
those of us who know where money is and can convincingly bring some of it
to your enterprise have always been well paid.

Given your intense need for capital it is quite unproductive to cancel meetings
without notice or to delay them indefinitely. My time is valuable, and the
owners of capital from whom I seek money for you are not used to being kept
waitingùnot here in Russia, not anywhere. Today money is impatient,
it pays attention only to those who have respect for it and for the professionals
that manage it. It will forever stand between you and I if you think my schedule
is not worth considering. For better or worse, it is customary for seekers
of capital to make way for the banker.

So then, I hope by having spoken openly and frankly here that you have come
to know me a little bit better. I know I still have much to learn about Russia
and about your enterprises, but I consider myself relatively well informed
today about international money, how it moves and the role it plays in Russia.
I would like my words to contribute towards an improvement in our relations.
Please accept them in the spirit in which they are givenùto be
constructive, and to make our next meetings friendlier, smoother and more

Until we meet, I’ll close by saying that I understand and sympathize with
your everyday difficulties. I strongly believe, however, that the Russian
economy will begin to flourish in the near future and that its re-birth will
take place in your manufacturing enterprisesùI am as committed to
this as are you. By getting to know me better and by helping me and my colleagues
of the financial world you will be helping to bring that future closer and
you will be the recipient of more of the investment capital you want, need
and so richly deserve.

Thank you. Richard Helbig

COPYRIGHT.Price, Helbig & Company

2 February, 1999, Johnson’s Russia List

Small Business Development in Russia

By Bjorn Kaupang

It could maybe be of interest for readers of JRL to read my opinion about
“Small Business Development” in Russia. My name is Bjorn Kaupang, and I have
been working in Nizhny Novgorod since 1992, with frequently visits to the
city. The last two years, I have spent most of my time in Russia. Our work
is mainly based on the forest industry, and for export.

Small Business Development

As Richard Helbig wrote in October last year in “An Open Letter To The Managers
Of All Russian Production Enterprises”, foreigners are welcome – as long
as they give money and don’t demand for more involvement. Small business’
are some of the pillars in the economic development of the society, and not
only in developed countries, maybe even more important in countries like

Most people start being entusiastic. When you tell about investment-projects,
especially politicians, but what happens when it comes to reality ? I will
tell about our last case in Nizhny Novgorod Oblast (County) ; For the last
year we have been working together with investors for to establish new furniture
factories in the region, using one of the county’s main raw material resources
– Birch. The plan was to re-equip two factories with new machineries, for
production of massive Birch furniture for export, estimated annual turnover
USD 7 mill. at each.

In addition two sawmills would get huge increased production, delivering
raw material – glued laminated panels ( which is new production for those
enterprises, with investment of approx. USD 2 mill. by foreigners for new
equipment). The perspective for the future (a five years period) was to establish
10 factories, where the investor also will be the buyer of the main production.
The positive side with this project was – investor ready to invest, buyer
(the same as investor) ready for to sign up agreement for purchasing production
for the next five years.

The negative side of the project – very close tie to one group.

What happened when all seemed to be ready – after one years investigation,
negotiating and preparing ? Yes, suddenly the sites we had been looking at,
and also made drawings for installation of new machines, was decided for
another purpose, with bigger investment.

It had been no talks in front about this situation – of course competition
is ok, but all parts have to know the situation, for to make their decisions
of how much time and money it is worth to put into the pre-project. This
I believe the Russian management, political and business, have to understand
and respect if they want to attract new investors.

Nizhny Novgorod Oblast lost the possibility for investment of approx. USD
50 – 70 mill. for the next five years period, and more important productional
output for approx. USD 125 mill. when all investment was done. And it was
all cash – business, no barter deals.

Conclusion for the investor-group is then that they turn to another
Oblast/county, or put investment in Russia on hold, at least for a while.

The Times (UK) 19 November 1998

Russia in need of ‘third way’ as economic winter bites

By Janet Bush

Russia’s parliament has this week been debating a bill that seeks to establish
the basic needs of Russians in order to calculate minimum wages and pensions.
The minimum requirements for a woman, a Dumas draft bill has decided, include
six pairs of panty hose and five pairs of underwear every two years. She
should be allowed two bras every three years, a skirt and dress every five
years and a winter coat every eight years. One bath towel is deemed necessary
every 23 years.

If this isn’t enough to ram home the message that Russia is unimaginably
different from industrialised economies in the West, nothing is.

Even after the shock of the catastrophic events of midAugust, many financial
market economists, together with the International Monetary Fund, are still
clinging to the idea that, with a sweeping restructuring of Moscow banks,
more privatisation and proper tax collection, Russia will return, redeemed,
to market reform. Most analysis of Russia’s current problems still revolves
around highly orthodox analysis honed on 19th Street in Washington. In this
mind-set, there is no acceptance of the possibility of a “third way” between
the pure free market and communism.

The IMF is still furious that it allowed itself to be pressed by the US Treasury
into giving Russia (in fact, assorted mafioso and oligarchs with Swiss bank
accounts and Russian banks that were speculating against their own currency)
the first tranche of a further $22.6 billion in July. An IMF delegation is
in Moscow this week but all reports suggest that there is a stubborn impasse
between the Fund and the Russian Government. The IMF is not prepared to release
any more money until it is assured that Russia is set against the option
of printing money to get itself out of trouble and is committed to a return
to free market reform. It made no secret of its disappointment with last
weekend’s economic plan which it criticised as short on specifics and long
on state intervention.

Meanwhile, Russia is resorting to emotional blackmail aimed at getting Western
leaders to persuade the IMF to come up with new funds. Yuri Maslyukov, Deputy
Prime Minister, said yesterday that, without more foreign money, Russia faced
a “national catastrophe that would write off the free market economy, democracy
and the territorial integrity of Russia”. Yevgeny Primakov pressed the case
for more IMF funds with Gerhard Schroder, the German Chancellor, in Moscow,
and with Al Gore, US Vice-President, who was in Malaysia for the annual
Asia-Pacific Economic Co-operation summit. With meteorologists predicting
that Russia will suffer its worst winter for 30 years, moral suasion has
already netted Russia food aid deals worth $1 billion from the US, Canada
and the European Union.

Behind the intense resonances of the Russian poor bracing themselves for
winter, however, is a reality that is far more complex, and points to the
absurdity of Western insistance on adherence to pure free market principles
in the middle of an economic disaster zone. While the Russian Government
circulates the begging bowl, the largely privatised Russian oil companies
are set to export 115 million tonnes of oil this year, a post-Soviet record,
and gas exports are up 2 per cent on last year. An estimated 500,000 tonnes
of wheat have been exported this year, 20 per cent of the total amount of
food aid so far pledged by the West.

Clearly, the search for hard currency is taking precedence over food and
fuel for the people which, so far at least, is thankfully being met by Western
charity. The Government is beginning to try to change this balance. Sergei
Generalov, Fuel and Energy Minister, has warned oil companies that they may
face export restrictions if they do not supply domestic customers as well
as those overseas. This is, of course, an instance of state intervention
that would presumably horrify IMF ideologues.

Not everyone is still uncritically regretful that the West’s favourite Russian
economic reformers have been booted out of the Government. One senior Washington
official said that the West had perhaps been naive to back the reformers
because they had never had the instinctive support of the Russian people.
There has, perhaps not in the IMF but elsewhere, been a realisation that
the path to capitalism can only be successfully negotiated with the will
of the people and if the fruits are shared more widely. It is also acknowledged
that the state must play a role in Russia’s revival and that, beyond the
pressing need to sort out the banking system, restructure debt and stabilise
the budget, there is a need for top-to-bottom structural reform, not just
of the banking sector but also of the legal and tax systems.

The American Chamber of Commerce recently organised a conference of leading
US companies on Russia’s prospects. Amid the gloom – Russian industrial output
fell more than 11 per cent in October – American firms were positive as long
as chaos acts as a catalyst for change. Stan Golis, vice-president of Exxon
Neftegaz, said: “This year could be a watershed year for Russia . . . but
political will is necessary to create the needed legislation that will allow
companies to work here.” In the months ahead Russia will have to carry on
negotiating the rescheduling of its debts, close banks and agree a believable
budget plan. However, it must do much more if sustainable economic progress
is to emerge from the current catastrophe.

It must protect tax collectors, 26 of whom were killed and 74 wounded in
1996 alone. It must prevent future privatisations from selling off valuable
assets cheap to a handful of oligarchs in “loans for shares” deals. It must
start to tackle reform of its antiquated Soviet agricultural system, as the
International Finance Corporation has recently suggested. If anybody wanted
a symbol of the skin deep nature of Russian economic reform, then consider
this: the country may have set up a stock market, but it has yet to end an
80-year ban on the free purchase and sale of land.

Los Angeles Times December 28, 1998

COLUMN ONE: Russians Bank on Bartering

By Richard C. Paddock, Times Staff Writer

SMOLENSK, Russia–Every hour, thousands of shiny cans of beef and pork roll
off the assembly line at the Smolmyaso cannery here. For the company, it’s
better than printing rubles.

In this part of the world, Smolmyaso’s 12-ounce cans of meat are as good
as cash. The cannery trades its finished product for cows and pigs to slaughter,
aluminum to make the cans, equipment to can the meat, electricity to run
the equipment, and cardboard boxes to ship the cans. It even pays its taxes
in canned beef and pork. “Canned meat has become like the dollar here,” said
Smolmyaso Director Vadim D. Skorbyashchev, holding up one of the cans. “These
are our dollars.”

With the dismantling of the Soviet command economy, Western advisors and
international lenders expected a modern market economy to emerge in Russia.
Instead, a medieval system of barter has grown in its place. Economist Dmitri
S. Lvov, an advisor to Prime Minister Yevgeny M. Primakov, estimates that
70% of Russia’s economy operates through the cashless exchange of goods and

“For seven years, we have been brainwashed into believing we were headed
for a market economy,” said Lvov, director of the Central Institute of Economy
and Mathematics in Moscow. “Seven years later, we realize we have ended in
a sort of feudal communism where forks and knives are exchanged for oil,
and oil is exchanged for tires.”

Struggling businesses are compelled to negotiate complex trades that can
involve more than half a dozen companies and span thousands of miles. Local
governments finance their budgets with milk, lumber and vodka that they receive
in taxes. Down-and-out commodities brokers who once negotiated major
international sales now search the Internet for firms with something to trade.

Workers are paid in products they make or in goods their employers acquire
by barter: Some get televisions, others clothes or sex toys or toilet bowls.
Many try to sell their “wages” for cash by the side of the road or at open-air
markets. Some who have been laid off get their unemployment benefits in the
form of manure. “People gladly take manure and are grateful for it,” said
Vyacheslav P. Mishchenkov, chief of the Smolensk regional employment service.
“It may sound somewhat gross, but people who live in town and have small
gardens in the countryside are happy to get manure. They can use it as natural
fertilizer and get a good crop.”

Barter first became widespread in Russia in 1994, when investors, bankers
and even factory managers found it more profitable to invest their money
in get-rich-quick schemes than in manufacturing or agriculture, diverting
cash that could have been invested in production.

The system of cashless transactions has spread as well to most of the 14
other nations that emerged from the former Soviet Union, which are plagued
by the same economic problems facing Russia. Gazprom, the giant Russian energy
company, recently agreed to accept $1.3 billion worth of food and other goods
from Ukraine and Belarus as payment for debts outstanding for natural gas.

With their reliance on barter, most Russian companies have weathered the
economic crisis triggered in August when the government froze foreign debt
payments and the ruble began falling to about 30% of its previous value.
After all, the plunging ruble and the collapse of the banking sector have
less significance to businesses that hardly deal in money anyway.

companies that officially have been bankrupt for a year have not gone under
during the crisis. They keep turning out their marginal goods–usually at
a loss–and trading them to other firms in similar straits. “In such conditions,
barter is our only outlet,” said Mikhail G. Vyrov, the Smolensk region’s
economic advisor. “Everybody understands that it’s one of the worst evils
an economy can be possessed by. Barter corrodes, corrupts and eventually
destroys the economy. But the bitter irony of our situation is that right
now it is our only means of salvation.”

In Smolensk, a city near the Belarus border that dates to 863 and was overrun
by the armies of Napoleon and Hitler, barter now makes up 80% of the economy,
Vyrov said. Arranging trades is a complex and time-consuming business. Many
companies have at least one barter specialist whose job is to find trading
partners and put together swaps.

“We have to spend all our time studying the industrial map of Russia and
leafing through outdated directories to look for information on what is produced
and where,” said Yuri V. Dadychenko, marketing director for Analitpribor,
a Smolensk firm that makes gas detectors for mines and power plants.

Firm Has Six-Stage Deal to Pay Taxes

Dadychenko recently set up a six-stage deal to pay the company’s taxes by
finding supplies for the city hospital. It worked like this: Analitpribor
shipped its safety devices to a nuclear power plant in the Tver region northwest
of Moscow, which canceled debts owed by a smaller electric company. The electric
company canceled debts owed by a glass factory. The glass factory sent bottles
to a plant in the republic of Mordvinia southeast of Moscow that manufactures
hospital supplies. That factory filled some of the bottles with saline solution
and shipped them to the Smolensk hospital. The city of Smolensk credited
Analitpribor with paying its local taxes.

“Some experts call barter a dead end,” Dadychenko said. “It is a dead end,
but what do we care if it helps us feel we are functioning? Without barter,
most of the enterprises in the region would have been long dead and cold

U.S. scholars Clifford G. Gaddy, a Brookings Institution fellow, and Barry
W. Ickes, a professor at Pennsylvania State University, make the case that
barter is a central part of a “virtual economy” that has developed in Russia
in place of a market system–despite what they said has been more than $70
billion in Western aid to help build a market economy since the collapse
of the Soviet Union.

The virtual economy, they say, has maintained social stability by providing
jobs, but the cost has been the creation of a steadily shrinking, noncompetitive
economy. By reducing the need for cash transactions, they note, barter helps
hide the fact that Russia’s industrial sector is continually operating at
a loss.

“What has emerged in Russia is something that arguably qualifies as a new
type of economic system, with its own rules of behavior and criteria for
success and failure,” the two scholars wrote in a paper published on the
Brookings Institution’s Internet Web site. “We call the new system Russia’s
virtual economy because it is based on illusion, or pretense, about almost
every important parameter of the economy: prices, sales, wages, taxes and

Lvov and other Russian economists attribute the rise of barter to government
policies that restricted the supply of money available to industry and
agriculture. Aid from the International Monetary Fund and other major lenders
was granted with the idea that Russia would maintain a tight monetary policy.

So-called young reformers brought in by President Boris N. Yeltsin to build
a market economy instead helped create a system of gangster capitalism that
transferred much of the country’s cash to foreign bank accounts. And rather
than encouraging investment in production, Yeltsin’s government attracted
money to its own treasury by selling short-term bonds that paid interest
rates of up to 200%.

“The young reformers have managed to eliminate the line for goods that existed
in Soviet times and replace it with a line for money,” Lvov said. “We have
managed to build an economy in which, instead of a deficit of goods and services,
there is a deficit of money.”

Now, with Russia’s tight money policy, the fallen ruble has become Russia’s
second currency, according to government figures. On Nov. 30, Russia’s Central
Bank reports, there were 191.9 billion rubles in circulation–the equivalent
of $10.7 billion at the official rate. By contrast, there are $30 billion
to $40 billion worth of U.S. bills in circulation in Russia, Primakov said
in a recent speech.

Most of the dollars are the personal savings of individuals who keep them
hidden in their apartments, safe from devaluations and bank closures. The
prime minister is trying to lure that money back into the economy. For most
Russians, however, cash is too valuable a commodity to spend on the shoddy
goods being produced by the aging industrial machine Russia inherited from
the Soviet Union, observed Kirill Vishnepolsky, business editor of the Kommersant
Daily newspaper.

Producers of low-grade goods have little choice but to trade with other companies
making products of similarly poor quality–and then blame their problems
on the country’s lack of money, he said.

“True, there is not much cash hanging around these days,” Vishnepolsky said.
“But if for a change you began producing something people really
wanted–something of good quality with a price tag that wouldn’t immediately
send the customer into a coma–you’d be surprised to see how soon you would
be offered cash for it.”

Canned Meat Helps Company Thrive

One company that appears to be thriving under the barter system is the Smolmyaso
cannery, which has nearly tripled its work force, from 792 to 2,200 employees,
in the past five years.

The enterprise has established five pig and cattle farms with a total of
5,000 animals, built up a fleet of 200 vehicles, opened a bakery and begun
construction on a block of apartments. It has started processing hides and
making shoes from the leather so it will have more goods to exchange with
suppliers who raise cattle and pigs. And it has opened 60 retail outlets
to sell its canned meat for cash. Skorbyashchev, the director, says he hopes
to double the cannery’s output of 2 million cans of pork and beef a month.

The 120-year-old company has done well in the barter economy because canned
food is a commodity that is always in demand and keeps its value–unlike
the steadily eroding ruble. Skorbyashchev, who has been director for 27 years,
said he negotiates all the firm’s barter deals himself. He is able to arrange
most trades with individual partners, without need for a long chain of
transactions, because of Smolmyaso’s strong market position.

“I usually keep all the trades and multi-move combinations in my head,” he
said. “The shorter the chain, the more profitable to me. Instead of one big
scheme, we have a couple dozen schemes. The main thing I have to worry about
is getting cash to pay salaries.”

To keep the system operating, the company usually pays its suppliers a share
of the finished products. For example, the cannery receives animals from
farmers, slaughters them and sends the hides to a tannery in Yaroslavl, about
350 miles northeast of Smolensk. The tannery tans the hides, keeping a percentage
of the leather in payment. Smolmyaso gets the remaining hides back, finishes
processing the leather and pays it to the farmers who provided the animals.

The cannery makes canned meat and sausage from the same animals, paying the
farmers with part of the finished product. The company trades some canned
meat for fodder, which it feeds to animals on its own farms and also trades
to farmers for more animals. To pay its taxes, the company delivers sausages
and canned meat to hospitals and schools. “The surviving enterprises today
are survivors only thanks to barter,” Skorbyashchev said. “The industry keeps
on running, people still have their jobs, and everything works.”

Across town, however, barter is not working nearly so well for the Diffuzion
machine tool factory, which once supplied high-precision tools to factories
across Russia. It declared bankruptcy in the summer of 1997 but keeps operating
rather than laying off its workers. “The machine-building industry has basically
been paralyzed,” Diffuzion Director Vladimir K. Moiseyev said. “We need ball
bearings made by a company in Saratov. The factory that manufactures ball
bearings is bankrupt. But we are also bankrupt, so we pay for the ball bearings
with drills.”

Workers Get Paid in Food, Clothes, TVs

At one point, the company tried to survive by paying its workers in hand
drills. The workers sold the tools in town for whatever they could get and
saturated the market. “The result is we completely lost the drill market
in Smolensk,” said Moiseyev, who was brought in to handle the bankruptcy.
Now he tries to arrange trades for televisions, food, clothes and footwear
to pay his workers.

“All these barter schemes and other cashless schemes appear because there
is no other way out,” he said. “My personal opinion is that barter will only
lead to a further destruction of industry. It’s only a way to prolong our

Sergei L. Loiko of The Times’ Moscow Bureau contributed to this report.

Barter Chain in Russia

The Analitpribor plant in Smolensk, which produces gas safety meters for
use in mines and nuclear power stations, owed money in local taxes that it
could not pay. Working backward, it researched and organized this barter
chain until it came full circle.

  1. The Analitpribor plant in Smolensk shipped gas meters to the Kalinin nuclear
    power plant in the Tver region.

  2. The Kalinin nuclear plant canceled debt owed for electricity supplied to
    the Tverenergo power company, also in the Tver region.

  3. Tverenergo canceled debt owed for electricity used by a glass factory in
    the region.

  4. The glass factory supplied bottles to a factory in Saransk, in the republic
    of Mordvinia, that manufactures saline solution.

  5. The saline solution company bottled the solution and delivered it to the
    city hospital in Smolensk.

  6. The Smolensk city government canceled the tax debt of the Analitpribor plant.

Source: SERGEI L. LOIKO / Times Moscow Bureau

22 July 1999 Johnson’s Russia List

10 reasons to invest in Russia now

By Ben Aris

I am confused and I would be interested to know what readers of JRL think:
are things as bad as they seem?

The economic situation over the six months of 1999 has not been as bad as
was expected. Inflation is relatively low, exports have been rising and Russia
is running a healthy trade surplus. Russian firms are experiencing a boom
as they either fill the gap left by the absence of imports, or increase their
exports capitalising on their improved competitiveness handed them from a
cheap ruble. And high international oil prices are bringing money to the
state coffers (although this probably won¹t impact the economy for another
nine months). The Russian economy has responded to devaluation in the way
a “normal” country would ­ something that we love to assume Russia is

What is more, the businessmen I have talked to in Moscow say that business
is not as bad as they had expected. Crisis has forced some real competition
on companies who have become concerned with cost-effectiveness and efficiency
in way that they never have before. Distribution is still difficult and much
of the progress of the last years has been undone. But the companies say
that crisis has been good as it has cleared out all the small and ineffective
firms. A de facto restructuring has occurred in nearly every sector, leaving
behind leaner and fitter companies.

Admittedly Moscow is, as ever, the special case. According to the city government
Moscow¹s share of the national turnover in consumer goods has grown
from a quarter of the total to a third ­ evidence more of a slip in
the regions than anything wonderful about Moscow.

On top of this, relatively few firms have pulled out. Investment is still
low but while total investment has fallen by about 40% (according to some
estimates) direct investment has only fallen by 20% (ditto).

Below is a note from Goldman Sachs listing “10 reasons to invest into Russia
now.” In the financial circles this note has met with a certain amount of
skeptism, but I think there is an argument to be made along these lines.

Best Regards Ben Aris

From Russia with Love: 10 Reasons to Buy Russia Today

Often, a view on Russia’s markets or economy becomes a fundamental discussion
of whether this enigmatic land will “make it”. From the euphoria of 1997
to the depression of late 1998, that discussion is impossibly difficult and
overly emotional. This note aims to steer well clear of the debate. We
acknowledge that the country has many, many problems; but this is a statement
of why we continue to expect both the Russian economy and assets prices to

From early this year we have been bullish on both. But their performance
has been considerably better than expected. We expect that great performance
to continue. This is why. First, we summarise our fundamental views on Russia
into ten reasons for buying Russian assets now. In the second section, we
translate this view into a discussion of which assets to buy, given present
levels of prices and uncertainties. We conclude that the best value lies
in the more “risky” assets: Prins (preferred to IANs), MinFins, equities,
local rouble debt, and longer-dated Eurobonds over shorter ones.

1. It’s growing. For the first time in decades the Russian economy
is really growing. May industrial production was up 6.1% yoy, to its highest
level since Sept. 1995. We expect 1999 growth of 7.8%. This growth is not
sparked by government, or CBR, pump-priming. Instead it is self-generated
growth, as private industrial companies take advantage of the great trading

2. It’s competitive and decentralised. The rouble’s collapse (it has
fallen 75%) has led to massive gains in companies’ competitiveness. Exporting
firms are now making huge profits. Producers of goods for domestic markets
have full order books. The privatisations and decentralisation of the Yeltsin
years are now paying off – the State no longer takes it and spreads it around.

3. A big shift from consumption to savings. The crisis has given a
huge knock to real incomes and consumption. Consumption was down 20% yoy
in April. Investment, however, was down just 1.1%. The current account has
swung massively positive (we forecast a surplus of 9.7% of GDP in 1999),
so increasing savings markedly. Savings will later turn to investment. The
period in which the country leveraged itself to finance current consumption
has ended.

4. Export volumes and prices climb. Reserves grow. Dry freight shipping
out of Russian ports was up 30% in May yoy. Oil and gas prices are climbing
back above last year’s levels (crude is up 15% yoy today). Reserves grow.
In May, before debt service payments on state debt, the CBR bought $1.9 billion
– reserves grew to $11.9 billion. We forecast them at $16.6 billion year-end.
All leading to a firm rouble. We forecast 26 Rb/$ year end, 29 Rb/$ end 2000.

5. A functioning credit system is at last emerging. Cash rich exporters
are lending and investing up and down the production chain to suppliers and
purchases, in what seems like the early signs of a functioning cash credit
system. Before they were lending to the government. See our Weekly Focus
of June 11.

6. Barter declines and arrears’ growth slows. The improvement in corporate
health and the relaxed monetary policy has engendered an increase in payments
settled in cash, and a slowdown in the growth of arrears. In the easier macro
environment restructuring can be more easily achieved.

7. The budget gets better. Over the course of the 1990s the budget
problems have slowly improved. The collapse of the exchange rate has given
this a great boost. Revenues are easier to collect and are increasing. Real
expenditures (about 60% of government non-interest expenditure is wages)
have collapsed. The result is the best budget performance in decades.

8. The IMF is about to agree a program; and now we have the G8. The
IMF program is near completion, easing debt payment pressure. The Russia/Soviet
debt divide – the “Finesse” – has been accepted (see our report of February
16). Western governments talk of a “final” rescheduling in H2 2000. The
newspapers, and corridors of power in Western capitals, discuss the need
for engagement. The G7 becomes the G8.

9. Decent government; the consensus has changed. The appointment of
Stepashin as PM is positive as it increases the probability of a pro-Western,
pro-reform president being elected in 2000 (see Weekly Focus May 21). While
still volatile, wild and corrupt, the aftermath of the crash has proved that
Russian politics – and crucially the Russian establishment – has changed
in the last years. Private property and relative openness are here to stay,
whoever wins the polls.

10. Outside Russia, gloom persists; from here it looks great. Many
folk, still stunned by the crash of August, see the Russian glass three-quarters
empty. But this country has suffered worse – Russians are a resilient bunch.
From Moscow the glass looks a third full and getting fuller. No doubt it
will be smashed again, but before then it will be filled and then drunk.
Enjoy it as it fills up.