Steven L Douglas
Action Research Project Proposal
The Games Russians Play:
What you need to know
To look back at my Russian business experiences from 1990 – 2000, they were anything but typical for an expatriate living a working in St. Petersburg. In thanks to a Russian partner I was introduced to the underworld of Russian business, more specifically the Mafia and occasional glimpses of deep-rooted corruption in the Russian Government. With no thanks to this Russian partner I was also introduced to transnational organized crime and honored with a memorable 8-hour interrogation by the KGB in February 1994.
A top lieutenant in the Russian Mafia Tombovsky Crime Family once told me the difference between a “Good Foreigner” and a “Bad Foreigner”. A good foreigner was what they called a foreign businessperson who came to Russia but had no timeframe set as to when he/she would depart. A bad foreigner on the other hand was classified as a foreign businessperson who came on short trips or a foreigner who came to work in Russia for a short period of time with a scheduled departure date. A majority of foreigners who came to Russia in the 1990’s were considered Bad Foreigners. The foreign partner that was looked upon, as a bad foreigner, was believed not to have a long-term interest in benefiting their Russian partners. The Russian partners were over anxious to find foreign partners for the explicit reason of gaining foreign capital for their enterprises. Following the beginning of privatization, most factories were in serious debt and cash poor, thus the reason for Russia to open her arms to foreigners.
I had many opportunities to watch, and analyze, business relationship between Russians and foreign visitors between the years 1990 and 2000. Soon following the financial crises of 1998 I created and organized the Foreign Commercial Consuls Club of St. Petersburg. Membership consisted of Commercial Consuls from most foreign countries with representations in St. Petersburg. This Club gave me a direct connection to representatives of many different countries and an invaluable opportunity to discuss with them their relations and feelings about the Russian market, culture and people. In early 2002, as an executive in Washington DC, I created a new organization called the Foreign Embassy Club of Washington DC which has membership of foreign diplomats from more than 25 of the area Foreign Diplomatic Missions. This newer Club allows me to continue my research on international relations. The founding members of this Club include the Embassies of the Russian Federation, Kazakhstan and Australia.
This Action Research Project is not about the Russian mafia or about organized crime. It is an explanation of what every foreign businessperson must be aware of before they attempt to enter the robust growing Russian economy.
Description of the Research Problem:
Just because a company is successful in their home market does not necessarily mean that the world is waiting on bended knee for them to come to their countries, unless of course they are willing to play by the local rules. Regardless of how well your product fits into a given market economy, you must understand the characteristics of the business culture, what I call “The Rules of the Game”, of your new market to have the opportunity to sell your products and make your investment profitable. This rule applies to the Russian Federation but there are a number of special steps foreigners must take before entering this sometimes volatile and dangerous market.
The Russian people love everything “American”, which is why American consumer products are in continuous and tremendous demand, from cigarettes (Phillip Morris) to blue jeans (Levi’s), beer (Budweiser) to chewing gum (Wrigley’s), diapers for babies (Proctor & Gamble) and fast food (McDonalds).
Russia has a special set of games that must be played before you are given access to the market. Unlike the USA, the government does not offer foreign companies any notable protections or security for their investments. I contend that no business can survive in Russian unless you have “krisha”; a roof; a protector that allows your company’s existence. “Krisha” normally refers to the mafia that offers you their specialized security services for a 25-30% commission on pre-tax revenues. This security includes protection of your facilities, distribution channels, transportation and personnel. To increase their commission share value the mafia has been known to disrupt production, distribution and transportation of potential or serious competitors including (but not limited to) harassing employees. Where in the early 90’s krisha predominantly referred to mafia protectors, it can now refer to government and/or mafia.
It is important to note that mafia rarely makes agreements directly with foreigners. In the early 90’s the only true protectorate was the mafia. By the mid-90’s this business security business changed to include local, regional and federal levels of government. Soon after the fall of the Soviet Union the new Federal Russian Government was too busy with national politics and priorities to get directly involved with foreign investor’s interests. In a short span of just 3-5 years this situation changed and local and regional governments were actively seeking foreign companies to open offices and manufacturing facilities in their perspective regions. In his final years as Mayor of St. Petersburg (formerly Leningrad), Mayor Anatolij Sobchak developed town meetings between his office and local mafia bosses. These mid-90’s town meetings eventually restructured the protection racket in St. Petersburg and the government became a new protectorate for large foreign businesses. This agreement between the Sobchak administration and local mafia assuredly offered benefits to both sides. The end result of this agreement was that the mafia would protect small to medium sized businesses, including trading companies, importers, exporters, restaurants, hotels and entertainment complexes including casinos and nightclubs. Depending on what part of the city you had your office also determined which mafia organization would protect you. Aside from regional distribution there were also understandings between mafia groups that hotels would be taken care of by the Tombovskaya Mafia and the Jewish Mafia would protect Casinos. The government would be in the business to protect large foreign MNC’s and foreign government sponsored programs.
As I mentioned earlier, the mafia rarely offered protection directly to foreigners. Small to medium sized foreign companies that entered the Russian market in most cases had Russian partners. This was a necessity since Russian laws were clear that you could not operate any sort of business on the Russian territory without official registration. The Russian partners were well versed in the game of krisha. Normally it was not necessary for a company to go looking for protection. In fact, the standard practice was that once a new office was opened, the local mafia would find there way to the office and make arrangements.
It is important that I note at this point, that Mafia protection was very structured. Mafia protection and payoffs were not made through series of threats in back alleys or covert locations. The Russian mafia organizations were well organized and had special companies created for making contracts with clients, keeping moneys paid on an official level. They even had the openness to hold negotiations in the lobbies of 5-star hotels in the city center. What makes this different than a company contracting for security services with a security specialist is that these agreements were forced upon you. The other more startling difference was that the mafia went way beyond the act of security, as I note in this ARP Proposal.
The larger foreign MNC’s entered the Russian market either by invitation from a potential Russian partner, by invitation of local and/or regional government administrations or by direct choice of the company itself. As I will explain in detail the option that offered the greatest long-term security was, and remains, having protection from the government. As will be discussed in this paper, many joint ventures ended in disaster for the foreign partners due to contract disputes with their Russian partners, lockouts, government interference, taxation, zoning laws and other schemes concocted by the Russian partners and their protectorate. This “interference”, on certain occasions, included physical assault and murder, depending on how high the stakes were for the Russian partners to gain absolute control over the ventures.
Having a small proprietorship or joint venture in Russia is like gambling in a casino. You must be prepared to lose everything you bring with you. When you do lose, which will eventually happen, you will most assuredly end up in court fighting to regain control of your investments and property. You must understand that Russia does not have a working court system. As I have told foreign businesses before, you can take a Russian to court and win your case but there is no working collection system to get paid on your judgments, unless of course you are willing to play the game and take the final step in the judicial process, Mafia Court.
Most foreign businesses that do go to court do not take this step. What they do is stop once the official Russian Arbitration Court announces its judgment. My former Russian partner entered our company into two separate Mafia Tribunals (now referred to as the Mafia Court). Fortunately we won both cases. We found that the Mafia Court system was a fair system. Perhaps we are prejudice in our thinking since we were the winners. To support my theory that most foreign business failures would have a better than good change to collect on their Russian Court judgments, if they utilized this unofficial Mafia Arbitration Court, I will devote a chapter of my paper on the workings of this special and mysterious element of unofficial Russian justice. The term “private debt collection agencies” (Donaldson 1996; Hertz 1997) has been used in reference to the mafia that is hired to collect moneys owed by one company to another. The term “Mafia Court” is not mentioned in any books I have included for this ARP.
For foreign companies that enter the Russian market using the government as their protectorate there is also a chance of being put out of business. In 1996 I established a new tradeshow management company in the USA with an office in St. Petersburg. My wife (a Russian citizen) established a sister company registered in St. Petersburg which allowed me to represent the US company in a physical office and to conduct business. Although this was technically a joint venture we had complete control over the business assets and operations without non-relative partners. Our “protectorate” was a bit different than typical mafia protection. Although we were classified as a small company we had official support from the local, regional and national government. Because of our high profile, local mafia chose to stay away from us. Our first 4 years ran without any problem because we had strong support from the Yeltsin administration.
Our successes changed abruptly at the end of 1999 with the election of Vladimir Putin. Putin completely restructured the political control and management of the Northwest Russian region and took most local and regional controls back to the Kremlin. He established a new regional authority that local and regional government needed to report to on everything they did. This regional authority reported back to the Kremlin and served as a new go-between between Moscow and the Regions. With this shift our contacts, non-financial protectorate, were out of power and useless to us. I made every effort to achieve the support of the new administration but this was a useless attempt and we found ourselves out of business by January 1, 2000. As I look back on these events I blame the results on two factors. The first, that Putin was disgruntled with the US Government following President Clinton’s withdraw of support of Russia following the World Bank scandals of 1998. Our company was the only American tradeshow management company in the region and once we lost our support, all support was shifted to our Russian competitors. The other reason was that we were not cash rich, a necessity to bribe local officials for their support. Although bribing officials can equate to having protection it is done without a structure or agreement. Payments for signatures were the most common methods of bribery without any form of protection. With the US withdraw of support in late 1998 followed quickly by the 1998 Economic Crises in Black August, it seemed like all of our regular foreign clients and new to market prospects put a block on Russian investment at least until after the New Millennium. Our only means of survival during these two tumultuous years were using our Russian side of the business to enlist participation in our events from Russian companies. Russian companies paid much lower participation fees than the foreign exhibitors, and more importantly paid in rubles, not dollars. Bribes were never accepted in ruble currency, only dollars. Although I lost my business I look back with great pride that we survived the period between Black August and the New Millennium.
A review of literature relevant to the research problem:
Many books have been written about Russia between 1990 and 2000 including “How To” books and special books about the Russian Mafia. Some of these books emphasize business as a major theme and/or discussion point. The books I have chosen to use for my ARP include (but are not limited to) Violent Entrepreneurs: The Use of Force in the Making of Russian Capitalism by Vadim Volkov (Cornell University Press, 2002) NOT available for review at this time; After the Collapse: Russia Seeks Its Place As a Great Power by Dimitri K. Simes (Simon & Schuster, 1999) NOT available for review at this time; How to Profit from the Coming Russian Boom: The Insider’s Guide to Business Opportunities and Survival on the Frontiers of Capitalism by R. Poe (McGraw Hill, 1993); From Nyet to Da: Understanding the Russians by Yale Richmond (Intercultural Press Inc, 1996) NOT available for review at this time; The Oligarchs – Wealth and Power in the New Russia by David E Hoffman (Public Affairs, 2002); The Russian Mafia: Private Protection in a New Market Economy by Federico Varese (Oxford University Press, 2001); Russian Etiquette and Ethics in Business by Lloyd Donaldson (NTC Publishing, 1995) and Russian Business Relationships in the Wake of Reform by Noreena Hertz (St. Martin’s Press, 1997); Bandits, Gangsters and the Mafia: Russia, The Baltic States and the CIS since 1992 by Martin McCauley (Pearson Education Limited, 2001); Doing Business in Russia: Basic Facts by Tankred G. Golenpolsky, Robert M. Johnstone, Vladimir A Kashin (The Oasis Press, 1995); Rebirth of a Nation: An Anatomy of Russia by John Lloyd (Michael Joseph Limited, 1998).
After reviewing seven of the aforementioned books I found no references to common problems that I have proposed in my ARP except perhaps for the book by Golenpolsky which is a businesspersons guidebook. All of the books I have noted above emphasize how corrupt Russia has become, that the mafia, or “mob” has taken over this capitalist society and turned it into a two-faced culture of Marxists (the masses) and Keynesians (the powerful elite). Martin McCauley was the only author of the seven books I was able to review for this proposal that actually spent time as a businessman in Russia but unfortunately his book concentrates on Moscow. No mention of my two case studies was noted in any of this material. If these books are deemed a good representation of literature on the subject, my paper should be a valuable addition to current literature on the subject of foreign business investment in the new Russian Federation.
A description of the proposed research methodology:
I will use this ARP to discuss my personal opinions, expressed above using two case studies. Although there would be obvious similarities between what they did in their Russian expansion, there are clear differences in how they played the Game and continue to play this game today. My two case studies are Philip Morris (Cigarette Manufacturer) and Subway Restaurants (Fast Food).
Philip Morris International, Inc. opened a representative office in Moscow in 1992. One year later they bought controlling interest in the Krasnodar Tobacco Factory. 5 years later they began construction on two new plants located in the Leningrad Region of Northwest Russia in Izhora and Kuban. According to a recent article Philip Morris to Invest USD 43 million on Expansion in Russia, (Russian Interfax St. Petersburg, September 25, 2002). Phillip Morris Russia anticipates that by the end of 2003 they will produce 80 billion cigarettes per year (4 billion packages of cigarettes equivalent). At the time this article appeared in the local Russian press Phillip Morris controlled a 22% stake in the Russian tobacco market with an expected increase of 3% per year. Their Russian operation is a sole-proprietorship with 100% ownership by the US parent company. Although there is probably special security that has been hired to protect their facilities, distribution, transportation and personnel these security are most likely employees of Phillip Morris, not a separate mafia or security organization. Phillip Morris has invested $500 Million in the Russian market since 1992.
The Subway Company opened their first Russian establishment as a joint venture with the leading fast food restaurant in St. Petersburg called OAO “Minutka”, in December 1994. Six months later, in June 1995 after Subway invested money to completely revamp the entire store, located on Nevsky Prospect the Russian partner seized control of the store. Subway took their case to the Russian Arbitration Court and reached a decision that could not be enforced. They then took their case to the European Arbitration Court and won their case there. What Subway does not understand, and they are not the only company who does not understand, is that the European Arbitration Court has no jurisdiction in Russia to enforce any judgments made. Had Subway played the Game and gone to Mafia Court, using other judgments as proof that they were right, they would have had a good chance of winning. Minutka would have no way of not fulfilling the demands of the Mafia Court decision. There is no bureaucracy or red tape that exists in Mafia Court. You do what you are told or you face serious and possibly grave circumstances. Subway has since opened a number of restaurants in Moscow and has learned from their earlier mistakes but continue to face an uphill battle due to a major downturn after the 1998 Economic Crises and a slow upturn over the last four years. Jim Ganziinger (President of Subway Russia) came to become a Subway franchisee based on a visit to Moscow in 1993 when he stood in the rain outside of a Moscow McDonalds where 5,000 customers were waiting on line. That site was his impetus to move forward as quickly as he could to establish his first restaurant in St. Petersburg. He jumped so fast that he was not aware from the outset that within six months he would lose his joint venture.
In my paper I will offer a detailed accounting of how both companies entered the market and where they are today. My research methodology will be to use published articles and reports on both companies that have been reported by Russian and non-Russian Press. I will also conduct interviews with executives of both companies.
How the research findings will be used and or disseminated
With prior agreement with the Director of BISNIS (Business Information Service of the Newly Independent States) my final paper will be submitted to the US Department of Commerce to be disseminated to all subscribers of their BISNIS Website (www.bisnis.doc.gov) to serve both as a warning as well as a suggestion on how to enter the Russian market, assuming my theories have not changed by that time.
- The Introduction (thecrooner.wordpress.com)
- My First Visit to the Soviet Union (stevenleesdouglas.wordpress.com)
- An Investigation into Russian Human Trafficking (sldouglas.wordpress.com)
- ‘The Russification of WikiLeaks’: Crowdsourcing the fight against Russia’s casual corruption (blogs.journalism.co.uk)
- Russia, Called ‘Mafia State,’ Regrets US ‘Cynicism’ – BusinessWeek (news.google.com)
- US embassy cables: Russia is virtual ‘mafia state’, says Spanish investigator (guardian.co.uk)
- An Investigation into Modern Religious White Slavery in the USA (sldouglas.wordpress.com)
- Russia Is ‘Mafia State,’ Prosecutor Said in Cable (businessweek.com)
- Russia Is ‘Mafia State,’ Prosecutor Says in Leaked U.S. Cable (businessweek.com)
- Chapter 12: Business, Mafia and Jazz (thecrooner.wordpress.com)
- Tajik president ordered to free jailed Russian pilot (rt.com)
- ‘WTO membership will boost Russian tourism’ (rt.com)
- 2012 Toyota Camry start production in Russia (inautonews.com)
- NATO ‘failing to adjust’ – envoy (rt.com)
- The Esimit Europa Project, an Ambassador of Cooperation Between the European Union and the Russian Federation (prweb.com)
- All-Russian Muftiate Favours Government Ban on Wahhabism in Russia (02varvara.wordpress.com)
- Table toppers Zenit and CSKA unable to break away (rt.com)
- $100 fine for Public Acts of Gayness in Russia (queerlandia.com)
- St Petersburg lawmakers consider fines for “gay propaganda” (gunnyg.wordpress.com)
- Activists Are Slamming This Russian Anti-Homosexuality Bill (businessinsider.com)