For US Firms, Russian Profits Take Patience

Among the challenges: red tape, the ruble, and a shrinking economy. Some investors succeed by finding reliable local partners to guide them.

FOCUSING on profits when venturing into Russia's unraveling economy is like a quest for happiness, says Polaroid's George Hamilton. "You'll fail every time."

Rather, you should go in with a long-term perspective and a lot of patience, advises the senior managing director of international business development at the Cambridge, Mass., company.

Polaroid has had a manufacturing joint venture in Russia since the summer of 1989 and - though it won't discuss the profit picture - the camera company has had the flexibility and persistence to keep the plant running through all the subsequent political and economic upheavals.

"When we enter a market, we enter it in a way that tries to add value to the local economy and tries to meet the needs that these countries have," Hamilton explains. "Where a number of Western multinationals ran aground was all they wanted was profits in a convertible currency."

Some foreign businessmen are making money. Russia is rich in natural and human resources and offers a huge potential market to companies eager to globalize operations. But pundits' predictions of a gold rush for foreign businesses in the heady days following the Soviet Union's demise have been tempered by hard realities.

Red-tape, high taxes, an inconvertible ruble, poor infrastructure, dire shortages, and an economy that is shrinking 15 percent annually are just some of the challenges foreign investors face.

Peter Steffian's real estate company has been stumbling over these hurdles for 18 months. Millpond International's joint venture with the Moscow's Department for Housing and Office Buildings has been stalled for lack of financing. Russian banks will only make loans on a time frame of 12 months or less, and the plummeting ruble makes other investors leery.

"I guess our partners thought we would just come in with a big bundle of money and build a building," Mr. Steffian says, alluding to some Russians' big-eyed expectations of their foreign partners.

Set up in May 1991 to develop commercial and residential real estate in Moscow, the joint venture got as far as securing a site in the city's center and drawing up architectural plans for office space before running aground.

"It doesn't look really awfully good right now," Steffian concedes. "We need somebody with some good hard cash to help us get this thing off the ground and help us develop more of a presence."

Steffian found another complication: locals trying to broker pieces of property to which they had no clear title. "People are offering all kinds of deals that can't be pulled off easily," he says. "It really disrupts the whole marketplace." He adds: "It's not a deal for the faint-hearted."

As the Russians become more savvy capitalists and the vestiges of the old monopolistic system fall away, Western companies are finding it harder to distinguish the reliable insiders from the wheeler-dealers, Steffian says.

Keeping on the right side of the law can be a full-time job, lawyers say. The fluctuating legal environment, with some areas of the private sector unregulated and others governed by contradictory laws, leaves foreign companies negotiating a legal minefield.

"It's often hard to know which rules to follow," says Catherine Mannick, a lawyer with Boston law firm Hale & Dorr, who counsels American companies entering the Russian market. "A lot of times you will have a law that says something like `and procedures for doing this are to be established by subsequent legislation.' "

United States companies continue to flood in, however, leading the international pack in sheer number. Three years ago only 35 to 40 had a toehold. Now about 300 have partners and offices in Russia, according to the US Department of Commerce. Hyperinflation - running at 30 percent last month - has slowed the influx, one trade officer says.

The pull is the market potential. Many US companies say they cannot afford to be left out, and don't want to be last in the door.

"If you're in telecommunications, and this is the world's biggest opening market, you don't stay out just because there may be hyperinflation," says Sarah Carey, a partner with Steptoe and Johnson in Washington, the first US law firm to set up shop in Moscow. Macro data are not that relevant to the individual investor, she says. Companies can also help shape the business environment as Russia's economy emerges from state control.

Crucial to success, however, is finding a trustworthy, politically astute, well-connected partner at the local level, Russia experts say. Dealing with the bureaucracy is time-consuming and can slow if not stop a business, they add.

Paul Lawrence, professor of organizational behavior at Harvard Business School, takes that advice a step further. His study of joint ventures finds that radically delegating management responsibility to Russian partners and concentrating on quality are keys to success. "Russians are sick of products that don't work," he writes in the latest Harvard Business Review.

Russians are also wary of the ebb of raw materials out of the country as foreign investment flows in. "Foreigners are viewed as coming in, plucking the richest parts, and going off - not leaving them with anything," says Marshall Goldman, associate director of Harvard University's Russian Research Center.

Invest in a small way with low expectations and when the market settles you will be positioned, is what consultants often advise.

Like many investors in the new republic, "we're still living off potential," says Ira Tatelbaum of Kuper Enterprises, a Boston manufacturing and trading company. "That's what keeps us going."

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