Making money in Moscow

Daniel Yergin August 1 1976

Making money in Moscow

Daniel Yergin August 1 1976

Making money in Moscow


Daniel Yergin

Only traces of an accent betrayed the fact that the businessman, now in his early fifties, was born in Eastern Europe, which he left at the outbreak of the Second World War. He is as fiercely dedicated to the profit motive and capitalism as any man you might meet, but he has made his career flying back and forth over the Iron Curtain, representing British, Canadian, Italian and American companies. He has made big profits for his clients, and he has made himself moderately rich in the process. Throughout dinner, he amused his companions with anecdotes about the many deals he has made with “the Commies,” as he called them. Or perhaps it would be better to speak of deals he has fought through to victory, for they were rarely easy. As he sipped his coffee, he came back to his central point. “You don’t have to be a large company. You can still make a great deal of money in Russia even if you’re on the small side. As a matter of fact, a lot of the big ones have lost a good deal of money in the Soviet Union. The important thing is to know what you’re doing.”

There is no business like doing business with the Russians. It takes great patience, extraordinary wit and, often as not, a strong tolerance for alcohol. Soviet Communism promises the end of capitalism, but in the meantime the Russians show no shyness in using the fruits of capitalism for their own purposes. In recent years, they have been proving themselves to be businessmen of a world class, though of a very unusual kind, and dealing with USSR Inc., a sprawling multinational corporation that also happens to be the world’s number two political and military superpower, has been a bracing educational experience for many Western businessmen. The Communists can be pretty good at outsmarting the capitalists at their own game.

Canadian exports to the Soviet Union have had their ups and downs. In 1968, Canada sold $89-million worth of goods to the Russians, the next year only nine million. In 1971 sales rose to $126 million. In 1973, they rose to $290 million, only to drop to $29 million in 1974. and then to shoot up to $408 million in 1975. The whole affair has been rather one-sided; during this period Canadian imports from the USSR never exceeded $29 million. Those years when Canadian exports have moved into the hundreds of millions of dollars have been the years of poor Soviet harvests, and the figures have reflected large Russian grain purchases. But Canada’s non-grain exports have shown a slow but steady rise and in 1975 they totaled $55 million.

In the late 1960s, Canadian government officials and businessmen began to hear of Russian interest in buying their technology and know-how as well as their industrial products. A major change in official thinking had taken place in the Soviet Union. “In our time,” Premier Alexei Kosygin had told a group of top Communist officials in 1966, “it is becoming more and more evident that the scientific and technical revolution under way in the modern world calls for freer international contacts and creates conditions for broad economic exchanges between socialist and capitalist countries.” What Kosygin really meant, although he could hardly admit it, was that Russia was not only failing to keep up with the rapid pace of technological development in the West, she was actually falling behind. So the Soviet Union would seek to buy its advance in the West.

Since the beginning of this decade the Russians have been engaged in a giant dragnet, trying to collect as much technical information as they can. Some of it they can get free—by subscribing to Western magazines, by getting people to quote prices with detailed specifications about the machinery they would sell, or by inviting Western businessmen to make junkets around the Soviet Union. An executive from a major Canadian forestry products company remembers how the process worked. “We were taken to a reasonably impressive paper mill. Around six in the evening, we were guided into the enterprise’s cafeteria, where we were treated to a long eight-course meal with plenty of vodka, neat. The next day, as we continued to be shown around, all of us a little the worse for wear, we were conscious that they were really trying to pick our brains. They staged debates among themselves that were obviously meant to draw us in and get information out of us about new processes. A few of us bit and told them about developments in our industry around the world.”

But the Russians acquire most of their technology by buying it, and the Canadian government has not been averse to selling it. “Our primary goal in supporting exports to the Soviet Union has been to foster exports that would promote employment,” says Robert Gayner, currently Ontario regional director of the Department of Industry, Trade and Commerce, and a man who was for three years Canada’s trade representative in Moscow. “We wanted to concentrate on technological areas where Canadian industrial experience gives us some sort of edge against other Western countries.” Canadian business has responded with a good deal of enthusiasm, as well, although businessmen have learned that doing business with the Russians is hardly a sure thing. Says J. A. Fuller of Worthington (Canada), Limited, “There have been an awful lot of disappointments.”

The first Canadian firm to sell the Russians a turn-key operation—a complete factory—was Bata Shoes of Toronto. At the beginning of 1970, a Bata salesman was in the Soviet Union on other business (the Russians had been buying from its foreign subsidiaries for some years) and noted what was obvious—that the Russian winter resembled the Canadian winter—and what was somewhat less obvious—that the Russians lacked the good winter footwear cheaply available to Canadians. During the next several months, Bata executives came to the conclusion that there was an opportunity to sell the know-how for Bata’s “slush-molded” process for making winter boots. They contacted the local Soviet trade representative in Moscow. “The Soviet foreign trade organizations are well informed and already knew about Bata and what we could do,” says Frank Maltby, the company’s technical director. The Russians appeared interested, and over the next two years Bata dispatched a series of sales missions to the USSR to meet with trade officials from foreign trade organizations, which actually sign contracts, and various ministries, representing the different parts of the shoe industry. By June, 1973, the Russians had indicated that they were ready to move to a contract. Shortly thereafter, a six-man negotiating team flew from Moscow to Toronto and a week later a more senior official joined them. Then followed 10 days of day-in and day-out negotiating. At last the contract was signed. The Russians would acquire Bata’s know-how. In addition, Bata would act as a kind of general contractor, putting together all the equipment needed for a complete factory.

“The Russians didn’t want to pay royalties,” says Maltby, “so what we figured out was what would be the royalties on a fiveyear basis if the plant were producing at 80% capacity. From their point of view, it is easier to pay a lump sum rather than trying continuously to get authorization for hard currency each year, and we had to take that into account.” (A U.S. businessman points out another reason the Russians do not want to be involved in paying royalties on

production: “The Soviets don’t want anybody in a plant verifying output.”)

By November, 1973, Bata had dispatched technical drawings and information weighing a total of 850 pounds. A year later, the company sent a crew to help install the equipment, and in September, 1975, more than five years after the dealing began, it sent in another crew to help start up the factory. “If you take the total time that elapsed from start to finish, it was a long time,” says Maltby. “But if you take the time actually spent on the deal, I don’t think it intrinsically took longer than it would with anybody else.”

It was to Bata’s advantage that the Russians already knew about their product. That’s the first problem most businessmen face in the Soviet market. One way of overcoming it is through the local Soviet trade representative, although trade shows are better. Another way to make contact is to just go to Moscow. If you are not sponsored, you cannot get a businessman’s visa, so many salesmen fly in on tourist visas and then knock on doors. That can be a very risky proposition. “It’s bloody hard to see somebody in a foreign trade organization if they don’t know the company by reputation,” says Gayner. “There’s only one game in town, and the player is awfully busy.”

Whatever the method, once contact with the foreign trade organization is established, you will usually be seen at the first meeting by a technical man, as well as an interpreter who also has some technical background. The technical man will be fairly well informed about your industry and will have some idea of what enterprises might use the product. This is a fairly recent development. “Ten years ago,” says a French businessman with long experience in the Soviet Union, “you had to negotiate through Soviet security men. At the foreign trade ministry you would actually be talking to an agent who knew absolutely nothing about business, and he would have to relay what you said to the trading specialists and then relay back to you their answer. It was terribly slow. But now you can talk directly with their trading specialists. As a result, the Soviets are more discriminating buyers now than before.”

If there is interest, you advance to the next stage. At a typical meeting, you might be sitting across the table from seven or eight people. The setting is more formal than it would be among Western businessmen. There might even be little Canadian and Russian flags on the table. The Russians will represent different ministries, foreign trade organizations and enterprises. “There are always some mystery people who are never introduced,” says a Canadian businessman who has sat in on many such negotiations. One man does the bargaining for the Russians through an interpreter, although almost invariably the Canadians sense that he understands English. These discussions tend to follow a

rigid pattern. Russian bargaining procedures are partly taught in foreign trade schools. “The Russians like you to be tough,” says one experienced businessman. “They don’t like weakness. They’re peasants. They love to haggle. Also, they have to show their superiors that they’ve knocked down the price. The key for a Western company is to calculate how far you can go.” The foreign trade organization officials also try to drive down the price for a somewhat capitalist reason. “A top buck value is usually set for the FTO,” says Gayner. “What they save, they can keep as a bonus. It means that they’re motivated to go for the best buck.”

They generally seek three bids for each deal. They then negotiate down to the last day with all three companies. They want you to know that there are two other companies competing, so you will bring down your price. Sometimes their techniques become outrageous. A leading Canadian consultant in the wood fibre industry, who had previously made contact with the Russians, was in Santiago, Chile, when he received an urgent Telex asking him to come to Moscow to finalize a deal. He left at once, flying virtually nonstop, and on his arrival contacted the people who had sent for him. They politely asked him to be patient. He waited 10 days. Nothing happened. Furious, he finally left, only later realizing the Russians were using him as a

stalking horse to get a Danish company to come down in price.

The Russians will apply pressure in many other ways. For instance, they will not contact you for a week, leaving you to do nothing but sit in your hotel room or stand in line to see Lenin’s tomb. They know you want to get home, and they let the time between meetings drag on and on. Successful practitioners in East-West trade have learned that there comes a time for the artfully staged walkout. One skilled businessman announced to the appropriate official at a foreign trade organization that he had his ticket for a flight on Saturday morning, four days hence. For four days, he waited in his hotel room. No word. Saturday morning he went to the airport. He was about to go through passport control when a voice called out after him. It was his friend from the foreign trade organization who had been allowed into the departure area. They had made up their minds. The deal was signed the following Monday.

But the delays can be more than mere tactics. The Russians have problems of their own. Their decisions are really the results of a bargaining process among competing agencies. Many Western businessmen observe a tension between the managers from the industrial enterprises, who are anxious to get the equipment, and the people from the foreign trade organization, who are trying to drive down the price. The smart Westerner will try to make an “alliance” in the meeting room with the industrial people. But the Soviet system can be even more Byzantine. A Canadian paper industry executive recalls his fruitless negotiations with the Russians: “One department in Russia gathers wood; another builds equipment; another builds the paper mill; another operates the newsprint mill; another markets the output outside the Soviet Union. There is no general manager to tie it all together. You can’t get a decision.”

There is little socializing with trade officials in the oppressive bureaucratic atmosphere of Moscow. On the other hand, the Russians go all out with hospitality for delegations traveling about the country. A banquet will be laid on almost every night. Everybody has a little glass filled with vodka. After a few minutes, a Russian gets up and makes a toast. Glasses are refilled, and in a few minutes there is another toast and another downing of vodka. The toasts go on at this rate, with the Westerners expected to respond almost as frequently. By the end of the evening, inebriation is far advanced, and, often as not, the dinner will conclude with a medley of songs in Russian and English. “If you don’t drink, that bothers them,” says a Canadian businessman who was a member of a delegation from the Canadian electric power industry. “One of the chaps in our group couldn’t drink because of his health. Our Russian hosts felt this was an insult, and it got rather nasty.”

In addition to questions of etiquette, Western business has learned some key principles about how the Russians do business. First and foremost, the Soviets want to be sure. They do not want to make a mistake. “You can’t blame the foreign trade guy,” says Gayner. “He says to himself, ‘I’m laying out $100 million—or five million dollars. I want to get it from some guy who is known so that my reputation will be protected.’ ” If he buys something from IBM and it goes wrong, he will be held less responsible than if he bought the same equipment at the same price from a small, relatively unknown company. “What this means,” says Gayner, “is that they’re announcing, ‘We don’t want to know about it before anybody else. We’re happy to know about it much later. What we want is to be sure that it works.’ ” An American businessman stationed in Moscow for several years sums it up this way: “The Soviet principle is to wait until the world market makes a choice and then to adapt it. That way they avoid the risk and save the research and development and competitive costs. But that keeps them in a state of dependency. I get the impression that it is deeply demoralizing for their own R&D people, who may work their way 60% or 80% through a project, and then have their work emasculated because the foreign trade organization makes a purchase from the West.”

A second principle of Russian business is that nothing is for certain. The Western businessman must be prepared to have everything go right with a deal and then

find the project derailed by factors that have nothing to do with it. “Four years ago,” says an executive from an Ontario manufacturing company, “we were about to sign a deal. But then we didn’t hear and didn’t hear. Then we heard—they had changed their minds. No explanation. And then I read in the newspaper that they had lost their winter wheat crop. Finally I understood—our buyer had had his foreign currency allotment withdrawn so that it could be thrown into the pool for the purchase of foreign grain. We have yet to get our deal going again.”

Doing business with the Russians gets much easier once you have made your first deal and established some rapport. “The trick of negotiation is to find out how much foreign currency has been allocated to the factory that is your end-user, and then come within $1,000,” says a Canadian whose company has done several million dollars business with the Russians. “A friendly atmosphere can help. After you have done business with them before, they can come to you and say we have suchand-such a number of rubles, and what can we get for it.” The question of finance is always important in doing business with Russia, which suffers from a chronic shortage of Western currency. Normal financing has generally been used for the sale of high technology products. The Russians generally pay one lump sum for licensing rights. In addition, credit from the Export Development Corporation has recently become available on a large scale to finance sales of capital equipment. Such credits, below normal commercial rates, are meant to be competitive with similar subsidized rates offered by British, Americans, Japanese and French government agencies. “There is a line of credit of up to $250 million waiting to be used for business with the Soviet Union, which will lapse if it is not used by the end of 1976,” says an Ottawa official. “Currently, contracts for something upward of $150 million are at various stages of negotiation and hopefully will turn into business.”

It is natural to wonder about corruption-bribery and the black market play so important a role in the Soviet economy— but it is doubtful that it exists on any significant scale in Soviet economic dealings with the West. For one thing, those having contact with foreigners are watched too carefully by the KGB. For another, a Soviet citizen cannot readily dispose of foreign currency without running the gravest risks. A westerner can, however, provide small amenities and favors. The Russians have an unsated appetite for Western goods and products, from record albums and good quality cassette tape recorders to medicines that are familiar in the West. “Only top officials can readily obtain pharmaceuticals from outside the Soviet Union,” says a businessman with a good deal of experience in Moscow. “So I sometimes bring in medicine for the wife of a foreign trade official. He is very appreciative. Is

this a bribe? I don’t think so. It’s a favor. It makes life a little easier for the wife. And it makes life a little easier for me. I know of cases when the Soviets have sent a delegation to negotiate with a big multinational company,” he continues, “and the company chooses to hold the meetings somewhere nice, like the French Riviera. The Russians have a hell of a good time while they’re negotiating. The Western executives invite them to play tennis. The Russians say they would love to, but they didn’t bring their tennis rackets. Fortunately, the company is able to provide them with tennis rackets, as well as tennis outfits in the right size, as little tokens of the company’s esteem, which the Russians are invited to take back with them to Moscow. How would I put it? This helps the atmosphere, and negotiations always go more smoothly in a better atmosphere.” But bribery isn’t nearly the concern to Western businessmen that copying is. “Of the suspicions one hears,” says Robert Gayner, “the most common is that Russians will get one off and copy it. That

doesn’t bother me personally. I’m sure that the Russians are well aware of the added cost of reproduction.” With complex technology, copying could take two or three years, and by then a new product would have been developed and marketed in the West. It is a different matter, however, when a Western company sells the Russians an entire factory. The question occurred to the people at Bata Shoes. “We thought of restricting the sale abroad,” says a Bata Shoes executive, “but you can’t stop them. There’s no way we could sue the USSR. But we feel that there is a shortage of this kind of shoe in the Soviet Union. The Russians could use 50 factories with the capacity of the one we provided, just to satisfy the home demand. We saw no threat here. And, after all, we have sold know-

how to many other people around the world as well.” Still, a businessman would be wise not to dismiss the problem entirely. The Italian auto maker Fiat is very quiet about the terms of its contract with the Soviet Union by which it built a giant auto factory at Togliattigrad. The Italians apparently thought that the cars would be sold only within the USSR, but the Russians began selling them in Western Europe. The Italian company according to sources in the international business community finally worked out an understanding with the Russians that they would not sell in some Western Europe countries, only to turn around and find Poland, for whom Fiat had earlier built a factory, selling the Western Europeans “Polish” Fiats. When the Russians found out they told Fiat that the additional understanding was off, and now the Italian company must stand by helpless as the Russians sell the Soviet Fiats throughout Western Europe— at perhaps two thirds the price of its Italian counterpart and considerably less than a Soviet consumer would pay.

The other question that worries businessmen is whether the Soviets will stick to contracts. If anything, however, the Russians are sticklers for sticking to contracts. An English-based agent for a number of Western European and North American high technology firms explains: “Never in my 20 years of experience of trading have I found that they wanted to wiggle out or break an agreement, or not pay punctually. And that’s not just my own experience. Why should they want to break a contract? It would make them look bad. Their sys-

tem doesn’t allow it.” Even here, however, things are not quite what they appear. “I have never come across a situation where the Soviets clearly and unambiguously were in default,” says a banker. “But if they can sign a loosely worded contract, with some pitfalls for the suppliers, so that later they can effectively exploit it, or if they later realize there is a loophole favorable to them in it, they will be as legalistic as they can.”

One must be careful not to overlook the possibility that the Russians may one day soon be sellers as well as buyers of technology. “A large number of Soviet institutions, such as banks and shipping companies, are going abroad,” observes a Montreal banker. “Whereas in the past they operated almost exclusively within the realm of East-West trade, they are now entrenching themselves elsewhere, in areas that have nothing to do with EastWest trade.”

There are indications, too, that they are moving into high technology on a major scale. “We should never underestimate what their technology offers,” says R. K. Alexander of Canada Wire and Cable. “I remember in 1973, some Western companies said it would take five or 10 years before the Soviets made a major sale in electric power equipment. Now, they have already won large contracts for turbines from Manitoba and British Columbia. Whether North Americans like it or not, Russians are going to be competing very strenuously in international markets, and perhaps even in our domestic markets. I had a discussion with a very bright trade official, of the younger generation, perhaps 35. I told him, ‘Your country can do anything, but you can’t market technology.’ He replied, ‘We’ve had a number of meetings on that subject, and you’re right. We don’t understand marketing. We’ve identified the problem, now we’re formulating a plan to generate that capability.’ I would take what he said seriously,” says R.K.. Alexander.

Many observers agree that those turbine sales represent loss leaders for the Russians. Their system is still too rigid and bureaucratic to adapt itself to the fast-changing world technological markets. “A Soviet trade official offered me a device for making television tubes,” says a businessman who has made a lot of deals in the Eastern bloc. “It had good specifications, long life, and was perhaps half the price of comparable equipment in the West. One of the biggest manufacturers of televisions in the world became very interested, and I sent off a trial order on their behalf for 1,000.1 got no answer. And still no answer. Finally, when I was next in Moscow, I went to see my man. He hemmed and hawed. He was clearly most embarrassed. At last, he said they might be able to provide four or five—in a year or two.”

For the time being, Canadian businessmen will only have to worry about selling to the Russians. Which is hard enough.