WORLD

A market where anything goes

Canadians confront Moscow’s business perils

MALCOLM GRAY April 13 1998
WORLD

A market where anything goes

Canadians confront Moscow’s business perils

MALCOLM GRAY April 13 1998

A market where anything goes

WORLD

RUSSIA

Canadians confront Moscow’s business perils

MALCOLM GRAY

Russia is no place for anyone who scares easily. Canadians who have been in Moscow for a while all have war stories of deals gone wrong, partnerships soured and property seized. Some have even received death threats—no small matter in a country with one of the world’s highest murder rates. Alex Rotzang, for one, worries about his personal safety. But the Calgary oilman is pressing his claim against the powerful state pipeline monopoly over a stolen oil shipment. Peter Derby, a 37year-old banker with Canadian roots, is intent on making the commercial bank he founded one of the best in Russia. But he is only too aware that in recent years, scores of bank executives across the country have suddenly turned up dead. The well-appointed Moscow headquarters of his Dialog Bank bristle discreetly with precautions that in-

clude armed guards, metal detectors and weapon searches on anyone seeking to enter the bank’s executive offices. ‘You have to take precautions,” says Derby. “Otherwise you can become completely vulnerable.” Hotel management in Russia can be an especially murderous business. In the past 18 months, a U.S citizen and two Russians who were executives in top Moscow hotels have been gunned down in what police say were clearly contract killings. The first of those murders also carried a chilling message to the city’s expatriate community. Paul Tatum, a 41-year-old American, had helped found the well-appointed Radisson Slavyanskaya Hotel, but became involved in a bitter dispute with his Russian partners. His murder remains unsolved, and is still the only killing of a foreign businessman in Moscow. But the pattern of Russian partners muscling out foreigners when their joint ventures start showing profits is all too common—as

many of the Canadians in Moscow can attest.

So the victory seemed especially sweet last week when Halifax-based IMP Group Ltd. turned the tables on its estranged Russian partners—who it accused of harassment and intimidation—by using spectacularly legal means to settle a hotel fight. After years of dispute with Aeroflot, Russia’s state airline, over their jointly owned Aerostar hotel in Moscow, IMP gained a Quebec court order that allowed bailiffs backed by the RCMP to seize an Aeroflot jet in Montreal. The day-long detention won a grudging promise from the Russians that they would pay IMP a long-overdue damages award of $8 million by week’s end.

The dispute is far from over, but the airliner caper illustrated the risks—and potential rewards—that confront Canadians working in Moscow. “There are great opportunities to make money here,” says meat importer Nathan Hunt, formerly of Toronto, “but you have to keep your wits about you at all times.” With a wealth of natural resources, a huge consumer market and a government pushing economic reform, Russia has plenty of investment attractions. But Canada-Russia trade is relatively low—just under $1 billion last year (Canada-China: $8.5 billion)—and there are only about 1,000 Canadians in the country, mostly in Moscow. Still, Canada’s businessmen have made an impact. Ads for Bombardier snowmobiles dot Moscow’s landscape, and McDonald’s eight outlets have spread through the city courtesy of

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the Canadian arm of the fast-food chain.

The IMP Group began operating the firstclass, 420-room Aerostar hotel in 1991 under a 50-50 partnership with Aeroflot. But the union went bad in 1995 just as the hotel was becoming extremely profitable. Alleging that the Russians were harassing and intimidating Canadian hotel employees as part of an attempt to squeeze it out of its $80-million investment, IMP went to court—and won. Yet despite international arbitration and a series of Russian judgments backing IMP, Aeroflot scoffed at paying the $8 million award—until last week.

On the strength of a March 13 Quebec Superior Court order enforcing IMP’s claim, the bailiffs took control of an Aeroflot Airbus A310 at Montreal’s Dor val airport.

The crew told police that Aeroflot did not own the aircraft and was simply leasing it, but IMP had anticipated that. The bailiffs in fact seized the plane’s duty-free goods, emergency gear and 50 tons of jet fuel—which Aeroflot did own. Airline officials acknowledged that it was the fuel seizure that led to their promise to pay IMP. “If we had been able to hold on to the fuel, we would ^ have taken off without lifebelts and E provisions,” said a spokesman. “

Aeroflot boss Valery Okulov pro§ fessed himself “utterly astonished” § by the police action, although Cana§ dian government and IMP officials » said they had warned Aeroflot that § one of its planes might be impound8 ed. Okulov, who is President Boris Yeltsin’s son-in-law, threatened to sue the RCMP. The dispute will almost surely further complicate diplomatic relations. Prime Minister Jean Chrétien raised the issue with Yeltsin during a visit to Moscow in October—only to have Yeltsin publicly shrug it off as relatively insignificant. But the struggle continues: IMP vice-chairman James Radford says the company is still owed millions of dollars more in damages from other court awards. The company’s Moscow experience “makes one very wary,” Radford says. “We’re still very bullish on Russia. We think there’s a tremendous opportunity. But we’re very unlikely to proceed with anything until we bring this to a satisfactory conclusion.”

The IMP saga has echoes for other Canadians in Moscow. Nathan Hunt knows the feeling of working under threats of violence and financial ruin. He arrived in Moscow in 1992, certain at 26 that he could make money as a broker in the booming meat trade between Russia and the United States. So the native Nebraskan arranged for a firm in Cleveland to send 1,800 tonnes of chicken legs to Vladivostok. In turn, the main Russian importer wired $1.2 million to a U.S.

bank. Bad move. Instead of chicken—and Hunt’s $22,000 commission as a middleman—the two middle-aged sisters on the U.S. side of the deal fed him excuses. Finally, the Russian client who had fronted most of the money began talking about cutting off Hunt’s little finger in order to get some action. The two women are now serving lengthy jail sentences after a U.S. court convicted them of fraud. But Hunt’s clients’ money was long gone.

Hunt accepted responsibility. Using an in-

heritance as collateral, he got a bank loan, then an agreement with a legitimate supplier and settled up with his Russian clients. He does not hold a grudge against the person who wanted to remove one of his digits. “I understand why he did it,” says Hunt. “I was the guy the Russians dealt with and in business here, personal contact is crucially important. This is not a law-based society and if a deal goes wrong, you can’t depend on the courts to put things right.”

He has been more successful directing the Moscow operations of Toronto-based Chisholm Ltd., currently the leader in foreign-meat imports into Russia at 55,000 tonnes last year, mostly for sausage. ‘We provide customers with two things that they can’t get from domestic suppliers: consistency and quality,” he says. Hunt remains optimistic about Russia, and is now building a house for his Russian-born wife, Olya, and their five-year-old son, Andrew, near Yeltsin’s country home outside Moscow. “The area feels safe,” he says. “Because Yeltsin lives there, the place is crawling with cops.”

Doug Steele, a 46-year-old former Halifax

resident, is another Canadian who knows the bitter taste of a deal gone bad. He arrived in Moscow six years ago. Almost on a whim, he decided to pursue a lifelong dream of owning his own pub when he found that there was not a really good bar in a city shaking off communism. Now, Steele has found growing international celebrity as the landlord of The Hungry Duck, a watering hole that The Washington Post described as “the most notorious bar in the world.”

Steele tries hard to make the joint live up to such hype—no easy task in a city as wide open as Moscow. Expatriates and Russians

crowd the bar nightly to fulfil two basic urges: to drink and find partners. To the high-octane mix of sex, booze and extremely loud rock music, Steele has added such twists as twice-weekly Ladies’ Nights. Only women are admitted for a two-hour time period, when they can drink free and ogle one or two male strippers dancing along the horseshoe-shaped bar. By the time male customers are allowed in and the cash registers start up again, most of the women are feeling no pain and dancing on the bar (another Duck tradition), many of them wearing less than the paid dancers. Politically correct the place isn’t. “I may not make much money, but I’m sure having a lot of fun,” Steele said during a recent sybaritic Ladies’ Night.

That is more than a bit disingenuous, since most of the time his throngs of customers are showering him with cash. And Steele is moving on up. In partnership with a French businessman, he has opened a less raucous place than the Duck (not too difficult). The Chesterfield Café, a restaurant with an American West theme, gets its name from a tie-in with the U.S. cigarette

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brand. Subsidies from the tobacco company lower the cost of top-flight bands that help attract yet more patrons.

But Steele has not always done so well. His experience with the Moosehead, a Canadian-style pub that he and some local partners first opened, turned out to be a rough introduction to Russian business practices. Essentially, Steele and another big Canadian investor agreed to an $865,000 buy-out offer from their local partners—and then got stiffed on the deal. “Even if I went to court and won,” says Steele, “I’d never get an enforcement order for the judgment here.” He is more careful now in picking his partners. And having evaded a kidnapping attempt linked to the first bar venture, he has learned how to survive in a city where dealing with protection racketeers and bribe-seeking officials is routine. “I love it here,” he says. “Moscow is home now and I’m not thinking of leaving anytime soon.”

The partnership-gone-wrong theme also strikes a chord with 28-year-old Torontonian Scott Pielsticker. Attracted by the possibilities offered by the fall of communism, he arrived in Moscow in 1992 as a footloose computer specialist. Among his souvenirs are photographs of bloody streetfighting that he snapped from the roof of his apartment building during an armed rebellion in October, 1993. His first business venture, a computer-training program, did not turn out so well: his Russian partner muscled him out of the business. “I was forced out, practically at gunpoint and received death threats,” says Pielsticker. “At that point, I was new here, didn’t have any influence and he was well-connected with the government. I decided just to let it go.” Pielsticker took some rough satisfaction when his partner soon failed in the enterprise.

Now, he has hooked up with a bigger—and better-connected—firm and is setting up computer systems for international companies operating in Russia. He argues that he has acquired far more business experience, good and bad, than he would have received at his age in Canada.

He is not the only member of his family who holds that view: his brother Brad, three years older, came to Moscow at about the same time. He set up a freight-forwarding company to shepherd imported goods through Russia’s slow and complicated customs system. The pitch he used—leave border-crossing headaches to us—attracted frustrated customers who were only too happy to do so.

Canadian to a fault, the Pielstickers have been instrumental in setting up a scholarship to their old high school, Toronto’s Upper Canada College, and raising $54,000-

enough to cover a Russian student’s tuition for two years. “We’re looking for a mature, versatile student—someone who plays hockey as well as the violin, for instance,” says Scott.

Among Canadians, few feel the tensions of the new Russia more keenly than the socalled repatriates returning to the ancestral homeland. Peter Derby’s Russian-born father was a member of Canadian delegations to the United Nations in New York City

shortly after the Second World War. “My father was always giving me things like MapleLeaf cufflinks and constantly reminding me of my Canadian heritage,” says Derby, who spent most of his childhood in New York.

He first went to Moscow in 1987 as an interpreter for touring pop singer Billy Joel. A background in finance and banking, plus his language skills, quickly gained him access to early reformers who were looking for ways to open up the country’s primitive banking system. “I wanted to contribute to Russia’s reintegration with the world,” says Derby, “combining my Russian heritage with North American values.” After work-

ing on the never-implemented 500-day plan to turn the Soviet Union into a market economy, Derby founded Dialog Bank and quickly built it into one of the most technologically sophisticated banking operations in Eastern Europe.

Derby has blended his backgrounds so effectively that former Russian prime minister Viktor Chernomyrdin said he could not tell if he was the most Russian foreigner he knew or the most foreign Russian. But Derby holds no illusions about the difficulof doing business amid what he calls the “unnecessary realities of Russia.” His conversation, laced with references to past talks with Yeltsin, is also full of caustic comments on the powerful new Russian bankers who are striving to control the government as well as former state assets. “They want to pull all the strings,” he says. “But they would be further ahead if they created a business environment where everyone knew what the rules were and played by them.”

Working in Russia can lead to big rewards— or death threats

He is not the only repatriate with mixed feelings about Russia. Rotzang, for one, got out of the Soviet Union in 1972. Then, against the advice of worried relatives, he turned around and went back just as the Soviet Union neared collapse. Almost 10 years later, the voluble 53-year-old can point to the success he has achieved with Yugraneft, a small but thriving RussianCanadian company that extracted and shipped about four million barrels of oil from Siberia last year.

Rotzang is a fighter. When 20,000 tons of Yugraneft oil disappeared from pipelines owned by the state firm Transneft in 1994, Rotzang demanded compensation. He maintains that some_ one close to a high official at Transneft §1 forged his signature and stole the oil. I ButTransneft has suggested that he file I a civil suit against the person he sus§ pects. “That,” says Rotzang, “is like a I bank saying you can’t make a withm drawal because there was a robbery— I and then suggesting that you sue the I robber if you want your money.” So far, o he hasn’t convinced Transneft to see “■ things his way—but he is still trying.

Another oilman, former Ottawan François Cadieux, applauds that approach. “With more foreign firms and individuals in Russia there’s more lobbying, which makes for greater chances of changing the way things are done,” says Cadieux, Moscow representative for Calgary-based Canadian Fracmaster Ltd. That kind of change may take time— and some more seized airliners—but to many Canadians the Russian experience is still worth it. “Of course there’s risk,” says Cadieux, “but the chances of returns are also greater. That’s why we’re here.”

With BRIAN BERGMAN in Halifax