Hearing of the passing of Boris Yeltsin, I can’t help but remember my trip to his northern empire in 2000.  We boarded a Lufthansa flight in Frankfurt, seemingly filled to the scuppers with jabbering Russian tourists anxious to return from their trip abroad. We left rainy Germany for the port city of St. Petersburg, near the mouth of the Neva River. Most of the terrain was obscured beneath heavy clouds so there was nothing to see until our descent at 10:30 pm. The sun sets late at 60 degrees north in the spring.  As we were coming down from cruise altitude, the lush green landscape became visible through breaks in the clouds.  We were going to land in Russia.

While the purpose of the trip was business, I was determined to soak in as much of the experience as possible. I had a total of one paltry year of Russian language in college so I could at least sound out the words and recall a tiny bit of vocabulary. 

In the late 1990’s doing business in Russia- that is, buying Russian goods- could be complicated. This was late in Yeltsin’s term and a kind of cynical take on the free market was beginning to set in.  Earlier, the eastern bloc had imploded and the communist hold on Russia was in deconstruction. Under Yeltsin a select few had managed to amass wealth- the so-called Oligarchs.  But as a few like Khodorkovsky were to eventually learn, wealth does not automatically confer political power in Russia.

Doing business in Russia was a highly manual activity. In 2000, the start of the Putin years, Russia lacked much of the business infrastructure that we in the west take for granted. When I say “business infrastructure”, I refer to the whole picture- commercial credit; internationally compatible contract and tort law; credible mechanisms for the flow of currency; GAAP; a multimodal transportation network; a comprehensible market exchange for commodities; and a market place with suppliers and specialists for the many instruments of finance and insurance. 

In the Yeltsin years, many formerly state-owned factories came under control of people who conducted business in facilities through quiet arrangements behind the curtain.  Factories would operate at low intensity or would even be shut down until orders came in.  Workers were furlowed and operated taxi’s or did other odd jobs until an order arrived.  Maybe this still happens today.  I don’t know.

We needed product that was made by a very few specialists in the world and one of those vendors was in central Russia.  Russian manufacturers are as skilled as we are of course, but there are differences in business culture that may be hard to anticipate.  Western standards concerning documentation was a particular problem.  I recall that our vendor was quite carefree about lot traceability and packaging.   They also had the maddening habit of reusing old lot numbers.

Then there was the problem of shipping.  Russia did not then, and still may not, have anything remotely similar to Aldrich.  Now, you probably think of Aldrich as the “chemical supply house” and you’d be right. But I’m thinking of Aldrich as the “master of logistics”.  Logistics in Russia was a problem.  Ground transportation was unreliable. Our solution was to hire a local to bird-dog the whole process.  It was worth every penny.

One of the differences I found was in the attitude of the few manufacturers I was in contact with.  They were usually aware of western prices for their goods and were never afraid to demand Aldrich-type pricing.   In the west, the customer is king.  That is just taken for granted.  Uppity suppliers are soon former suppliers. 

What I ran into in Russia was something that I hadn’t seen anywhere else, including China or Taiwan.  Our Russian supplier wanted to dictate terms and was unwilling to budge- I think they call it “Vlast”.  We absolutely needed better prices for the raw material.  I’m sure that there were urgent arrangements behind the curtains that were part of the need to stand fast. But in the end, it was their absolute inflexibility that caused them to lose the business. 

While in Russia I did try to source other raw materials and “vendors” who could supply spot buys of particular compounds.  At the time, many chemical factories were partially shuttered, so custom chemical processing capacity was very much hit and miss.  Processing equipment sat in dark and idled buildings waiting for a purchase order and prepayment. 

We met with principals in an empty flat to talk about the manufacture of custom compounds. But the same problem always arose. They wanted cash up front, preferably deposited in a European bank.  I was very clear that this was not the transaction model that we were accustomed to and in fact, this requirement was a showstopper. My Russian contacts were mystified that an American would come all this way only to refuse to pony up the cash to get the ball rolling. And that is where my attempts at trying to do business with Russia ended. 

The operators of the factories I was in contact with had the pots and pans, skilled staff, and expertise in the technology- these guys were first rate technocrats. At first glance, what they lacked was the benefit of investment capital to plow into their operations to find and service customers.  But, digging deeper, it wan’t just the hard cash they lacked. There was a system-wide lack of free market history and culture that, elsewhere, would have provided the institutions and mechanisms to exploit opportunity. 

I admire Russia and I believe that they will eventually get their system working well.  But they do need to get away from the fascination with the strongman model of governance. From my travels I have concluded that countries with cultures that date far back are simultaneously blessed and cursed by it.  They are blessed by the warm embrace of cultural richness. But they are also cursed by it because it can be a sort of ball and chain that complicates the adoption of change.

Note: This was written a few months prior to posting.

Copyright 2007