Doing Business in Russia – Part 3

Via Andy at Siberian Light I have come across the rather good blog of Mark Nesop, calling himself The Kremlin Stooge, which I have added to the blogroll.  In one of his recent posts he asks:

What is it about President Medvedev’s attempts to set up a “technology city” at Skolkovo that drives some western journalists over the edge? It seems to be more than just the typical desire – again, on the part of some sources – to see Russia fail at everything it tries; these sources seem to be trying for self-fulfilling prophesy.

Journalists are generally idiots and masters at getting the simplest thing wrong; journalists writing about Russia are usually especially idiotic and ill-informed, although no more so in the west than anywhere else.  Still, a stopped clock can be right twice a day, and even if I wouldn’t agree with the western media’s reasons (whatever they are) for not rating Skolkovo’s chances of success too highly, I’d probably say they’re right if indeed they are predicting this project will go nowhere.  Skolkovo, from what I can make out, is an enterprise zone the Russians want to attract the IT giants of the world to set up shop in through use of various incentives such as low taxes, lifted visa restrictions, infrastructure, etc.   Dubai ran a similar programme called Internet City while I was there in 2003-2006 and it seemed to be fairly successful.  At least, all the right corporate signage was loftily displayed on the buildings.  The incentives Dubai offered were sponsor-free business and the ability to get a residency visa for staff based in the offices.  These were clear incentives, and they worked.

In theory, Russia could easily do the same.  But I am skeptical.  Why?  Because Russia could easily do the same across the entire country, yet hasn’t.  There are probably a lot of reasons for this, but one is that the stifling bureaucracy which puts the investors off in the first place and makes the building of an enterprise zone necessary is hugely profitable for many thousands of people: bureaucracy places the obstacles in your way, bribery gets you around them, making the paper-pushers rich.  Take away the bureaucracy and there’s no need for bribery, and people can’t supplement their income by virtue of their access to a certain stamp.  Yes, the Russian government could in theory do away with the bureaucracy in the enterprise zone, but in my experience pushing bureaucracy away in Russia is like moving water around in a bath.  Clear some away, and more rushes in to fill the void.  In my entire time in Russia – almost four years – I never saw any reduction in the level of bureaucracy I had to deal with in work or otherwise.  A lot of it changed, in fact most of it changed, almost every month.  And a lot of it increased.  But in no area, as far as I can remember, did it decrease.  I don’t think Russians could break the iron embrace of bureaucracy and corruption even if they wanted to, and I’m sure there were a few – let’s take Medvedev at his word, even – that do.  For a start, the edicts from Moscow get somewhat mangled, incorrectly interpretted, and sometimes completely ignored out in the provinces.  When I was in Sakhalin we suddenly found the immigration process had changed completely overnight due to a bollocking from Moscow being handed down to the local immigration department who had stuck with the old process for almost a year after the new one was issued.  Fortunately, Skolkovo is in Moscow so this effect should be diluted somewhat, but the temptation for some government department or office somewhere to stick its snout into a trough which nobody else has yet been able to eat from will be strong, and it would not surprise me if this happened and it was a year or more before the national government found out and did something about it.

Examples! Examples! I hear you cry!  Tell us about your experience with government departments in Sakhalin!  Okay, I will.

In one of the years I was in Sakhalin I was involved with the construction of an accommodation block, which could house about 100 people.  During the design stage, the Russian design institute drew up its plans and architectural drawings and submitted them to the local authorities for approval, which takes the form of a construction permit.  This process in itself is lengthy and painful, but that’s not the point of my post.  Naturally, the design institute had done everything it could to make head-or-tail of the Russian regulations regarding fire safety and put forward what it thought was a compliant design.  Unsurprisingly, this was deemed not to be so by the concerned fire safety authority and changes to the design were recommended and subsequently implemented.  The amended design was resubmitted, and the fire safety authority stamped its approval on the design and thus (from a fire safety point of view) was approved for construction.

Fast forward two years, and the building is almost complete.  People were getting ready to move in and the builders were only really waiting for the snow to melt to complete the rest of the works.  However, before people could move in the fire safety authority had to give its approval.  For this they charge a small fee.  Unfortunately, they will not consider any building that has not already been inspected and approved by a certain private company (almost certainly owned by a relative or friend of somebody in the fire safety authority), and the fee they charge is far from small.  I mentioned this “pre-approving” in a post last year about the costs of building a warehouse in Moscow, and it is a common occurrence in the process of getting approval for lots of things in Russia.  So we went ahead and arranged for this private company to come and inspect our new building’s fire safety systems.  And would you believe it?  Nope, all wrong.  Totally wrong.  That, that, this, that, and that: all wrong.  But it was built exactly as per the design approved by the fire department.  This didn’t matter one jot, apparently.  As far as the inspector was concerned, that we had an approved design meant nothing.  I believe the rough words were “I don’t know who signed that, but it wasn’t me and I say it’s wrong.” In normal countries these are grounds for a lawsuit.  In Russia, they are grounds for “negotiations”.  The fire safety authority itself was not in the least bit interested that they had approved a design which was now being rejected by their favoured company, and would probably have been mighty surprised if it hadn’t been.  Retrofitting fire safety systems into a completed building would cost about the same as pulling it down and starting again, so the process began of discussing “what could be done” in order to achieve the approval from the private company.  On this, they were most helpful.  You can do this, change that, pay us this, and the rest goes away.  And so we did.

I am sure the story above will be familiar to anyone who has tried to do business in Russia.  Unfortunately, very few people who have are writing blogs.  And even fewer people who write blogs about Russia have done business there.  The bloggers who write about Russia generally do a very good job (when they’re not writing about media coverage of Russia, which usually involves stating the obvious), far better on almost every issue than what I do on here.  But my experience of working firstly in running a business, and then involved in construction in Russia, is probably the reason why I don’t share a lot of bloggers’ optimism over Russia’s economic future or their specific development plans.  If they could have, they would have.

(Doing Business in Russia – Parts 1 & 2 are here and here respectively.)

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8 Responses to Doing Business in Russia – Part 3

  1. Mark says:

    Thanks, Tim; unless you already had this under construction, you threw it together fast – does that reflect your abilities as a builder?

    I’m curious as to whether domestic construction companies have to face the same agonizing process; do they only try it on with foreigners, who are presumed to have deep pockets? I’m afraid I have no such business experience myself, and I mostly do battle with journalists who shit on Russia because I like the country and its people, and am tired of them being shit on.

    Russians enjoy an enviable literacy rate and educational system. They’re smart people, with a fine appreciation for culture and art. Internet use is widespread, and there’s generally no excuse for not knowing how business is done and how society and living standards advance in countries that have been successful at it. I understand that when it was a Communist empire, it was de rigueur to hold western practices in contempt for the money-grubbing, selfish disciples they produce. However, now that Russia seeks a competitive, trade-based economy, it is no longer possible to reconcile that desire and old attitudes.

    I think Skolkovo will be a success, but your post makes clearer just what an enormous challenge it will be.

    In 2006 there was a bad fire in the same building that housed the Canadian Consulate (7th floor, right under Sberbank, although it has since moved); I’ve visited this building many times, and we became quite friendly with the Canadian Consul, who is a locally-engaged Russian. The mostly-female employees of Sberbank couldn’t get out because the stairwells were locked: if I recall correctly, they were being used as storage for boxes of records and files. I do remember taking the stairs on one occasion because the elevator was taking foerever, and finding a floor that was blocked off by steel rails. In any case, the women who died jumped rather than burn.

    http://vlad.tribnet.com/issue552/Social_life/Inspection_blacklists_fire_safety_violators

    Russia is certainly correct to establish and enforce strict fire regulations in the interest of public safety; however, I agree the case you describe is something quite different.

  2. Mark says:

    I meant to put in that the fire I spoke of was in Vladivostok, although I’m sure anyone who actually folows the link will figure that out pretty quickly.

  3. Tim Newman says:

    Thanks, Tim; unless you already had this under construction, you threw it together fast – does that reflect your abilities as a builder?

    No, I wrote it from scratch. If the post is written in my head, I can get it down on paper pretty quickly.

    I’m curious as to whether domestic construction companies have to face the same agonizing process; do they only try it on with foreigners, who are presumed to have deep pockets?

    Both. Domestic builders have a terrible time too, which is why the main developer in most towns happens to be the mayor or a relative. The foreign companies get screwed for more money though.

    I’m afraid I have no such business experience myself, and I mostly do battle with journalists who shit on Russia because I like the country and its people, and am tired of them being shit on.

    Journalists cock up everything, it’s nothing personal on their part, it’s just plain incompetence. Their writings on the oil industry are no better. They’re always going to be writing rubbish about Russia, I can’t be bothered to try to correct them, I prefer giving my own take on the place instead. More satisfaction that way, I think. :)

    Russia is certainly correct to establish and enforce strict fire regulations in the interest of public safety;

    The Russian regulations in themselves are not too bad (well, they are stupid in places but will just about achieve the desired result). But they are rarely enforced properly, and the enforcement is usually a tool to extract bribes rather than increase safety.

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  7. Nick Wilsdon says:

    I’m not optimistic over Skolkovo myself. Encouraging the IT sector means allowing small companies to develop, not just welcoming the multinationals. Start-ups are the heart of this industry.

    As you spell out well in this series – bureaucracy is the killer. This is especially true for small IT companies, who have to spend huge amounts of time on company management rather than doing what they are good at.

    However speaking to other IT entrepreneurs, St. Petersburg seems to have had some success with their tax-friendly zones so there’s a small hope there!

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