"Perception versus Reality: An American Businessman's View of Russia Today"

Peter B. Necarsulmer
Chairman and CEO, The PBN Company
Outline of Talk Presented at the Kennan Institute for Advanced Russian Studies
Washington, DC
March 29, 1999

• It's been 10 years since the dawn of perestroika. One of the central lessons to be learned about Russia is that things are not always as they seem. And, predicting the future, well that's a very dangerous game. I don't know about you, but my crystal ball is pretty murky when it comes to Russia.

• How many times did we and the western news media have it all figured out?

  - One month before the total collapse of the USSR, President Bush told the Ukrainians to hang in there with Gorby. Yeltsin would go nowhere.

  - Once Gaidar left the Government in 1993 and Chernomyrdin checked in, it was certain that reform had ended as we know it. Yeltsin, the prognosticators said, was finished too.

  - When Zhirinovsky appeared, national socialism was inevitably to follow. Yeltsin was dead.

  - When Zhuganov won the first round in the last presidential poll, Yeltsin was dead again. The communists had been resurrected.

  - When Yeltsin finally won that election, Lebed had ascended and the General was crowned the new strong man of Russia. Once again, Yeltsin was to be not long for this world.

  - And, after the August collapse and the firing of Kiriyenko, all were sure total economic catastrophe would ensue and that economic reform had gasped its last breath...once again.

  - With Primakov's arrival, so it was said, the KGB had returned to power in the embrace of yet another communist resurrection. Yeltsin had finally given up the ghost.

• My objective today is not to show how many times and how many people have been wrong about Russia, especially the news media--that would be too easy.

• Rather, I hope to underline, especially with today's growing tensions over the Yugoslav crisis, that snap judgments and generalizations about Russia can be very tricky. History shows we inevitably eat crow.

• After all, this is a country with a millennial history, a geography spanning 11 time zones and a population of more than 150 million people.

PURPOSE

• My goal is to put some insights on the table from an American businessman's perspective. The views of someone who works and lives in Russia 75 percent of his time.

• Thank you very much for inviting me to join you today--I know I am not your typical guest speaker. You have so many distinguished Russia scholars, presenters and analysts. About all I have in common with them, I'm afraid, is that I've bought and even read some of their books.

• I'm kind of like the plumber or the garbage man. In that sense my perspective does have value--after all, everyone needs a plumber. And, I have been doing business continuously in Russia since 1990. Also, I think I am an acute observer of the economic and political situation because I have to be. More than half of my firm's business is in Russia and the former Soviet Union. If Russia goes down the tubes, the Steven Cohens and Marshall Goldmans will still have jobs. Me, I'll be looking for work.

• There is a lot of conventional wisdom out there about Russia. And, it is fueled by the media, relentlessly. There is also studied and informed academic interpretation. And then, there is plain street smarts and horse sense. I hope to share some of that with you today.

• So what do the headlines say versus what we on the ground hear, see, feel and think? For my talk, I would like to focus on five items of conventional wisdom.

  - First, Americans in Moscow are in physical danger and disrepute over Yugoslavia.

  - Second, The August 1998 crisis reduced Russia to an economic wasteland.

  - Third, American and other foreign companies have left the country in droves, unable to conduct business.

  - Four, the Russian Government is non-functional.

  - And, five, corruption in Russian society is absolute.

  I'd like to start with the first proposition, AMERICANS ARE IN DANGER OVER YUGOSLAVIA.

  The reality, it seems to me, is more subtle.

• Apart from Embassy employees, no one feels or is physically endangered. That might change, but as of one hour ago the mood of normalcy has not altered in our Moscow office.

• Demonstrations are limited and are more social than political. The main participants to date are skinheads, gangs and Zhirinovskyites -- only a handful are true Serb sympathizers. Today's Washington Post photo of several demonstrators barely 16 years old in front of the US Embassy tells us a lot.

• While the bombing is a leading, top-of-mind discussion issue in Russia just like everywhere else, the overwhelming majority of Russians remain focused not on international relations or national politics - not on Serbia and Kosovo - but on daily life. Perhaps even more so than here in America.

• The main political development of note is the apparent consensus among the leadership. For the first time in as long as anyone can remember, Yeltsin, Primakov, Luzhkov, Zhuganov, Chubais and Zhirinovsky share a common opinion.

  Does this signal a galvanizing of nationalistic sentiments among the elites? I take a more cynical view. This consensus at this time is being driven by each leader's own assessment of what plays politically in Russia. No one wants to be outdone on Russian nationalism and Slavic brotherhood.

  Apparently Gaidar, Nemstov and Fyodorov share this concern although they have wrapped their "negotiations mission" in a truly weird way-keeping Russia from moving to the right. So, whether Zhuganov is calling for arms and volunteers, or the Democrats are calling for peace, we need to understand that all of them are in the first place trying to fill a potentially dangerous political void. And that their primary concern is domestic political and electoral considerations.

• American credibility is on the decline to be sure, but the decline began long before the Yugoslav situation. Two other factors contributed to the decline: one transitory, the other much more fundamental.

• On the transitory front is America's fascination with Monica Lewinsky. The impeachment spectacle in Washington had more impact that one might imagine-there is almost never a conversation involving a Russian and an American without the question arising: What is wrong with you people? Throughout Europe and especially in the former Soviet Union, people continue to be astounded by the diversion, divisiveness, cost and stupidity of the entire controversy. Silly as it may seem, this truly hurt American credibility in Russia.

• More fundamental, is America's close association with the failures of economic reform in the eyes of Russian leaders and citizens alike. The August crisis, the ruble's freefall, and attending dislocation; the 17 million defrauded investors from early privatization; raging corruption; and, negative economic growth, are clearly associated with America and American policy. Much more than Yugoslavia, American policymakers need to understand that their views on economic strategy for Russia do not carry much weight among Russians today.

• But in all this, we also must remember that, to the degree anti-Americanism is taking hold, it is focused on our government, not our people and not American businesses on the ground in Russia.

  Let's take a look at another piece of conventional wisdom-namely, "THE AUGUST CRISIS MADE RUSSIA AN ECONOMIC WASTELAND."

• The view that business has been and remains at a standstill. That Russia desperately needed humanitarian aid to survive the winter. That the only business being done is being done by barter.

  Here, a major reality check is in order.

• Banking continues. Trade continues. Investment continues.

• Ruble emissions have been moderate.

• Inflation is real, but predicted hyperinflation has not occurred and almost certainly won't if the IMF loans happen which today appears a virtual certainty.

• There is food in the stores. And it is worth observing that American food aid designed to stave off the consequences of a predicted explosive and cruel "Russian Winter" only arrived last week......on the first day of Spring.

• The regions have not crumbled or collapsed.

• And, there are numerous signs of the end of economic free fall and the start of economic recovery, especially in Moscow. Restaurants, clubs, movie houses, retail shops which were barren through January have survived the worst and now are seeing customers return.

  Let me not be Pollyannaish. It will be a long time before the economy grows again. There will be additional defaults and more banks will close. But behind the headlines and conventional wisdom, a lot of good has come from the August crisis.

• For one thing, it achieved more structural reform at the enterprise level in one month than 7 years of effort by western technicians, the World Bank, Harvard Institute, Gaidar, Chubais and Nemstov. And, it disclosed for everyone, the fundamental flaws of the post-Soviet Russian economic model pushed by the West and its counterparts in Russia.

• In order to survive the crisis, enterprises and government for the first time responded to economic dislocation in free market terms. They rationalized their labor forces. They reduced overhead and began to think and act competitively. They became self-reliant.

• The August financial crisis and ruble devaluation led immediately to a critically needed reduction of import dependency, especially for food products. The new demand for domestic production not only serves as a prophylactic against future inflation but has spurred investment and growth in local productive capacity.

• Also, the Berezhovskies, Potanins, Gusinkys and other oligarchs who had put a stranglehold on the economy and the government of Russia were dealt a severe blow by the crisis-freeing the country, at least for now, from their excesses.

• And, in collapsing the capital markets of Russia, the August crisis and the imperative to attract investment in its wake has placed an important and sincere focus by the Government on shareholders rights, transparency, investor protections and regulation. As a result, Russia is setting the stage for a new beginning for a truly functioning capital market place.

  Close to the widely held view on the August Crisis is the conventional wisdom that, "FOREIGN INVESTORS HAVE LEFT RUSSIA IN DROVES AND IT IS IMPOSSIBLE FOR AMERICAN FIRMS TO CONDUCT NORMAL BUSINESS."

• The truth of the matter is quite different.

• While expats and speculative, portfolio investors left in a more or less grand exodus last fall, serious and long-term players have not.

• The most recent AmCham and European Business Club surveys show that virtually no major company has pulled out of the market and many corporations are investing anew - more wisely and cautiously to be sure.

• Mars, Philip Morris, Coca-Cola, McDonald's, Danone, Nestle, BMW and others are maintaining or expanding investments.

• Numerous oil and gas development and transportation projects, including the Caspian Pipeline Consortium, are underway, especially following the enactment of Production Sharing legislation and the recent rise in world crude prices.

• And, activity is picking up strongly in the strategic investment funds. Quietly, but steadily, new funds are being launched and others that had been put on hold are now headed for closings.

• The Russian Government strongly supports investments in the "real economy." They have no other choice and their actions, especially in investment law reform, speak loudly and encouragingly.

• Again, let me not exaggerate. Business is tough. Just as with Russian firms, foreign companies also had to restructure following the crisis. An example. At one major American company, every expat employee in Moscow enjoyed not one but two personal cars and drivers, one for the work day and one for the evening. These kinds of excesses have properly been trimmed. And, high-cost expat employees have been replaced in many cases by equally qualified Russian nationals.

• My firm, like others, had to search for new ways to do banking, to transfer funds, adjust pricing and otherwise respond to the crisis. But it was not impossible and now we, like other foreign companies, are stronger, smarter and better prepared for the future.

  The conventional wisdom also says "THE RUSSIAN GOVERNMENT IS INCAPABLE OF FUNCTIONING."

  That Primakov is paralyzed, walking a tightrope and barely holding on. Yeltsin's impeachment is around the corner and the coalition government with communists in key posts makes governing impossible. Nothing can happen until Maslykov is forced out and a new President is elected.

• Here again, I would like to offer some countervailing views.

• Primakov's Government, while transitional, has held together. This "Noah's Ark" of communists, apparatchiks and the occasional reformer has demonstrated an incredible ability to keep government functioning and to maintain civility among the legislative, executive and regional authorities.
• An unprecedented austere federal budget was approved. Relations with the regions, on a fast track toward total disintegration last fall, have improved markedly.

• The State Duma and the Council of the Federation are dealing with important legislation ranging from tax and investment law reform to intellectual property protection, production sharing agreements and shareholders' rights.

• In its negotiations with creditors and international lending institutions, the Government is engaged in serious multilateral negotiations to restructure its debt and by definition its entire monetary and central banking systems. Of course, it's never over until the fat lady sings. But it now appears that an IMF deal which would prevent or forestall further major defaults by the Government is within reach.

• It also must be noted that tax collection and tax compliance has improved substantially, and in some recent months even exceeded optimistic projections.

• No question, this is a transitional government whose major, indeed, historic achievement, has been political stability-not dramatic economic progress or leadership.

• As the Duma and presidential elections approach - which will be late this year for the Duma and in 2000 for the presidential polls - less and less will happen in government in terms of substantive laws, regulation and legislation. But this inertia is reflective of political realities, not a fundamentally incompetent or incapable Government. In other words, politics in Russia is not always so different from politics in the United States.

• The wild card is Yeltsin. Will his ego, bruised by Primakov's accomplishments, lead him to attempt to remove the Prime Minister? The President has been sending ominous smoke signals of late which suggest his ego may not be kept in check. On the other hand, will the impeachment process which has been stalled for more than two years get a new lease on life because of the Yugoslav crisis? And, then there are the real and daily concerns about Yeltsin's health. Will he continue to force the early obituary writers to eat more crow, or will he finally wither away?

• The other wild card is the IMF and a bailout seems highly likely, not to mention essential. All in all, on political stability, the budget, civil relations among factions and institutions, federal and regional relations, and, securing IMF support, this is a Government that has, in fact, achieved much more than all the pundits predicted or are prepared to admit.

  I would like to address one last piece of conventional wisdom: "THAT THE RUSSIAN ECONOMY AND SOCIETY IS HOPELESSLY CORRUPT."

• On this subject, reality and perception are still too well aligned, I'm afraid. Maybe the margin of difference is only 20%. But these days, with the European Union Commission debacle, it's hard to argue that Russia has a monopoly on corruption.

• Nevertheless, there is a widely held and I believe incorrect view that it is impossible to conduct business ethically in Russia. That around every corner lurks a Mafia boss ready to offer protection. That American businesses are faced with a Hobsian choice fearing the knock of the tax police at their door- either pay confiscatory taxes that will lead to bankruptcy, or skirt their legal obligations.

• This is not true. Further and immediate tax relief and reform is urgently needed. But it is possible to pay the piper and still make a profit.

• Legitimate foreign businesses, by and large, are left alone by the organized Mafia. Maintaining independence and ethics is a matter of commitment, competence and common sense on the part of management. In the case of The PBN Company, we were told and still are told that we can't serve our clients unless we pay off journalists and bribe government officials. Our 10 years of experience shows otherwise.

• There are other important and encouraging facts that usually escape the headline coverage. Facts that undermine the conventional wisdom about corruption in Russia.

• There is the strange case of Special Procurator Yuri Skuratov. His survival and apparent return to the job, under the protection of the Federation Council, bodes well.

• The Primakov Government has been unrelenting in reducing the previously unfettered access, influence and gluttony of the oligarchs, especially Berezhovsky.

• Indeed, there is a very serious and real commitment by Primakov to address corruption and he is the man with the resources, professional security services background, and the information to actually do it.

• So, while all is not well on the corruption front - and at least 50% of the Russian economy remains in the grey and black shadows - the situation is not hopeless.

  CONCLUSION

  In conclusion, there is one prediction about Russia that I can make with some certainty: expect the unexpected and take everyone's crystal ball with a grain of salt, including mine.

• Don't always believe what you read, see and hear in the headline coverage-a critical eye and critical view are necessary and useful for a balanced perspective of reality in Russia.

• Second, don't count Yeltsin out. He's got more lives than a cat.

• Third, Russia has been around for 1,000 years and we are less than a decade into the post-communist era. It's going to be many more decades before anyone writes the final chapter. In this sense, I am prepared to have cold water doused on my essentially positive view of Russia's prospects over the long-term, even the medium-term. At the same, time, I am prepared and ready to be proven right in my basic optimism.

• I do know that the fundamentals that attracted investment and led to economic cooperation with western business have not changed-it's still a nation of 150 million consumers, boasting a highly educated labor force; it's home to endless supplies of natural resources; and, a pioneer in scientific and technological innovation. In today's interdependent international economy, the West and Russia are doomed to cooperate. I and many others want to be part of the process.

• An obvious reality is that those who stay in the game have the best chance to win-those who leave the game have no chances at all.

• There is one piece of conventional wisdom that you can take to the bank. Russians will remember who stuck around during the tough times and those who jumped ship.

Thank You.

Peter B. Necarsulmer is Chairman & CEO of The PBN Company, a strategic communications, government relations and public affairs firm with offices in Moscow, Kyiv, London, Washington and Chisinau, Moldova. The author can be contacted by email at Peter.Necarsulmer@pbnco.com.