Lessons about Reform in Russia and Kazakhstan from the Experiences of U.S. Investors

Drawing upon personal experiences, Richard Dean, Partner and Head of Russia and Central Asia Practice at Coudert Brothers in Washington, reflected on valuable lessons learned about reform in the presentation of commercial clients in Russia and Kazakhstan. He offered several important observations to consider when doing business in the former Soviet Union and discussed programs that have improved business relations between the United States and Russia.

Dean stressed that when doing business in the former Soviet Union, it is important to recognize the differences between U.S. and Russian business cultures. While the United States' approach to commercial regulation is that business practices that are not prohibited by law are permitted, Russia is still overcoming the Soviet mentality that only specifically authorized business practices are permitted. Most Russian managers and bureaucrats are accustomed to having complete control over their enterprises, Dean continued. He noted that the differences have led to much frustration for U.S. companies in dealing with Russian companies and government bureaucracy.

According to Dean, Russia's early attempts at privatization were compromised by conflicts over what the objectives of economic reform should be. The Yeltsin administration's primary goal was to destroy the Soviet system, effectively underestimating the country's economic potential for change. Dean contended that Western advisors directly contributed to the failure of economic reform because they assumed that the introduction of market principles, even by decree, would automatically lead to the creation of Western-style institutions. Dean observed that the disconnect between Yeltsin's federal reforms and bureaucratic implementation contributed to incentives to managers and government bureaucrats to strip assets rather than to build strong Russian companies. As more and more Russian oligarchs seek finance from international and Western institutions, corporate governance should improve, but it is important to be appropriately skeptical about the public relations campaigns many of these oligarchs are undertaking in the United States.

Reform in Kazakhstan has been substantially different than in Russia. Dean explained that unlike Russia, there has always been a strong imposition of order by the Nazerbayev government, which led many to believe that foreign investment would be easier. Corruption remains rampant throughout Kazakhstan, the bureaucracy is formidable, and suspicion of foreigners is pervasive. Business transactions often depend upon the type of relationship your business partner has with the ruling family. He argued that the Kazakh environment is more closely related to Indonesia under Suharto than Russia under Yeltsin or Putin.

Dean argued that international exchanges for graduate work or research, combined with professional internships, provide Russian participants with a better perspective on Western practices. He cautioned that despite improved conditions, investment in Russia remains risky, especially for smaller businesses. The cost and difficulty of conducting business in Russia gives larger firms an advantage over smaller businesses and entrepreneurs. Putin's latest attempts to introduce judicial reform and to control the problem of organized crime signify an important improvement in the investment climate in Russia. Finally, Dean concluded, effective U.S. assistance should be centered on promoting foreign direct investment and technical expertise to support the development of Russian business leaders.