Doing Business with Russia

When the Soviet Union fell apart in 1991, its centrally planned economy went down with it. But the end was also a beginning: from a business point of view the birth of the Russian Federation meant that suddenly, and unexpectedly, opportunity was everywhere. ‘No one in the world was prepared for the fall of the Soviet Union’, said Bernie Sucher, an American businessman who would become one of the leading figures in Russian investment banking. ‘Nobody had that in their business plan.’

Russia debuted onto a globalising stage. Cheap labour was luring companies to new countries. Supply chains evolved to bring manufacturing closer to raw materials and distribution closer to buyers. Russia was the latest in a series of ‘emerging markets’, a glossy, new parlance first appearing in 1981 that made ‘third world’ countries palatable to the investors who played on financial markets and to companies that built factories on the ground. Some of the world’s biggest brands – from Snickers chocolate bars to L’Oréal shampoo – were eager for access to the billions of roubles Russian consumers had under their mattresses. Russian industry was starved for Western equipment – there were pipelines to build and phone networks to install.

‘Wild East’

In the early 1990s executives from thousands of international companies, hedge funds and investment banks bought overcoats and winter boots, and packed business-class cabins from London, New York, Frankfurt, Paris, and Tokyo. A gold-rush mentality fuelled a near stampede of capital and capitalists into Russia. Moscow became something of a ‘Wild East’. ‘Entrepreneurs, consultants, lawyers, bankers and academics with foundation grants, as well as fast-buck artists and swindlers from all over the world, swarmed across Russia looking for a piece of the action’, wrote the reporter David McClintick in ‘How Harvard Lost Russia’, his 2006 account of how one of America’s most distinguished universities mismanaged its role as adviser to the Russian government.

In 1998 Russia joined the G-7, making it the G-8. Its politicians and ultra-rich executives – the famed and feared oligarchs – did shots at Davos and joined the global elite. Enormous fortunes were created when joint ventures and investments went well. Then, almost exactly 30 years later, the stampede went sharply into reverse. Days after the full-scale invasion of Ukraine, British, US, and EU airspace closed to Russian aviation; Russia retaliated in kind. Tickets on the few routes out – Dubai or Istanbul, for example – soared in cost. Expats could not get out fast enough; their companies were soon to follow. A great experiment in the history of global commerce was over.

Everything is possible

In 1991 Western governments were almost uninhibited cheerleaders for the new Russia and its first president, Boris Yeltsin. ‘Here appears a democratic Russia’ said the French president Jacques Chirac in 1997: ‘A Russia with which everything becomes possible again.’ Some of these words were political politesse. Politicians and businesspeople were aware that Russia was an opaque proto-democracy deeply scarred by corruption and criminality. But the belief predominated that democracies and open markets were inseparable twins – free markets and the rule of law fed each other, and were believed to be jointly at the heart of functioning democracies. (The US made a similar assumption regarding China in the belief that all countries with a growing middle class eventually democratise.) Russia was one of the world’s most attractive emerging markets, becoming even more so in 2001 with the emergence of the BRIC acronym, courtesy of the asset management division of Goldman Sachs. The acronym, comprised of Brazil, Russia, India, and China, represented the four standout emerging markets whose share of global GDP was projected to eventually outstrip the traditional economic giants such as the US, Germany, and Japan. The Russian market had a huge seal of approval from one of the most prestigious authorities in the financial services industry.

But the Russian government was another story. Its ostensibly open, multi-party elections were stage-managed and deeply corrupt. The 1996 elections were financed via the ‘loans-for-shares’ scandal, in which Russia’s emerging oligarchs were given stakes in the country’s most strategic industries in exchange for ‘loans’ to the state. Those loans financed Yeltsin’s campaign and were never repaid. The oligarchs kept the collateral. By the end of the decade, the lion’s share of Russia’s economy was controlled by a group of people small enough to fit around a dinner table. These were the ‘semibankirshchina’, the ‘seven bankers’ who controlled some of Russia’s largest banks.

But still, international companies came in droves. Initially, the biggest play was simply to export goods to Russia and get them in front of consumers. In 2002, however, foreign direct investment in Russia – money spent to build factories on the ground – started to climb steadily, reaching a total of more than $54.9 billion on the eve of the global financial crisis. The Russian government’s default of 1998 was a reminder of just how messy Russian macroeconomic (and macropolitical) governance was. Yeltsin’s government was unable to collect revenue: both individuals and companies had elevated tax minimisation and outright evasion to a fine art. At the same time, government spending was out of control, domestic politics was mired in scandal and a drop in oil prices – Russia’s greatest export – made matters even worse. In August 1998, unable to bring spending and revenue even close to each other, the Russian government under then prime minister Sergey Kiriyenko (known as the ‘Kinder Surprise’, for his youth and inexperience) defaulted on all domestic debt, announced a new exchange rate for the rouble that wiped out most Russians’ savings, and froze repayments of Russian banks’ external debt. Russian consumers could no longer afford Western goods – or much else. Western investors lost confidence in the Russian government’s ability to manage its own affairs and left. Adam Elstein, then managing director of Bankers Trust in Moscow, told the Financial Times that, when it came to buying Russian government debt, most foreign investors ‘would probably rather eat nuclear waste than buy Russian paper again for the foreseeable future’.

Warnings

But Russia bounced back from this self-inflicted wound, buoyed by fresh demand for its mineral wealth during a global growth cycle and a massive spike in oil prices following the geopolitical instability of the 9/11 attacks. The 2000s, up to the financial crisis of 2008, were years of unprecedented wealth creation. Russian board rooms celebrated listings on the London Stock Exchange.

Yeltsin had resigned on the eve of the new millennium and appointed Vladimir Putin his successor, a move confirmed by elections in March 2000. Putin’s arrival to power was initially a cause for celebration in domestic and international circles alike. He was sober, unlike Yeltsin; he was law-and-order, also unlike Yeltsin. He surrounded himself with economic and political advisers admired in the West. And yet in his first year Putin bungled his response to the sinking of the Kursk submarine, one of the country’s worst peacetime disasters. As 118 submariners sank to the bottom of the Barents Sea, Putin was shown on national television enjoying a summer holiday. He refused international offers of assistance for five days.

When Putin seized Mikhail Khodorkovsky’s Yukos oil company in 2003 – part of a broader process of warning Russia’s oligarchs to stay out of politics and to align their business empires with national security goals – Western business panicked. Suddenly, it was hard to find the guardrails around investing in Russia.

One warning got everyone’s attention: Putin’s speech at the 2007 Munich Security Conference made clear his disenchantment, to put it mildly, with the Western-dominated global order. NATO expansion, Putin said, had nothing to do with updating the transatlantic alliance or strengthening security in Europe. ‘On the contrary’, he said, it represented ‘a serious provocation that reduces the level of mutual trust’. But by 2007 the price of oil was well on its way to $100 a barrel, driving the creation of phenomenal wealth in Russia in parallel with its political hardening. Moscow was clogged with Bentleys – Russia once had as many as seven dealerships. At the Ralph Lauren boutique in central Moscow, crocodile handbags priced at more than $21,000 were flying off the shelves,The Moscow Times reported.

The 2014 invasion of Crimea prompted moderate hand-wringing. Some foreign executives headed to the exits as professional services firms decided that Russia was no longer for them. For others, there was token concern from HQ, followed by a request to boost sales targets: ‘Corporate headquarters was wagging their fingers, “this is bad what is being done with Crimea, but nevertheless we think you have the potential to increase the sales forecast for next year another 5 to 10 per cent”’, one German executive recalls.

No order

And then came February 2022. Russia’s 30-year run as a darling of the investment community was over. We can only guess when business class tickets to Moscow will once again be hard to come by. The real question is whether it will happen at all.

The erosion of the global order, a decades-old geopolitical comfort zone, is an unsettling development. The US-Soviet standoff was one of the more predictable and oddly stabilising features of the Cold War. It was tense: enormous atomic arsenals pointed at each other and ready to fly a a moment’s notice. But once you got used to it, you could get a lot of work done. Now, there is nothing to get used to.

Charles Hecker is the author of Zero Sum: The Arc of International Business in Russia (Hurst, 2024).