DOING BUSINESS IN CENTRAL ASIA
by Donald R. Nicholson
With a total population of 55 million and a wide array of natural resources, the five countries of Central Asia present a challenging opportunity for U.S. business interests. The Central Asian-American Enterprise Fund (CAAEF) has been operating in the region since 1994. Maintaining offices in Almaty, Bishkek, Tashkent, Khujand, Dushanbe, and Ashgabat, CAAEF works closely with local banks and other investor groups to provide small- and medium-sized businesses with a blend of financial support ranging from micro-loans to investments of up to $5 million. As of June 1999, CAAEF had disbursed almost $100 million in equity investments and loans to more than 1,100 businesses and entrepreneurs in the five countries.
Doing business in Central Asia is not easy. In addition to the cultural and language barriers, legal, tax, and banking reforms are still in their early stages, making it difficult to do business openly and transparently. There are wide differences between the individual countries, especially in the levels of bureaucracy and governmental controls. Government regulations and zealous bureaucrats present obstacles to private companies. Therefore, a newly arrived American businessperson looking to quickly reach an agreement and begin implementation will need to be patient and understanding. Local entrepreneurs may look and sound like their Western counterparts, but there are wide differences between appearances and reality.
Although the Soviets and Russians have been the major sources of external influence for more than 100 years, the region is multicultural, multilingual, and currently bereft of hegemonies. In dealing with local businesspersons, it is usually more important to know their tribe, clan, or horde, than their specific nationality. Private business activities have always existed in this region, but they are only now being conducted openly and legally. Knowledge and understanding of Western style legal agreements is a new and still generally unknown phenomenon. It should also be noted that, while local businesses may willingly sign our extensive and all encompassing documentation, experience in enforcing contracts in the local courts is still limited.
CAAEF has learned a number of key lessons from its involvement in Central Asia. Some notable ones are:
$ There are major differences between Soviet and Western accounting principles. Therefore, it is critical that all parties understand and agree to the same common financial terms, conditions, and expectations of the business.
$ Marketing is a relatively new skill, and its importance is often ignored or understated. Adequate provisions need to be included from the very outset of any business.
$ Government involvement is usually far greater than in the United States. We recommend establishing clear lines of communication with relevant government ministries, agencies, or other regulatory bodies.
$ When acquiring Western-made machinery and equipment, it is essential that after-sale servicing and spare parts be available. Although it may seem advantageous to buy certain equipment, the true test comes when there is a need for spare parts or servicing.
$ Investing in a joint venture or new business is usually easier than exiting. With no real capital market, and a somewhat limited number of other interested investors, divesting can be a long and protracted process.
$ In some countries, currency conversion regulations make it difficult to transfer dividends, repatriate capital, remit interest payments on loans, or pay royalties and licensing fees. With higher rates of devaluation, these impediments can result in significant currency losses.
$ Good communications are of paramount importance. As businesses operate in multiple languages, management must be bilingual or supported by qualified translators versed in the relevant terminology.
For U.S. companies, CAAEF is an interested and willing supporter provided the conditions are right and the proposal makes sense. CAAEF=s financing can range from a few thousand dollars under the micro-loan program, to $5 million as a direct loan or equity participation. Since inception, CAAEF has invested in, or financed, businesses in almost every sector of the local economies with the exception of hard liquor, tobacco, and armaments. It can provide three different types of financial assistance for a U.S. company looking to finance a local joint venture: (1) as an equity partner in the venture, provided it meets CAAEF=s requirements and has local private participation; (2) as a source of medium-term financing; or (3) as a source of a shorter term Amicro@ credit.
With five years of experience CAAEF can be a good source of information and advice on how to do business in Central Asia, and what a new investor can look for or expect. Having financed hundreds of local entrepreneurs, CAAEF is also a source of information on how select markets are doing and what the prospects are. CAAEF is able to introduce potential local agents and representatives to U.S. companies that may be new to the region and can help arrange introductions to state-owned companies and agencies involved in specific sectors.
CAAEF welcomes the interest of U.S. companies and feels that good opportunities exist in such areas as health care, distribution, business/financial services, and franchising. With most investors focusing on oil and gas, many smaller opportunities where the risks and rewards can be very attractive have been neglected.
Donald R. Nicholson II is President and CEO of the Central Asian-American Enterprise Fund.
For more information on CAAEF, contact its U.S. office at: 1634 Eye Street, NW, Suite 200, Washington, D.C., 20006. Tel: (202) 737-7000, Fax: (202) 737-7077, or visit its website at www.caaef.com.