September 1997

by Vladimir Berzonsky, Jr.

The vastness, remoteness, and relatively undeveloped infrastructure of the Russian Far East are giving way to the opportunities of a rapidly evolving regional economy. The development of the first of the Sakhalin Shelf oilfield projects will soon bring many U.S. firms to the region for the first time. While there are still plenty of obstacles to doing business in the region, American companies can succeed when properly prepared to operate in the challenging area of Russia.

1. Get to know Russia first. If your company already operates in Russia, it may be a relatively simple matter to establish a foothold in the RFE, since many basic issues will have already been addressed by your firm elsewhere in the country. Although there are complexities and nuances specific to each city and region in the RFE, prior knowledge and experience of Russian business conditions will be very helpful. The absence of any prior experience or presence in Moscow or elsewhere in Russia should not, however, discourage prospective investors from considering the RFE as a specific focal point for making an initial business venture.

2. Start small and plan for the long term. Unless your company is in an inherently large-scale business, such as oil extraction and refining, the Russian Far East should be approached cautiously. An initial presence and infrastructure should be established on as small a scale as feasible. Moreover, various geographic and economic factors particular to the region have resulted in price distortions that escalate almost all business costs in the region.

3. Find a good partner. As is true elsewhere in Russia, identifying a reliable local partner is an absolutely essential element of establishing a successful business operation in the RFE. Commit significant time and effort to identifying a local partner, and then to building a solid relationship. Background investigations and due diligence can provide information essential toward making intelligent and satisfactory decisions. A related issue is whether the foreign investor should seek to work with an already existing Russian entity such as a privatized, former Soviet collective or to build one's own structure from the ground up. Depending on the specific business activity, there are advantages and disadvantages to both approaches.

4. Contacts. Establishing relationships with government officials is another delicate and complex aspect of establishing a business presence in the RFE. American executives who have worked elsewhere in Russia or in the Middle East or in Asian countries will have applicable experience. Although it takes time and energy to cultivate ties with RFE officials, foreign investors can establish cooperative and mutually beneficial relationships with krai, oblast, and municipal officials throughout the region.

5. Choose your bank carefully. Banking in the RFE can be a challenge even for Americans familiar with the banking environment in Moscow or Eastern Europe. Banking is underdeveloped in the RFE, and banking transactions are often cumbersome. Opening and accessing personal and corporate bank accounts can be confusing and time-consuming. Far Eastern banks also have been notoriously volatile and prone to collapse. Fortunately, the situation is fast improving, as banks in the region catch up with current Moscow banking practices. In addition, Moscow and international banks are beginning to open offices in the major Far Eastern cities. Representatives of foreign organizations are well advised to seek experienced assistance in establishing bank accounts. For these and other reasons, it is also important to obtain the services of a reliable local accountant/bookkeeper as soon as possible (see "Primorskiy Banking More Competitive," Page 1).

Although the risks involved in expanding into the Russian Far East are significant, many foreign investors have already established a foothold and positioned themselves for long-term growth as this regional market develops. Moreover, proper planning, including seeking experienced professional assistance, can enable American businesses to explore the opportunities for growth in the RFE. For more information, on the RFE, visit BISNIS Online at www.mac.doc.gov/bisnis/country/regions.html#FarEast.

Vladimir Berzonsky is an attorney with the Vladivostok Office of Russin & Vecchi L.L.P.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)