April 1999

by Edward Merewether and Brian Mullady

The current banking crisis in Russia has demanded that U.S. companies develop new ways of moving and managing the cash needed to pay employees and vendors and to support client needs throughout the nis. One of the keys to successfully and legally conducting business in today's Russia is to realize that the labyrinth of impediments to conducting banking operations does not mean that it is impossible to legally realize almost any desired financial objective. The critical element is understanding and taking advantage of the full range of regulations (or, one might say, opportunities) to accomplish your financial objectives. Although the banking crisis has created a difficult situation, it is possible to develop unique ways to successfully work within the current system.

Prior to the crisis, many companies simply transferred cash to a Moscow bank by wire transfer and then withdrew the funds for payment of salaries, goods, and services. Now that Russian banks are no longer stable intermediaries for funds, getting cash into the country for payroll and operations must be addressed in other ways. First, however, it is a good idea to reconsider the status of a number of banks in Moscow on a regular basis in hopes of finding one that remains solvent and operates normally. In-country staff and various international accounting firms and public information services can help evaluate the situation. If the situation with the banks appears too uncertain, it may be best to seek alternative solutions to the normal banking routine. (This may be particularly necessary for small companies whose monthly cash transactions may be too low to be deemed of interest to the major international commercial banks in Moscow.)

In finding new cash management solutions, it is essential to be straightforward and legal, while minimizing the cost impact as much as possible. To accomplish this, it may be necessary to consider a range of solutions that can be used by in-country staff as the daily situation demands.

1. Continue to transfer small amounts of cash to a local bank account, then withdraw the funds upon arrival. Periodically, banks may function normally as funds become available. But, remember that transferring and placing large sums in a bank remains risky.
2. An alternative means of getting funds into Russia for normal office operations is to hand carry it. Due to relatively low airline fares between Moscow to several U.S. cities, professional courier services can be useful. (With the cheap airline fares, in some cases, the costs can be as low as the cost of a normal wire transfer when substantial amounts of dollars are involved.)
3. Direct transfers of funds from corporate headquarters to the accounts of suppliers and vendors in Russia even directly to the accounts of employees can be successful. This works as long as the vendor or employee has some confidence in their local bank. It may be surprising to some, but many local banks still function and can be used. When cash is delivered into the hands of local national staff, the funds should be registered with local authorities both when passing through customs and at the local bank. Funds are deposited into the bank only when the banks (both the sending bank and a recipient bank) concur that funds can be deposited, transferred, and then delivered to suppliers or vendors.

Handling cash makes everyone nervous. Therefore, if you decide to follow this course, it is a good idea to establish some internal rules of procedure.
--Declare all cash (if more than US$10,000) with U.S. Customs when leaving the country.
--Don't establish fixed schedules or flight patterns and take nonstop flights between the United States and Moscow.
--Declare all cash when clearing customs in Russia.
--Arrange for unobtrusive security to meet you at the airport.
--For your own peace of mind, establish a good paper trail for funds being transferred.
--Get official receipts for all cash disbursed in Moscow.
--Don't deliver cash to individuals, only to business entities.

For business transactions in a nearly all-cash environment, it is also wise to keep clearly within legal bounds from both the U.S. and Russian perspectives. To ensure this, all cash transfer transactions should be made at a bank where the U.S. dollar can be converted to rubles at the time the payment is made. The transaction must be conducted in rubles (legal), not in dollars (illegal). With the bank as witness to the cash conversion and transfer, all issues of audit trail and accountability should be satisfied, at least for the time being. It is important to maintain a friendly business relationship with the local bank so that it acknowledges you as a valued, if not current, customer.

In a "cash only" environment, it is important to avoid the temptation to bypass the rules. Some suppliers and vendors may suggest that this will save them taxes collected by the bank, if applicable, and precludes accountability by the business to the tax authorities, and that it will save you money. But sooner or later illegal activities will come home to haunt you. The legal environment is rapidly changing in Russia. It takes some work to stay on top of the changes and to always seek those options and opportunities that give the maximum benefit to suppliers, vendors, and employees while still complying with the law. Ultimately, it's worth the effort and, once the vendors understand that you are not going to break the law, they will work with you.

For more information on the current banking situation in Russia, visit BISNIS Online at www.mac.doc.gov/bisnis/country/rusfed.htm#Russia.

Ed Merewether is the Vice President for Business Development and Brian Mullady is Country Manager, Russia, at Technology Management Company in Albuquerque, New Mexico.

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