Reform in Russia and Kazakhstan and the U.S. Investor

By
F. Joseph Dresen

The "decision to open our office in Moscow," stated Richard Dean, Partner and Head of Russia and Central Asia Practice, Coudert Brothers LLP, at a Kennan Institute lecture on 3 June 2002, "came on the weekend that [Soviet leader Mikhail] Gorbachev jumped out of a limousine in Washington, D.C. to shake the hands of the crowd." That action demonstrated that the West had embraced Gorbachev, Dean recalled.

Dean reported that, despite the good feelings that existed toward Mr. Gorbachev and his opening to the West, U.S. business people soon discovered that good feelings could not bridge the chasm that existed between U.S. business practices and Soviet practices. One aspect of those differences involved the difficulties Soviet business people had in developing creative solutions to commercial problems. Mr. Gorbachev himself identified the problem in a speech: "[W]e must become a nation that understands that unless something is specifically prohibited, it is permitted." That understanding was not fast in coming, as Dean discovered in his dealings with Soviet negotiators that insisted on obtaining specific authorizations for every action. Dean recounted how his office would take pleasure in quoting Gorbachev's reformist exhortations back to these negotiators, until one finally responded "Mr. Gorbachev deals at the level of theory; we deal at the level of reality."

After the Soviet Union collapsed, much of the Soviet mentality and bureaucracy remained entrenched in Russian commercial life. The typical Russian manager in the early 1990s was a man used to having complete control over his enterprise, was likely to view the reform effort as temporary, and whose main objective was to get as much out of the country into a secure place as quickly as possible. "This is not likely to be the profile of a CEO of a company that we would like to invest in," Dean observed. Meanwhile, the Russian bureaucracy proved every bit as resistant to reform by decree from President Yeltsin as it had under Gorbachev. Dean recalled one occasion when a Boris Yeltsin decree intended to relax a regulation on company registration was met with the following retort from a Russian official: "If Yeltsin wants to come down here and register the company, he can. I'm not going to do it."

New problems emerged in post-Soviet Russia in the form of center-region tensions. Dean stated that when the Sakhalin II oil development project began in 1988, federal officials would do all the talking, and regional officials would remain in the background. Later, regional officials would still sit in the back, but would begin talking. Then the regional officials sat at the table and chaos ensued as they fought with the federal officials over the project.

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. However, 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. Dean argued that the Kazakh environment evolved to resemble Indonesia under Suharto rather than Russia under Yeltsin or Vladimir Putin.

The problem with Russian reform efforts, according to Dean, was that the Russians were somewhat conflicted about what the objectives were. Early on, Yeltsin and his advisors were determined to destroy the old system. They were guided in this, Dean stated, by Western policymakers and theorists who believed that by putting into place certain market incentives and transplanting Western law and practice that somehow Russia would develop institutions that would be comparable to our own. This was grotesquely naïve, Dean insisted. What happened instead was that profit incentives were swamped by the burden of taxes, corruption, bureaucracy, and organized crime; mass privatization resulted in mass self-dealing; and that mass self-dealing of privatized assets politically discredited economic reforms.

The market incentives have begun to work a little bit better in recent years, Dean allowed. Russian companies have gotten the message that improved corporate governance will improve their share price, and a number of them are aggressively marketing themselves as reformed. Despite the well-coordinated press campaigns to bolster their images, Dean cautioned, Westerners still need to exercise caution in dealing with them. Another source of pressure on Russian corporations to reform comes from President Putin's drive to impose stability: "Who knows how it will go," concluded Dean, "but make no mistake—Putin has restored order…but he has done it through the FSB. He has not won the hearts and minds of his opponents, he has done it by restoring the power and authority of the old First Department"—the intelligence and monitoring directorate of the old KGB.

Dean noted that in his experience, any package of assistance or advice offered to the Russians or Kazakhs with an air of paternalism or condescension to it has been and will continue to be an abject failure. Dean argued instead that international exchanges for graduate work or research, combined with professional internships, do a better job of providing Russians or Kazakhstanis with a useful perspective on Western practices. "In the end, the best thing we can do for Russia or Kazakhstan is to create opportunities for these people to use the enormous talents they have," Dean concluded.

Upcoming Events

Webcast

Impact of Low Oil Prices: Petro Power or Petro Poverty?

October 31, 2014 // 10:00am11:30am

Experts & Staff

Contact the Kennan Institute

Tel: (202) 691-4100
Fax: (202) 691-4247
kennan@wilsoncenter.org
 

Kennan Kyiv Project

Україна, 04071, Київ
вул. Костянтинівська, 4, офіс 2
Проект КЕННАН
тел/факс: (+380 44) 425-36-24
kennan@kennan.kiev.ua
www.kennan.kiev.ua