British firms go unpaid in Russia chaos

IT LOOKS as inevitable as the onset of Russia's freezing winter. Soviet-era economic remedies are back in fashion in Moscow. And British companies, once heroic pioneers on the rough soil of its opening markets, are looking on in mute horror.

The new Prime Minister, Yevgeny Primakov has yet to complete assembling his team, but the presence of two veterans - the Soviet-era central banker Viktor Gerashchenko and Yuri Maslyukov, once head of Gosplan - has been enough to instil international gloom. Talk abounds of protectionism and Soviet-style hard currency controls.

Even the latest top government appointment, a pro-marketeer called Alexander Shokhin, admitted yesterday that, without western aid, the money-printing presses will roll; it would now be a miracle if they didn't.

None of the thousands of foreign companies working in Russia - including about 300 from Britain - is insulated from the fall-out of Russia's deepening economic crisis, which saw the rouble fall again yesterday. Scores of locally hired staff have been laid off. Others have gone unpaid for weeks, because of the paralysis which has seized the Russian banking system.

A few have flown home, notably the international bankers, badly scalded by Russia's default of $40bn of rouble-denominated short-term debt. Expansion plans have been torn up, and advertising budgets cancelled. Attention has switched to the question of whether it is worth soldiering on in what was always an unpredictable emerging market, complicated by corruption and bureaucracy, but which is now in utter chaos.

Leading the victims - apart from bankers - are the foreign companies which import goods into Russia, the confectionery, clothing, medicines, foodstuffs and other consumer products which were hard to find under the Soviet Union, but have now become part of Russian life. Together, these firms are owed many hundreds of millions of dollars (or the rouble equivalent) by Russian distributors who cannot pay their bills because their own money is in frozen Russian bank accounts.

One survey of 50 foreign companies is said to have found that, together, they are owed $450m, trapped by the banking freeze. The effect is to bring business to a halt.

"We've stopped importing stock," said Paul Carter, of SmithKline Beecham, which imports cosmetic and pharmaceutical products such as Aquafresh toothpaste, and is currently owed $20m by its Russian clientele. "At the moment there is a vacuum in the market, in which we have the consumer demand but no product. It's incredibly frustrating."

Like many, Mr Carter is trying to recover his company's money while also watching for clues to the new Russian government's economic policy. "The big fear of the multi-national importers is that the rouble will be truly convertible, as we have to pay for our products in hard currency."

Inevitably, the crisis has also spawned its own class of grifters, who are not affected by it directly, but claim to be. Suspicions abound that some Russian distributors, now not paying for their products, have bulging US dollar accounts offshore - "escape money" against the day that the government finally implodes and retributions begin or, for that matter, the the taxman's knock on the door.

Ultimately, there is little that foreign creditors can do to recover their money, beyond refusing to supply more stock or offering generous rescheduling deals. The legal system is still strewn with loopholes, and the courts are overburdened. Personal relationships, forged over the vodka bottle, now count as never before. But many millions will be written off.

All this amounts to a reversal of fortune in which the foreign importers helped create the conditions for their current woes. Hungry to penetrate vast, untouched markets, they were willing to expand aggressively despite the lack of credit sources (banks were far more interested in pocketing the profits of high-interest short-term government paper than lending to Russian entrepreneurs).

They found themselves extending ever-larger credits to their distributors, most of which were, in effect, unsecured because of the byzantine nature of the legal system. Worse, some foreign companies were lured into a complex web, from which it is now impossible to squeeze funds because they do not know with whom they are dealing.

For instance, they signed distribution deals with shell offshore companies, only to have the goods received by one subsidiary, while a second would undertake to make payments. The result, according to experts at Andersen Legal (an affiliate of Arthur Andersen), is that their debtors are judgment- proof.

Even if the system extracts itself from its current gridlock, the effects will be felt for a long time. Trust - between foreign importer and local distributor, banker and client - has been dealt a bruising blow.

A year ago, there was euphoria among Moscow's foreign companies, who were rubbing their hands gleefully at the prospect of a growing economy in a country of 147 million, replete with vast potential markets. All that has changed. Unless Mr Primakov and his friends overhaul the Russian banking and legal system, confidence is unlikely to recover fast.