Russia holds pot of gold for those who risk assault course

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The Independent Online
More than 400 British companies have decided that the benefits of investing the new Russia outweigh the risks. Phil Reeves reports from Moscow on why the former Soviet Union holds Eastern promise for UK investors.

It is one of those announcements that sounds like a future Trivial Pursuit question, a tiny punctuation mark in history which we will one day look back on with damp-eyed affection. More than 30 years after first securing fridge space in swinging Britain, Tupperware has finally arrived in Russia.

The multinational is launching operations in St Petersburg with unabashed optimism. "The Tupperware career and earnings opportunity are being well received," boasted its chief executive, Rick Goings in his best business- speak.

His company is entering one of the toughest beats on the planet. On the one hand, there is the endemic corruption, bureaucracy, legislative chaos and (for some) the nightmare of distributing over a sparsely populated country that stretches across 11 time zones. On the other, there are 147 million new consumers, low labour costs, a highly educated population, and a large economy founded on vast natural resources.

So far, some 400 British companies have pondered this equation and concluded that the benefits outweigh the risks - particularly in oil and gas. BP and Royal Dutch/Shell this month agreed to spend about $4bn in Russia's under-financed oil sector, eclipsing all previous investments.

This is not to say that today's investors and businesses have no serious worries. A government corruption scandal has greatly weakened the Russian's government's team of pro-western economists led by Anatoly Chubais, and will slow down reforms. And a battle is looming over the stability of the rouble; the crisis on the world markets, which has prompted an exodus of $5bn of foreign money from the domestic T-bill market. To defend the currency, the Russian Central Bank is preparing to draw on it $21.5bn reserves.

Yet businesses have seen worse threats come and go. In the three years since SmithKline Beecham has been in Russia, its sales have risen 800 per cent.

The Anglo-American health care company will this year sell something close to $100m worth of cosmetics and pharmaceutical products into Russia which are imported from its western European plants. It knows the "headline" problems - the demands for protection money, the 500 annual contract killings, the stories about conmen dressing up as customs officers and taking delivery of lorryloads of produce.

But the first two of these blights affect Russians far more than established foreign firms, and the last is relatively rare. Far less is said about the daily hurdles that they must overcome to trade successfully.

Take, for example, "parallel importing" and "grey customs clearance". When SmithKline Beecham imports a lorryload of toothpaste or headache pills, it pays import duties which are then passed on to the price-tag.

Middle-men have found that they can market the same items cheaper in Russia by buying them from SmithKline Beecham in the West, and importing them independently - bribing the customs with a pay-off which is much less than the duty. Thus, the company finds itself competing with its own products on Russian soil.

Nor are these the only unscrupulous rivals who eat away at profit margins of western consumer goods manufacturers. The markets of Russia and the former Soviet Union are packed with cheap imitation products produced in India and Turkey. "Look at this," said SmithKline's general manager in the former Soviet Union, Paul Carter, brandishing a Turkish-made toothbrush with the same shape and livery as Aquafresh brush, but with a different name. "I went to an outdoor market in St Petersburg where there were boxes and boxes of these. They were selling five for every one of ours as they were much cheaper."

But for most businesses forgers are overshadowed by another overriding concern. "Ask me what's tough about Russia," said one western executive official, "and I will give you three answers. Tax, tax, and tax."

The chaos after the collapse of Soviet-style central planning spawned a system that is incomprehensible and hugely abused. Typically, a law- abiding foreign company can expect to have to pay up to 100 of the country's more than 200 different taxes. Just charting a path through the labyrinth of different laws can prove baffling even to the best qualified accountants - and places a hefty burden on administrative costs. "There is a huge grey area where we are just not sure what the right answer is," complained the same expatriate.

Mistakes can be costly; the tax police have the power to seize assets, freeze bank accounts, and even suspend operating licences if a company fails to settle an alleged tax debt within a mere 10 days. Appealing against their rulings requires a long and costly trek through the courts. The system is also laden with regulations that are tantamount to taxes on gross revenue rather than profit.

It is into these perilous but profitable waters that Tupperware is now venturing. A pot of gold lies on the horizon, but so do plenty of landmines. Their sales staff may now be preparing for their first Russian Tupperware party, but it is far too soon to celebrate.

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