Personal Interest and Customs Brokers

Of all the great debates about Russia that have been chewed over in academic circles since time out of mind – Stalin’s death count, Peter the Great’s role as a reformer, who really runs the Kremlin – one of my favorites is the one about national character. Is Russia an Asiatic country? European? Or is there a mysterious, purely Russian, third way, discernable only to true Russophiles?

I never really understood the point of the debate, because to anybody who has spent any time in Russia, Europe and Asia, it is obvious that Russia resembles no other place in the world. It is only itself. Yes, it has despotic bureaucracies like China; but Chinese communists now run one of the most unabashedly capitalist countries in the world. Sure, most of its population lives in Europe, but they live somewhere out in the sticks, way past the Brits and Swedes, weird contrarian neighbors on a woodlot at the end of the paved road.

The real answer to any philosophical debate is in the breach, to my way of thinking. Russia may have a dense oriental bureaucracy, but her bureaucrats never figured out how to make state capitalism work; their imaginations are turned towards the collection, not creation of wealth. Europe looks great to a Customs officer on a shopping tour but all the goods at the Gallery Lafayette in Paris cannot provoke him to advocate changing the business rules at home, and actually make his own country a prime shopping destination. Instead, the Customs officer will return to Russia with his shopping bags full of loot, put on his new TagHeur watch, and go back to work, where he will insist that Russia do business its own way, because of its history, its people, its peculiarities.

Why is this? Most people know the first part of Winston Churchill’s immortal definition of Russia, “It is a riddle, wrapped in a mystery, inside an enigma…” but do not know the second part: “…but perhaps there is a key. That key is Russian national interest.” I would add another key for post-Soviet Russia; the key of personal interest.

Personal interest makes Russia impermeable to change at a certain molecular level; state workers game the rules in their organization to fit their own self-interest and you either play by those rules, or you don’t play at all. Their psychology distorts concepts like the market and free trade beyond all recognition. Any Western company in Russia depends on the good will and pleasure of a very small group of selfish persons, purely economic men acting in the rational interest of their pockets. Strong business models and company structures, good lawyers and competent staff, all count heavily towards business success in Russia. But a business that provokes conflicts with officialdom, fails to negotiate the red tape and neglects to line the pockets of the right people (officially or unofficially), will have a short life in Russia indeed. One of the salient facts of Russian life, is that in all conditions, and no matter what, it grows bureaucracy; and bureaucracy must be fed. Businesses in Russia exist only the extent that they can feed the State; and it is most important to keep the chief bureaucrats fed best.

However, as the Wicked Witch once said, “These things must be done delicately.” A western company risks running afoul of racketeering and foreign corrupt business practice laws by just handing out bribes left and right; beyond that, there are enormous risks to its reputation and brand involved. A good graft system needs carefully laid veneers of professional-quality respectability and deniability applied in thick layers for optimal function. Fortunately for western companies, Russian officials are nothing if not expert in constructing just the type of cover they need to make the whole system work for them, while keeping everyone else in the dark.

For a good example, look no farther than the Russian Federation’s Federal Customs Service. It has devised an entire library of arcane rules and regulations and interprets them within a closed and opaque structure, with access granted to only a very few. Fortunately, for western companies involved in foreign trade, the Russian customs clearance system is designed especially to keep them as far away as possible – importing and exporting to Russia may cost an average of $2000 per container on top of ocean freight charges, but it has the advantage of being RICO-proof.

Recently I trawled up an article entitled, “Russian Customs Brokers Will See No Crisis” from St. Petersburg Times. The article basically states that, current economic situation in the world notwithstanding, import and export brokers in Russia continue to profit. The author writes in a sort of bland Bizarro-world prose that westerners adopt when they talk about Russia -- it all sounds good and wise and market-oriented, while serving as a smokescreen to keep the situation on the ground hidden from prying eyes.

Here are a few choice lines:

“Companies that specialize in customs registration usually have essential contacts, even on a personal level, which ensures successful business. Customs brokers know and understand the law and all its nuances.”
 Essential contacts, even on a personal level, which ensures [sic] successful business; meaning that the flip side is true, without these contacts, you are toast. Please let us have money while you burn. The law is incomprehensible except to brokers with essential contacts, who ken its nuances by consulting with oracles.

“Russian customs are notoriously problematic. Russian business ethics and customs still differ from those in the West, and the customs business has its own specific national character, which for many foreign companies is the decisive factor in choosing a mediator for this sphere of business”
 The specific national character under discussion is an outstretched hand that must receive $2000 per container load to cross the Russian border. A smart company pays a customs broker who ensures that this fee only gets paid once, at the most twice, per shipment. The broker should be related to the Customs officer he bribes.

“The range of services offered by a customs broker is usually standard, but companies should pay attention to the broker’s reputation and experience. Experts advise companies to choose on the basis of recommendation.”
 The broker should be related to the Customs officer he bribes. The officer recommends the broker, and the broker recommends the officer.

“There is currently a problem emerging with so-called “grey brokers.”
“…Grey brokers” are also organizations that have competence in dealing with customs, but they are not officially certified...
“The main obstacle facing potential brokers is the high demands stipulated by the Customs Code. Customs fees of 50 million rubles must be paid; the firm must have an insurance document of civil responsibility at a cost of 20 million rubles…
“There are, however, some brokers who do not even attempt to obtain certification, and without facing any risks are in a better position than even legal brokers.”
 Anybody working in the St. Petersburg shipping market knows that there are literally hundreds of customs brokers running around offering their services. The entry cost for a legal customs broker at the time of the article’s writing is about $2.5 million USD, a good sum, to be sure, but hardly prohibitive in Russia. The real reason that a grey broker does not face any risks is that they are hard to prosecute; they close immediately upon running into trouble, and then the same guys re-open under another name. I have run into a few companies who base their entire business model on this.

“The Russian market is now becoming more transparent, and it is obvious that the future lies in professional companies that cooperate honestly with the state and other trade bodies…
The system of customs brokers is justified and is indeed one of the guarantors of the law’s enforcement.
 The transparency of the Russian market is a debatable and my research shows that if anything, customs brokers do nothing to guarantee the law. They keep western companies in the dark as to the real nature of Russian Customs law, collect fees they use to bribe customs officers and contribute mightily to Russia’s standing as one of the most corrupt nations.

As in all matters economic – if you want the truth, follow the money and find out who benefits. The rest – discussions of national character, personal contacts, et cetera – only hides the real situation.

Customs Updates from St. Petersburg Port

Here are some interesting tidbits about Russian Customs gleaned from the reading the on-line newspaper, Fontanka.ru, found at www.fontanka.ru.

According to a March 3 report, the Federal Customs Service contributed 416 billion rubles into the Russian government budget for the first two months of 2009 – 36% less than for the same period in 2008. The FCS brought in 50.7% of the total Russian state budget in 2008, or 4.7 trillion rubles
www.fontanka.ru/2008/04/23/099/

The Federal Customs Service opens a large number of administrative cases against cargo for various suspected contraband activities, as I have written about in previous blogs. But just how high is the arrest rate? A Northwest Customs report from 2008 states that 2644 cases were opened in 3 months, which works out to about 10,500 cases per year. Most cases, the report states, are opened regarding wood products, computer technology, meat, and fish, items with cultural value and clothes and shoes imported from East Asia.

During the same period, Northwest Customs opened up 255 criminal cases, or about 85 per month, and confiscated 38 kilograms of narcotics.
www.fontanka.ru/2009/03/02/154/

For those of you wondering just exactly why the Russian Federal Customs Service arrests cargo, here is an insightful little piece. Baltic Customs in the First Container Terminal in St. Petersburg arrested 80 tons of contraband Chinese towels and bedspreads during the week of March 19. The towels and bedspreads were listed in the customs declaration as textiles and textile materials. Customs is deciding whether to press criminal charges.

Like a good investigator, I looked at the Harmonized Code for the towels and bedspreads. They fall under Section XI Textiles and textile articles, but not under Chapter 54, “Man-made filaments.” In fact, the proper category would have been Chapter 63, “Other made-up textile articles; sets; worn clothing and worn textile articles; rags.” I had to dig into the chapter 63, though, down to item 6302. “Bed linen, table linen, toilet linen and kitchen linen” to find the right classification.

It is easy to see why an importer would not want to list his cargo as worn clothing or rags, and not at all obvious to find the distinction. What is obvious is that the importer will pay a fine to Customs – about $3000 – and demurrage charges to the container carrier for the 6 shipping containers that will sit months in port while the case is resolved.
http:// www.fontanka.ru/2009/03/19/071/

One fact the Federal Customs Service may be proud of is its low rating among Russian Federation officials caught taking bribes for 2008. First place honors go to officers of the Militia, Russia’s version of the police. Out of a total 1300 prosecutions for taking bribes in 2008 (a record for Russia), the Militia accounted for thirty one percent. The World Economic Growth Competiveness Index 2007-2008 ranked Russia 111th out of 131 countries in the reliability of law enforcement.

Russian Customs accounted for only two percent, which no doubt accounts for its high World Bank Doing Business 2008 ranking of 158 out of 178 countries in regards to the ease of trading across borders.

Eighty one per cent of the prosecutions, the article notes, were for bribes of less than 30 thousand rubles, or about one thousand dollars US at average exchange rates. This is another sure sign that democracy and reform are on the march in millennial Russia.

www.fontanka.ru/2009/01/28/128/

Property Rights, Russian Customs and Monopolies

I can still recall the Soviet Union of the late 1980s and early 1990s, when the majority of Russians regarded goods produced in their own country with mostly mixed but almost entirely negative feelings, covering an entire range between silently suffering tolerance and outraged disgust. We forget about it now, but the Soviet Union was responsible for offering its citizens Bizarro-world consumer wonders, such as exploding color television sets, five-gallon glass jars of pickled squash and tins of inedible mystery meat (the dreaded tushonka). Staples like meat, cheese and cooking oil were parceled out to families by redeemable coupons (taloni). Defesit (shortage) was the biggest word in the Soviet lexicon, and people didn’t ask each other where they bought something, they asked ‘gde dostali?’ (Where did you get a hold of it?). Back then, street gangs made a fortune trading in anything and everything imported – blue jeans, baseball caps, chewing gum, shampoo, deodorant, music and VCR tapes. They fueled a booming underground economy that equaled the official Soviet GNP and gave rise to a deep and abiding respect among Russian consumers for all things imported. It is no wonder that Russian consumers in 2009 are the most brand-conscious in the world.

Russia in the modern world is a country of avid consumers; the social compact between the Putin and Medvedev administrations gives citizens the freedom to travel and consume, and a measure of security and stability, in exchange for Kremlin and oligarch control over resources and profits. The bargain extends into the world of foreign trade, where the Russian Federal Customs Service brings in over 40% of the annual state budget through the collection of duties and taxes on imports and exports. Russia’s appetite for foreign goods has slowed down in step with global economic distress but it is a sure bet that once the economy turns around (and fuel prices rise to their mid-2008 levels), Russia will begin to import western consumer goods with the same enthusiasm as they have for the past decade.

Western brand name goods are among the most popular imports to Russia, and western companies – together with the Russian government – are going to great lengths to protect the trademarks and copyrights of major corporations. The promulgation of the Customs regulation, “The Regulation on protection of intellectual property rights by customs authorities” pushes a large share of enforcement squarely onto the Federal Customs Service and gives them broad authority to halt shipments of suspected contraband, unlicensed, or unsanctioned goods at the Russian border. A tough law, and tough enforcement, the logic goes, forces counterfeiters out of the market by forcing them to either go legitimate, or get apprehended.

This may very well be the long-term effect, but the short-term effects may be entirely different; this being Russia, the only surety is improbability and logic has its own set of special rules. Consider this comment by the Russian newspaper Noviye Izvestiya:

“Businessman-importers help Russia integrate into the worldwide system of consumerism, make connections, and tie the economic elements of the market to business methodologies little-known to those brought up in a planned economy.

“But only for a certain period of time. A desired-for equilibrium cannot exist for long in Russia’s wobbling, difficult balance. The market for brands is an example. It is not a matter of shoot-outs with machine guns or single-shot snipers delineating the parameters of profitable territory – this is my territory, and this is my territory, too. Thank God, the players are on a different level. That said the arsenal of measures and actions available to destroy the competition are not insubstantial.

“Episodes from this brutal struggle began to appear when new players began to show up in the Russian brand-name import market alongside the large, powerful companies created 6-8 years ago. The new ones entered the market, one after the other. Young, ambitious wolves who wanted to exercise their legal right to work at importing brand names. But at the time all of this began, the big companies (which started up the piquant business of flooding the nation with alcohol and other well-renowned addictive substances), strengthened not only economically, but also socially. The gained a well-deserved authority among brand-name producers and wholesalers in the West. They secured for themselves certain exclusive rights that, it is true, are completely inexplicable for even the most progressive advocates of the market. Finally, they cultivated well-placed connections and associates inside of the country, which for Russia was, is, and will always be the most important thing.

“Waking up one fine day to find all sorts of competitors in small companies and cooperatives, which following the enactment of laws on competition, spread throughout the country like mushrooms after spring rain, this group of persons, buddies of the brand market, didn’t wait long to take action. And they didn’t have to invent ways to crush the competition: the immortal telephone rules, intertwined state and commercial structures, legal traps and other well-honed tricks, were arts not lost to them.

“Inspection agencies of all different kinds were set loose on an inconvenient company. It is a well-known fact that the number of inspection agencies in Russia long ago surpassed the number of actual persons. Inspection agencies paralyzed a company’s work, upset delivery schedules for goods, and turned the pockets of any who resisted inside out. Men in black masks descended on warehouses in sudden raids. This happened with a company importing Nescafe brand products. Its goods were illegally removed from all of its warehouses all at once, and held without explanation for over a month in conditions that destroyed the product. The whole time the company lost business with stores where the coffee was sold in accordance with absolutely legal documents. But the empty shelves didn’t sit bare for long; they were filled with deliveries of coffee provided from the same people, who ordered the raids. Examples from Moscow of this sort are unbelievable – once, over a six-month period, the Federal Customs Service opened and closed for an inconvenient company many times. They closed for a month. Then opened a month later. Then closed again. Then opened again. Then closed…the goods shelf life expired, they were spoiled, contracts among partners lost all meaning, and the company closed. While another one prospered.”

While protecting western trademarks and brand names is important, the article suggests strongly that this is done in Russia at the expense of fair competition among businesses, to the benefit of only the well connected. And from my previous blog, it is clear that the FCS needs very little justification to stop, arrest and confiscate a shipment of goods under the pretext that they are counterfeit, or imported without permission of the trademark holder.

How should western brand-name companies respond? They spend billions on researching, developing and bringing their brands to market, and have the right to protect them. At the same time, does a brand name business do the right thing, if by protecting its intellectual property, it deprives a small businessman of his livelihood, and promotes market monopolization in Russia?

Intellectual Property Rights, Trademarks and Russian Customs

The protection of intellectual property rights, trademarks and copyrights are hot topics for the Russian Federation as it tries to join the World Trade Organization. Anybody who has ever spent any time in Russia walking through the barakholki, or clothing and sundry markets, knows first-hand that the Land of the Firebird is also the Land of Imported Chinese Knock-offs Sold at Really Low Prices. In St. Petersburg, the Apraskin Dvor, right off Sennaya (Haymarket Square) sells quasi-brand items like Calven Klein shirts, Christian Diar ties, Donna Kaban NY dresses, and Lei Jeans in row after row after row of overflowing, privately run stalls. If the quality is dubious compared to the original, the design is often good enough to fool the non-attentive observer for a few minutes, or at least until the second or third round of vodka is drunk (after which, who cares).

Then there is the music scene, where only one or two reputable stores (such as M Video) offer anything resembling factory-produced and certified compact discs. They usually cost twice as much as pirated versions, and even if the quality isn’t quite so good, most Russians make the trade-off willingly. The losses to western copyright owners measure in the billions of dollars annually, and since Russia imports most of its counterfeits from China, it’s no wonder that the Federal Customs Service subjects Chinese imports to a 70% full inspection regime (i.e., seven out of ten shipping containers are inspected physically).

Lately the Russian government appears to be paying more attention to the problem of counterfeits – although it should be noted, that on this point, the official opinion diverges sharply from the opinion of the average Russian consumer, who earns around $1000 per month and looks on the knock-offs as a necessary evil. As the Russian saying goes, isskustvo trebyet zhertv, art demands sacrifices, and few nationalities more willingly sacrifice for fashion than Russians do. In any case, the Russian government clearly wants to fall into line with the world’s main trading nations in terms of respecting intellectual, trade and copyrights.

One of the main directives for handling counterfeits can be found on the Russian Federal Customs Service’s website under the “For Business” category. Entitled “The Regulation on protection of intellectual property rights by customs authorities” the directive sets down in 74 laborious statutes of stultifying bureaucratese just exactly how the FCS must handle violations of intellectual property rights on Russia’s borders.

The Regulation boils down to a few key points; the FCS can stop goods from entering Russia upon petition of the trademark holder; the procedures to stop the import of counterfeit goods are elaborate, involving a substantial body of proof; the FCS registers trademarks, copyrights and intellectual property into a centralized Registry only upon submission of a very specific information; and the FCS has broad authority to interpret the Regulation and enforce it.

The final point is the most important one for importers to Russia. The Regulation does not specify that the cargo may only be held upon appeal from the copyright or trademark holder, or by the owner of the intellectual property. Instead, it puts the decision into the hands of the customs post supervisor (head). He may delay (suspend) the import for 10 days, during which time the importer may appeal the suspension. The importer further may ask for a single 10-day suspension. The decision to release the cargo ultimately rests, again, with the customs post supervisor.

The system could not be better designed for abuse. First, when cargo is arrested, Russian Customs regulations permit the arrest of the ‘means of transportation’ along with the cargo. To look at this as a practical matter, assume that your cargo is detained at the Torfyanovka customs post on the Russian-Finnish border. The FCS officer who just arrested your cargo essentially just told you that you will pay at least 10 days’ for holding a truck, with driver, chassis and container, at the border – an expense that can easily be $1000 per day, or a minimum of $10,000. Whereas the ‘unofficial tax’ for ‘expedited service’ at Torfyanovka is $2000. Do the math and ask yourself which option you would choose. Add in the pressure coming from your buyers, who are waiting for their cargo to get to market; and the fact that your truck may be carrying dairy products or some other cargo with a short expiration date, and it’s not hard to understand why most importers are not going to make any trouble, or fuss and fight.

The Regulation stipulates that goods arrested under suspicion of counterfeit remain under control of the FCS until the cargo is either released into free circulation, destroyed, renounced in favor of the state, transferred to state ownership, or exported out of Russia. I know from personal experience that getting cargo destroyed requires an amazing amount of time and energy, including getting a court resolution. The entire process can take up to two years. Most importers won’t bother with renouncing their ownership rights, since this is also a very bureaucratic process, and prefer just to walk away. This leaves the final option as the most viable – allowing Customs to take ownership of the cargo, and sell it through the Russian Federation State Property Committee.

Which leads us back to an earlier blog, Administrative Arrest – Russian Customs Scam? Does it seem like the FCS will arrest counterfeit goods at the Russian border to protect trademark and copyrights – or will dishonest officers use the Regulation as an excuse to line their own pockets?

http://www.customs.ru/en/fbusiness/ENGCustomsrelatedissues/?id695=2959&i695=1

Can $160 Million Clean Up Russian Customs?

One of my favorite things about the internet is that it makes recent history so accessible. I don’t have a hard time remembering research before the web came along – I spent too many long hours in libraries, getting lost in the stacks in pursuit of obscure texts – but I love the ability to conjure these reams of information into my Anchorage office by just hitting a button.

Looking into the activities of the Russian Federal Customs Service takes a little ingenuity and digging but sometimes it yields fascinating and wonderful bits of insight. I ran across a nice little nugget the other day on the World Bank website entitled “A+ for Russian Customs!” The short piece – really little more than just a blurb – dated from 2006 and outlined the successes of a $140 million dollar World Bank program to “modernize the infrastructure for clearing goods.” This is part of a six year Customs Development Project “to modernize the operations of 800+ customs posts manned by the 62,000 staff.”

Since we are already in 2009, the target completion date for the Customs Development Project, it might be a good idea to look and see if the Federal Customs Service indeed earned an A+, which, the World Bank site says, “In early 2005, the Russian business community rated…as the best government agency in terms of openness and transparency.”

First off, rating the FCS as Russia’s best agency in terms of openness and transparency is faint praise for a country rated among the worst for government corruption in the world. During all of my travels to Russia, I can think of any number government agencies that are more transparent than the FCS. The GAI, or Federal Automobile Inspectorate, for example, is a paragon of transparency and openness – when one of their officers, or gaishniki, stops you for a traffic violation, it’s pretty clear that you can bribe him on the spot or fight the ticket in court. Whereas an FCS officer invokes any number of little-known or ambiguous rules when delaying cargo, requiring appeals by letter, and thirty-day response periods for rulings.

The World Bank program involved 24 offices out of over 800, or about .003% of all FCS posts; and with $140 million dollar spread around them, or about $5.83 million per year for 6 years, a little more than $971 thousand dollars per year per FCS post. For a significant customs post, such as Torfyanovka on the Russian-Finnish border, this is chicken feed – the post processes hundreds, sometimes thousands of trucks per day, and with the standard bribe to let a truck through standing at $400 per truck, the incentive to keep taking bribes far exceeds any monies laid out by any foreign agencies.

The program intends to introduce e-filing for customs declarations; this apparently, will help speed up clearance times, as well reveal patterns that can help pinpoint contraband and fight corruption. Electronic systems are hardly a panacea, however, especially in a place like Russia, and particularly in an agency like the FCS. Any electronic system is prone to gaming – how hard would it be, for example, for a corrupt businessman and a corrupt FCS officer to agree on the information put into the e-declaration, and then between them ensures that the cargo gets steered to a single officer or group of officers, for customs clearance? In late 2006, the Russian Federal Transportation Militia raided a series of container carrier offices searching for materials relating to the falsification of data in Bills of Lading. It turned out that corrupt employees in the carriers’ own offices were changing the origins and cargo types for containers of meat. If western companies, with their own internal security systems, can be corrupted, then it is a sure bet that the FCS can be corrupted, too.

In another famous case in St. Petersburg, a Baltic Customs officer was shot dead in his office in 2005. He had been in charge of entering information on 30 shipments of meat into an FCS database. The containers of meat disappeared after leaving the port.

The World Bank website further states, “By the end of 2004, the implementation of a new Customs Code had reduced the processing time inland customs offices from 10 days to 3 days, for 98 percent of the declarations.” At the risk of offending the employees of the World Bank, who are no doubt well-meaning and competent people, this statement just seems dubious. Maybe their target 24 offices were in locations with little or no foreign trade, like Tigil or Diksi in the Russian Far North.

Certainly, they were not in the places where customs declaration processing needs improvement the most, like the First Container Terminal in St. Petersburg, or on the Russian-Finnish and Russian-Latvian borders. In these locations, containers with meat are subject to 100% full physical inspection of their contents, which means a delay of at least one day per shipment but usually winds up being much more (over 10 days, for example, in the port of St. Petersburg). Imported Chinese goods are subject as well to a 70% inspection, slowing down their processing.

That said, even baby steps and small achievements are positive – but we should not get our hopes up too high for the success of reforming the FCS any time soon. Many observers are skeptical that e-filing plans will not work unless there is sufficient political will behind them to really root out corruption. It may already be too late for the current generation, who, in the words of one observer, are incapable of changing. “It's too late," he said. "These guys are used to driving a Mercedes and are used to going on holiday four times a year, and you aren't going to change this."

http://go.worldbank.org/5PNUC2GS90
http://www.templetonthorp.com/en/news172.html

Thoughts on the new Shushary Terminal in St. Petersburg

One of the more welcome pieces of news to come out of the Russian transportation market in recent months was the announcement that Russia’s National Container Company is opening an off-dock container terminal in Shushary, St. Petersburg. The Shushary Terminal occupies a prime piece of logistics real estate – at the intersection of the Moscow Highway and St. Petersburg Ring Road, near the main center of western investments in the auto industry (Ford, Toyota and Nissan all have plants nearby) and right next to Pulkovo airport.

Even better news is that the Federal Customs Service included the Shushary Terminal into the Baltic Customs zone of authority; according to the NCC press announcement:

”This will provide a unique possibility to transport containers from FCT to the off dock facility in Shushary in bond under the simplified scheme of internal customs transit. Such scheme does not require presentation of any additional commercial documents by either shipping line or consignee apart from those readily available at the time of vessel’s arrival at FCT, i.e., freight manifest and bill of lading.”

Shipping lines and freight forwarders will now be able to move containers directly from the First Container Terminal by truck or rail shuttle to the Shushary Terminal under bond and with minimal documentation. The cost for the service is now under negotiation with NCC, but the cost for moving a 40’ container the 17 kilometers to the off-dock from the port will likely be somewhere between $200-$300 including container lifts.

The move is a good response to the long-awaited desire for Russia to provide more capacity for the booming container cargo market; carriers, importers and exporters have clamored for additional space for years, as market growth outstripped the capabilities of the First Container Terminal to handle it. The complaints became especially vocal after the great reefer crisis of 2006-2007, when carriers scrambled to import thousands of containers of beef and pork before a quota deadline expired on the New Years. The Shushary Terminal adds storage space for 10,000 TEU of laden containers and 4,500 TEU of empty boxes, and NCC estimates its annual throughput at 200,000 annually.

The only immediate drawback is, of course, the drastic drop in the need for the excess capacity. With 2009 volumes at FCT down almost 30% compared to 2008, there doesn’t seem to be much immediate need for the space at Shushary. However the market is bound to rebound when the price of oil rises again, and when it does the additional throughput will be very much appreciated.

Looking at the longer term, the availability of new capacity in St. Petersburg presents container carriers and cargo importers with a host of interesting issues that will determine the shape of the market for years to come. By now, carriers probably will have negotiated space commitments for Shushary, and if the historical patter obtains, Maersk Line will pursue aggressively a large share of the 10,000 TEU available slots to support its major clients in the automobile industry. Competitive logic dictates that MSC, OOCL, CMA-CGM and the other majors match the move by securing their own quotas. The interesting question will be to see if the costs for holding these spaces are passed along to customers while the market remains flat.

Assuming the market recovers in 2010, carriers will face further challenges managing their policies for using the Shushary Terminal. For example, if there is a 2010 congestion crisis, will a carrier force a customer to move his box from FCT to Shushary and then recover the cost before releasing the cargo? Contract of carriage terms allow for just this but it would be a tough sell in the Russian market, and probably wouldn’t fly with global or key customers.

A few other questions arise immediately from contemplating the new off-dock Shushary Terminal. As I’ve discussed in my other blogs, the major cause of congestion in the port of St. Petersburg (among other places) is the awkward and opaque paper mill of clearing cargo through Russian Customs. Certainly, Baltic Customs bears a large responsibility for the fact that over 50% of all containers passing through the First Container Terminal in 2008 took 6 days or more to leave the port.

This being the case, it is hard to see any real advantage to creating the capacity for more container storage space in St. Petersburg. A container carrier needs to turn his equipment about six times per year to make a profit; anything less, and lost time begins to eat into profits. Although it seems counter-intuitive, there is a real danger that additional capacity in a situation of slow turn-times exposes a container carrier to greater financial risk, not less; more of his equipment is tied up for longer periods of time.

I don’t believe this is an idle speculation. There is plenty of speculation about corruption in Baltic Customs, and its liberal use of administrative arrest ties up to 10% of all cargo shipping containers at one time in tangled webs of bureaucracy. A container carrier could very well ask what advantage there is to having even more of his containers sitting idle while consignees negotiate with Baltic Customs, or go to Arbitration Court, to get their cargo released.

In other words, without addressing the main cause of congestion in the port of St. Petersburg – the Federal Customs Service – the new off-dock may prove to be nothing more than a Band Aid.

http://www.container.ru/English/Company/News/20081230.html

St. Petersburg Volumes Down 30% Since 2008

The economic downturn is hitting Russia hard these days, and the downward trend is especially notable in the container shipping industry, which is suffering from falling rates and volumes for the first time in over a decade of growth. According to the website for the National Container Company, owner of the First Container Terminal (St. Petersburg’s largest container terminal),

“The throughput of First Container Terminal (FCT, St. Petersburg) in the reported period equaled 124,608 TEU (-24.7% comp. to 2008). In February, FCT handled 61,301 TEU (-27.3% comp. to Feb 2008).”

To get an idea of just how bad the situation has become, compare the weekly throughput numbers for 2008 with those of 2009. Figures are expressed in TEU (twenty foot container units).

Week 1
2008: 7,868
2009: 3,873
Percentage change: (51%)

Week 2
2008: 10,027
2009: 8,563
Percentage change: (15%)

Week 3
2008: 10,120
2009: 9,263
Percentage change: (8%)

Week 4
2008: 11,548
2009: 8,058
Percentage change: (30%)

Week 5
2008: 11,547
2009: 9,118
Percentage change: (21%)

Week 6
2008: 12,326
2009: 10,066
Percentage change: (18%)

The numbers represent a sea change from 2006 to 2008 (when I worked in St. Petersburg). Then, the hottest topic among container carriers was the lack of capacity to meet the demand at FCT. Now the market turned around 180 degrees.

The situation, it would seem, has benefits for container carriers and cargo shippers alike; with so much excess capacity on the market, and ships running at less than full capacity, cargo moves as scheduled, with key clients as well as spot customers all but guaranteed space. And once at port, customs processing should theoretically happen faster since there is less cargo for Baltic Customs to work on.

The result should be much faster turn times for cargo. This is important for container carriers since they are in the business of selling container space. A container carrier generally expects to get up to 6 export loads per year per shipping container – meaning that the container loads at a shipper door, delivers the container to the consignee, takes back an empty container and re-positions it for another load, 6 times during the course of a year. A cycle would then be about 60 days from export load to export load.

Without congestion, the Russia cargo market should be able to accomplish this. At present most containers in Russia take up to 30 days to turn around – but, as we have seen in previous blogs, over half of all containers take between 6-15 days to clear FCT, and 15% of all loads take more than 16 days. And with a high percentage of shipping containers leaving Russia empty (about 70%, as can be seen by FCT data); these boxes have little chance of finding their next load of export cargo within 60 days. Every day is critical – time is money, always, in the shipping industry.

Therefore, it would seem that a slowdown in volumes would mean boxes turn faster. But as we all know, Russia is a land of paradox and contradiction. Russian Customs clearance procedures remain complex and opaque, and corrupt officers in the Federal Customs Service – including many of those in Baltic Customs – look at cargo as a source of personal enrichment. For them the situation may be – in the unforgettable formulation of V.I. Lenin – the worse, the better (tem khuzhe, chem luchshe).

Russian Customs brings in over 40% of the revenues for the Russian state. These revenues are collected on imports and exports, and over the past few years, oil exports provided a lion’s share. Now, as one Russian Customs officer told the newspaper Novaya Gazeta,

“The customs clearance system for import cargo has practically fallen apart! Only a handful [of importers] are determined to bring in consumer goods. Whoever used to import cargo now says, who needs you and your Customs? Right now oil duties account for 45% of the Federal Customs Service budget, but the price of oil is falling. We’ll probably be forced to revoke them altogether by spring. Then how does Customs think it can take care of itself, if the only import that’s left is illegal? All of the duties are going right into the hands of the [Customs] chiefs.”

A likely scenario is that, under pressure to collect more revenues from import cargo to compensate for the loss of revenues on oil exports, and unwilling to give up their personal income streams, Russian Customs officers will put import cargo under more intense scrutiny than ever before. They will ask more, not less, questions about the correct valuation, weight and volume of all cargo, intending to maximize the amount of duty.

Will cargo turn faster now that the days of congestion are over in St. Petersburg? We will follow developments closely in the months to come.

http://www.container.ru/English/FCT/About/Stat/index.html
http://www.novayagazeta.ru/data/2009/004/22.html

Bribes for Brands

For visitors to contemporary Moscow, it is hard to conceive of the city without a cornucopia of expensive imported goods – shops filled with Gucci, Prada, Naf Naf and Benneton line Tverskaya Ulitsa, the supermarkets overflow with imported French and Dutch cheeses, prime cuts of meat, oranges, grapefruits, kiwi, pineapples…it looks, to a westerner, just like the West. Brand names are an omnipresent fact of life in most big Russian cities now, and this is by no means a bad thing. I remember all too well the Russia of the 1980s and early 1990s, when the stores were barren and black-market traders, fartsovshiki, ran the streets in little leather-jacket gangs and literally followed you for blocks, trying to get you to part with some coveted article of clothing.

As Russia grew into its economic potential, the fartsovshiki grew up too; they got smart, and many of them brought their hustle, intelligence and street smarts to foreign trade. Roman Abramovich, one of Russia’s richest oligarchs, got his start back in 1987 by parlaying a 2000 ruble wedding present into a black-market business in perfume, toothpaste, tights and deodorant. I know plenty of Russian friends and professional acquaintences with similar biographies.

Yet few westerners actually think about where their brand name goods come from, how they get into Russia, and how they cross the border. Transportation is one of those things that people take for granted, like water or electricity – you just go into a Moscow supermarket, and there are Chiquita bananas in produce and Huggies diapers in baby supplies. But questions of branding, trademarks and intellectual property rights are matters of hot debate in Russia, and still being sorted out between importers, the courts and in the Federal Customs Service. In true Russian form, much of the decision-making is arbitrary, and decided in the breach by money changing hands.

A recent article in Novaya Gazeta called “From Huggies to Levis” discusses in fascinating detail the affect attempts by western companies to guard their trademarks on imports to Russia. Western companies tend to have no mercy on copyright infringement, seeing it righty as theft. Apparently the European Business Association (representing some of Europe’s biggest brand names) recently appealed to the Russian Federation Arbitration Court to limit the import of brand-name goods to licenced importers. According to the article, “The object is that even authentic goods imported into Russia without the trademark owner’s permission must be considered contraband.”

For an official dealer, the situation presents no problem. The Customs Code grants a trademark owner the right to enter its trademark into the customs register as its intellectual property. The company then decides which companies have the right to be their dealer and requests their names be entered into the customs register of approved importers. This is a hard blow to the many small and medium Russian businesses, for whom it may be impossible to obtain permission from a trademark holder.

But the law and its interpretation is not yet clear. The article cites a case with the Moscow-based company AVTO-Logistika, an autoparts company whose cargo was arrested by request of the auto manufacturers Honda and Nissan at the Vyborg Customs Post on the Finnish border in February. AVTO-Logistika markets itself as speedy and reliable parts supplier, and it hurt them to have their cargo tied up while customers were waiting. Vyborg Customs decided the cargo was contraband – not counterfiet, because there was no doubt the parts were genuine Honda and Nissan – but contraband. The law appeared to be on the side of Honda and Nissan but AVTO-Logistika decided to argue Customs’ decision and went to Moscow Arbitration Court. Judge Anatolij Erokhin – in a ruling that shocked many observers – found in favor of AVTO-Logistika. AVTO-Logistika indeed was within its rights to import spare parts without permission from Honda and Nissan.

However other judges have ruled the exact opposite way, in favor of trademark holders, even when the cargo is not for re-sale but for municipal use. For example, the electric company for the city of Vologda, Vologdaoblcommunenergo imported 172 rolls of European produced building insulation. Officers at the Vologda Customs Post arrested and confiscated the cargo because the electric company was not listed in the customs registry as an official dealer of the insulation.

The general rule seems to be that the Customs Service allows trademarked cargo into Russia only with official permission from the trademark holder. But experienced importers know that the Federal Customs Service has two unwritten rules; the first is, nelzya, no esli ochen khochetsa, mozhno – it is prohibited but if you really want to, you can; the second, money talks. As the article comments, “…the standard bribe at the border for an opening – that is, for allowing a truck laden with cargo through [customs] is $400. The trucking company quietly includes this cost into his services. But if a foreign trademark licence holder decides to look out for his interests and puts his trademark into the customs register, the ‘tax’ goes up to $3,000 per truck. The cost is immediately passed along to consumers of imported goods.”

Of course, it would be interesting to find out where the 172 rolls of confiscated insulation finally wound up, who sold them, and at what price. Knowing what I do about the Federal Customs Service, contraband, and confiscation, it would be easy to draw a cynical conclusion.

Citation: http://www.novayagazeta.ru/data/2009/002/12.html

At the Trough

United States and Russia trade averaged almost 22% per year over the past decade or so, and hit $26 billion in 2007. Direct U.S. investment into the Russian economy – mostly in airline, automobiles, cosmetics and consumer goods manufacturing reached $11 billion in 2006. Trade relations between the two countries may never be as warm or collegial as those between, say, America and England or America and Germany, but even that may be only a matter of time; after all, the sight of Russian businessmen in American offices is hardly a novelty, and American expatriates in Moscow are a common sight. Even with an economic downturn hitting companies hard on both sides of the ocean, Russian-American trade is a safe bet to grow for decades to come.

I may sound optimistic, but with good reason. I worked at the United States Embassy in Moscow from 1987-1989, and remember very well the CIA reports and political analysts back then predicting the Soviet Union would persist for another 20 years easily. Anybody back in the 1980s guessing that by the new millennium Moscow would rank among the world’s most important business cities would have been laughed out of town.

But, for all the phenomenal growth and changes to Russia over the past 30 years, though, her society retains ancient elements – historical constants that color trade relations with all of her partners, including the United States. It is easy to overlook the persistence of the past when doing business with Russia; a transportation professional sees a recognizable physical infrastructure of ports, cranes, trucks, trains and warehouses, and can infer that that the regulatory and administrative infrastructure will be somewhat recognizable. We can forget that the cultural and social contexts in which countries trade are critical too.

For example, it is easy to dismiss the current formulation of Russia’s economy – state capitalism, as described by Vladimir Putin, or oligarchy – as some sort of an aberration of history, a reaction to the chaos and banditry of the Yeltsin era in the 1990s. But in fact, in my view, Russia’s acceptance of the strong hand of the state under Putin (and now Medvedev) is nothing more than a return to the state monopoly over the economy – foreign trade included – that Russia developed over centuries of imperial Tsarist and Soviet rule. In the long view, Russia has always been dominated by a small group surrounding power – either the Tsar or the General Secretary – and accepts it, so long as power provides political and economic stability.

Serious actors in foreign trade are limited to those closest to state power – ministers under the Tsars, and oligarchs at present; minor players are tolerated provided they do not get big enough to pose any threat to power. Foreign trade was never a game open to all, but a tightly constrained practice, even seen as a dangerous source for the possible infection of society by foreign ideas. While the latter notion may have died out in its most obvious form, foreign companies operating in Russia usually find that their success or failure depends on the ability to adapt to local conditions far more than in other countries.

That patronage, informal networks and family relationships are the important prime movers in Russian business truly comes into the forefront when considering business decisions like staffing and choosing partners. A western perception that hiring a person solely based on connection is wrong turns on its head; the wrong move is not to hire a connected person.

In this context, topics that I have addressed in earlier blogs – bribery and corruption – are perceived very differently in Russia. In the United States, these are serious legal offences with strong connotations of shame. Here again the perception gets turned on its head, and to understand why, take a look back into history, to the venerable Russian principle of the kormushka, or trough. The kormushka was system whereby the Tsar allowed a bureaucrat, such as a provincial governor, to take a portion of the goods or revenues he collected for the state, and use them to feed and finance his administration and family. The kormushka was especially attractive for governors working far beyond Moscow, in hardship areas such as Siberia and the Far East, and its efficacy was a key factor in the rapid expansion of the Russian empire in the 17th and 18th centuries.

The only drawback in the system was that it tempted unscrupulous governors to fudge the revenue collections and keep more than their share. Moscow is far away, and God is in Heaven, went the old saying. Russian historical records are littered with chronicles of greedy governors and explorers who lost their lives betting it would be a good idea to skim the Tsar’s profits and keep a little extra for themselves, only to be ratted out later by jealous partners. Later, under Soviet power, the falsification of economic data was endemic to the system; according to many economists, by the late 1980s the gray and black-market economy made up close to fifty percent of the gross national product.

Playing to type, when they demand a bribe or kickback from a business partner in foreign trade, the modern Russian bureaucrats and administrators seek what may very well be in the their minds the dues of office. None of them is rich by dint of salary, or will ever even approach a facsimile of wealth without dipping into the kormushka of foreign goods passing through their hands. The whole point of getting a senior position, from their perspective, is to get access to the big bucks (and by the way, this type of Horatio Alger story – which seems like something out of Bizarro world to us – demands no less hard work, intellect, personal risk, and drive than our American version).

For an officer in the Federal Customs Service, getting to the kormushka involves little more than finding a lower valuation for some goods, charging a little less customs duty, and taking back some of the balance for himself. It’s quick, easy and nobody is going to blow the whistle. No wonder anti-corruption legislation goes nowhere in Russia; the very people who need the laws most benefit from breaking them; and no raise will ever equal the sums they can collect on the side. Taking away what we call corruption keeps them from feeding themselves, and their families, at the trough.

Administrative Arrest – Personal Experience

In my last blog, (Administrative Arrest – Russian Customs Scam?), I discussed the Russian Federation State Customs Service practice of administrative arrest and its possible link to a system of kickbacks and organized crime in the port of St. Petersburg. While any definitive link between administrative arrest of cargo and corruption is speculative – and ultimately, almost improvable without a signed confession from a participant in the scheme – the material that I have cited dovetails with many of my own experiences in shipping cargo to St. Petersburg.

In fact, while at Maersk, administrative arrest was a huge issue for the company as a container carrier. Shippers and consignees change the information on the contract of carriage, or Bill of Lading, constantly; this is expected in international trade, and corrections to this information are accepted as a matter of course. A carrier usually charges a fee for an amendment to the Bill of Lading, and this raises no red flags in Customs at the country of destination unless the change is radical or something that would give an alert officer pause.

International container carriers generally accept shipper-packed containers as is, and refuse to make representation to the weight, contents, measure, quantity, quality, description, condition, et cetera of the container. They require the legal signatories of the Bill of Lading, or contract of carriage – the shipper and consignee – to warrant and take responsibility for the accuracy of these facts. This is normal international shipping practice.

Remember that Russian Customs requires ocean carriers to submit a vessel manifest for any vessel arriving in St. Petersburg 48 hours before docking at the First Container Terminal. But Russian Customs also holds the ocean carrier responsible for the accuracy of the cargo measures – an absurd conflation of two distinctly different documents, a Vessel Manifest and a Bill of Lading, that leads not only to high additional costs for shipping companies, but for Russian importers and consumers.

For example, one of Maersk’s clients was a major international sports shoe manufacturer. The Russian importer had continual problems with his cargo falling under administrative arrest. The problems began because the shipper loaded his cargo at different warehouses in China, and at the request of the Russian consignee, asked for a separate Bill of Lading for each portion of the cargo. This is a perfectly normal cargo consolidation practice. Unfortunately, at that time the Maersk line information systems did not support sufficiently the consolidation data – at the first trans-shipment port en route to Russia, they would ‘drop’ all of the Bills of Lading, except for the first alphanumeric one. So a container with six Bills of Lading associated to arriving in Bremerhaven would arrive and during loading onto a Baltic feeder into St. Petersburg, would ‘lose’ all but one Bill of Lading. This one Bill of Lading would duly be entered into the vessel manifest and submitted to Russian Customs.

Upon arrival in St. Petersburg, the importer presented his six Bills of Lading to Customs for clearance, and the inspecting officer would immediately place his cargo under arrest, since the vessel manifest had shown only one Bill of Lading associated with the container, not six. Our best efforts from Maersk to explain the situation, and find a way to handle it besides having Customs open a case and place the cargo under administrative arrest, went nowhere.

I discussed the matter with officers of Baltic Customs more than a few times. Their initial position was that shipping companies should actually station their own representatives to supervise and verify all containers that they carry. That this would require a company the size of Maersk Line to hire thousands upon thousands of additional workers worldwide went right past them. Objections included, Maersk Line is a rich company, and can afford it; we don’t care what international shipping law is, this is Russia and we have our own laws; and the ever-popular, if you don’t like it, you can leave the market. There was no effort to meet us halfway, much less attempt to find a way to mitigate the problem; Baltic Customs was among the least business-friendly government bodies I have ever encountered anywhere.

A few officers were sympathetic, of course, and understood the ridiculousness of the situation. However, they complained their hands were tied, and that the regulations would have to be changed in Moscow by Central Customs. And they certainly were not going to go to bat for western shipping companies. Meanwhile, though, Customs held the cargo for weeks at a time while administrative cases were laboriously opened, shipping documents examined, explanations heard and rulings made. Each one of these cases cost Maersk $3000, hurt relations with the importer and took up dozens of hours of staff time for our in-house lawyer.

Eventually staff found a number of work-arounds; I assigned a few of the better Customer Service associates to monitor, audit and scrub the data for all of the importer’s containers before they loaded on the Baltic feeder, since it was possible to find data by looking in other systems to confirm the number of Bills of Lading per container. In late 2007, Maersk introduced an improved system that integrated shipping data completely, and the problem thankfully disappeared.

Following up on the thought from the kompromat.ru blog written by Vitya, administrative arrest benefits everybody – Customs shows its value by intercepting possible contraband, and by closing arrest cases before they reach court. This second point is very important; Customs always has a chance to lose its case when brought to court, and a lost case is counted as a black mark against performance. By closing the case before it reaches court – that is, without dispute from the importer – Customs shows it is acting correctly. The offender confessed and paid his fine.

The legal sleight of hand is the breeding ground for conspiracy and kickbacks. In the heated and highly competitive St. Petersburg market, only a few freight forwarders or ocean carriers are willing to fight Customs. When they do act, it is usually alone, quietly, and to request the resolution of a single case rather than to change the underlying principle. Raising the issue loudly offers no certain outcome, and carries with it the risk of losing clients and business.

Meanwhile, as Vitya’s blog explains, unscrupulous businesses are eager and active participants in the plan, especially when they can buy back their own goods at a fraction of the cost.

Administrative Arrest – Russian Customs Scam?

One of the most vexing – and costly – penalties that the Russian Federal Customs Services imposes is administrative arrest on import cargo. Administrative arrest is a procedure Customs uses to stop cargo about which there are suspicions of illegal or improper activities. Customs generally initiates the procedure while checking cargo documentation; if they find a discrepancy between measures affecting cargo valuation, such as cargo weight, volume or description, the cargo is placed under administrative arrest until the issue is resolved to the satisfaction of the Customs officers.

Here is an example from my days as manager in the Maersk Customer Service department in St. Petersburg, Russia. An American shipper – let’s call him US Cream – sent a shipment of coffee creamer to a consignee – Mr. Slivki – in Russia. Mr. Cream sent the shipment documentation to Mr. Slivki, who prepared to use it for customs clearance once the cargo arrived at the First Container Terminal in St. Petersburg.

However, after Mr. Cream sent the documentation, he noticed that he had made a minor mistake in the piece count; instead of 1800 cases of creamer, he had sent 1600 cases. Mr. Cream duly sent an instruction to Maersk to change the Bill of Lading to reflect the amended piece count. Maersk did so and re-issued the Bill of Lading.

The problems began because Mr. Cream just happened to amend the piece count while the cargo was already on its final leg of the journey to St. Petersburg. Every large international container carrier operates by the same scheme; they use a hub-and-spoke system to move cargo from one point to another. Hubs are linked by the largest container ships, called line-haul vessels, moving eight to twelve thousand containers at a time between, say, Newark, USA and Bremerhaven, Germany. Smaller ships carrying only a few thousand containers then pick up cargo destined for ports along the spoke lines. For example, Maersk Line serves the Baltic Sea with a rotation of four vessels – called Baltic feeders – that pick up cargo in Bremerhaven (or other north European ports) and bring it to St. Petersburg, Kaliningrad, Riga, and other ports.

Russian authorities require that foreign vessels submit a cargo manifest 48 hours prior to arrival in port. According to the Russian Customs Code, the party submitting a cargo declaration for customs clearance is responsible for its accuracy, and is fined should it submit an inaccurate declaration.

When Mr. Slivki took his documents to Baltic Customs at the First Container Terminal, he immediately ran afoul of this rule. The cargo manifest Maersk submitted to Customs 48 hours prior to its vessel call showed his container loaded with 1800 cases of creamer, but Mr. Slivki showed them documents stating there were 1600 cases of creamer in the container. The Baltic Customs officer placed the cargo under arrest until the documentation issue was clarified, and the cargo could be properly valued.

Unfortunately, for Mr. Slivki, Customs elected to store the cargo in the shipping container, and left it on the First Container Terminal, where it began to incur demurrage fees from Maersk (demurrage is a penalty container carriers charge to cargo owners for holding their container). Even worse, Russian Customs takes the position that, since the container carrier submits a vessel manifest to them to declare the type of cargo they are bringing into Russia, the carrier is responsible for the accuracy of the information on the manifest. So even though the discrepancy between the cargo manifest and the Bill of Lading was not caused by Maersk, Customs still demanded payment of a fine amounting to $3000 before releasing the cargo. In fact, Maersk warns on its website about changing any cargo measures after a container has departed Bremerhaven to avoid exactly this situation.

The situation quickly went from bad to worse. Mr. Slivki refused to pay the fine, citing the fact that Mr. Cream made the mistake that caused the cargo to be arrested, and the fine to be levied. Mr. Cream refused to pay the fine, claiming that he was only the cargo shipper and not liable for anything that happened to the creamer once it landed in Russia. I exhausted myself trying to sort through the situation, and all the while, the container sat in the First Container Terminal, running up demurrage charges. Worst of all, the creamer had an expiration date, and this put an effective deadline on the negotiations.

I wish I could say it ended well, with everybody coming to a rational conclusion for the event; however, when I left St. Petersburg that year, negotiations were stalled and there was no end in sight. The creamer would never be allowed to enter Russia, since its expiration, date had long since passed, and the container continued to grind away on the terminal, taking up space and draining $50 a day away from the company.

Was this an isolated incident? By no means; in fact, at any time, between five and ten percent of all containers at the First Container Terminal in St. Petersburg are under administrative arrest. Put another way – if the First Container Terminal handled 312,000 import boxes in 2008, then between 15,600 and 31,200 of them fell under administrative arrest. Each one of these boxes represents an enormous amount of what people in the shipping industry call frustrated cargo – cargo that cannot move for one way or another, that clogs up the transportation system, and takes up space that could be used more profitably. Container carriers make their money by turning containers as fast as possible, not by charging demurrage fees to their customers. And – as the case of Mr. Cream and Mr. Slivki illustrates – nothing kills a good deal faster than running afoul of the rules in Russian Customs.

Yet there is a winner in the situation – the Russian Federal Customs Service. Not only do they collect a fee of $3000 from each container (potentially $93,600,000 in 2008 if the 10% number of arrests held true that year) but, according to anecdotal evidence in the Russian press, administrative arrest is used as a cover for a system of collusion, bribery and kickbacks between corrupt Customs officers and unscrupulous businesses. Rather than innocent victims caught inadvertently in a web of their own making, administrative arrest covers a cargo confiscation scheme revealing the most cynical gaming of the system.

This very revealing material appeared as a blog by Vitya on the kompromat.ru website on September 15, 2007, and was read widely in St. Petersburg shipping circles.

“The so-called ‘confiscation scheme’ continues to be in active use, and from the moment criminal charges began to be filed with the Customs investigations department under Russian Federation Criminal Code statute 188, it has grown to enormous proportions. Through Baltic Customs alone between 250 and 300 containers [with contraband are imported] every month, which, expressed in financial terms carry cargo worth around $50 to $60 million dollars, resulting in losses to the [Russian Federal] budget of approximately $20 to $30 million dollars [in customs duties].
“The essentials of the ‘confiscation scheme’ are as follows: A cargo shipping container arrives with contraband goods, and trusted Customs officers are in on the scheme. Upon arrival of the container, and even before the cargo declaration is registered, the container is inspected by order of the Customs chief – and, during the Customs inspection, at which the cargo consignee is not present or represented, the presence of contraband cargo is established. A protocol instituting an administrative case against the cargo is written, and the cargo is arrested.
“Thereafter the arrested cargo, by order of the Customs chief, is removed to bonded warehouses run by ATP-7, or Pra-LTD, Baltimor, Merkurij or Sodruzhestvo. During the next month, fictitious investigative activities are carried out, the result of which is an order for the immediate sale of the arrested cargo, because naturally neither the cargo consignee, the shipper, nor any of their representatives has any chance of stopping this. Then Baltimor, Merkurij, Pra-LTD or Sodruzhestvo buy the cargo through a series of shell companies, complete the sale on paper but actually return the cargo to its real owner. The cost of the scheme is about $15 to $20 thousand dollars [per container], of which about $10 thousand dollars goes to the [Russian government] budget – between 10 and 15 times less than the actual amount of cargo duty [if the cargo were declared officially]. The balance goes to the corrupt Customs officials as thanks for their help in carrying out the scheme.
“The most surprising thing is that, by using this scheme, practically everybody makes out and nobody is in any danger at all. Customs shows high results in detaining contraband goods – although it is true that the scheme only applies to consumer goods, and for some reason cigarettes, alcohol, and rare and valuable materials are never touched. The Prosecutor’s office carefully and honorably ensures the observation of legality by prosecuting criminal cases according to statute 188, which, for some reason, never seem to make it to court and remain unsolved. And commercial players who own the confiscated goods reap huge profits and have dependable channels for bringing contraband goods into the territory of the Russian Federation.
“If you consider that during the first half of the year, Baltic Customs detained over 500 containers with consumer goods, then it follows that the participants in the scheme earned profits in excess of $20 million dollars, while the government in turn lost over $50 million in customs duties. An analogous situation obtains in the Far East Customs Region.”

Congestion and Customs

Along with roads and fools, transportation professionals may want to add another eternal problem to doing business with Russia – congestion. Russia’s infrastructure has not kept pace with the boom in Russia’s economy over the past decade. While shippers have been able to maximize poor roads and inefficient railways, and coax impressive volumes out of limited port facilities, congestion remains an ever-present fact in Russian transportation.

Throughout the 1990s and now the first decade of the new millennium, shippers grown accustomed to 40-kilometer lines of trucks at the Finnish-Russian border. They have learned to build their cost models to account for waits of up to 10 days or more for cargo to leave port. They have learned the hard way, through anxiety, lost profits and countless man-hours spent trying to understand the incomprehensible, that the major cause of congestion at Russian gateways is the Federal Customs Service.

For example, the First Container Terminal handled a record 1,072,346 TEU in 2008, up 11% over 2007. An impressive gain, to be sure, but consider that over 60% of all containers took 6 days or more to leave the port and it is clear the throughput could have been much more.

The situation at the Russian/Finnish border is equally difficult – the roads leading from the port areas of Kotka and Hamina are overloaded with truck traffic, and border crossing at Torfyanovka, despite undergoing modernization over the past few years, is still unable to keep pace with demand.

The reason? Corruption among Russian Customs officers. The January 19 issue of the Russian newspaper, Novaya Gazeta, featured a fascinating piece about Torfyanovka, The Great Post (Великий пост).

The piece states baldly that Russian Customs forces virtually every Russian importer to violate statute 291 of the Russian Federation Civil Code – Bribe Giving (Дача взятки), and explains how the mechanisms of corruption work:

“…not long ago the chief of a Customs post, who had been fired not long ago, told me how to act to make sure no problems came up with Customs.
“Go to the Deputy Chief of Customs Clearance and say, “I (for example) want to bring in fuel injectors for tractors. He’ll tell you straightaway without any beating around the bush: A thousand dollars per container – and no problems.
“You start to get indignant: “What do you mean? Look at the Customs Code here!” And you go with your Code to the Clearance Inspector and try to import your cargo in by the rules.
“Then the Clearance Inspector says, “Your Customs Declaration has pencil marks here.” And so you go and make a new Customs Declaration. Then Customs tells you, “Somehow these fuel injectors don’t look like fuel injectors. You need a Certificate of Conformity for them.” You find the Certificate.
“Then questions come up about the invoice. And this goes on for a month until you finally go to the very same Deputy Chief of Customs Clearance and say, “OK, let’s do it your way.” He agrees, only now the amount isn’t a thousand, but five thousand. That’s the fine for stubborn people.
“Importers of cargo with an expiration date, as well as importers to whom delivery dates are important, don’t let the situation reach the point of a “fine for stubborn people.”
“And a lot of people are interested in making Customs go faster. The first three days customs stores cargo free, and then makes you pay 4 rubles per kilogram per day. Then it goes to 8 rubles per day from day six. If, for example, you have 5 tons of cargo (and there are many people like this), then a week of storage can cost you about 300,000 rubles. If you’re e a small businessman, then don’t even hope the amount won’t keep growing.”
“If Customs isn’t in Moscow – then add in the cost of having your truck sit (since carriers fine you for this), and the cost of not fulfilling your contract with the person who ordered your goods.
“Customs officers understand all of this perfectly well. And even though the Customs Code stipulates a three-day period for clearing cargo, it’s common for cargo to be held up at Customs for a month. Customs requests all kinds of documents, checks and re-checks the authenticity of the cargo, and demands all sorts of additional explanations from the supplier. ‘Would you be able to confirm the length of the continuous drive belts? I understand the question is totally idiotic but Customs demands it…’
“Collecting damages from Customs is almost impossible. Even if the Arbitration Court confirms that Customs held the cargo illegitimately, compensation for damages means filing a new claim and spending another year going around in the courts.

Just how deep is corruption in the Russian Federal Customs Service? And who is involved in it? I hope to address these topics – and more – in my next few blogs.

No Time For Corruption Like The Holidays

In 2007, Transparency International ranked Russia 143rd out of 179 countries on a scale of the world’s most corrupt countries. Corruption in business hits foreign trade the hardest since this is where the big money is – after all, the Federal Customs Service collects anywhere from 40-60% of the Russian government’s annual revenues.

It is incredibly difficult for an outsider to understand the full extent of the criminality infecting the Customs for the simple reason that graft, bribery and kickbacks are soft crimes benefitting the person offering the bribe, as much as the person receiving the bribe. There is no way to penetrate the system unless you are part of it, no incentive to disclose what goes on (and indeed, disclosure may be extremely dangerous), and good reason accept the status quo if it benefits you. While most western companies operate under strict prohibitions against offering bribes, the stark reality is that, one way or another, almost everybody pays to play.

A 2008 report issued by the Institute for Comparative Social Research and the Institute for Public Projects in Russia titled “The Nature and Structure of Corruption in Russia” mentions that getting customs duties reducted costs 30-50% of the sum on which the duties are assessed. The cost for bribes to participate in capital projects in Russia – investment in port, road, rail or warehouse infrastructures – equal about one-third of the contract value.

While smearing with a broad brush may be unfair – after all, with over 60,000 officers Customs workers in Russia spread over 8 departments covering the world’s largest landmass, doubtless there are plenty of honest officers out there. They are no doubt dismayed – and disgusted – by the unlawful excesses they witness, and want nothing more than to see deep and serious reform. They understand that corruption means less money for Russia’s schools and universities, for the care of her pensioners and elderly, as well as for funding badly needed road, rail and port projects to support foreign trade.For the money skimmed by dishonest Customs officers goes towards nothing but their own pleasure – it funds shopping sprees for designer clothes, fancy trips to exotic destinations, and opulent feasts in high-priced restaurants.

Most Westerners in Russia’s foreign trade are insulated from the day-to-day corruption in Federal Customs by design; they avoid getting caught up in racketeering by working import and export operations through an army of freight forwarders who deal with Customs on their behalf. A western company gets an invoice for service and pays it with a clean conscience, relying on the freight forwarder to do the dirty work. The St. Petersburg transportation market supports literally hundreds of freight forwarders whose stock-in-trade is handling customs clearance. The most reliable among them keep their customers on Customs’ good side, and are therefore offer the most expensive services. As the old Russian proverb put it, ne imet sto rublei, a imet sto druzei – better one hundred friends, than one hundred rubles. For a western company moving cargo to Russia, best business practice boils down to four simple rules: 1) Master the technical side of shipping; 2) Find a good freight forwarder who can handle the money side predictably; 3) Budget for the occasional shipment to go awry and 4) Don’t antagonize Customs.

The last proscription is tricky. Here it helps to remember that, while it is nice to thank an officer for services rendered, another Russian proverb applies: Spasibo v karman ne polizhish – You can’t put a thank you into your pocket.

Unlike government workers in the West, who work under strict proscriptions regarding the receipt of gifts, Russian government workers nearly always expect a little something extra from their constituents. They always want to put a thank you in their pockets – corruption is, after all, not an abstract concept, but a very human one. And the officers working for the Russian Customs are nothing if not human beings. Although they may be raking in the big money from bribes, graft and gaming the system, they also appreciate a little grease on the wheels from time to time. Unlike the tedious West, where even a little gift above as little as $25 can land a public servant in hot water, there are plenty of very public occasions where it is not only appropriate, but expected, to put on the grease in full public view.

In fact, there is nothing a Russian Customs officer likes more than thoughtful little gifts for the holidays. This being Russia, there are so very many holidays to choose from. As the Russian Embassy website puts it: “Russian holidays present a motley picture — new and old, official and unofficial, professional and private, religious and secular. All occasions warrant a celebration.”

Remember it: “All occasions warrant a celebration.”

The first main holiday to celebrate is New Year’s. New Year’s is the season for giving, and indeed, it is considered extremely bad form for anybody to show up at Customs without shopping bags stuffed with goodies. I have heard of officers at Baltic Customs dressing down couriers from freight forwarders for daring to show up empty-handed during the holidays. When I worked in St. Petersburg, it was routine for shipping companies and freight forwarders to spent thousands of dollars on New Year’s presents for officers in Baltic Customs. Goodie bags included boxes of Belgian truffle chocolates, bottles of Remy Martin cognac, Asti Spumanti, or French champagne (not Russian), jumbo-sized jugs of Johnny Walker Red and Black Label whiskey, top-of-the-line vodkas (Finlandia and Kremlovskaya, the preferred brands), tins of Danish butter cookies, company calendars, leather-bound diaries and office sundries. Department heads got high-end electronics like multi-system boom boxes, DVD players and karaoke systems.

These gifts were given by the more budget-conscious, and lie somewhere way down low on the comparative generosity scale. The more high-end givers, rumor had it, were the bigger freight forwarders who splashed out to sponsor extravagant feasts at St. Petersburg’s best restaurants, notably – and how could it be otherwise? – The Staraya Tamozhnya, or Old Customs House. At the very top end, it was said, the senior officers were fully sponsored shopping vacations to France, Finland, Greece and Thailand – the ultimate in holiday cheer.

Even though the New Year is the traditional main holiday season, Russians take any excuse to party and relax, and the concept of New Year has become somewhat elastic over the past 20 years. Now many Russians begin their winter vacations on December 25, or ‘Catholic Christmas,’ which neatly segues neatly into January 1, followed by Russian Orthodox Christmas on January 7 and Old New Year on January 13. Many officers take advantage of the January 26 International Customs’ Worker holiday to stretch out their rest and relaxation even more.

The extended holiday break is a time for many of the department heads in Customs to take a break, as well, and most importers know it as a the myortvi sezon – the dead season, when it is notoriously difficult to resolve any but the most basic Customs issue. Anybody with any authority is far away from Russia, out on holiday, incommunicado, and junior officers dare not make a decision in their absence – a major reason why the average dwell time for containers in the port of St. Petersburg increases dramatically during the winter. If your cargo gets held up before Christmas, the chances are good it will not be released until February; something to build into your transportation cost model.

Then there are birthdays – among the most sacred and beloved of Russian holidays, a chance for family and friends to gather around the table to feast, drink and toast the imennik, or ‘name day person.’ The occasion is highly personal – the so presents the perfect occasion for a constituent to show his or her favorite Customs officer the exact value placed on their relationship. For example, referring back to the kompromat.ru article cited in previous blogs, for his birthday on February 13, 2006, the head of the Dagestani Diaspora reportedly presented Baltic Customs chief O.V. Tugolukov with a Volkswagen Taureg, and his wife with a Virtu telephone. “What did he do to inspire such generosity?” asks the blogger, Vitya. He really need not ask. As the old saying puts it, “Give a man a ride home, you’re a nice guy, but give him an expensive imported German luxury ride, and you’re a wise guy.”

Are these orgies of gift-giving spontaneous expressions of gratitude coming from the business leaders of the Russian transportation business community? Are the Russian businessmen so grateful for the helpfulness Customs officers show them that they are unable to restrain themselves from handing out thousands and thousands of dollars worth liquor, expensive vacations, electronics and even automobiles, for the slightest excuse?

Maybe. Cultivating good relations with government officials is the way to protect your business interests in Russia. And the consequences of not doing so go beyond looking foolish, like the only person showing up at a birthday party without a present. As outsiders, we can really only speculate

Clearing Customs -- Fishing in Muddy Waters

Experts researching corruption in government identify two main elements necessary for it to take root and thrive; complexity and a lack of transparency. A complex process, with many moving parts spread out across a bureaucracy, is easily exploited by corrupt bureaucrats who game the system for personal gain. And the more opaque the system – the harder it is to get information about its inner workings, access its decision-makers, and figure out exactly how to get things done in it, the easier it is for dishonest players to exploit its clients. “It’s easier to catch a fish in muddy waters,” goes the Russian proverb, and the waters do not get much muddier – or shadier – than in the Russian Federation Federal Customs Service.

First, a bit of background. The Federal Customs Service in Russia differs dramatically from Customs in western countries. For example, the United States Customs Service focuses mostly on security, data collection and facilitating trade. It collects some duties but the United States government earns most of its money on trade by taxing the sale of goods once they reach market. Russia turns this equation on its head – although some taxes are collected at point of sale, the Russian government collects the lion’s share of its revenue from trade at the border, imposing 18% and higher duties on most imported goods. As a result, the Russian Federation Federal Customs Service collects over 40% of all government revenues.

Billions of dollars in goods – and duty payments – annually pass right under the noses of Customs. Many of these officers get paid only a few hundred dollars a month; even the most highly paid draw only a few thousand dollars monthly salary. The temptation to skim off some of this bounty draws crooked Customs officers irresistibly. The complexity and opacity of the processes necessary to import cargo into Russia provides plenty of opportunities.

The first place to begin is with a Russian Customs import declaration form – in Russian, a GTD, or Generalnaya Tamozhennaya Deklaratsiya – has 54 different ‘positions’ (or blanks) for an importer to complete regarding the origin, destination, end use and value of the cargo. Similar import documents for United States Customs have a total of four blanks to fill in – origin, destination, weight and value. Even China, a country not known for its transparency, requires importers to fill in only four blanks on a simplified import form.

In addition to a complex GTD, the Russian Federal Customs Service demands an entire series of other documents for customs clearance. These include Certificates of Conformity, Bills of Lading, buyer and seller contracts, importer registration documents, bank certificates and so forth – 13 documents in all. Woe to the importer whose documents are not 100% accurate. Any discrepancy between the documents can lead to a so-called ‘administrative arrest’ of the cargo. A Customs officer may arrest the cargo and hold it until the documentation of the cargo is in order, to his satisfaction. An administrative arrest can delay the delivery of cargo to its consignee by weeks or even months. Shipments are held regularly for the most trivial of documentation errors – a small weight discrepancy between documents, or an obvious clerical error.

Add to the complexity of documentation leads an opacity of process and importers are put in the middle of a bureaucatic minefield. Most Russian Customs posts lack automation; they do things the old-fashioned way, by passing piles of hard copy shipping documentation tied together by string, called papki, between departments. The papki slowly wend their way from department to department, from stack to stack, undergoing rigorous checks by officers vigilant for any error. Documents may pass the declarations department but then get hung up in the operations or hard currency departments. Initiative is frowned on among junior officers; only senior officers are allowed to make decisions about the disposition of cargo, which they write in hand on important papers.

The lack of access to Federal Customs contributes to the opacity. For example, the Baltic Customs building in St. Petersburg cannot be entered without setting a prior appointment with an officer, which may in turn take weeks to make over the phone. There is no email communication with Customs and even during a meeting, officers rarely commit to a course of action immediately. Difficult cases, even those with common sense resolutions, drag on interminably. The Russian Customs Code consists of over 10,000 pages of text, interpretation, resolutions, and instructions, and it is nearly impossible to master the entire mind-numbing document.

Hence experienced importers rarely even dare to venture into a Customs post. The cost and consequences of error are too significant. So in their place an entire industry of freight forwarders – expeditori, who specialize in the interface between the consignee and Customs – emerged over the past 20 years. In St. Petersburg, there are literally hundreds of companies whose sole task is to manage the paper flow for import shipments and ensure a good relationship with Customs. These freight forwarders cultivate ‘their own’ Customs officers, working more as junior partners for Customs rather than as freight advocates for cargo consignees. Saavy importers value the best-connected expeditori to handle their cargo and essentially pay them to maintain a cozy and profitable relationship with Customs. The expense of the bribes is hidden easily in the invoices expeditori present for payment to importers.

The cost to the shipping industry is enormous; in 2008, Transparency International estimated that each import shipment cost an additional $2050 US dollars above ocean freight and cargo handling fees to clear customs. Insiders estimate that it takes a bribe of about $1000 per container to expedite a shipment through Customs, although this can be more depending on the difficulty of the shipment. A shipment of expensive meat may cost many thousands of dollars in bribes before it can leave a port. These additional costs are reflected in higher costs to Russian consumers – imported meat and protein products, fruits and produce, and consumer goods, are significantly higher in Russia than they are in Western Europe (even high ocean freight costs cannot account alone for unit price differences for goods at point of sale).

The paper mill takes its toll on the shipping industry; the time a container takes to turn, or complete an export-import cycle, is a critical measurement for container carriers. Dry shipping containers in the First Container Terminal in St. Petersburg average 8 days on the dock before they leave the port, and refrigerated containers (with higher-value meat and fruit) average over 12 days. These compare to turn times of just hours in many western European ports. Container shipping lines build the additional expense into their cost models, and pass them along to exporters.

The only beneficiaries of this system are corrupt Customs officials. Exploiting a complex and opaque system for money gives them funding for a nice life – I know of many a Customs officer who drives a Mercedes or BMW, vacations a few times a year in Greece or Australia and wears a gold Rolex on a salary not much more than a thousand dollars a month.

Customs Corruption and the China Trade

Bribery, kickbacks, the falsification of the value of goods and money laundering are regular events at Russian border crossings. The Russian Federal Customs Service collects between forty and sixty percent of all government revenues – billions of dollars worth of goods pass by Russian customs posts daily, and the temptation to skim cream off the top is too much for corrupt inspectors, the majority of whom earn less than $1500 per month.

The results? Imported goods cost the average Russian consumer more than in other countries. The Russian government loses billions of dollars annually. Transportation companies pay higher prices for services. And logical trade patterns deform to cope with the corruption.

Returning to the Novaya Gazeta article, The Great Post (Великий пост), the author describes how corruption influences trade patterns, affecting even Russian importers bringing goods from China.

“A curious fact: Almost all Chinese import goes by sea and clears Customs in Vyborg [on the border between Finland and Russia]. Although it would seem more logical to bring the goods through Far East Customs. But Vyborg is a huge border opening with seven dry-land Customs posts. The largest post, Torfyanovka, lets through up to 1000 trucks a day. Torfyanovka is known as the ‘Great Post’ and there many anecdotes about that in its corporate world.
“It is by no means necessary to go by yourself to Vyborg and bring a bunch of documents in order to import your cargo into Russia without troubles. Customs brokers there offer a full menu of services, including reducing the declared value of cargo and minimizing the paper chase, as well as transportation and storage (on the Finnish side of the border there are a huge number of distribution warehouses).
“Legalizing cargo [i.e., falsely declaring it to reduce the amount of duty paid, going through back channels, et cetera] by using brokers isn’t terribly onerous, but it is not cheap. But the legal way will cost you much more. Just the unofficial tax for allowing a truck through Customs amounts to 400 dollars at present. Truck companies automatically include those 400 dollars in the cost of their services.
“Multimillion sums pass through the hands of Vyborg’s brokers. Sources close to Customs rumor that the entire money stream flows around Igor Zavrazhnij, the Deputy Chief of the Federal Customs Service, and Federal Security Service Director Alexander Bortnikov. But these are undoubtedly shameful rumors since even Putin visited Torfyanovka recently, and he liked everything, and he even decided to expand the Customs post. Would the Premier really praise a criminal enterprise?
“Meanwhile nobody brings their cargo through Far East Customs – everything there is too slow. For example, Chinese consumer goods fall under the 111th Risk Profile, and are subject to 70 percent full Customs inspection. That takes a long time; Chinese clothes are brought into Russia in huge cellophane vacuum bags, to take up less space [in a shipping container]. And yet by law the Customs inspector is supposed to open and inspect all these bags.
“It is possible to avoid inspection by paying off the Customs inspector. But after that, again with the goal of speeding up Customs clearance, you will need to pay for sanitary inspection, transportation control (which registers the weight of your container with cargo), and many others as well. Nobody in the Far East offers a full menu of services to facilitate Customs clearance. And to pay separately for them costs too much.”

Right now, it is far cheaper and faster to bring Chinese goods to the Russian market by water via Europe – even though the trip is double the mileage of shipment by the Trans-Siberian Railway, and container rates are usually sold at a premium by shipping lines, since the cargo competes for space on ships with goods destined for Europe.

There are three reasons for this. The first is that, historically, Russian Railway tariffs are not competitive with the ocean rates. It costs shippers hundreds or even thousands of dollars more per container to send cargo overland than by boat. Second, the Russian Railway has a reputation for unreliability – in part, because cargo may be stopped at the Russian border by Customs for any number of reasons, foremost if there is missing or inconsistent documentation. Containerized cargo rarely gets lost or stolen but unless it is shipped in block trains, it does not arrive with the same consistency as an ocean to truck intermodal combination.

Now a third reason has appeared; the Vyborg gateway offers the best chance to bring in cargo without inspection. Even figuring in the expense of bribes, Chinese shippers and Russian consignees found a more cost-effective solution than rail. As the Novaya Gazeta article suggests, Russia’s trade patterns are set to a significant degree both by the clumsiness of its trade regulatory agencies and the corruption of its Customs officers.