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.