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.