These are not good days for supporters of investment in Russia. The tandem collapse of the ruble and the government that supported it has introduced a period of instability that will likely last until the presidential elections in 2000. But the enormous Russian market, now accustomed to an array of Western goods, remains impossible to overlook. Although many Western companies in Russia recently have scaled back operations - in some cases dramatically - there has not been a wholesale exodus front the country, and that represents the strongest evidence that long-term investment there can withstand the tests of the nation's emerging political and economic system.
Experienced investors in Russia know that conditions won't improve overnight. More than a few obstacles lie ahead. For example, Western investors will find it increasingly difficult to repatriate profits; import duties and tariffs will become unpredictable; the regions will battle Moscow for control over their affairs: trade will likely take on a protectionist tint; and the Russian tax man is going to become more aggressive as the central government tries to raise badly needed revenue.
This government crackdown on the economy is something that Western business and security professionals must watch carefully as they assess future investments in Russia. The government's economic policy will most likely force Russian business partners to become more inventive in their attempts to circumvent state control. It could lead Russian companies toward committing fraud, bribery, theft, and other financial manipulations. It could make Russian businesses more dependent on inappropriate ties to government officials and cause them to lose their resolve and resources to defend themselves against notoriously powerful Russian organized crime.
As a result, Western companies must be on guard when seeking out business partners in Russia. Of the many tools a company has to evaluate potential partners or investment targets, a thorough and confidential due diligence investigation can be one of the most effective. Such an investigation looks beyond the usual material potential partners provide for official consumption. A more detailed due diligence investigation would seek to answer questions concerning the history and development of a company, who its principals and shareholders are, the company's reputation within its industry, whether the company maintains ties to organized crime, and whether the company in question is under investigation by law enforcement or other regulatory authorities.
This research can be tricky in Russia, however, because little open source information is available. Consequently, it is important that the investigation be conducted by someone with extensive contacts and experience in the country.
The most important caveat is for investors to beware of the difference between form and substance in the former Soviet Union. In Russia, enterprises that look legal on the surface can be used for highly illegal activities, including money laundering, and these front companies create an enormous exposure for all business partners.
The security professional should be suspicious of Russian companies with highly complicated - but legal - subsidiary structures. These subsidiaries make excellent money laundering devices. Companies with many offshore shareholders or subsidiaries are also suspect and should also be investigated further for possible money laundering activities.
Western businesses must also beware of the potential legal pitfalls of getting involved with businesses that follow improper procedures. …