Establishing Trade Relations In Russia

By Ernest R. Larkins and Fenwick Huss

The decision about whether or not to do business in Russia, what to look out for, and how to go about it are presented in detail right down to where to go for information and support. The guidance may also apply to establishing trade opportunities in other countries and international markets.

Russia has the potential to become one of the foremost consumer markets during the next century. In addition, as Russia makes the transition from a planned to a market-driven economy, large capital expenditures to rebuild its deteriorated infrastructure provide attractive opportunities for suppliers of capital goods. The large, virtually untapped market potential warrants significant efforts by businesses, large and small, to establish a foothold.

The Russian government views U.S. products and expertise as essential during its transition to a market economy, resulting in a favorable attitude toward U.S. businesses. Russia became a member of the International Monetary Fund (IMF) and the World Bank in 1992. Both organ-
izations made significant loans to Russia and are likely to extend additional credit. Also, the Overseas Private Investment Corporation (OPIC) and the Export-Import Development Bank (EXIM) made guarantee and loan programs available to firms doing business in Russia.

The U.S.-Russian Trade agreement provides most-favored-nation tariff treatment for U.S. products and services. It allows U.S. businesses to conduct market studies, and commercial agents and consultants to operate freely, and provides some protection for U.S. intellectual property rights--including computer software and databases. Russia is also moving forward with legislation to protect copyright and patent rights.

The U.S.-Russian Federation Income Tax Treaty, which became effective January 1, 1994, reduces instances of double taxation and provides for nondiscriminatory treatment for U.S. companies.

Russia's industrial sectors, particularly those in need of Western products and services that have access to hard currency, include agribusiness, telecommunications, transportation, and health care.

While the market potential suggests that U.S. businesses make inroads in Russia now, they should proceed cautiously. Major uncertainties, such as political problems and currency shortages, accompany the trade opportunities and make tangible investments risky and, perhaps, inadvisable for many U.S. companies. The current Russian economy is characterized by dangerously high inflation, falling real incomes, rising unemployment, increasing crimes against businessmen, and a dearth of legal and market information.

Exporting offers less risk for testing the developing market and establishing future markets that may lead to more tangible investments. Also, while the uncertainty regarding Russian income taxes is particularly acute, changes in tax rates are unpredictable. Exporting also avoids Russian income tax.

How to Proceed

Because the value of the ruble has been fluctuating wildly and may be difficult to convert, U. S. exporters are reluctant to accept Russian money in return for goods and services. While many industrial and governmental sectors can pay in dollars or other stable money, some Russian establishments lack hard currency. In this situation, business cannot take place without a compensatory trade arrangement--sometimes referred to as countertrade.

Compensatory trade arrangements may involve tangible assets (e.g., finished goods or commodities), intangible assets (e.g., know how), or services (e.g., technical assistance). The arrangements take two general forms--bartering and linked transactions, the latter being made up of counterpurchases, buybacks, and offsets.

Bartering. Compensatory trade in which goods or services are exchanged for other goods or services under a single contract is called bartering. Pure barter is uncommon since exchanged goods and services are not usually of equal value. Barter involves a single transaction in which the agreed medium of exchange consists of something other than, or in addition to, money. Instead of selling the goods, the U.S. exporter can use a switch trader to dispose of unwanted items. The switch trader gives the U.S. exporter "clearing currency units" for the goods received. When the switch trader sells the goods, the U.S. exporter redeems the clearing currency units for hard currency.

Counterpurchases. Most U.S. compensatory trade with the former Soviet Union takes the form of counterpurchases--sometimes called indirect compensation agreements. These involve linked transactions in which a current trade takes place for cash or credit only because the U.S. exporter agrees to import Russian goods for the same amount of cash or credit at a later date.

Counterpurchases from Russian establishments are often for natural resources, e.g., oil, natural gas, timber, precious metals, or vodka. These goods are more likely to have a predictable market in the U.S. than consumer products manufactured in Russia.

Buybacks. Buybacks--sometimes called direct compensation agreements-- involve future or counter deliveries of production resulting from exported equipment, materials, technical know-how, trademarks, or services. For example, an exporter agrees to build a factory by exporting materials and construction
services. If the exporter receives payment in the form of chemicals produced at the plant, the transaction is a buyback arrangement.

Offsets. Offsets are a means of recovering scarce foreign exchange or hard currency when exports involve large sums. Foreign governments often demand offsets in relation to high-ticket military or civilian procurements, e.g., aircraft and satellites. They compensate the foreign country for its loss of currency, jobs, and opportunities
to develop the imported technology locally. The U.S. exporter agrees to import from the foreign country, make commercial investments there, or transfer technology to the foreign country in return for selling in the foreign market.

Finding Information About Exporting

Federal and state programs are available to assist in financing, marketing, and insuring export efforts. The U.S. government has many programs for small to mid-sized businesses with little export exper-ience. In addition, a wide variety of intermediaries can provide support to effectively carry out export sales.

Recently, the U.S. has made strides toward integrating its assistance programs. For example, the Department of Commerce publicizes its Business Information Service for the Newly Independent States (BISNIS) as "one-stop shopping" for U.S. firms seeking business opportunities in the separate states of the former Soviet Union. Businesses can consult with international trade specialists at BISNIS by appointment or phone. The periodical, BISNIS Bulletin, provides current information about markets, bilateral agreements, trade opportunities, financial arrangements, tariffs, and trade events. BISNIS's Flashfax Bank provides the latest market and trade information.

Finance. The Export-Import Development Bank (EXIM) has several programs that assist exporters with financing. Recently, EXIM opened these programs to the now independent states of the former Soviet Union. Among the programs available to exporters are direct and intermediary loans, working capital guarantees, and credit protection to private sector lenders on loans to foreign importers of U.S. goods and services. Services are available through regional offices, city/state cooperative programs, and commercial banks.

Overseas Private Investment Corporation (OPIC) makes direct loans available to small and medium-sized businesses and guarantees financial institution loans up to $50 million against commercial and political risks.

The Agency for International Development (AID) conducts the Forfeit Guarantee Program which helps U.S. exporters to overcome difficulties in factoring export receivables from developing countries.

The U.S. Small Business Administration (SBA) provides several loan guarantee programs for businesses that do not dominate their markets. Various SBA loan programs work approximately the same way. First the exporter applies for a loan at a bank or other financial institution. If the institution denies the loan application, the exporter contacts an SBA field office about a loan guarantee. In addition to the regular business loan program, the Export Revolving Line of Credit program guarantees loans used for financing export-related labor or material costs, developing overseas markets, carrying foreign receivables, funding trade missions, and financing participation in trade events. The International Trade Loans program provides loan guarantees for the purchase or renovation of export-related plant and equipment in the U.S.

Insurance. Through its Export Credit Insurance Program, EXIM insures export receivables against default for political and commercial risks. The Foreign Credit Insurance Association (FCIA), which functions as EXIM's agent, also insures export sales against selected losses. OPIC's insurance program can protect U.S. interests in developing countries against political violence, expropriation, and currency inconvertibility.

Marketing. The Department of Commerce provides general market data as well as specific trade leads. The BISNIS Search for Partners and BISNIS Commercial Opportunities newsletters, for instance, identify medium and long-term trade opportunities. The U.S. Department of Commerce Office of Service Industries (OSI) provides foreign market leads for service providers.

Businesses can use electronic bulletin boards and fax retrieval services to obtain trade data. Short-term trade leads can be obtained through BISNIS's online Economic Bulletin Board (EBB). Trade leads are also available through the U.S. Department of Commerce's National Trade Data Bank (NTDB), accessible in public libraries and educational institutions on CD-ROM. Other marketing leads can be obtained from the Export Opportunities Hotline, which is a fax retrieval system containing information about approximately 80 countries and 50 industries.

The Export Opportunity Hotline (EOH) is a one-stop source of export information. Telephone operators answer questions regarding export procedures, sources of information, and regional export-related events. For a nominal fee, EOH will post buy/sell notices on their electronic bulletin board, provide industry reports for specific countries, provide market data and analysis for specific countries, identify potential agents and distributors, and match products or services to export opportunities.

Trade fairs and similar shows provide an excellent opportunity to display U.S. manufactured products for potential importers. The Department of Commerce and other Federal agencies sponsor or certify many of these promotional events. The Department of Commerce's Foreign Buyer program sponsors and supports approximately 20 domestic trade shows each year. These events provide U.S. businesses with export potential--the opportunity to present their goods and services to foreign buyers without traveling abroad. At each trade show, Commerce provides export counseling, staff interpreters, and private meeting rooms.

The U.S. Department of Agriculture provides marketing guidance for agribusiness exporters. Country-market profiles for approximately 40 foreign markets can be obtained for certain high-priced agricultural commodities.

In addition, the U.S. Department of Commerce's International Trade Administration (TA) offers a wide range of services including checks on the reliability, reputation, and financial stability of a potential trade partner.

Although the bulk of export information comes from the Commerce Department, other organizations and agencies also provide useful marketing information and services. U.S. exporters can obtain current demographic and social data on the Russian market from the Bureau of the Census. OPIC provides five investor services that can benefit exporters: advisory services, investment missions, opportunity bank, investor information service, and an outreach program.

State and Private Sector Programs

Because increased exports translate into higher employment, some states pour significant resources into stimulating exports. Some states establish and capitalize export finance corporations. Many states have opened trade offices in major cities and sponsored shared foreign sales corporation (FSC) programs.

Private sector assistance to exporters through chambers of commerce, trade associations, colleges and universities, and banks tends to be uncoordinated with Federal government programs. These sources often are more familiar with the assistance needs and export potential of local businesses than Federal agencies.

Russian Support

Governments within Russia are interested in a variety of joint ventures with U.S. firms. State and regional governments are generally reliable partners considering the frequent and significant bureaucratic delays and costs. Experts have suggested limiting the role of central governments whenever possible. District governments that are capable and motivated to generate new business, however, usually can resolve problems quickly and often prove reliable.

Direct Exports to Russian Businesses

Direct exporting is risky for new or small exporters. It requires substantial resources, experienced personnel, and time. Even firms that have been successfully exporting to other markets might hesitate to sell directly to Russia. The primary obstacles are the scarcity of market and distribution information and Russian lack of familiarity with direct marketing approaches. Large companies with an exporting division, department, branch, or subsidiary are more likely to engage in direct sales to Russian firms.

U.S. exporters that do choose direct selling maintain substantial control over their distribution channels and customer relations. Direct exporting leads to specific knowledge of various trade barriers and the best means to circumvent them. Successful direct marketing leads to potentially higher export profits. U.S. businesses that export initially to Russia through indirect means may decide to sell directly after becoming accustomed to the market

U.S. exporters can make direct sales to end users, e.g., hospitals or universities, through Russian agents or to Russian merchants. Agents work for a commission and do not take title to the goods sold; merchants buy the goods for resale. Import brokers, purchasing agents, and sales representatives are examples of foreign agents. Foreign merchants include distributors, trading companies, desk jobbers, and retailers.

Russian Agents. An import broker facilitates contracting by bringing the buyer and seller together, either of whom could be the principal. Brokers do not take title or physical possession of the goods. The principal pays the broker a commission for actuating this contractual arrangement. Brokers normally emphasize particular goods and markets. Most brokers deal in commodities such as grain or timber. Some Russian brokers, however, specialize in manufactured goods with strong demand, such as computer equipment.

Purchasing agents are commissioned to find specific goods. Unlike brokers, their principal is always the buyer. Often, foreign purchasing agents represent the home country's government or large contractors. Generally, the purchasing agent can place an order and handle all packing and shipment.

A sales representative is similar to a manufacturer's representative except that the former operates abroad. The exporter provides the sales representative with promotional literature and product samples. The sales representative solicits export sales for a particular geographical region over a specified time but normally does not have the authority to bind the U.S. exporter. Typically, he or she sends orders to the U.S. exporter for acceptance. The sales representative normally handles noncompeting items of several U.S. principals, which pay their commissions, and may operate under exclusive or nonexclusive contracts.

Russian Merchants. Full stocking distributors purchase goods from a U.S. exporter at a discount, warehouse the goods as inventory, and resell them at a profit. Often, distributors commit to service the products they sell. Use of a foreign distributor is usually long-term and includes exclusive sales rights to specific products and territories.

Export desk jobbers are sometimes known as "export drop shippers" or "cable merchants." They primarily deal in raw materials. For their areas of specialty, they have extensive knowledge of sources of supply and markets for their goods. Though they may hold title for a few hours, they rarely take physical possession of the goods purchased and sold, and are normally not responsible for shipment arrangements.

U.S. exporters of consumer goods may sell directly to foreign retailers. Initial contact with foreign retailers is often made through advertisement, company literature, or a sales representative. Direct dealings with Russian retailers should increase as the market-based economy grows and currency exchange problems ease.

Until recently, trading companies known as Foreign Trade Organizations (FTOs) coordinated all trade with Russia. These Russian establishments specialize by industry or region. Although U.S. exporters can deal directly with a Russian enterprise now, FTOs can still be useful in analyzing the market, distributing the product, or identifying potential trading partners. The U.S. Department of Commerce publishes a partial list of FTOs and their specialties.

Locator Service for Russian Intermediaries. The U.S. Department of Commerce can help identify representatives, agents, and distributors to facilitate U.S. exports to Russia. Through its Agent/Distributor Service (ADS), Commerce can locate, screen, and evaluate various representatives at a reasonable cost--$125 per country.

ADS works as follows. The potential exporter contacts the local district office of the Department of Commerce. The office evaluates the marketability of the business' product, prepares sales literature, and forwards the entire package to the U.S. Foreign Commercial Service (FCS) in Moscow. Trade specialists with FCS review the package and locate potential agents, distributors, or other representatives. FCS evaluates each contact according to their interest in dealing with U.S. businesses and their abilities. Finally, FCS forwards a list of up to six qualified contacts and appropriate information about local agent practices and expectations to the U.S. business. The entire process usually requires 60 to 90 days.

Indirect Exports Through U.S. Intermediaries

U.S. exporters that cannot perform all the necessary marketing functions of selling abroad might engage an independent U.S. party with export expertise. The U.S. exporter should make its selection according to the marketing functions it cannot perform in-house. The marketing functions each representative can perform will vary according to experience and resources.

Like direct exporting, the intermediaries used in indirect export sales fall into two general categories, agents (who work for commission) and merchants who take title). Agents include export management companies, manufacturers' export brokers, and resident buyers. Merchants that export goods of unrelated companies include export trading companies and cooperatives.

As a practical matter, export management companies often operate on a buy/sell basis, allowing them to take full advantage of government financing programs, while some export trading companies do business on a commission basis. This blurring of traditional roles often results in the interchangeable use of the terms export management company and export trading company.

U.S. Agents. U.S. export agents do not take physical or legal possession of exporters' products. Agents secure orders and present them to the exporter in return for a fee. All arrangements for advertising, promotion, pricing, financing, payment, transportation, warranties, and after-sale repairs are left to the U.S. exporter.

Export Management Companies (EMCs) usually are well-versed in the legal, logistical, and tax aspects of exporting. They handle all export activities for one or more U.S. exporters, usually on an exclusive basis for one to three years. EMCs function as export departments for their clients and, thus, are supply-oriented. However, the exporter uses its own name, not the EMC's, to conduct contract negotiations and other correspondence.

Most EMCs specialize by product, foreign market, or both. U.S. exporters that sell different product lines or to different overseas markets might use more than one EMC. The ability to penetrate foreign markets quickly and efficiently is a major advantage of using an EMC. A potential disadvantage in using an EMC is that the U.S. exporter may not retain adequate control over its product or company image.

Most EMCs solicit and transact export sales on a commission basis, although agreements sometimes involve a retainer fee. Some larger EMCs purchase directly from U.S. exporters and resell abroad or otherwise finance the sale so that U.S. exporters receive immediate payment for their products or services. For information on specific EMCs, contact the National Association of Export Companies, the National Federation of Export Associations, or a local chamber of commerce.

Manufacturers' Export Agents (MEAs) provide a moderate amount of assistance for U.S. exporters. Working on a commission basis, MEAs sell in their own name and often focus on specific, limited markets. They provide no advertising, financial assistance, or similar services. Occasionally, MEAs will assume some credit risk--via a del credere or guarantee agreement--in return for an additional commission.

Contracts with MEAs are usually short-term. Often, they apply only to a single transaction. A U.S. exporter might use several MEAs over time.

MEAs may be helpful to exporters in three situations: to execute transactions for those with modest sales; to expand into a new and unfamiliar market, and to assist an exporter with a product that is new to foreign consumers.

Export brokers operate similarly to import brokers discussed earlier. Their primary function is to facilitate contracting between a buyer and seller. Most brokered sales involve commodity items like agricultural products. Brokers receive their commission from their principal, which may be either the buyer or the seller. The major difference from the import broker is their location and, consequently, their knowledge of the market. Import brokers typically are more familiar with the demand for goods in Russia; export brokers have more understanding of the available supply in the U.S.

Resident buyers operating in the U.S. can be either domestic or foreign. Foreign government agencies or government-sponsored companies are examples of the latter. Whether domestic or foreign, resident buyers locate goods in the U.S. market for their foreign principals. Once located, they negotiate the best price and often receive a commission from their foreign principal. In addition to placing orders, resident buyers usually handle all shipping arrangements.

U.S. Merchants. Some U.S. intermediaries buy goods for remarketing abroad. Export trading companies (ETCs) typically operate in this manner. Also known as export merchants, ETCs are similar to domestic wholesalers. Once the U.S. exporter sells to an ETC, the latter conducts the foreign marketing effort and is responsible for transporting the goods. ETCs are usually more oriented to foreign demand than domestic supply. They determine what items the foreign market needs and seek those goods in the domestic market. Most of their contracts are nonexclusive, transaction based.

For information on ETCs, contact the Office of Export Trading Company Affairs in the U.S. Department of Commerce. U.S. exporters also should consider using the International Trade Association's computer databank, Export Trading Company Matchmaking Project.

Cooperative export arrangements are sometimes called "piggybacking" or "mother henning." They involve U.S. exporters with established systems of selling abroad agreeing to handle export functions for unrelated companies on a contractual basis. Sometimes the cooperative contracts with a foreign purchaser for goods that it cannot produce and must turn to other U.S. companies to complete its order and fulfill its contract. Compensation can take the form of a discount in buy-sell arrangements or can be on a commission basis.

Generally, cooperative exporters are large companies with substantial in-house resources and extensive knowledge of export demand and foreign markets. The goods piggybacked are noncompetitive with the cooperative's own products but may be similar. For example, a U.S. auto manufacturer may agree to piggyback tires or seat covers for a smaller company that is new to exporting.

Export intermediaries such as EMCs and ETCs that receive a certificate of review from the U.S. Department of Commerce qualify for special legal benefits. Also known as export trading companies or statutory ETCs, these entities are structured along industry lines, e.g., agricultural goods. In contrast to other monopolies, however, statutory ETCs are specifically exempt from many U.S. antitrust regulations. The Export Trading Act of 1982 confers these benefits.

Thus, statutory ETCs can engage in otherwise illegal activities, such as price fixing and operating as a cartel, while avoiding treble damages and other penalties often resulting from antitrust violations. *

Ernest R. Larkins, PhD, and Fenwick Huss, DBA, CPA, are professors of accounting at Georgia State University.

TELEPHONE AND FAX NUMBERS OF AGENCIES AND ORGANIZATIONS PROVIDING EXPORT SUPPORT

Organization Telephone Fax

Agency for International Development

Forfeit Guarantee Program (202) 647-9842

American Association of Exporters and Importers (212) 944-2230 (212) 382-2606

Bureau of the Census:

International Database Service (301) 763-4811 (301) 763-4610

European Center in Atlanta (404) 651-2950 (404) 651-2976

Export Hotline (800) 872-9767

Export Opportunity Hotline (800) 243-7232

Export-Import Bank:

Export Credit Insurance Programs (202) 566-8955 (202) 566-7524

Financing Programs (202) 566-8819

Foreign Credit Insurance Association (305) 372-8540 (305) 372-5114

The Exporter: The Magazine for the Business

of Exporting (212) 563-2772

FSC/DISC Tax Association (212) 370-3995 (914) 723-6270

Institute for East/West Studies (212) 557-2570 (212) 949-8043

ISAR (202) 387-3034

National Association off Export Companies (516) 487-0700

National Federation of Export Associations (301) 907-8647

Overseas Private Investment Corporation (OPIC) :

Direct Loans (202) 457-7087

Insurance Programs (202) 457-7059

(800) 424-6742

Loan Guarantees (202) 457-7178

(800) 424-6742

Small Business Administration:

Export Revolving Line of Credit Program (202) 205-6490 (202) 205-6064

International Trade Loans Program (202) 205-6720 (202) 205-7272

Regular Business Loan Program (202) 205-6490 (202) 205-6064

(202) 445-7064

Small Business Investment Company Program (202) 205-7586

U.S. Department of Agriculture:

AgExport Connections (202) 447-7103 (202) 523-9613

Commodity Credit Corporation Guarantees (202) 720-5319

Country Market Profiles (202) 447-7937 (202) 382-1727

Economic Research Center (202) 219-0700 (202) 219-0759

Trade and Market Information Centers (301) 344-4811 (301) 763-4610

U.S. Department of Commerce:

Agent/Distributor Service (202) 482-4767

Business Information Service for

the Newly Independent States (BISNIS) (202) 482-4655 (202) 482-2293

Comparison Shopping Service (202) 482-4767

Economic Bulletin Board (BISNIS) (202) 482-1986 (202) 482-2164

Export Trading Company Matchmaking Project (412) 644-2852

Finance Services and Countertrade Division (202) 482-4471 (202) 482-5702

Flashfax BISNIS Bank (202) 482-3145

Gold Key Services (202) 482-4767

National Trade Data Bank (202) 482-3986 (202) 482-2164

Office of Export Trading Company Affairs (202) 482-5131

(202) 566-8944

Office of Service Industries: (202) 482-3575

Information Industries Division (202) 482-4781

Transportation, Tourism, and Marketing (202) 482-4581

Finance and Management Industries (202) 482-0339

Trade Opportunities Program (202) 482-4787

World Trade Data Report (202) 482-4767

World Trade Institute (800) 356-9984

AUGUST 1995 / THE CPA JOURNAL