For patient investors, Russia offers rich rewards

Thursday, March 10, 2011

Lack of financing leaves vast resource deposits unexplored, but companies must learn to navigate a different business culture. On a recent trip to Siberia, Hans Gjerdrum, director of international business development for Calgary-based Kudu Industries, was reminded just how frosty business relationships in Russia can be.

Despite setting up a meeting ahead of time and following all the right procedures, including sending a formal request letter and registering his passport, Mr. Gjerdrum was rebuffed upon arrival.

The Russians are "very good at making things difficult," he says.

But that hasn't discouraged him. "It is still one of my favourite places to do business - maybe because of the challenges," he says, which speaks volumes, coming from a man who has operations in 33 countries.

Mr. Gjerdrum won't give up on Russia because Kudu's oil field pumps are in heavy demand there. As well, "there are so many similarities in terms of applications of products and technologies" between the two countries, he says, particularly in the resource sectors. However, he had an advantage: When Mr. Gjerdrum started his job, the company already had business relationships in Russia. Breaking into the country as an unknown company and forming new connections can be a much harder task, other business people say.

Russian diplomats are trying to dispel this belief in order to attract Canadian investments that would bolster their economy. On Wednesday, the country's deputy minister of natural resources, Sergey Donskoy, trekked to Toronto to explain how much potential there is for Canadian mining companies to explore and develop new Russian projects. The vast country is rich in minerals such as iron ore, nickel and copper, and also has extensive oil and gas deposits. Some of it could be up for grabs after President Dmitry Medvedev vowed to privatize government-owned assets in the resource sector during his keynote address at the World Economic Forum in Davos in January.

Yet Canadians who have done extensive work in Russia stress the importance of realistic expectations. Their key advice: Business negotiations in Russia require patience, Russian intermediaries are crucial allies, and legal counsel is a must. If these rules are followed, they say, the market is ripe for business.

One of the more exciting sectors is junior mining, which "is wide open right now," Mr. Donskoy says through an interpreter. Russia is in desperate need of foreign companies to start explorations. The country's venture-financing market is in shambles, leaving junior players with no way to raise exploration funds. Even when they do undertake geological exploration and present their findings to bigger companies, the take-up is minimal, Mr. Donskoy said.

For those willing to take a risk in Russia, however, a crucial first step must be developing strong relationships with knowledgeable intermediaries. "Either you're on the inside, or you're on the outside," Mr. Gjerdrum says. "If you're outside you are participating in tenders and so on, but you're probably have a very hard time getting the business."

"Russians like to do business with Russians," he adds. "We can't just go in as foreigners."

Michael Woods, an international trade and competition lawyer at Heenan Blaikie LLP in Toronto, says that isn't unreasonable. "Don't forget their perception is that we're right next to the Americans, we have our own system, we're not prepared to sit and listen, we don't have much patience, we're just in it for the fast buck and then we'll leave," he says. To really make inroads, he stresses the need to find representatives who have some international clout, because Russians respect experience.

It is also crucial to conduct proper due diligence. "Talk to people who have been in that market for a number of years and have made all of the mistakes so that you don't have to," Mr. Gjerdrum says, noting the country has some bureaucratic barriers that can be difficult to navigate.

Mr. Donskoy acknowledges Russia has bureaucratic problems, but would not specify. "I'm sure you know what they are," he says.

Mr. Woods points out that there is no formal negotiation process and suggests obtaining legal counsel with Russian experience and keeping them involved. The Canada Eurasia Russia Business Association (CERBA) is a good starting point in the search for trusted partners. Major Canadian cities have their own chapters and members offer impartial advice.

There are also lessons to be learned from the handful of big Canadian companies that have been successful in Russia. Kinross Gold Corp. is often cited as the flagship, after buying a 75-per-cent stake in the Kupol gold project in 2007, which produced 555,000 ounces of gold last year.

Kinross was welcomed by the Russian government, but that may have been due to its overall investment plan, which included the surrounding community. Instead of simply buying into the gold project, Kinross also put money into education and work-force training. Russians appreciate this type of approach, says Piotr Dutkiewicz, former director of the Institute of European and Russian Studies at Carleton University. "It means you are not only extracting Russian resources, but you are supporting human resources."

The investment has put Kinross in good standing and contributed to further deals. In January, it bought another Russian gold deposit for $368-million (U.S.).

To achieve similar success, it's important for Canadian players to drive a hard bargain, Mr. Woods says. Russians "really respect people who stick to their guns, and who "know what they should get and negotiate hard," something Canadians often fail to do, he says. But the most important asset is patience.

"There are some really wonderful people in Russia and they can be a pleasure to do business with," Mr. Woods says, but "it's not a place to dabble." Companies must expect a drawn-out process and be willing to absorb speed bumps along the way.

Mr. Donskoy admits that the negotiation process can be lengthy. "It does take time, it does take patience," he says. Still, Mr. Gjerdrum is willing to wait it out. Russia "could be another Canada for us in terms of market potential," he says. "You just have to be patient."

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INVESTING IN RUSSIA

Canadians who want to tap Russia's resources have ample opportunities, but must take precautions when negotiating deals. Piotr Dutkiewicz, former director of the Institute of European and Russian Studies at Carleton University, outlines four criteria:

Be realistic

Working with Russian parties takes a lot of patience. Don't expect deals conclude rapidly.

Find a Russian partner

Russians like doing business with Russians, so find an intermediary who can work their connections for you. Ensure they can be trusted and check their history of deal making.

Hire solid lawyers

Russian arbitrage court has improved its record of late, but never take your assets for granted. Hire international trade lawyers at the outset.

Social investment

Build a business plan around not only profit, but also in the surrounding community. When Kinross, for instance, invested in a mine in 2007, it also contributed to education.

Tim Kiladze