Sunday, October 5, 2003

New economy holds instability and risk



By Cliff Peale
The Cincinnati Enquirer

MOSCOW - From currency stability to organized crime and the potential of government shakedowns, the success of Procter & Gamble's operations in Russia is tied to how much risk the company is willing to tolerate.

While P&G's U.S. business fluctuates with economic undulations, blue-chip brands such as Tide, Bounty or Folgers generally are dependable profit makers for the long haul. Americans have made many P&G products market dominators.

Outside the Western world, in countries such as Russia, it's a whole new game of risk roulette, and it's often not about the quality or marketability of the product.

For years, Soviet rulers restricted what Russians could buy and sharply limited foreign investment. Even after the fall of the Soviet empire, many Western companies were hesitant to get into the market. Decades of intrigue, including bribery, intimidation and the shadow of the KGB made Western companies think twice. With the rise of the so-called Russian Mafia, companies needed to factor organized crime into their risk assessments. In addition, trademark violation cost international companies $3 billion in Russia last year, according to Russian state data.

And then there's the currency issue. Under the Soviet regime, officials kept the exchange rate of the ruble artificially high. Then on a single day in 1998, the value of the ruble fell 50 percent, devastating the financial position of foreign investors. Since then, the ruble has stabilized and Russian analysts seem confident the country can ensure the safety of overseas investments. "Economists forecast that Russian currency will be stable over the next couple of years," says Natasha Zagvozdina, an analyst at Renaissance Capital in Moscow. "And political stability also is better."

Financial risk is not limited to the ruble's exchange rate. This summer, P&G chairman A.G. Lafley met with Russian Prime Minister Mikhail Kasyanov to talk about other economic factors, including customs duties on imported equipment and tax liability.

Then there is corruption. Many nations of Eastern Europe, Russia included, have long been seen in corporate circles as hotbeds of government corruption, where the ability to compete can become a pay-to-play proposition as officials offer to cut red tape in return for payoffs. P&G insists it has avoided the bribes and other demands.

"Frankly, we've said 'no' so often that they go somewhere else," said former chairman John Pepper, who spearheaded the move into Russia in the early 1990s. "They think, 'Those odd birds just don't do it.' "

Still, P&G has developed strategies to deal with the risks:

• Keeping a low profile. P&G offices blend into their neighborhoods. In Moscow, for example, P&G leases several floors of a nondescript office building, with no sign posted outside.

• Employing as many locals as possible. All but a dozen of P&G's 1,600 employees in Russia are natives. That means they won't flee when a crisis hits and are less likely to be targets for organized crime.

• Spreading out operations so an unforeseen crisis in Russia or China or Turkey or Brazil isn't financially fatal.

"As we balance the portfolio, we know and expect that somewhere in the world we're going to have some currency challenges," said Kerry Clark, president of P&G's global market operations.

Of course, the biggest risk is that consumers won't buy P&G products. But so far, that hasn't been a problem in Russia.

"We're actually feeling very good about Russia," Clark said.




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