Caspian Business Journal

The Two Paths to Doing Business in Central Asia: Which Way to Go?

Knowing how to navigate a new business environment is never easy, and anyone looking to do business in Central Asia could find themselves faced with a number of obstacles. But this shouldn’t lead to despondency. Philip de Leon takes a look at the different options open to investors in the ‘stans’, and explains how with prior planning and self-conscious behavior, it is possible to steer clear of the main pitfalls.

Anyone interested in doing business in Central Asia will be confronted with two parallel worlds: the world of “this is how business is done here” and the world of “best business practices” as implemented, or should we say advocated, by well established economies and international organizations such as the World Bank and the Organization for Economic Co-operation and Development (OECD). The former world is one that tries to justify questionable business practices – such as bribes and working with the close circle of top decision makers – by saying that “the way we do business here can be sourced in our history and culture.” The latter refers to concepts of corporate governance, business ethics and to the sole value or merit of a person or a project. The excuses of regional specificities that should not be contaminated with Western concepts have no ground: simple concepts such as transparency and accountability can be applied universally without interfering with, or endangering cultural identities. Understanding how the two paths operate is useful and keeping them apart as much as possible is a good approach but far from being a widespread reality.

The following article does not claim to be a checklist of actions to take, or things to watch for, for anyone considering doing business in Central Asia. However, it will throw some light on potential issues that may arise, which is preferable to trying to solve them after stumbling upon them. Central Asia can be an El Dorado but it also can burn anyone, no matter how large their company may be.

A young boy sells fish in Kyrgyzstan. Photo by Sam Tranum

Central Asia’s Business Climate On November 17th 2009, Transparency International, a civil society organization fighting corruption worldwide, released its 2009 annual Corruption Perceptions Index (CPI) which measures the perceived level of public-sector corruption in 180 countries and territories around the world. There were no major changes from the 2008 CPI, with most of the Central Asian countries ranking towards the bottom of the totem pole. The best performing country, Kazakhstan, ranked 120th  compared to 145th in 2008; followed by Tajikistan at 158th compared to 151th; Kyrgyzstan at 162th  compared to 166th; Turkmenistan at 168th compared to 166th; and Uzbekistan at 174th compared to 166th.[1] In the 2010 World Bank’s Doing Business report which ranks 183 countries on their ease of doing business, the rankings are also mostly disappointing: Uzbekistan ranks 150th compared to 145th the year before; Tajikistan makes a commendable leap forward from 164th to 152nd but has still a long way to go; Kazakhstan remains stable at 63rd compared to 64th in the 2009 Report; Kyrgyzstan is mentioned as one of the top 10 reformers, ranking 41st compared to 80th just a year before; and Turkmenistan is not even mentioned [2].

Those bleak rankings should not deter those who understand the endless opportunities these countries have to offer, but extreme caution must be exercised without necessarily falling into paranoia. In some cases, the battles will be challenging, as an entire mindset has to be changed and molds of preset behaviors will have to be broken. The disillusionment among many local people  regarding the possibility of seeing things change can also be disheartening. Nevertheless, the efforts of civil society actors to turn things around should not be overlooked, even if they remain in their infancy in some countries such as Turkmenistan. Winston Churchill once said “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Major foreign companies have taken a leap of faith, adopting the optimist approach despite the challenges that are present in Central Asia. The natural resources sector such as oil, gas and mining represents a large chunk of all the foreign investment that comes and goes into Central Asia. Service companies are also present including in the hospitality industry: the Hyatt Corporation opened a new hotel in Tajikistan in 2009 – the chain was already present in Kazakhstan and Kyrgyzstan. The opening of an American Chamber of Commerce in Tajikistan at the same time clearly demonstrates that almost no market is out of reach in a global economy. Small and medium-sized companies, willing and able to look at challenging markets, have also entered Central Asia: by being among the first in, they can gain a significant share of the market, which is not always possible back home. In order to be successful in these ventures however, it is necessary to understand the specific dynamics of local business, most notably the importance of families and clans, and their vested interests.

The joy of big families and clans

It is useful to have a chart of the reigning families and clans to know who is responsible for what and who has leverage over the decision-makers. If we take the example of Kyrgyzstan, Kurmanbek Bakiev, the President of Kyrgyzstan has his brother Marat serving as ambassador in Germany while his brother Adyl has been posted as an adviser to the Kyrgyz ambassador in China. In October 2009, Bakiev appointed his son Maksim to head the newly created Central Agency for Development, Investment, and Innovation (CADII) while another son works for the National Security Service.

The challenges of conducting investigative reporting in Central Asia on ruling leaders precludes an exact picture of the scope of the family clans’ power but information percolates: in neighboring countries, Gulnara Karimova, daughter of President Karimov of Uzbekistan, is said to have large stakes in oil, gas and telecommunications companies, while in neighboring Kazakhstan, President Nazarbayev’s son-in-law, who was married to Dariga Nazarbayeva, was a rising star until his downfall for criticizing the system. When followed closely, the family sagas make the cast of characters of famous American and Mexican soap operas look awfully dull.

The big family concept extends to the clans, which encompass former companions from more tumultuous times, such as from the civil war in Tajikistan, to regional and ethnic clans. The influence of the families and clans does not permeate every single transaction conducted in the country as their attention revolves mostly around the most profitable deals. However, it does help to keep an eye open to avoid stepping into sensitive turfs that can be landmines, even for well-informed locals. Similarly, the ease of doing business in some of these countries does not correlate with the perceived level of corruption. For instance Kyrgyzstan has made spectacular progress in the past year in creating an environment conducive to business according to the World Bank Doing Business report. Kyrgyzstan also happens to be the only Central Asian country to be a World Trade Organization member, a position it has enjoyed since 1998.

Our way or no way?

The prospect of lucrative markets in Central Asia in times of cutthroat competition, pressure on managers of Western companies to generate results, and the large number of countries that do little to sanction questionable practices constitute a challenge, notably for those that want to play by the rules and maintain an even playing field. Cutting corners seems like a good short-term solution but it has mid- and long-term consequences: First, giving in, even just once, opens a crack that can be used to further milk the cow that gave milk but that can also lead to embarrassing blackmail; second, any company that gives bribes can jeopardize the support of its own government for assistance if something goes wrong with the deal; third, the U.S. enacted the Foreign Corrupt Practices Act in 1977 which has dire consequences for companies caught bribing foreign officials in business transaction and the Organization for Economic Co-operation and Development (OECD) followed with the OECD Anti-Bribery Convention that entered into force in 1999. So far 30 OECD member countries and eight non-member countries – Argentina, Brazil, Bulgaria, Chile, Estonia, Israel, Slovenia and South Africa — have adopted the Convention.

Needless to say that the astuteness of those seeking bribes to get around anti-corruption measures and the ingenuity of the players is endless. In the process, the British Virgin Islands seem to be a Central Asian favorite, notably for registering companies and to ease payment transactions, whether legal or illegal. One common approach to avoid possible liability is to hide behind the local partner and let him deal with the murky aspect of doing business locally but existing US and OECD legislation can pierce that “partner” veil and sanction the end-beneficiary.

Business Practices

One of the challenges faced by many foreign companies operating in Central Asia is to remain true to Western business values. This can be difficult, even more so when local partners will offer to alleviate the burden of dealing with questionable local business practices to either shelter the foreign companies, or simply to prove they can be a valuable partner. Explaining that the penalties of foreign anti-corruption legislation such as the FCPA have a reach beyond the borders of the United States is not an easy task. So what should a foreign company do in such a context? The first step is not to engage in questionable activities or even infer that alternative methods of doing business could be considered. Second, visiting your embassy and meeting the officers in charge of commercial affairs, even the deputy chiefs of mission or the ambassadors, is a wise approach. It enables the embassies to brief companies on business opportunities they know about but also to warn them of potential dangers. It also enables them to stay aware of issues affecting companies in order to raise them in all the relevant meetings they may have with local officials. Third, joining a local international trade association such as an American chamber of commerce or a European Business Association is extremely valuable. Sharing experiences with other members can save you time, money and exposure to difficult situation. It also enables you to voice your concerns and have these concerns voiced through the organization, which can shelter you from retaliation if you are a whistle-blower on an issue dealt with by many, and it also gives more weight to your concerns as such associations are often the spokespersons for the international business community at large, even if you are not an American or European company.

A New Generation of Entrepreneurs and Leaders

The above comments are not intended to imply that everything is hopeless. There is a new generation of Central Asian entrepreneurs and leaders who fully understand the benefits of integrity, transparency and accountability. Many went to the United States or Europe on programs funded by the host country and now some countries are even paying for their own students to go study abroad. It is the case of Kazakhstan, which through its Bolashak program (“future” in English) has sent thousands of Kazakh students to the best universities. Others never traveled internationally or beyond Central Asia, but they have nevertheless a clear understanding of what is at stake, from having been the victims of the system themselves. As Central Asia is in transition, it will take years for the new generation to replace the exiting generation and its approach to doing business.

Taking the time to build personal relationships to know your interlocutors remains an important component of the business negotiation process in Central Asia, though this aspect of doing business can be transposed to most countries in the world. Another characteristic that remains anchored in the system is a top-down chain of command that can be debilitating as lower ranking executives or officials are better off doing nothing than taking the risk of making what could be considered the “wrong” decision. The need to submit correspondence via letter or fax is also a tiring process, as one never knows if the lack of reply is due to: 1. the fax not going through; 2. the fax going through but being received by a receptionist not sure what to do with it and sitting on it or making the executive decision that it is not worthwhile pushing up the food chain; 3. The recipient is not interested; 4. The recipient does not speak English and will not bother figuring out what the fax is about, even more so if it is sent by someone he/she has never met before, etc. In the end, finding a local partner is the solution most advocated in business circles. It is true that if a good one is found, it can lead to a very fruitful collaboration. It is however recommended to stay involved and not let the local partner be the only “visible” party on the ground. If the business relationship goes sour, it will be very difficult to come and take over the business if no one knows you and if you have no idea how the business was conducted in your absence, who the local contacts are, and what procedures are in place.

Footnotes:

[1] Transparency International (2009), “Global Corruption Report 2009: Corruption and the Private Sector.” See: http://www.transparency.org/news_room/in_focus/2009/gcr2009

[2] World Bank (2009), “Doing Business 2010.” See: http://www.doingbusiness.org/