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Sep 2, 2008 | 22:41 GMT

8 mins read

Russia: Western Businesses and the Return of the Cold War Mentality

Alexey SAZONOV/AFP/Getty Images
Summary
The Russian resurgence evinced by its intervention in Georgia on Aug. 8, combined with the United States' possible responses to Moscow's newfound strength, could put some U.S. and Western companies operating in Russia and Russia-friendly countries at risk of being targeted by the Kremlin and its associates. U.S. and Western firms could face threats of various kinds from Russian intelligence, the judiciary, regulatory bodies, organized crime, nationalist groups and Russian businesses.
The Russian resurgence showcased by Moscow's intervention in Georgia on Aug. 8, combined with the potential U.S. responses to Russia's actions, could put U.S. companies operating in Russia and countries supportive of Russia (Belarus, Armenia, eastern Ukraine and potentially some Central Asian countries) at some risk of being targeted by the Kremlin and associated groups as a Cold War mentality begins to resurface in U.S.-Russian relations. Unlike during the Cold War, significant numbers of U.S. companies are operating in Russia today, representing an easy target for possible retaliation should U.S.-Russian tensions increase. Following the collapse of the Soviet Union, U.S. and Western businesses rushed into Russia in the early 1990s. Russia offered a virgin market with plenty of opportunities, great infrastructure — compared to most undeveloped markets — and a starved pool of consumers looking to enjoy their newfound liberty by exercising their freedom to consume. However, from the very start life has been hard for U.S. and Western businesses in Russia. From the beginning of the hectic privatization period, Russian industry was broken, decaying and divided up by former politicians, organized criminals and various oligarchs. Thus, running a business in Russia means learning to navigate the often indiscernible links between government, organized crime and business rivals — and the Kremlin can make this as easy or hard as it likes. The tactics that the Kremlin could use against Western and particularly U.S. businesses could range from overt uses of government power — such as actions by the Federal Security Service (FSB) or regulatory agencies and the judiciary — to less obvious strategies such as using the powerful Russian organized crime network or nationalist groups. Russian oligarchs and businessmen could also use Russia's anti-Western mood to go after their Western competition.

The FSB as a Lever

The Kremlin is worried that foreign companies will be used to distribute Western political propaganda, general influence and branding that will stifle domestic competitiveness. From Moscow's (not altogether paranoid) perspective, U.S. firms are staging grounds for foreign spies. Former Russian President and current Prime Minister Vladimir Putin previously was a KGB operative who in the 1980s was in charge of business and technology espionage — a tactic that served the KGB well and that the FSB continued with vigor even as Cold War ended. This trend is likely to continue; FSB activity regarding Western companies could even intensify as political tensions between the United States and Russia increase. Strategies could vary from increased surveillance and harassment to infiltration and the direct physical targeting of Western executives and employers. U.S. companies could also find themselves facing opposition from environmental and health-related nongovernmental organizations set up by the FSB and consumer boycotts initiated either openly by the Kremlin or through intermediaries.

Regulatory Agencies and the Judiciary

One of the Kremlin's favorite overt tactics against Western businesses is to use the Russian federal environmental agencies, like Rosprirodnadzor, to pressure companies by citing environmental damage caused by Western — usually energy — projects. The Kremlin is not actually concerned about the environment, but rather uses regulatory agencies like Rosprirodnadzor as a tool to target its political and economic competitors. Such a tactic was used to pressure Royal Dutch/Shell into divesting itself from the $22 billion Sakhalin 2 project in December 2006 and also against Chevron Corp. on its Caspian Pipeline Consortium project. U.S. businesses could therefore see Russian federal regulators such as Rosprirodnadzor — and the federal veterinary and plant health regulator Rosselkhoznadzor or the Federal Migration Service — as main sources of direct pressure that can use environmental and food health and safety as an excuse to attack U.S. and Western companies, ultimately leading to litigation. As tax, migration, environmental and health regulatory bodies attack foreign companies on separate grounds, the Russian federal and state level judiciaries will be the ones ultimately bringing court cases against Western companies. Most of these court cases will have predetermined outcomes and will give the Western businesses few options but to submit to the eventual ruling.

Organized Crime

As a more indirect tactic the Kremlin could outsource its pressure tactics to Russian organized crime and nationalist movements. Russian organized crime is notorious for its involvement in business, and no foreign company operating in Russia can ignore its presence if it wants to survive. The Russian underworld was a strong force even during the Soviet era, operating lucrative smuggling operations of Western luxury goods, operations that allowed organized criminals to seize the day (and most Soviet industry) as the Soviet state collapsed in the early 1990s. Russian organized crime pervades Russian society and is very active abroad. It is active in everything from the advanced financial "white-collar" crime to protection rackets within the country. It is also a reality for any business operating in Russia. Protection and security provided by Russian organized crime — essentially racketeering — is so prevalent for foreign businesses that they customarily set aside 10 percent of their monthly profits for such "services." Certain groups also offer a multitude of services that can range from personnel protection to clearing of competition. The Kremlin, politicians and FSB also have many links to Russian organized crime and can use those contacts to pressure Western businesses. Strategies could range from raising protection prices to conducting targeted attacks against employees of Western companies that the government later blames on organized crime.

Nationalist Movements

The Kremlin could also encourage various nationalist movements to pressure U.S. businesses, through either consumer boycott campaigns or direct attacks. The wave of nationalism inside Russia is still growing, and the government has no plans or desire to rein it in. Various nationalist groups — particularly groups like the Nashi and Pobeda youth groups — could therefore be used indirectly as tools to pressure U.S. businesses inside Russia. The larger Nashi group is a Kremlin-controlled youth group with a membership of between 100,000 and 150,000. Most Nashi organized activities have to date targeted — with very little violent events — foreign political representatives, such as embassies, diplomats and international organization offices, although individual members of the Nashi have taken matters further. It would not be a stretch for the Nashi to reorient its activities from the political and diplomatic targets to the more business-oriented. Members could easily make it very difficult for consumers to frequent Western businesses by conducting activities like protests and sit-ins outside restaurants and stores, and they could start boycotts of Western products. Whenever the United States makes a political move against Russia the safety of Americans and American symbols inside of Russia are at risk. Therefore, there could be a shift in how American and Western companies brand themselves, with much less emphasis being placed on their country of origin. McDonalds is the prime example of this nationalist outburst — not altogether surprising, as McDonalds is a target for anti-U.S. sentiment from France to the Middle East. Its restaurants were most recently targeted in February 2007 in St. Petersburg, although attacks were seen during the Kosovo War in 1999. It is not clear if the most recent attack was the work of nationalist groups, but the rise of targeted attacks against U.S. businesses is certainly something that cannot be discounted. Whether their actions come as directives from the Kremlin or not, U.S. companies doing business in Russia should take nationalist groups into account.

Russian Business Interests

However, it is not just the Kremlin that will use the increased tensions between Russia and the United States to raise pressure on Western businesses. Russian oligarchs competing with Western companies could use the anti-Western mood to make it difficult for their direct competitors to operate in Russia or to force their Western financiers to abandon control of joint ventures (without recouping their investments, of course). Oligarchs could use their links to organized crime to do this overtly, but they could also pressure Russian companies working with Western companies as third parties — particularly for transportation, information technology and communication — to stop cooperating or else lose business with the oligarchs' conglomerates. Oligarchs could also use their links with the Russian state to elicit pressure on Western companies. There are likely to be more cases like that of the joint U.K.-Russian venture TNK-BP, in which Russian oligarchs used everything from the Federal Migration Services to direct FSB-launched raids on offices and tax audits to try to force U.K. firm BP out of the venture. U.S. businesses in Russia should therefore expect to be targeted and might want to review their policies and adopt those used often in the Middle East, particularly in terms of personnel safety. Russia's nationalist movements have more freedom to operate — and are often directly linked to the Kremlin, like the Nashi group — than during Soviet times. Furthermore, U.S. and Western firms in the former Soviet Union are more visible — and therefore far easier targets — than they ever were during the Cold War.

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