Palms & Company Document

WHY RUSSIAN COMPANIES AND CIS

NEED WESTERN INVESTMENT BANKERS

TO ASSIST THEM TO OBTAIN CAPITAL INVESTMENT.

by

Dr. Pyotr Johannevich van de Waal-Palms

In 1988 American Investment Bankers created $335.8 billion in new capital investment. So far this year there has been $221.1 billion raised for companies which need capital. Such competence has to be used by Russian firms if Russian companies are going to make progress. The services cost money. Payment does not necessarily have to be made all in cash. Fees can be paid in stock (shares) of the company or exports of goods, etc. The cost of investment banking services can range up to 10% for small transactions and as low as 2.2% on larger transactions. Free services from government agencies of the West, or consultants paid to represent them, do not produce the best results for Russian companies.

Igor Postnikov was apprehensive when Moscow agreed to let the U.S. Defense Department select a joint venture partner for his enterprise NPO Mashinostroyenia. His worst fears came true. From a list of 17 interested companies that proposed commercial spin-offs of the bureaus space and missile technologies the U.S. Defense department awarded a contract for $5.12 million to a stunningly low-tech company Double Cola Company a maker of soft drinks.

It was Mr. Postnikov's last choice He says "Everyone is laughing at us", he said. Imagine one of Russia's most famous military design bureaus making cola! "Defense Conversion" proposals such as Double Cola irritates Russian and CIS industry. Also it does nothing to keep workers employed. The cola line will employ only 50 of the 6000 workers.

In another example, $3.9 million was also given to International American products company to make dental chairs with a St. Petersburg firm in military avionics. Hearing Aids International Company, will make hearing aids with a Moscow military electronics factory. None of these is a spin-off of Russian military technology which is what Russian defense factories need. An example of a good match is that Rockwell International will work with Gosniias in Moscow to develop a satellite based air traffic-control network.

Of course the chief Gerbert Yefremov of Mashinostroyenia is shocked by the result. Of course given Russia's economic problems no director is going to refuse $5 million dollar gift. But what is needed is a private American investment banker to find a more technologically advanced project and a different partner. His senior colleagues like Pavel Shirokov says "We are doing something stupid". Mr. Vyacheslav Martynov the deputy director feels the same way.

My point, which must be understood, is that a Russian or CIS factory must have its own independent objective investment banker in the U.S. to represent the Russian factory. Otherwise the consultants hired by the government of the U.S., and the partners chosen for the Russian company by them, may not be suitable nor the best available proposal. In every business proposal, both sides always have their own independent representation, that is paid by their own side and not by the other side. This avoids conflicts of interest. Whoever pays me is the one I am working for. That is always so. If Russian companies continue to take "free" advice from people who are paid by the other side, they may not get the best advice. This is a serious problem for Russia. Russians do not yet understand this. Perhaps it is because of their experience with other economic systems. It has always been true that when you wanted money in Russia you asked the government for it and they gave it or not. The market system is not about giving money. Instead it is about finding the right partners among millions of businesses in the world. For this you must have someone who knows the western companies and can represent your interests.

You will save a lot of costly mistake and lost time and failed efforts, and your government could save a lot of costly mistakes as well, if they listened to and employed private westerner citizens to work for them and give them objective independent advice. This is the problem with the Russian economy. The knowledge of how to make money is not known by Western governments. Western Governments, like the Russian government, only have experience in spending money. The knowledge to make Russian companies profitable and their employees highly paid and their shareholders earning profits is known by western private businessmen and investment bankers. Your best variant is to obtain such advice. That requires specialists in making profits who understand all the difficulties of Russian type laws and how to avoid them.

Western Investment bankers understand the psychology and culture of Russia. If Western companies could accomplish their goals without investment bankers and without paying them commissions o($6 billion last year), they would not use Investment Bankers. There is a reason why they accept this expense and pay it. . It saves money in the long run.

Last year the United States Congress created a special investment fund to bank-roll Russian businesses. More than 40 funds now exist with more than $20 billion available for investment But in the first 15 months of its three year mandate the Russian American Enterprise Fund, which is armed with $340 million in U.S. tax dollars, has committed only 2.4% of its assets. They have been unable to locate good investment proposals because Russian companies do not know how to prepare such proposals. The fund says "if you don't do it right, we are going to fail and end up in newspaper articles about how stupid weare. There is a yawning gap between available money and Russian company efforts to document their proposals properly and make requests for money that can be financed. The charter of this fund says it must return any capital which has not been invested within three years to the U. S. Government. Of 800 applications received so far from Russian companies the fund has had to reject 500 for not having coherent business plans or a sufficient grasp of business fundamentals. The fund hopes it can at least invest $50 million during the next 8 months but they say the more they work at this every day the less certain they are that Russian companies will prepare and present proposals that will enable them to accomplish this goal. Every simple task that might take a couple of hours in America can take several days in Russia. The biggest obstacle is the due-diligence work and pre-investment analysis of borrowers. RAEF has even offered to 2000 Russian Banks to participate in the financing and offered to share the interest payments and the risk. Only eight have indicated any interest. The tortoise pace makes the fund directors suspect that the assets may never be lent. There is no hope of disbursing $340 million in three years says one director. If we accomplished $100 million the board would be ecstatic.

It is very important that Russian companies engage Western Investment Bankers to prepare their capital proposals and act as their representative in the United States to present these proposals to the 40 venture capital funds who are anxious to make investments, but must have proper proposals.

For discussions in Russian language in Moscow 7-095-324-6134 æÁËÓ 7-095-324-4249, Alexander Wislobokov

For discussions in Russian language in United States of America, Washington D.C., Tel: 1-703-818-0508 Fax: 1-703-818-00236 , Email: sanich@juno.com Alexander Goldenberg

For discussion in English or Dutch: 1 425 828-6774 E-mail: palms@PeterPalms.com Dr. Pyotr Joannevich van de Waal-Palms

Offices in Vilnius Lithuania E-mail serg@novatex.lt,
Grigorij Kolesnikov
2012 Vilnius, Zirmunn 58-41, Fax: (3702) 42-54-40 Tel: 3702 72-11-34
Other e-mail: root@gigrin.aiva.lt or novatex@taide.lt

Offices in Gomel, Belarus: David Sticknety, E-mail david@belarus-online.com
IAEWP I.L. U.N. P.O. Box 97 Gomel 246050
Tel: 375-232-54-4404, Pager (Russian only) 375-232-53-9130 - A770

Office in St. Petersburg: Tate Ulsacker, Dun & Bradstreet Nord, Tel: ( ) , Fax ( ) E-mail <idcinfo@cityline.ru palms@m16.medport.ru

UKRAINE Oleg Jourin PhD
P.O. Box 25 Lutsk-23 City Volyn Region, Ukraine 262023
Tel: 380-3322-45521 Fax: 380-3344-30631
http://www.theoffice.net/patron
E-mail: patron@theoffice.net

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