Palms & Company Document

"HOW TO AVOID REFUSAL OF REQUESTS FOR CAPITAL INVESTMENT IN RUSSIA"

Without Competent Western Investment Bankers as Advisors, Capitalization Requests Are Rejected by Western Private Investors.

by

Dr. Pyotr Johannevich van de Waal-Palms

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 have experience how to prepare such proposals. The fund says "if we don't do it right, we are going to fail and end up being described in American newspaper articles about how stupid we are. There is a yawning gap between available money and Russian company efforts to document their proposals properly and make requests for money. The charter of this fund says it must return to the U.S. Government, within three years, any capital which has not been invested. 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. Without Independent Western Investment Bankers to Represent them Russian and Ukrainian Companies might be matched with unsuitable Investors.

In 1988 Investment bankers raised $335.8 billion internationally. So far this year there has been $221.1 billion raised for companies which need capital. Such competence has to be used if Russian companies are going to make progress. It does not necessarily require all cash. Fees can be paid in stock (shares) of the company or exports of goods, etc. The fees can range up to 10% for small transactions and as low as 2.2% on larger transactions. Free services from Western government agencies 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". Imagine one of Russia's most famous military design bureaus making cola! "Defense Conversion" proposals, such as Double Cola, irritates Russian industry. Also it does nothing to keep worker employed. The cola line will employ only 50 of the 6000 workers. $3.9 million was also given to International American products company to make dental chairs with a St. Petersburg firm formerly engaged in military avionics. Hearing Aids

International Company. will make hearing aids with a Moscow military electronics factory. None of these companies is a spin of off Russian military technology, which is what Russian defense factories need. 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 a $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, say "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 factory must have its own independent objective investment banker in the U.S., to represent Russian companies with a branch office. Otherwise the consultants hired by the government of the U.S. and the partners chosen for the Russian company by both of them, will not be suitable nor the best possible solution. In every business deal in the world both sides always have their own independent representation that is paid for by their own side and not by the other side. 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 will never 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 mistakes. Your government could save a lot of costly mistakes if they listened to private westerners to give them independent rather then to Western governments. 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 in Western governments. They like the Russian government only have experience in spending money. The knowledge to make Russian companies rich and their employees highly paid and their shareholders earning profits is with western businessmen and investment bankers. As long as you look for free help from Western governments. You will get only money and that will not solve your problem. You must get marketing know-how and knowledge of how to make profits within Russian law. This 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. We know it is not yet time that Russian companies will learn how to spend money to save their companies and get good results. We know that ownership will change as a result. Bankruptcies will come. Prices for industry will go up for a short time and then down when no profits are earned and maybe in 2 or 3 years new managers will learn they need Investment Bankers in the West and then decisions will be different. I do not expect my words to change anyone's mind. I just write them to put them down for history so that later someone can say. "he saw what the future will bring. Let us use him now to tell us what the future will be next time so we can avoid repeating our mistakes. Russians know a lot. but they know different things than what I know. Only by using my knowledge together with Russian knowledge can progress be made. By yourself you will still experience many mistakes and a rotten economy. But the day is coming that this will change. It is only a question of how long it will take for Russian businessmen to learn all the fine points of global international business in a market economy.

If Western companies could accomplish their goals without investment bankers and without paying them commissions on $335.8 billion in syndicated capital, they would certainly consider alternatives. There is a reason for this expense. It saves money in the long run.

For discussions in Russian language

For discussions in Russian language

Comments: Russian General Directors will benefit from the advice of an experienced American Investment Banker in preparing investment capital proposals and dealing with questions about disclosures. we invite your inquiries

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