BELARUS NEWS AND ANALYSIS

DATE:

15/04/2008

Q&A: Intetics Managing Partner Alex Golod on Belarusian Economy

The mission of Going Global, which appears on MidwestBusiness.com on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

WILMETTE, Ill. - Alex Golod serves as vice president of business development and one of three managing partners for Wilmette, Ill.-based Intetics. In part three of a three-part Q&A, international expert Michael Muth discusses with Golod the Belarusian economy, its politics and the pros and cons associated with conducting business in the country.

Michael Muth: Have there been any repercussions since July 2007 when Alexander Lukashenko threatened to take unspecified actions against American businesses in Belarus?

Alex Golod: Absolutely nothing. It was a political statement. While it could potentially affect us, it's more likely to affect some larger players. We're well below the radar with only 100 people. Some other organizations are much larger than us. I don't have any information that anyone in IT has pulled out.

I think it's pretty much the other way around. It has been a banner year for IT in Belarus. Even more important, our company specifically states in our policies that any political activities within our offices are prohibited. There is no place for politics in Intetics. We do business.

MM commentary: I'm glad to hear Belarusian politicians are just as full of hot air as American politicians.

MM: U.S. Department of State: "Most of the Belarusian economy remains in government hands." Problem?

AG: Not really. I don't think it creates any problems. Our only problem is a labor shortage. We have way too many competitors wanting to hire our best resources and it goes both ways. There are way too many companies. There's not much consolidation.

The government doesn't negatively interfere in the affairs of IT. On a positive note, the government has announced initiatives supporting IT including a tax-relief plan and a formation that's a so-called "Belarus Silicon Valley". It's called a Park of High Technologies.

MM commentary: Perhaps the government contributes to the labor shortage by luring potential employees away with more security than a technology career.

MM: U.S. Department of State: "A 'golden share' requirement allows government control in all companies with foreign investment." How have you dealt with this?

AG: Golden share means there were government enterprises that became private. The government kept golden share in those enterprises. There is no connection between private companies and the government if the company (like Intetics) always remains private.

MM commentary: It sounds like the U.S. Department of State should be more clear in its communications.

MM: U.S. Department of State: "Belarus' continuing problems with an opaque and arbitrary legal system, a confiscatory tax regime, a cumbersome licensing system, price controls and a lack of an independent judiciary create a business environment not conducive to prosperous, profitable investment." Comment?

AG: While this is probably a true statement in general, it doesn't really affect the IT industry. Government makes rhetoric. There are four monsters of IT outsourcing in Eastern Europe with more than 1,000 people and two of them based in Belarus. IT is independent from government. That's why IT has come to life in the last 10 years. The IT companies are thriving. There is more and more competition.

Taxation certainly affects our bottom-line profitability. We have to live with that. That affects our rates. We don't license anything. We don't have any Belarusian or Ukrainian clients. Most of the companies that want to establish software development centers in Belarus employ us or our competitors. Alternatively they can hire Deloitte to do some research. Deloitte maintains a presence in Belarus.

If the potential Western clients parachute in Belarus, they will likely lose. They won't be able to navigate the system. It's very bureaucratic. There are some cultural barriers. If they hire someone off the street, they also won't succeed. With our model, why build your own software center if you can hire us? It minimizes risk. The initial investment can be minimal. While it's a risky environment to navigate, there are some immense rewards.

MM commentary: One huge advantage with Intetics is it's foreign-based locals investing in their own local operations. This is vastly different than foreign firms making foreign direct investments abroad.

MM: How can you hire developers in Belarus if unemployment is 1.2 percent, GDP growth is 10 percent and the government employs 80 percent of all workers?

AG: While it's definitely a problem, it's a problem from a different angle. There isn't a direct hit on IT because - even though the government employs 80 percent of people - it doesn't employ a lot of IT experts. There are many good universities that churn out qualified graduates.

There are a lot of specialists. There isn't a shortage of qualified specialists. The problem is they're all employed and you have to pay for them. For example, Check Point Software from Israel came to Minsk and opened its own center. The firm pays almost 50 percent more and everyone wants to work for them.

MM commentary: Then there's the issue of how accurate government statistics really are.

MM: U.S. Department of Commerce: "In the Ukraine, local companies are often subject to oppressive taxation and unfair tax-collection practices." How has this affected you?

AG: That's a reality of life. We want taxes to be lower, but since that's not possible, we play the game. We employ consultants who can help us in legally transparent ways. Though there are some examples of unfair treatment, we haven't experienced that. We've only been there three years.

MM commentary: The IRS has been accused of the same things in the U.S.

MM: U.S. Department of Commerce: "Significant improvements in the rule of law and corporate governance are still needed in the Ukraine." Have you gone to court there? If so, what were the results?

AG: Fortunately we haven't had that experience. The legal system in the Ukraine works much better and gets stronger. It has been quite noticeable in last five years.

MM commentary: I still wouldn't want to go to court there without a firmly entrenched local at my side.

MM: U.S. Department of Commerce: "Ukrainian government officials, though, purporting to understand the benefits of e-commerce are mostly indifferent to the problems of this sector." Is this a problem for you?

AG: While it's probably true, it's not a problem. We don't expect preferential treatment from the government. We also don't expect that they'll take interest in us and invest or provide us with some advantages. It's a pretty stable and growing sector in the Ukraine.

Manufacturing and agriculture have problems. It's a focus for the government efforts. I would stay away from political rhetoric. IT isn't problematic for the government and it does bring in taxes. Why put more control on it if it's a growing industry?

MM commentary: Would we really want any government sticking its hands into something if it's not really needed in the first place?

MM: U.S. Department of Commerce: "Understaffed units have difficulty dealing with the large number of intellectual property rights infringements." Have you had to deal with this?

AG: We also haven't experienced that. Intellectual property rights belong to our clients as soon as we're done. As for Intetics rights, we've had instances where competitors in the U.S. were stealing our marketing collateral word for word.

Those were U.S. companies with offices in the Ukraine, India and Russia. We had to force them to take down our materials from their Web sites. They were even using our case studies with different names.

MM commentary: I still wouldn't want to have to enforce intellectual property rights there.

MM: U.S. Department of Commerce: "Foreign investors have complained of cumbersome National Bank of the Ukraine regulations that require them to open both hard currency and Ukrainian hryvnia accounts in Ukrainian banks to bring money into or out of the country." How have you dealt with this?

AG: To some degree, this is an issue. As it's their law, we have to live with the law. We can't avoid it. We do what we're told. It's kind of cumbersome. Since we're U.S. based and those are subsidiaries, most of the money goes through the U.S. banking system.

We pay expenses for our software development centers and make sure they have enough money for operations and salaries. As for foreign currency exchanges, we lose some money because of this.

European client contracts and rates are set in euros, which is getting stronger every day. While we do win there, we lose on transaction costs. It's also true for British pounds. In general, bank accounts in different currencies are quite common in Europe. It helps a lot! Try to open a bank account in euros in the U.S. It's not possible. It costs us money here, which negatively affects our operations.

MM commentary: Currency transaction costs are just another cost of doing international business.

More generally, I don't necessarily agree with marrying business and politics. When you make business political, you get into trouble. Silvio Berlusconi in Italy (who owned huge companies) had to divest his business interests when he became a prime minister in Italy. There are now accusations of corruption and they're probably justified. It's always going to be a problem.

Our goal is not to make any political statements. Many here don't want to invest in oil companies. I'm one of them.

You don't do anything unethical or immoral when you have operations in Belarus. People are people. Government is government. When you marry the two, you usually end up with something bad. While I don't agree with some of the statements flying out from both the U.S. and Belarus, it's my personal opinion. I prefer to keep it that way.

Organized crime in Belarus was a serious problem in the late 1980s and early 1990s. Those times are gone. It's no longer a problem since Lukaschenko took them out. He fought with them. It's not like Russia. He cleaned up a lot of things. Belarus and the Ukraine are culturally rich countries that are worth the visit even without business connections. If you have time and money to invest, it can also be very profitable.

MM commentary: Educated in economics, theoretically I agree that business should be separate from politics and intentionally merging the two is wrong. Since leaving school, I've learned reality dictates that governments do impose taxes and enforce laws that impact business. Any business decision maker has to consider the government wherever they do business.

MM: Have you studied international business?

AG: I have a technology background with a degree from a Minsk technical university in applied mathematics and computer science. While I don't think formal study in international business is required to succeed, it is desirable. I wish I would have a better understanding of the legal and financial aspects of business. All three of our partners have technical backgrounds.

We have a lack of sales background. We don't know how to sell and close the deals. That's the real problem we're facing every day.

MM commentary: Learning how to appropriately close the sale in other cultures is an especially hard skill to learn.

MM: What other languages do you speak?

AG: Russian is my first language. Belarusian is very close to Russian. I studied Spanish in Chicago (since I'm fascinated by Latin American culture) and traveled in Spanish-speaking countries on several occasions. I'm bilingual and have used English and Russian interchangeably all my adult life.

I'm not ready to sacrifice my cultural background. I still love Russian literature and theatre. Chicago has a rather strong and growing Russian community.

MM commentary: It has amazed me how fast and large the Russian-speaking community in the Chicagoland area has grown.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. Source:

http://www.midwestbusiness.com/news/viewnews.asp?newsletterID=19094

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