**DOING BUSINESS IN CENTRALASIA**

 

by Donald R.Nicholson

 

With a totalpopulation of 55 million and a wide array of natural resources, the fivecountries of Central Asia present a challenging opportunity for U.S. businessinterests. The Central Asian-American Enterprise Fund (CAAEF) has beenoperating in the region since 1994. Maintaining offices in Almaty, Bishkek, Tashkent, Khujand, Dushanbe, andAshgabat, CAAEF works closely with local banks and other investor groups toprovide small- and medium-sized businesses with a blend of financial supportranging from micro-loans to investments of up to $5 million. As of June 1999,CAAEF had disbursed almost $100 million in equity investments and loans to morethan 1,100 businesses and entrepreneurs in the five countries.

 

Doing business in Central Asia is not easy. In addition to the culturaland language barriers, legal, tax, and banking reforms are still in their earlystages, making it difficult to do business openly and transparently. There arewide differences between the individual countries, especially in the levels ofbureaucracy and governmental controls. Government regulations and zealousbureaucrats present obstacles to private companies. Therefore, a newly arrivedAmerican businessperson looking to quickly reach an agreement and beginimplementation will need to be patient and understanding. Local entrepreneursmay look and sound like their Western counterparts, but there are widedifferences between appearances and reality. 

 

Although the Soviets and Russians have been the major sources ofexternal influence for more than 100 years, the region is multicultural,multilingual, and currently bereft of hegemonies. In dealing with localbusinesspersons, it is usually more important to know their tribe, clan, orhorde, than their specific nationality. Private business activities have alwaysexisted in this region, but they are only now being conducted openly andlegally. Knowledge and understanding of Western**style legal agreementsis a new and still generally unknown phenomenon. It should also be noted that,while local businesses may willingly sign our extensive and all encompassingdocumentation, experience in enforcing contracts in the local courts is stilllimited.

 

CAAEF has learned a number of key lessons from its involvement inCentral Asia. Some notable ones are:

$      There are major differences between Sovietand Western accounting principles. Therefore, it is critical that all partiesunderstand and agree to the same common financial terms, conditions, and expectationsof the business.

$      Marketing is a relatively new skill, and itsimportance is often ignored or understated. Adequate provisions need to beincluded from the very outset of any business.

$      Government involvement is usually far greaterthan in the United States. We recommend establishing clear lines ofcommunication with relevant government ministries, agencies, or otherregulatory bodies.

$      When acquiring Western-made machinery andequipment, it is essential that after-sale servicing and spare parts be available.Although it may seem advantageous to buy certain equipment, the true test comeswhen there is a need for spare parts or servicing. 

$      Investing in a joint venture or new businessis usually easier than exiting. With no real capital market, and a somewhatlimited number of other interested investors, divesting can be a long andprotracted process.

$      In some countries, currency conversionregulations make it difficult to transfer dividends, repatriate capital, remitinterest payments on loans, or pay royalties and licensing fees. With higherrates of devaluation, these impediments can result in significant currencylosses. 

$      Good communications are of paramountimportance. As businesses operate in multiple languages, management must bebilingual or supported by qualified translators versed in the relevantterminology.

 

For U.S. companies, CAAEF is an interested and willing supporterprovided the conditions are right and the proposal makes sense. CAAEF=s financing can range from a few thousanddollars under the micro-loan program, to $5 million as a direct loan or equityparticipation. Since inception, CAAEF has invested in, or financed, businessesin almost every sector of the local economies with the exception of hardliquor, tobacco, and armaments. It can provide three different types offinancial assistance for a U.S. company looking to finance a local jointventure: (1) as an equity partner in the venture, provided it meets CAAEF=s requirements and has local privateparticipation; (2) as a source of medium-term financing; or (3) as a source ofa shorter term Amicro@ credit.

 

With five years of experience CAAEF can be a good source of informationand advice on how to do business in Central Asia, and what a new investor canlook for or expect.  Having financedhundreds of local entrepreneurs, CAAEF is also a source of information on howselect markets are doing and what the prospects are. CAAEF is able to introducepotential local agents and representatives to U.S. companies that may be new tothe region and can help arrange introductions to state-owned companies andagencies involved in specific sectors.

 

CAAEF welcomes the interest of U.S. companies and feels that goodopportunities exist in such areas as health care, distribution,business/financial services, and franchising. With most investors focusing onoil and gas, many smaller opportunities where the risks and rewards can be veryattractive have been neglected.

 

*Donald R.Nicholson II is President and CEO of the Central Asian-American Enterprise Fund.*

 

*For more information on CAAEF, contact its U.S. office at: 1634 EyeStreet, NW, Suite 200, Washington, D.C., 20006. Tel: (202) 737-7000, Fax: (202)737-7077, or visit its website at www.caaef.com.*