What is business diplomacy?

In this case, diplomacy is not a synonym for being maddeningly polite. Rather, business diplomacy refers to the basket of tools that a company can use to make sure it is understood the way it wishes to be understood - it is the proper and effective use of messages and information about a company, its policies, and practices.

This type of diplomacy can have a direct and critical impact on a company's overseas business. It involves the foreign contacts, organizations, and institutions that a company must communicate with to get registered locally, to sanction a deal with a local firm, to be able to employ the people it wants to hire, or to pay taxes at an agreed-upon rate. A company also must use business diplomacy to ensure that it will be regulated in accordance with local rules and that the playing field is level in the particular market.

The need for business diplomacy is particularly acute in the former Soviet Union, where a flood of U.S. business interests in the 1990s were met by recalcitrant bureaucrats and a minefield of conflicting trade and investment legislation. American and local industry in-country joined with U.S. embassies to assist these governments in developing as relatively predictable and profitable places to do business.

Some business people point to dealing with corruption as a major source of concern when doing business overseas. In the former Soviet Union, corruption remains the "elephant in the room" during most business discussions. The Foreign Corrupt Practices Act, which prohibits U.S. companies from paying off foreign officials to help their business prospects, makes it crystal clear that the bribes and payouts cannot be a part of American business dealings. Embassies and American firms need to repeatedly make it clear to foreign governments and companies that American firms will not risk their entire business and personal liability on one deal. This kind of clarity in business negotiations is part of business diplomacy.

Know your audience

A successful business diplomacy strategy for any foreign market should consist of three distinct parts: 

Businesses can segment their audiences into three major groups. First, a company must identify the primary decision maker. In some cases, this is the country's president or a key cabinet minister. Next, identify the others who influence the decision maker. This may be other cabinet members, fundraisers, a classmate, even a spouse or college roommate.

The third and largest group consists of any others who have a say in decisions or potential impact on a company's ability to do business, positive or negative. On a governmental level, this could include the country's finance minister, the minister of labor, education minister or customs director. The list could include parliamentary committees or opposition leaders, nongovernmental organizations (NGOs), think tanks, even the media. Peripheral groups that also may be relevant include international finance institutions (IFIs), business associations, assistance organizations, embassies, and the United Nations.

What is the message?

Once the "who" has been identified, it"s time to work on the "what."  Diplomacy requires a company to advocate for itself and its goals. What is the company there to do? How much will you pay in taxes, environmental fees, social security, etc? How many jobs will the company create? And how long does it plan to stay? Is it there for the long term?

Another aspect to business diplomacy involves a thorough description of the company's attributes. Companies should explain that they prefer to hire locally and that they will provide training to increase local hiring. The business can stress its environmental impact and promise to be a good community member, participating in the country's arts and culture and supporting local health clinics and orphanages or other causes.

The style in which a company delivers these messages is important. Diplomacy works hand-in-hand with transparency. Communicate early and often, delivering a complete message. Is a company being heard the way it means to be heard? How can it determine this?

One test to ensure the message is getting across is to monitor the follow-up questions accompanying any interview. Media stories that go awry are a sure sign that a message is not coming across the way it was intended.

Careful diplomacy, of course, is particularly important when there are problems. Does a company sound defensive or conciliatory? Ultimately, it is important to remember that when trying to change behavior, it's best to deliver a constructive message.

Accomplishing your goals

Ultimately, regardless of the diplomatic tools a company uses, the goal is to get all parts of government and civil society to buy into the project. The government in general, and  tax police in particular, needs to understand the job creation benefits  a company will bring to the table, among other pluses for the local economy. The foreign minister should appreciate the extent of a company's effort to address all legal and regulatory matters. The finance minister should recognize that the project is a model for cooperation between the two countries. Parliament and NGOs needs to understand the lengths a company went to in order to get environmental impact approvals from the IFIs. Opposition leaders should know the revenue and jobs creation implications of the project. And the media need to have facts on how many new jobs you are bringing and any other relevant local content, such as a company's support for the local tuberculosis clinic or other community assistance projects.

New politicians want to differentiate themselves. They will use a convenient hook, and sometimes that involves piling on to complaints about business projects. If this includes your project, that's no good. It's critical to begin advocacy right away to assure that your company does not present a handy target for a struggling political campaign.

Ultimately, the goal is to change behavior: from ignorance to support, from opposition to neutrality. In any transition, revolution or election brings new actors and new decision makers. The best position is to know all the candidates, so no matter who comes in, they know you and appreciate your business's contributions.

Beth Jones, a former Assistant Secretary of State for Europe and Eurasia and Ambassador to Kazakhstan, is executive vice president at APCO Worldwide, where she heads the business diplomacy team.

APCO Worldwide (www.apcoworldwide.com), an award winning and an independently owned global communication consultancy, supports numerous American firms with market entry, public affairs and strategic communication programs in the Russian and CIS markets. APCO also assists Russian and Central Asian companies by developing and implementing corporate positioning programs in the United States and Europe.

Moldova and Ukraine Eligible for U.S. MCC Assistance

Moldova and Ukraine in November 2006 became eligible for Millennium Challenge Corporation (MCC) program assistance. The countries will now begin a consultative process to develop a Compact, which is a multi-year agreement between the MCC and the country to fund specific projects targeted at reducing poverty and stimulating economic growth. 

Also in November 2006, MCC approved a $24.7 million agreement with the Government of Moldova for assistance with its anti-corruption strategy under MCC’s Threshold Program.  The Government of Moldova hopes, with the MCC’s assistance, to battle corruption in the public sector.  This initiative will be carried out mostly under the guidance of the U.S. Agency for International Development and U.S. Department of Justice.  More information on the Moldova Threshold Program can be found at http://www.mcc.gov/countries/moldova. 
 
In Eurasia, MCC has signed a $295 million Compact with Georgia in September 2005, and in March 2006, it signed a $235 million Compact with Armenia. In November 2005, the Kyrgyz Republic was named eligible for MCC Threshold Program assistance. 

The Millennium Challenge Account is an innovative approach to development assistance centered on the recognition that sound policies and good governance are critical to poverty reduction and economic growth in developing countries. For more information, visit www.mcc.gov.

Moldovan Oil Terminal Opens on the Danube

Danube Logistics, owned by Dutch-registered EasEur Holding B.V., in October 2006 completed construction of Moldova's Giurgiulesti oil terminal on the Danube River. The terminal has eight tanks with a total capacity of 60,000 cubic meters. Giurgiulesti, a free international port, is located on 41.9 ha hosting 15 resident companies that enjoy special tax breaks under the law. Besides the oil terminal, Danube Logistics is set to build a grain terminal, dry cargo terminal, container terminal, and passenger terminal by 2010. Construction of the dry cargo and passenger terminals is expected to be completed by the end of 2008. The Danube's 7-meter depth allows the port to accommodate seagoing ships with maximum tonnage of 10,000 tons.

Moldova’s Wine Sector

The wine industry remains Moldova's leading industry with a lot of potential and centuries-old traditions. Moldova is in fact in the top 15 largest wine exporters in the world. Vineyards account for just 7 percent of all agricultural land, but provide a quarter of all agro-industrial production. The country has 145 wine companies, with total processing capacity of one million tons of grapes. The industry has always been export-oriented, with 95 percent of the output being exported. 

The 5th Annual Moldova Wine Festival took place in Chisinau on October 7-8, 2006, attracting 36,500 attendees. Most of the foreign attendees came from Ukraine (approx. 19,000), Romania (approx. 7,400) and Russia (4,027), although there were also visitors from Germany (530), the United States (382), Poland (226) and Lithuania (111). Some 50 Moldovan wineries set up stands and marched in a wine parade on the central square of Moldova's capital during the two-day festival. It is also an opportunity to taste the young wine of the year's vintage.

Another popular annual wine event is ExpoVin Moldova. The fair showcases Moldova's largest wine producers and exporters, and also attracts suppliers of bottling and wine production equipment. The next fair will be held in February 21-24, 2007, see www.vinmoldova.md.

For more information on Moldova, visit BISNIS online at http://bisnis.doc.gov/bisnis/country/moldova.cfm

by Michael Voronenko

Between late 1991 and mid-2005, foreign investors had invested a total of about $36.8 billion in Kazakhstan, primarily in the oil and gas sector. Lately, other sectors of Kazakhstan's economy have attracted the attention of international investors. Along with Russia and Ukraine, Kazakhstan is the only Eurasian country to actively participate in the recent wave of international IPOs from that region demonstrating both the interest of its private sector to seek international financing and the level of sophistication to be able to obtain it. In addition to its continuous political stability, Kazakhstan's developed banking sector is one of the reasons why the country has been able to achieve such impressive levels of economic development.

Although the country is mainly known for its rapidly growing oil and gas sector, Kazakhstan's banking sector is one of the most dynamic components of the national economy with large and mid-segment banks rapidly moving toward greater adoption of international accounting standards. As Kazakhstan is enjoying significant revenues generated by oil companies, Kazakhstani banks also generate substantial additional foreign currency flow by drawing on international capital markets. While integration into international markets has led many of the country's banks to adopt the system of international accounting standards, many others went under. Thus, the number of banks in Kazakhstan dropped significantly between 1995 and 2004, according to 2006 Index of Economic Freedom, and this development has had a positive revitalizing effect on the national economy.

According to a survey of the Kazakhstan banking sector prepared by RusRating in January 2006, three leading banks dominate Kazakhstan's banking sector in terms of both assets volume and revenues:

Key Financial Measures, Top 3 Kazakhstani Banks, USD mln. (as of 1 Jan. 2006)

The second largest bank in the country, Bank TuranAlem, competes with Halyk bank in the retail, SME loan, and personal deposit markets, while Kazkommertsbank is more heavily focused on corporate clients, according to the same report. TuranAlem has been able to gain this advantage over its main competitors by having established a large presence throughout the country and has become one of the most recognized banking brands among Kazakh consumers.

The successful strategies developed by these three banks have had a major positive impact on the overall development of the Kazakhstani banking sector. Their large size makes it possible to serve major natural resources firms without risk of liquidity problems. Furthermore, thanks to their stable financial condition and positive reputation among Western investors, these banks serve as a channel for long-term loan programs. TuranAlem includes among its shareholders European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), The Netherlands Development Finance Company (FMO), and East Capital (Sweden). Halyk Bank raised $680 million in December 2006 in an IPO in London priced at the top end of a guidance range. Halyk's successful issuance followed that of Kazkommertsbank, which took place in November 2006 and was also priced at the top end of the range—the first London offering by a leading bank from the former Soviet Union.

In addition to the top three banks, mid-sized banks (also known as second-tier banks) account for virtually all the remaining banking activity. As of January 1, 2006, the 12 largest second-tier banks held a combined 39 percent of the banking sector's assets. Most of the 34 second-tier banks (14 of which are at least partially owned by foreign investors) are linked to one of Kazakhstan's financial-industrial groups and they differ significantly in the scale of their activities (www.rusrating.ru/en/research/BS_Kazakhstan).

The third-tier banks are smaller financial institutions that have either have not been able to develop a competitive position on a national or even regional scale, or have opted for a strategy that seeks a small but reliable customer base. This sector of the banking industry also currently enjoys financial stability and has filled important market niches locally. Third-tier banks are largely operated by individuals or entities that are satisfied with their market position and might not be interested in additional outside investments, if such cash influx would require them to alter their competitive strategy.

As opposed to the earlier years of growth when competition was motivated by corporate loans, currently Kazakhstani banks compete in the markets for personal loans, financing for smaller and medium sized-businesses, consumer deposits and settlements services. Virtually all Kazakhstani banks identified retail and SME loans as a top priority in 2006 along with expansion into neighboring Eurasian countries.

In addition to the private banks, there are two state-owned financial institutions: (1) Kazakhstan Development Bank, which finances underdeveloped sectors of the economy, such as agriculture, and guarantees export loans and (2) Zhilstroisberbank, which maintains accounts for individuals planning to build homes and provides financing at below-market rates for home building. Although strongly capitalized, these banks do not represent serious competition for Kazakhstan's commercial banks.

Booming Sectors

The emergence and growth of the middle class in Kazakhstan has led to the rapid expansion of retail banking, especially consumer loans for automobiles and durable goods. Due to the fact that such growth levels are a relatively recent phenomenon, the consumer market remains unsaturated. This situation has pushed the major retail banks to increase their range of banking services and improve technologies.

Mortgage financing is another key growth sector. As in Russia and Ukraine, the demand for housing has been increasing steadily due to the improving standards of living, and construction has rarely been able to keep pace. In Kazakhstan, housing demand has additionally been stimulated by government housing programs and by the transfer of the country's capital to Astana. Commercial banks have taken advantage of this opportunity and are now offering various primary and secondary market mortgage programs. In addition, the mortgage market has matured even more with the development of mortgage securitization programs that have often been set up with funding from multilateral financial institutions, such as EBRD. Still, credit risk and liquidity risk remain the most serious potential problems in this market as the mortgage market is relatively new and has not had sufficient time to develop effective consumer credit monitoring mechanisms.

Increasingly, Kazakhstani banks are becoming solid investment vehicles for international players. This provides a degree of predictability and trust on the part of the investors and a good source of financing for their Kazakhstani partners. Thus, the stability and the level of development of Kazakhstan's banking sector have supported the investors' interest in the country's rich oil and gas sector.

Michael Voronenko is a trade specialist for BISNIS in Washington, DC.

Banking on Kazakhstan
31 January 2007
London, United Kingdom

Organizer: FT Business Events

www.ftbusinessevents.com/kazakhstan/Overview.asp

International Forum and Exhibition
"Security and Safety Technologies"
6–9 February 2007
Moscow, Russia

Organizers: Zaschita EXPO Company, Rosoboronexport, and
Reed Exhibitions Company

www.tbforum.ru/eng/ 

Ukrainian Financial & Corporate Growth Summit
7 February 2007
Kyiv, Ukraine

Organizer: FT Business Events

www.ftbusinessevents.com/corporateukraine/Overview.asp

CIS Metals Summit
12–14 February 2007
Moscow, Russia

Organizer: Adam Smith Conferences

www.adamsmithconferences.com/

Mortgages in Russia and the CIS
15–16 February 2007
Zurich, Switzerland

Organizer: C5 Online

www.c5-online.com

Fourth Economic Forum “BRIDGE”
16–19 February 2007
Tsakhkadzor, Armenia

Organizer: Master

www.bridge.am

11th Annual Pacific Rim
Construction Oil Mining Expo & Conference  (PACCOM) 2007
20–21 February 2007
Anchorage, Alaska

Organizer: Sourdough Productions

www.sourdough.net/events/paccom/

Corporate IT Strategies in Russia
27 February–1 March 2007
Moscow, Russia

Organizer: Adam Smith Conferences

www.adamsmithconferences.com/

4th Annual
Global Technology Symposium at Stanford
7–9 March 2007
Palo Alto, California

Organizer: USRTS

www.usrts.org

Ukrainian Investment Summit
12–13 March 2007
London, United Kingdom

Organizer: Adam Smith Conferences

www.adamsmithconferences.com/

Northern Virginia Eurasian Innovation & Investment Forum
27–28 March 2007
Fairfax, Virginia

The forum will bring together business, industry, and science leaders in information & communication technologies (ICT), environmental energy technologies, and civilian security technologies fields from the U.S. and Eurasia.

Organizers: Civilian Research & Development Foundation (www.crdf.org), the Northern Virginia Technology Council (NVTC), and the Russian Foundation for Assistance for Small Innovative Enterprises (FASIE)

www.innovationforums.org/virginia/