Robert Agee, President of AmCham Russia, joins us to discuss American business in Russia since the 90s, who left and how after the start of the war in Ukraine, who suffered and benefited from Western sanctions, and the outlook for American (and Chinese) business in Russia going forward. *The Trialogue Podcast is hosted by the Stimson Center and produced by University FM.
Robert Agee, President of AmCham Russia, joins us to discuss American business in Russia since the 90s, who left and how after the start of the war in Ukraine, who suffered and benefited from Western sanctions, and the outlook for American (and Chinese) business in Russia going forward.
*The Trialogue Podcast is hosted by the Stimson Center and produced by University FM.
(Transcripts may contain a few typographical errors due to audio quality during the podcast recording.)
[00:00:00] Peter Slezkine: I'm Peter Slezkine, Director of the U.S.-Russia-China Trialogue Project at the Stimson Center. Since the middle of the 20th century, relations among the United States, Russia, and China have had an enormous impact on each country separately and on the world as a whole. The purpose of the trialogue is to better understand this extraordinarily complex and consequential relationship by directly engaging with experts from all three countries.
I'm joined today by Bob Agee, president of AmCham Russia. He is in town in D.C. visiting from Moscow. So, we have him here at the Stimson Center. Very happy to have you on the podcast.
[00:00:44] Bob Agee: Nice to be here.
[00:00:45] Peter Slezkine: Bob, can you tell us what AmCham is? What does it do in the world? Who does it represent?
[00:00:49] Bob Agee: So, the American Chamber of Commerce is pretty famous in and of itself, but AmCham Russia has existed in Russia for 30-plus years. We represent the interests of the American companies and/or foreign companies, even Russian companies, that have business interests with the United States. We have about 250 members to date.
[00:01:15] Peter Slezkine: Sorry, just to interrupt, is this something that is officially part of the U.S. government, or is it private?
[00:01:19] Bob Agee: No, it is completely non-aligned with the American government. It's the American Chamber of Commerce in Russia. We are not affiliated in any way with the U.S. government.
[00:01:28] Peter Slezkine: But tell us a little bit more. You said that the American Chamber of Commerce is famous, but probably not everybody knows how it functions. So, when was it founded? Where does it exist in the world?
[00:01:36] Bob Agee: Oh, okay. So, the American Chamber of Commerce, good question. I mean, it's obviously based here in Washington, D.C. They have a massive office not far from here. They represent the business interests of all the companies in the United States. So, that's AmCham, I guess, USA. But there are AmCham's all around the world. Every country has its own American Chamber of Commerce. There's one in Singapore, a huge one in China, obviously, one in Russia. So, each AmCham, as I said, represents the business interests of the companies in its specific territory. So, in our case, Russia.
[00:02:12] Peter Slezkine: And that one came to Russia after the fall of the Soviet Union. There was obviously no AmCham in the Soviet Union.
[00:02:17] Bob Agee: Correct. I think it was set up in the 1991-1992 timeframe. I was on the board. Back then, I was one of the people who helped set up. I was running Xerox at the time in Russia.
[00:02:29] Peter Slezkine: So, you were freshly arrived as a representative of Xerox when it came to the Russian market.
[00:02:33] Bob Agee: Correct. Well, actually, Xerox predated what was Russia. It actually had a representative office and quite a successful business operation back in the ‘80s when it was the Soviet Union. And back then I was even involved with what we called counter trade, where you'd have to barter stuff out in order to send stuff in. So, that was one of my first jobs.
[00:02:55] Peter Slezkine: Were you just a businessman who ended up at Xerox and then ended up in Russia? Or did you have some Russian connection/Russian interest ahead of time?
[00:03:01] Bob Agee: I have Russian heritage. So, I spoke Russian, growing up, and studied Russian through, believe it or not, high school. I took Russian. Can you imagine they had Russian in high school back then?
[00:03:12] Peter Slezkine: This was in which part of the U.S.?
[00:03:13] Bob Agee: California, in northern California. It's a pretty large Russian community there, as you know. And then took it as a minor. I was an economics major at Berkeley, but I also took Russian as a minor and studied in the Soviet Union as an exchange student. I had quite a bit of, let's say, foundation in Russian.
[00:03:30] Peter Slezkine: When were you in the Soviet Union as an exchange student?
[00:03:33] Bob Agee: '79. So, I graduated from Cal in 1980.
[00:03:39] Peter Slezkine: Did you like the Soviet Union in the late ‘70s? Was it exciting?
[00:03:42] Bob Agee: I would say it was pretty fun.
[00:03:44] Peter Slezkine: Straining?
[00:03:44] Bob Agee: No, it was fun. I was a student in Leningrad at the time, and we lived in a famous building overlooking the Neva River right opposite the Winter Palace. It was a very exciting time. I enjoyed it very much. I made quite a lot of money selling jeans on behalf of my student community to the black market representative that I befriended. So, I made so much money back then selling jeans. I took a 10% commission on all the jeans I sold.
[00:04:11] Peter Slezkine: So, you've been a good American businessman in Moscow, in St. Petersburg, for a while.
[00:04:15] Bob Agee: No, it was Leningrad at the time. But yeah, for a long time.
[00:04:19] Peter Slezkine: So, you ended up at Xerox in Russia?
[00:04:22] Bob Agee: I started with Xerox first in California, and then I got a job pretty quickly in what was called our Eastern European operations in London. This was with the counter trade stuff going on. I, then, went on to different places around the world, working as a country manager, first in Yugoslavia mid-'80s. And then, Africa. I was managing director of our company in Nigeria. And then they moved me to Russia when that started to open up as a major opportunity in the early 1990s.
[00:04:54] Peter Slezkine: And so, you were a board member of AmCham in Russia from the very start.
[00:04:58] Bob Agee: Correct. Not from the very, very start, but I was involved from the start. I can't remember when I joined the board. For a long time, I was on the board, executive committee. So, yeah, I've been involved with AmCham for a long time. And then after Xerox, I went to work for a little startup company called Cisco Systems that nobody had heard of at the time. This was, maybe, like, 1997. We had about a year and a half of boom times until the crash came in ‘98. We lived through that crisis, then we lived through the 2001 dot-com crash. I mean, there's always a crisis coming up now and again. So, we lived through quite a few of those. So, I stayed with Cisco for a long time, like, 15-plus years. I then did some private investments after that and joined AmCham as the president right before the current crisis started in ‘22. So, late ‘21, I joined AmCham.
[00:05:52] Peter Slezkine: Late ‘21, you became president of AmCham.
[00:05:54] Bob Agee: Yes.
[00:05:55] Peter Slezkine: So, we're going to get to that moment and then what followed in a second. But first, tell us about the ‘90s, early 2000s. So, when you first became associated with AmCham in Moscow, presumably American business was the biggest deal in town. So, what was it like operating in this newly capitalist environment? How much were you able to do? I mean, on one hand, again, you're the big dog in town; on the other hand, there's guys with guns running around who impose some, kind of, constraints.
[00:06:23] Bob Agee: You know, Xerox's business was booming. Every American, I think, their business was booming. So, our objective was to set up the operations, training center, service center, warehousing and logistics, all that stuff. And then, most importantly, a dealer network. So, we set up a dealer network throughout the country. We did that pretty quickly.
[00:06:44] Peter Slezkine: And the mob didn't touch the American businesses?
[00:06:46] Bob Agee: No, not really. I mean, I guess, if you were involved with, I don't know, cigarettes or something like that, it would be a different discussion. I'm not really sure what issues they might have had. But not really, no.
[00:06:59] Peter Slezkine: Did you have dealings with the prominent oligarchs at the time — Berezovsky, Gusinsky?
[00:07:04] Bob Agee: We met a lot of them back then, of course. They were, like, nascent business guys. But I don't think we necessarily did business with them, per se, because Xerox wasn't really at that level. I mean, maybe, when we got into Cisco, we were doing some big strategic projects. But they were involved with massive mineral deals and so forth. So, I wasn't like an investment banker who was talking to them about $100 million finance deals, no.
[00:07:28] Peter Slezkine: So, you have lived this whole time in Moscow since 1991?
[00:07:33] Bob Agee: Correct.
[00:07:34] Peter Slezkine: And became president of AmCham in 2021?
[00:07:38] Bob Agee: Correct.
[00:07:39] Peter Slezkine: So, start in 2013, before the first round of major sanctions. So, what was the situation then? What was the American business reaction to the first round of sanctions in 2014 after the annexation of Crimea? And then what was it like all the way through 2021?
[00:07:56] Bob Agee: Well, I think no business up at that stage was still very buoyant. It was absolutely booming. There were the periodic little mini-crises or ruble devaluations, but nothing significant. 2014, you know, the Crimea annexation, I think, you know, again, a little bit of, maybe, some shock and surprise and disappointment, amongst others, some of which you heard about today at our conference. But I think, by and large, with a few exceptions, most American businesses did not react in a sense of panic. It was more wait and see what's gonna happen. There may be a bit of concern, but I don't think there was this real major panic that you would've seen more recently.
[00:08:44] Peter Slezkine: And in 2014, those sanctions did not profoundly affect the business model of American companies operating in Russia.
[00:08:51] Bob Agee: Not really, no.
[00:08:52] Peter Slezkine: So, in 2021, what did American business in Russia look like? And also, relative to other foreign companies, the Europeans, obviously, were very present, so, how much is energy, how much is services? What did it look like?
[00:09:09] Bob Agee: So, in 2021, it's interesting, we had a survey that was done in 2021, a survey by the chamber and Ernst & Young at the time. So, interestingly, 73% of American businesses looked upon Russia as a strategic market. That's a pretty significant number.
[00:09:28] Peter Slezkine: What does that mean? That means for their overall corporate strategy…
[00:09:31] Bob Agee: Russia was a key market. Not a key market. 12% said key, 73% said strategic.
[00:09:39] Peter Slezkine: Which is the highest.
[00:09:40] Bob Agee: Which is, like, what maybe India or China would be like today.
[00:09:44] Peter Slezkine: I don't know business lingo. I know foreign policy lingo, in which “strategic” is a euphemism for “nuclear.”
[00:09:48] Bob Agee: No, no, no. Strategic and business means it's like the highest level of importance for a company. So, that's really important. So, what did it look like? 30% were involved with energy and natural resources. Makes sense. 24% were in consumer goods manufacturing. 14% were multi-industry. 13% aerospace. I guess that would be Boeing, mainly. 5% industrial manufacturing. 5% IT, telecoms. The rest is miscellaneous.
So, $100 billion of investment up to that point had been made in Russia. And it was a very significant market with a pretty good level of trade. I think, at the stage of ‘21, the trade between the two countries was around $25 billion a year, something of that nature.
[00:10:44] Peter Slezkine: But the EU dominated. European companies had the largest share of the pie.
[00:10:50] Bob Agee: Well, it depends on which industry you are looking at. I think the Americans dominated the IT space, for sure. That was my segment. I think American companies dominated the energy sector pretty well. I think, in aerospace, again, American companies had the lion's share of the market.
[00:11:09] Peter Slezkine: And then tanks roll across the Ukrainian border in large numbers, everything changes practically overnight. So, what is the reaction?
[00:11:19] Bob Agee: The reaction, initially, obviously, shock, panic. People were very, obviously, dismayed that this was happening. I think most people didn't believe it was going to happen. And it therefore came as a big shock when it did happen.
[00:11:34] Peter Slezkine: And what was the initial reaction on balance? How many people just packed up their bags and left? How many companies shuttered operations? How long did they wait?
[00:11:44] Bob Agee: It depends on sector by sector. Some took very quick actions. I think, you know, in the first year, there were probably, again, I don't have the exact numbers in front of me, but I'm guessing there must have been at least 50-plus companies that just quickly terminated their operations and left.
[00:12:06] Peter Slezkine: And they pulled everything up by the roots, nothing remained?
[00:12:08] Bob Agee: I think, yeah. Well, let's take that in its context. Nobody really just ran out the door because you have to sell your operation, you have to pass it on. You just can't leave. I mean, this, kind of, a misnomer that people just, like, hung up their coat and ran to the airport, I don't think I really saw anybody do that. But there were a lot of companies that moved quickly out the door, wrapped things up, and really, kind of, almost gave their businesses away.
[00:12:38] Peter Slezkine: And did they do this for fear of the sanctions or reputational reasons?
[00:12:44] Bob Agee: That's a good question in terms of their motivation. I would imagine it's more reputational. I think there was a fear that you would be put into this list of companies that continue to do business in Russia. And of course, companies are risk averse.
[00:13:02] Peter Slezkine: And for a lot of them, even if Russia was a strategic country, it's still a small part of their overall global business. So, it's not worth the reputational risk.
[00:13:10] Bob Agee: Correct. I mean, at best, even though it was strategically important ‘21, in ‘22, it was like, “Well, let's reassess the situation.” I know one of the big four companies who had pulled out. Not only did they leave, but they paid their Russian management team to take the asset off them. So, the Russian team was able to absorb one of the biggest consulting operations in the country, not just for free, but they actually got paid to do it.
[00:13:46] Peter Slezkine: Why was that necessary?
[00:13:47] Bob Agee: And it was they assumed the legal liability. So, they said, “We'll assume all the legal liability. You're completely unencumbered. You can leave. Not a problem. We take care of everything going forward.” And the money was there to pay the salaries and the staff and the cost of operations for the year going forward. So, that guy, he and his management team, were literally given this asset for free. And there's a lot of stories like that. There's a lot of stories where the local management team were able to obtain these very significant corporate assets for nothing. There was a big oil services company, one of the biggest names in the United States, who, again, just basically handed over the company to the local management team. They're now the owners of this company.
[00:14:36] Peter Slezkine: And it's a Russian company?
[00:14:37] Bob Agee: And it's a Russian company. And I talked to him recently and I said, “Well, how did you do?” He goes, “Well, 2022 was really tough. We were completely cut off. Like, day one, everything shut off — emails, technical support, spare parts, equipment that we used to get from the mother company, all gone. All we had was our engineers and what was in the warehouse.” But, you know, he then went scouring across the globe, looking for spare parts and components and between, I guess, the combination of finding stuff in China, countries around the borders of Russia, and Russia itself, he was able to complete every single oil field project that he had that year.
So, he, kind of, survived 2022. And now, looking at him in 2024, he's a pretty happy guy. He owns this oil services company which used to be a $100 million a year business for a big major multinational company. Now, he's doing it all himself with his management team.
[00:15:37] Peter Slezkine: So, what percentage? I know you named a number, but what percentage of American companies packed up and left as quickly as they could?
[00:15:45] Bob Agee: So, I guess, just go over, like, year by year, it's hard for me to remember exactly how many. I think it's, out of 400, maybe 50, 75 left in year one. Now, when we say left, some, as they transformed themselves into Russian entities. So, what was, for example, Baker McKenzie is now Melling, Voitishkin, right? They're still part of our chamber but they're no longer owned by Baker McKenzie. It's now a Russian legal entity. But they still represent all the major American multinationals. So, the law firm connections stayed the same. The culture of the organization stayed the same. Just the brand changed from X to Y. And that's the case with many of these former American companies. They changed their names. The local management stayed the same. The shareholders just changed. So, it used to be American. Now, it was Russian. And that's probably, I imagine, about 50 companies in that category today.
So, I guess, in terms of leaving, you've got to, kind of, put this into perspective. When we say leaving, the companies who have left, maybe over the course of a couple years, we're talking about 100 companies that have actually “left.” And even then, those companies, many of those have maintained a very small office. So, they keep an entity, they keep a representative, but they've technically left the marketplace. So, there's quite a few companies in that category, a lot of the IT businesses.
[00:17:17] Peter Slezkine: But those ones could come back if [crosstalk 00:17:20] change.
[00:17:20] Bob Agee: Those companies could come back, yes. President Putin actually said this in a speech to the RSPP, which is the Russian association for entrepreneurs and industrialists, in the Congress recently. And he said, they do keep track of how you left. There's companies who have left what they call in a bad way, companies that left in a good way, and companies that haven't left at all.
[00:17:46] Peter Slezkine: So, what does it mean to have left in a bad way?
[00:17:48] Bob Agee: Well, I think, in the bad way is if you, kind of, slammed the door on your way out, you didn't treat your customers, perhaps, the way you should have done, you cut them off from service support, and so forth. So, they, kind of, keep track of that process. And I think, companies who sold their assets to a Russian entity, again, it depends on how you sold it. Did you sell it with a call option? Or, did you just sell it and you're out? So, for example, that big four company, they sold it. They didn't sell it, they gave it away. They gave money. So, the local partner bought them out and there's no call option. Other companies have call options.
[00:18:29] Peter Slezkine: Call options mean you can get it back?
[00:18:31] Bob Agee: You have the right to buy it back at a pre-agreed formula. What that formula is and for what the amount is is not known because it's private by each company. But you have the right to buy it back. And I think around 20% of the companies that departed in year one have those call options. I think it goes down a bit in year two, maybe 15% of the companies that departed.
And in year three, it's always very hard to get a call option at that stage because the Russian government changed the rules. They said, “No more call options,” or if you need a special approval to get a call option. So, it became much more difficult to do that. And then, of course, the discount being demanded by the Russian government and what they imposed, what they call an exit tax. So, then they said, “Well, okay, if you leave, you have to sell your asset at least 50% off fair market value, and you have to pay an exit tax,” which started, I think, at around 10% and then ultimately went up to 20%.
[00:19:31] Peter Slezkine: Why did they only do that in year three? Just because they were caught off guard?
[00:19:35] Bob Agee: Yeah, they were, kind of, slow. I think, in the beginning, there was the desire to keep American companies here. I think it actually started in year two, if I'm not mistaken, not year three. It started in year two, this kind of discounting process. I think, in year one, they didn't react fast enough to the whole process. Year two, they did. And year three, then they ratcheted up the percentages. And it became, I mean, honestly, in year three and onwards, it became almost financially nonsensical for a company to engage in the whole process, because why would you walk away from an asset when you're getting 10 cents on the dollar? It just doesn't make sense.
[00:20:17] Peter Slezkine: Well, and if you've already spent two years there, you’ve absorbed the reputation.
[00:20:20] Bob Agee: Yeah. So, again, you know, as I said, the percentages, maybe, of the companies who have “left,” 95% of it was in year one, year two.
[00:20:31] Peter Slezkine: So, of companies from the sanctions imposing countries, so North America, Europe, Japan, Korea, Australia, and so forth, was there any difference in behavior, any patterns that companies from certain countries left more abruptly in a bad way? In a good way? More immediately?
[00:20:51] Bob Agee: Yeah. I would say the Scandinavian companies left very abruptly. And, like, I can't really comment whether it was going bad or not, but they just really rapidly took off. So, there was a lot of emotion.
[00:21:03] Peter Slezkine: Like IKEA, which was huge in Russia, they [crosstalk 00:21:08].
[00:21:07] Bob Agee: You know, I don't know the details.
[00:21:08] Peter Slezkine: Okay. But generally, Scandinavian companies.
[00:21:12] Bob Agee: The Finns and the Scandinavians were gone, like, within a week. And then a lot of companies tried to start selling their assets. I think the Europeans, by and large, I know a lot of Russian companies were eagerly looking to buy departing companies. I mean, there was almost a competition. There were competitions. Tenders were held to buy assets. So, I know one particular Russian company, we had him in a conference of ours once, they had bought up to 20 European departing companies in different industries, 20.
[00:21:45] Peter Slezkine: A single Russian company?
[00:21:47] Bob Agee: A single Russian company. I think it was actually called the company whose name was Profit.
[00:21:52] Peter Slezkine: Was it specially put together for this purpose?
[00:21:53] Bob Agee: Yeah, it was, kind of, a special purpose vehicle. Maybe, he already had some operation that he started. He bought his competitor who was departing and then he bought another, and then he bought another. Then he became this, like, mini conglomerate. And he said he bought 20 departing — all European — across various industries. And he said the average purchase price was 3.5x EBITDA. So, earning before interest and tax and amortization, which is a common factor.
So, if you're a businessman and you know, this 3.5x EBITDA means that you're paying, call it, three and a half dollars for every dollar of profit that gets generated a year. So, your ROI… and that's just pure profit. So, to pay that lower a price is just unheard of in anybody or anywhere around the world. It's like a giveaway price.
And this guy bought 20 companies, like this. Just imagine the cash that he's generating. And he says, you know, all the companies are operating really well. A lot of the businesses he acquired kept the management team in place. He might have put a CFO in each of those companies to look after them and make sure everything was done properly and integrated into his operation. I asked the question, “Would you like to sell any of them back to the companies if they wanted to come back?” “No way. Those companies, I'm extremely happy with doing extremely well.”
So, I guess this is another key, kind of, takeaway. And that is, when companies leave, they don't close down their operations. The exception may be some of the IT companies, because the IT companies left, they never really made anything, just brought stuff in to be sold. But with the exception of that particular industry, companies that were here, they left the marketplace, the teams got left behind, operations continue with or without the Western entity that used to have ownership of those assets. And they continued to this day doing very, very big business.
[00:24:02] Peter Slezkine: Although I talked to a Russian guy who said he knew somebody who took over a French car factory in these conditions, Renault or Peugeot, I don't know. Any case. That they were left with a factory that was just a hunk of metal because they didn't have the software to make all the robot arms do what they're supposed to do. And it was just a total dark warehouse for a year or something, a number of months. And then, one day, like Willy Wonka's factory, all the lights turned on and all the machines started whirring. And it's because somebody in France decided to press the button.
[00:24:38] Bob Agee: And let it start working.
[00:24:40] Peter Slezkine: But that without cooperation from the West, in this case, none of this sophisticated machinery can be repurposed or used. Is this an exaggeration told over drinks?
[00:24:49] Bob Agee: Every industry has its own little story. I know another story of another automaker whose factory was sold to the Chinese. If I'm not mistaken, it was Mercedes or one of the big automakers was making their cars. So, that was taken over by the Chinese.
[00:25:04] Peter Slezkine: And the Chinese are using German machinery to make their own.
[00:25:08] Bob Agee: To assemble Chinese cars.
[00:25:09] Peter Slezkine: And they were able to repurpose this machinery.
[00:25:11] Bob Agee: Yes. And moreover, what used to be the market share of 70% plus market share was controlled by the Western suppliers — Toyota, Chevrolet, BMW, Mercedes. Now, it's 70% Chinese.
[00:25:27] Peter Slezkine: The automobile industry?
[00:25:30] Bob Agee: Yeah. So, it moved essentially…
[00:25:31] Peter Slezkine: From 70 to 70?
[00:25:32] Bob Agee: Exactly. So, 70% was supplied by the big, foreign manufacturers that we all know. Now, it's 70% Chinese. Remember, this is one of the biggest car import markets in the world. I think it’s, like, number eight, number nine in the world, car imports, maybe even bigger. That market was just given lock, stock, and barrel to the Chinese manufacturers.
And I think when you look back on this period and see some of these transitions that took place, this is going to be recorded as, kind of, a pretty major milestone for the Chinese car manufacturers. I remember when I was running Cisco in the early part of my career, a company that not many people had heard about started to sell their stuff in Russia. It was called Huawei.
And so, it was, maybe, a couple billion dollar company at the time, but Russia became one of their first export markets. And they, you know, were competing with us in what we call DWDM, dense wave division multiplexing equipment. They were doing some really incredibly strange deals in terms of how they approached their market. Of course, they didn't have any constraints for FCPA regulations and what have you.
[00:26:51] Peter Slezkine: What does that mean?
[00:26:52] Bob Agee: Foreign Corrupt Practices Act law governing how American businesses can and cannot do business abroad. Chinese have no constraints in that regard. But in any case, the net of it is they started to use Russia as their, kind of, big test case on how to expand their business. Today, that little company, and that's not that long ago, let's call it 15, 20 years, 15 maybe, it's a $100 billion a year company.
[00:27:19] Peter Slezkine: So, Russia was one of their first big foreign markets?
[00:27:20] Bob Agee: Absolutely right. They learned how to export and develop their market businesses in Russia.
[00:27:26] Peter Slezkine: And the same is now happening in the automotive industry.
[00:27:28] Bob Agee: Exactly right. They're developing their dealer networks, their manufacturing capabilities, all of which has been given to them for free. The entire dealer network, set up by all the foreign manufacturers over 20 years, Chevrolet, BMW, all these great companies, all the engineering centers set up, all this stuff all given to the Chinese for free.
[00:27:55] Peter Slezkine: Are the Chinese building the infrastructures like the charging network?
[00:28:00] Bob Agee: I think the Russians are building that themselves bit by bit. You find a lot more recharges than you used to, certainly, around Moscow. So, I don't know who's actually putting in the investment. I think the city government is supporting it. Each building that goes up is going in with chargers, apartment buildings.
What can I say? This is a market that's been given to the Chinese, as I said, like, on a silver platter. And they're taking advantage of it. And some of the cars are, I don’t know, maybe spotty and have their own issues, but some of these cars have gained a lot of traction. I know one of the big American companies who used to lease cars imported from the West, they went through a very thorough review about what cars are going to be buying now. I think they have, like, a car fleet of 1,000 cars, a big company, a lot of employees.
And they settled on, I think it's called Geely. I think it was the Geely, because Geely, I think, was the company that bought Volvo, if I'm not mistaken. And they went through this thing. And, of course, that company took over the Volvo service network for free. And they said, “We really went with this company because of the reliability and the fact they had this entire dealer service network supported by Volvo technology,” and so forth. So, I guess we've created our own competitor for the future now.
[00:29:18] Peter Slezkine: So, we'll get to who benefited from Western companies leaving in a moment and what might happen in the future, but let's stick with the Western companies, with the American companies that you know so well. We talked about those that left. The majority remained in some way. So, what constraints were they dealing with? How were they impacted by sanctions? To what extent were they impacted by new Russian restrictions? What was it like operating American business in Russia for the last three years?
[00:29:48] Bob Agee: So, I mean, all the companies have been impacted by sanctions in different ways, both Russian and European and American sanctions. So, it's, kind of, an interesting thing to note that Russian companies, I just saw surveyed not long ago, their biggest problem that they face are interest rates. Because of the inflation rate in Russia, interest rates went up, as you probably noted, 20%-plus. It's 21% now. So, very hard, very big burden on cash flow and so forth. So, that's their biggest problem.
American companies’ biggest problems are enforcement of EU and U.S. sanctions because they have to comply with these sanctions. Russian companies don't. So, that's point number one.
So, the impact on sanctions have been mainly felt by Western businesses operating in Russia, not by Russian companies.
[00:30:42] Peter Slezkine: But Russian companies still didn't have difficulty getting components and reaching markets if they export, getting inputs?
[00:30:51] Bob Agee: Yes, that is true, but…
[00:30:53] Peter Slezkine: Or do they just label everything as having come from Kazakhstan and everything is fine?
[00:30:58] Bob Agee: A lot of stuff got substituted in through what we call third countries, Turkey and Central Asia, and so forth. But also from China. You would be absolutely surprised on how many spare parts and components can be sourced from China. From what I hear and see, almost anything can be sourced from there.
[00:31:15] Peter Slezkine: And that includes Western components and Chinese made components.
[00:31:18] Bob Agee: Yes.
[00:31:20] Peter Slezkine: So, just everything that they want, whether Chinese made or Western made can be found in China.
[00:31:22] Bob Agee: Well, China or other countries. So, I think we did an analysis about the shift of our own companies and where products and components came over the years. And we saw that the percentage of companies that shifted purchases to either local inputs or from third country substitutes were quite significant. So, from localization, that's actually buying more stuff locally, as opposed to importing them. There were significant increases. A third of our companies — these are AmCham member companies — increased localization by 90%. That's localized purchases. Another third increase by 50%. So, two-thirds of all our companies increased local purchases by either between 50 and 90% over the last couple years. That's a huge number.
The second big takeaway is third party, third country substitutes. So, again, these are AmCham companies, not Russian companies. A third of our companies have switched to a third country, third country being not just China, everywhere, up to 100%. So, 100% of their inputs now come from, not EU or U.S., but from third countries.
So, you can think, if that's the case with U.S. companies, what is it with Russian companies? So, I think one of the key takeaways that I think is important for everybody to understand is sanctions go up. This de-dollarization process takes place because of the lack of access to banking services. Trade gets diverted. It doesn't get stopped. And the diversion moves in the direction of China or Turkey or India or other countries that can supply parts and components or goods into Russia that they need.
[00:33:27] Peter Slezkine: Could the U.S., with a strong enough will, have plugged all these holes? Because you hear people in this town talk about sanctions being applied more rigorously with different results. Or is it just impossible to stop the stream? Water's going to find an outlet.
[00:33:42] Bob Agee: I think the stream, there's just too much now. I think 95% of all the trade taking place between Russia and China is done not in dollars but in rubles and yuan. So, we created our own situation. We de-dollarized trade. The trade is now done in currencies other than the dollar. There’s a lot of trade done in dirhams, a lot of trade done in yuan, a lot of rupee, ruble clearing taking place. A lot of bitcoin and digital platform payments are taking place.
[00:34:17] Peter Slezkine: How important is India? We've mentioned China quite a bit.
[00:34:20] Bob Agee: I think India is an important market [crosstalk 00:34:22].
[00:34:21] Peter Slezkine: Or is it mostly just to export oil?
[00:34:23] Bob Agee: I think oil is a massive market. I think there's a lot of Indian companies starting to develop pharmaceutical joint ventures and businesses in Russia. So, I think the pharma potential is there. Currently, American companies are still very prominent and very successful in the Russian pharma and med tech segments. But, I guess, depending on how severe if more restrictions were to be applied, Russia is too big of a market, I think, and the border with China is too extensive. And, of course, China and America has its own, now, trade issues to contend with.
I think Russia and China will continue to develop that relationship going forward, unless there's some sort of a shift in our own strategy towards Russia that, kind of, helps bring it back into a more direct relationship.
[00:35:17] Peter Slezkine: So, as the representative of American business in Russia, what would you like to see change in order to improve the economic situation for American business?
[00:35:28] Bob Agee: I would say, look, first of all, there are some sanctions that have been applied that I think have damaged American businesses in Russia. So, I think, firstly, there was an investment ban imposed on American businesses. So, no American business can invest. And you can imagine you have these massive companies, other than maintenance, they're not able to make any investments at all.
The Russians, then, set up their counter sanction that said, “Well, okay, if you're not going to be investing, then you don't need to get dividends.” It's not exactly a direct link, but it's a de facto link that's been established, because now dividends have to be approved by a commission in order for them to be paid. And the rest say, “Well, if you're not going to invest, why do you need a dividend, right?” So, there's that kind of relationship established.
So, one of the things that I would be suggesting to the U.S. government would be to eliminate that investment ban and work with my Russian counterparts to ensure that dividends are allowed to be paid. That would release a huge amount of money back to the United States in terms of dividend flow and also allow the balance sheets of these companies that have been building up cash for the last three years to pay those dividends and also make necessary investments to expand their businesses in the country.
So, that's number one. I think there's another sanction that was put in place that affected what we call luxury goods. The Europeans, I think, were quite clever insofar as they set a €300 threshold. Anything above €300 is considered luxury, anything below €300 is non-luxury. We, for some reason, set a level of $0. So, any cosmetic or pharm company that deals in perfume or what have you cannot send anything from the United States. Anything. Like, a little bottle of face wash, nothing. And one particular company, a very famous American brand company, who had a lot of employees in Russia selling their products, they have shifted from 100% American supplied goods to 100% Chinese supplied goods. So, just think about that. American brand used to import everything from the United States — loyal American supply customer situation. Everybody was happy. Now, buying all their products from China. So, you know, who wins out of this, who loses?
So, I think that I would advise that restriction to be changed. I think, allowing American individuals to provide services in the country, whether they be consultants or advisors or auditors, they should be allowed back and be allowed to do those services in the country. I think that's good for both the U.S. companies that are providing those services and for Russians to receive those services. That would be number three.
I've been a big advocate for a long time for aviation safety. I think we imposed very severe restrictions on the supply of spare parts and support for the commercial aviation industry in the wake of the war. But this is a catastrophe waiting to happen. I think it happened when we did the same thing in Iran. There was a crash that changed our policy. I think it's something that we should do before a disaster happens. Obviously, we want to be selective of how we do it to ensure there's no military spillover. But I think it could be done and should be done.
And I would probably also extend this request, maybe not initially, but later, to certain individuals. I think a lot of individual people had been sanctioned by the previous administration.
[00:39:16] Peter Slezkine: Russians.
[00:39:16] Bob Agee: Yeah. Russians. And I think, if we want to, you know, following this very good program we attended today at George Washington University, one of the key takeaways from this program was that we want to, kind of, try to engage in more dialogue. Dialogue and communication between parties is important. Second track diplomacy, business diplomacy that takes place is an important and supportive to the bigger level discussions and negotiations going on by the diplomats. This helps support the whole process of an improved relationship between the countries, if that's what our government actually does want, which I hope it does.
And that means that, having more people being able to travel here and more people able to travel there, having this increased dialogue, I think, is going to help diffuse the situation and will help bring about a more peaceful relationship between the two countries.
[00:40:16] Peter Slezkine: How is this message received in Washington?
[00:40:20] Bob Agee: I don't know. I don't know. I haven't delivered it. I'm planning to deliver it.
[00:40:24] Peter Slezkine: So, this is all a rehearsal for a much more important…
[00:40:27] Bob Agee: Exactly. You're my test case on this. We've been waiting for the administration to get all the appropriate people in place. So, we're planning to see them in the upcoming weeks.
[00:40:36] Peter Slezkine: But how enticing do you think this picture of economic cooperation of American business investment in Russia really is? So, Rubio, at some point, maybe after the very first meeting in Saudi Arabia, mentioned the great economic opportunities that might be available, but others will say that Russia is a relatively small market for American companies overall, was a small piece of the business before. What are the actual prospects? I understand for those who are now in Moscow, this is a top priority, but for those sitting in headquarters somewhere in the U.S. or in the White House, how enticing is it?
[00:41:11] Bob Agee: Well, look, I mean, if Russia was for 73.5% of the companies in 2021, a strategic market, then, you would say that, when things start to normalize, it again becomes a strategic market. Maybe not for 73%, but for a large percent. Why is that the case? It's one of the largest countries in the world in terms of energy production — oil, gas, massive reserves of uranium nuclear energy processing. Huge levels of cooperation in aerospace as a buyer of American aerospace technology. And I think that's probably something that we could use a good new, happy customer for our aerospace product.
[00:41:55] Peter Slezkine: The only customer that would be happy buying from Boeing at this stage.
[00:41:58] Bob Agee: I didn't mention any names, but I'm saying they would. And there's huge opportunities in space cooperation and exploration. There's massive opportunities in the Arctic areas.
[00:42:11] Peter Slezkine: What are they, specifically? Because again, we hear about the Arctic.
[00:42:12] Bob Agee: Yeah, there's a lot of oil and gas projects that are pending there. And I think, back to the famous issue of rare earth metals, we have a whole summary of rare earth metal potential in Russia, A lot of potential projects there. And it's interesting, I think you probably heard recently that the Chinese have suspended all shipments of rare earth metals in the United States.
Well, there's a pretty nice possible area of cooperation with the United States and Russia in rare earth metal development and joint ventures. And uranium, did I mention that, one of the huge uranium processing titanium. It's a massive titanium facility that one of our aerospace companies owns, or co-owns to this day is a joint venture sitting there. So, I think, there's a lot of these areas of cooperation. I think you're not going to be able to say you flip a switch and it's all going to happen on day one. But I think Russia is just too strategically important for the United States to ignore. It wants, I think, a commercial relationship with the United States. And I think, it probably looks upon China with a degree of trepidation, too much reliance on one massive neighbor. The Chinese possibly look upon Russia. Don't want to get over reliant on their gas and oil. Russia doesn't want to get over reliant on China as a customer. But, you know, if all other roads are closed, that relationship will continue to grow. We did an analysis on the gas market. Russia's already number one supplier of gas to China that's gonna be growing. That's gonna be growing.
[00:43:51] Peter Slezkine: And they still haven't built the pipeline from Siberia, too.
[00:43:54] Bob Agee: They haven't built that, but they have another major pipeline opportunity via Kazakhstan that exists that can be activated. And maybe, this Power Siberia two comes onboard. They have LNG export opportunities to China. So, you know, that's going to grow it. There's no question that that's going to continue to grow.
[00:44:13] Peter Slezkine: And that's clearly part of your message here is that not only are there economic opportunities in Russia, but that, given the framing of U.S.-Chinese competition, it's either us or them.
[00:44:24] Bob Agee: Russia will never now decouple totally from China, there's too much now going on. Trade is already $250 billion a year. It's grown by over 50% over the last couple years, that relationship's gonna continue to grow. But I think for the United States, it's important to try to repair the relationship with Russia. I think it's good for American business. I think it's strategically important that it, kind of, starts to maybe decouple as much as possible, this growing relationship with China
And as I said, start to develop some of these projects that benefit the United States as opposed to benefit China.
[00:45:05] Peter Slezkine: Thank you very much.
[00:45:07] Bob Agee: Thank you!
[00:45:11] Peter Slezkine: Thanks for listening to the Trialogue Podcast. Make sure to subscribe to the show, so you don’t miss out on any episodes.
The Trialogue Podcast is hosted by the Stimson Center and produced by University FM.