Big Russian and Far East market is not just for big design firms

Big Russian and Far East market is not just for big design firms

By KEN McGOWAN and BILL BROZ
McGowan Broz Engineers

With the rapid pace of resource development in the Russian Far East, it's the giant oil, mining and engineering/construction companies that seem best positioned to cash in on the region's emerging wealth.

But they're not the only ones. Over the last two years, our 10-person mechanical and electrical engineering firm has profited significantly from opportunities in the region. The key is to keep abreast of regional developments and be prepared to form partnerships or alliances with larger concerns.

Unless a firm's senior management has significant previous foreign experience, it's unrealistic for a small company to do business directly with a Russian firm or government agency right out of the chute. It's best to start one or two tiers down -- providing services to a major Russian-American joint venture, or to a large U.S. company subcontracting to a joint venture.

The power plant's site on the Omolon River is in one of the most remote places on earth.
Although the challenges are many -- lack of social services, need for interpreters, unfamiliar local customs, high business costs and remote locations, to name just a few -- the opportunities are there for those who choose to look at the long term.

McGowan Broz is currently working on its second Russian project, a prime power plant and site electrical distribution system on Sakhalin Island -- the new center of Russia's oil and gas industry. Direct investment on Sakhalin Island alone has been projected to reach $25 billion over the next two decades.

The "multiplier effect," though difficult to quantify, will certainly push total economic activity to a level many times that sum. Most of the capital, and much of the development expertise are likely to come from North America, and clearly Pacific Northwest companies are well-situated geographically to be in the thick of this activity.

McGowan Broz's first project in Russia, a 12-megawatt diesel power plant serving a producing gold mine in the Magadan Region, completed startup last year. Our firm's opportunity came about through a long-standing relationship with the supplier of the plant's engine generators, who in turn had a contract with the Russian-American joint venture developing the mine.

The project site is located on the Omolon River, in one of the remotest valleys on earth. Miners from North America and Russia are now teaming up for what could become a 21st century Klondike -- a $1 billion gold deposit buried underneath the Russian permafrost. Over the next 15 years, it is estimated that the mine will yield 100 tons of pure gold, equivalent to half the gold that has ever been mined in Alaska.

To get to the isolated construction site, workers fly north to Anchorage and then west to the Russian seaport city of Magadan. The final leg is by helicopter, another 500 miles across an untracked moonscape of tundra, mountains and shimmering swamps. The choppers are not heated or soundproofed, and the wooden benches that serve as passenger seats make the four-and-a-half- hour flight seem like an eternity.

The power plant was designed for operation down to -74 degrees F. The exhaust stacks are 25 meteres high, as required by Russian authorities. Photos courtesy McGowan Broz. Engineers.
The power plant was designed to operate under severe arctic conditions, and has certainly had a chance to prove its reliability: winter temperatures have dipped as low as -74 degrees F. For most construction work in that part of the world, cold-regions engineering experience is essential and our staff's experience on Alaskan projects came in very handy.

Further, because of the remoteness of the project site -- accessible only by ice road in winter and helicopter in summer -- logistics became a paramount concern. When the movement of equipment and materials started to bog down, our firm shifted hats and helped order material and coordinate shipments. We still joke about changing our name to the "McGowan Broz Freight Forwarding Co."

Doing business in Russia demands a level of patience and flexibility beyond that needed on even the most demanding projects in the West. During construction, one of our senior staff members was on his way from Anchorage to Magadan when a routine refueling stop turned into a case study in post-Cold War bureaucracy.

It seemed that the plane had landed on a restricted runway that was being used for Russian military maneuvers -- only the army hadn't bothered to notify the airport. The aircraft was detained and not allowed to move for several hours, all without any explanation. Sporadic but heated dialogue transpired between air traffic controllers and the army. At one point, a senior (and rather frightening looking) army officer came aboard, which did little to calm already jittery nerves. Finally, the plane was allowed to refuel and take off for Magadan -- again, with no explanation.

Though perhaps not as extreme, some of our experiences with Russian building code issues were reminiscent of that fueling stop.

The power plant, shown here nearing completion, provides over 10 megawatts of electrical power to a working gold mine. The plant also recovers waste heat for distribution to various buildings.
Although doing business in Russia may appear menacing, there are resources available to assist the small firm just starting out. The Foundation for Russian-American Economic Cooperation, with an office in Seattle, sponsors American Business Centers in Yuzhno-Sakhalinsk, Vladivostok and Khabarovsk. The centers are geared to helping small businesses get established in the area, and provide a myriad of services ranging from identifying potential joint venture partners to assisting with due diligence.

Joint ventures operating in the region face strict requirements on Russian labor content, for which the centers can also provide assistance. Another excellent source of information is the locally-published Russian Far East Update, which summarizes economic developments in mining, oil, gas and other areas each month.

The business opportunities in the Russian Far East are tremendous. Other than technical expertise and business savvy, your most valuable asset is probably a healthy sense of humor.

Ken McGowan, P.E., and Bill Broz, P.E., are principals in the Bellevue-based firm of McGowan Broz Engineers, Inc.

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