WASHINGTON – In December 2010, amid much fanfare and expectations, Maryland became the first U.S. state to open an office in Russia with the aim of increasing trade.
But in July the office was “suspended,” becoming the latest casualty of tensions between Russia and the United States, and a symbol of lost potential for Maryland business with Russia.
The office was shut down at a time when exports from the state to Russia were climbing dramatically. Between 2010 and 2013, exports from Maryland to Russia, consisting primarily of transportation equipment, increased by more than 300 percent, making it the sixth largest destination for the state’s exports.
“I don’t believe we tapped the opportunities that existed,” said Robert Walker, deputy secretary at the Maryland Department of Business and Economic Development.
The suspension of the office – Walker believes there is a chance it could eventually re-open – is just one sign of the impact of the events in Ukraine.
The trade office was in the hands of the Partnership for International Business Development, a Russian company whose website lists other clients, such as IBM and Siemens. Maryland did not station state employees there.
“I believe budgetary constraints were one reason, but the reason behind (the closing) were relations between the U.S and Russia,” said Boris Kornilov, general director of the Partnership for International Business Development, who was Maryland’s representative in Russia.
Additionally, companies, ranging from construction firms to small bookstores, are feeling the pain of what is considered by foreign policy experts to be the lowest point in U.S.-Russia relations since the fall of the Soviet Union.
Contingency Office Closure
Less than a 30-minute drive away from the Kremlin, the seat of power in Russia, an office in a Moscow building served as Maryland’s contingency office.
The contingency office “opened with the expectation that it would facilitate trade,” between Maryland and Russia, and transform the state into a “global gateway,” said Walker, who was present at a ceremony that marked the opening of the partnership in Moscow.
In practical terms, the contingency office was to provide market advice and information to Maryland companies interested in entering the Russian market, while also bringing Russian investment into Maryland.
The contingency office was not paid a retainer, but rather worked on a performance basis. Walker said $30,000 was spent since the office started.
In that time, the contingency office assisted between 20 and 30 Maryland companies.
“In 2008, 2009, 2010, the relations between the U.S. and Russia were pretty good … Russian companies were looking at the U.S. and small (U.S.) businesses were looking at Russia,” Kornilov said.
Much of that optimism was based on President Barack Obama sweeping into power in 2009 and expectations that he would prioritize improving relations with Russia.
“The pursuit of power is no longer a zero-sum game … That’s why I have called for a “reset” in relations between the United States and Russia,” Obama said, during his first presidential visit to Russia in 2009.
But earlier this year Maryland’s contingency office was suspended, in large part because of the prevailing geopolitical situation.
“In light of the environment, we suspended the operations,” said Walker, blaming the “political situation, sanctions and business climate in general.”
The environment Walker was referring to stems from the situation in Ukraine.
When Ukraine’s President Viktor Yanukovych chose to sign an association agreement with Russia, instead of one with the European Union, in February, protests erupted in Kiev. The protesters were successful in removing Yanukovych, and in response, pro-Russian troops took over the Ukrainian peninsula region of Crimea.
The United States and the European Union then imposed sanctions on Russian individuals believed to have been associated with the intervention in Crimea and the continued support by Russia of pro-Russian rebels in eastern Ukraine.
Business Slows Down
Since 2010, economic relations between Maryland and Russia have grown rapidly. Between 2010 and 2013, exports from Maryland to Russia increased from less than $100 million to nearly $500 million. In fact, the first half of 2014 saw an increase of more than 5 percent over the same time period in 2013.
But this rise could in part be explained by contracts signed much earlier, and the figures are likely to change in the future, said businesses that deal with Russia.
“It has affected business very much so,” said Michael Rae, president of Rockville-based Argus Limited, which provides equipment for oil and gas pipelines in Russia, among other countries in the region.
For Argus, the recent sanctions could mean a decrease in business by as much as 75 percent, which would lead to layoffs and moving into smaller offices.
In 2011, Argus completed a $45 million deal to supply compression equipment to Russia, the largest Export-Import Bank of the United States financed deal with Russia in more than 15 years.
“The latest ups and downs have been painful personally,” Rae said.
The economic impact of the sanctions on the Russian economy are slowly becoming clear.
Russia’s former finance minister Alexei Kudrin, considered to be close to President Vladimir Putin, recently said that Russia had already lost almost 1 percent of Gross Domestic Product growth because of the sanctions. Investors have also pulled out almost $75 billion from Russia in the first half of 2014, while foreign direct investment from the U.S. to Russia was down by almost half, according to the Central Bank of Russia.
Forty-one Russian and Crimean government officials have been placed on the U.S. sanctions list, in addition to the 46 entities on the list as of Sept.17, according to the U.S.-Russia Business Council, a Washington-based trade association.
Sen. Ben Cardin, D-Md, a member of the Senate Foreign Relations Committee and chairman of the U.S. Helsinki Commission, has praised the sanctions against Russia, while also making it clear that the loss of business is Russia’s fault.
“The sanctions leveled against Russia are directed at Mr. Putin and his inner circle who are responsible for the ongoing aggression, not the people of Russia or American companies,” said Sue Walitsky, Cardin’s national communications director, in an email.
A business that would seem immune to the crisis thousands of miles away, is a small bookstore located in Kensington.
Russia Online, Inc., which opened in 1999 and specializes in books from Russia and former Soviet countries, has suffered from an overall decrease in the bookstore market. But the crisis has taken a toll as well, said James Beale, founder and owner.
He said that even though books were not directly affected by sanctions, he was “always aware that sanctions against banks,” through which payments are made, could be a problem.
The bookstore, Beale said, is facing slowing imports from Ukraine also, where publishers have to cut back on employees because of the deteriorating economic situation.
“There could be unofficial problems,” Beale said, referring to a slowing down of exports from Russia because of longer customs checks.