Monday, September 27, 2010

The Russian Way in business

Russia seems to have a peculiar culture in business and politics, probably the heritage of communist years mostly affecting it. What I find mostly abhorring is the culture where the powers-to-be can twist everything the way they want with no regard to justice, human rights or other aspects of democracy.

In Russia, this culture is clearly thoroughly ingrained in the society and its structures, where most frightening is the way even the judicial system is subjected to the will of the ruling class. Most abhorrent examples where how, for instance, Mikhail Hodorkovski was sentenced to a lengthy imprisonment and stripped of his wealth just because Vladimir Putin wanted it so. And the judicial arm of government rushed to do his bidding, quite probably out of fear of falling out of his favor. I am also more than a little bit suspicious that the government might have its hand in Anna Politkovskaya's murder as well. If not, at least it is very clear that the government was behind the poisoning of Alexander Litvinenko in London in 2006...

Well, that is the darker side of the Russian way of handling things. It is not always that tough in business life, especially in international business, where they can't always use as absolute methods of solving a problem. However, they know how to extort and use dirty ways to get their way.

Concrete examples, you say? Ok, let's start from the big ones, where foreign businesses have been blackmailed into submission. The Royal Dutch Shell's project called Sakhalin-2 springs to mind. You can read about it here. It was one of the biggest oil and gas projects in the world, and the Russians wanted control of it. They had made a deal with Shell about developing this area that gave Shell the majority ownership and control over the project. Shell had started the project in 1994 and had invested something in the area of 10-20 billion euros in it. So, the Russians let the Shell invest and build the field, and when it was nearing completion and it was time to collect the fruits, the Russians grabbed it. The operation was camouflaged as environmental problems and certain environmental permits were suspended to up the pressure and prevent production in the fields. Putin's boys also used some legal threats and in the end Shell had to submit. Suddenly all the environmental problems disappeared after the power-and-wealth grab was successful...

This is the way Russian government operates. They invite foreign companies to invest in Russia and when those foreign companies are hostage to the investment they have made, Russians take what they want by blackmail. And then they are surprised when foreign companies are a little reserved in investing in Russia? Go figure...

Let's take a couple of smaller examples, where we Finns have also tasted the rotten culture of our dear neighbour. First, import of Russian birch. Russia is mainly an exporter of raw material and their forest and paper industry is rather primitive. In comparison, Finland is known for its high tech forest and paper industries over the world and exports lot of its knowledge, technology and machinery abroad.

Vladimir Putin wanted Finnish companies to invest in Russian forest and paper industries and, supposedly, to develop them to the same high level as in Finland. He decided to force them to create paper mills etc. in Russia and do the refining of raw materials there, instead of exporting the materials and doing the added value work elsewhere. Vladimir decided that he would make the Finns to bring the high tech know-how and the capital required into Russia for free. After they would have made their investment, he could once again hold them hostage and demand what he wanted. Birch was what the Finnish forest industry required, so he decided to set big export tolls on birch. This way he would soon have the technology and the Finns would fix their primitive forest industry into a global success. And naturally, the Finns would pay for everything. Brilliant thinking!

However, Vladimir's plan backfired. The Finns didn't want to be held hostage and adjusted to the situation by stopping birch import from Russia. Finnish forest industries were forced to close a few factories to do so. So, Vladimir didn't get his way but lost the birch export to Finland. He tried to rectify the situation by promising to postpone the tolls by a few years, but it was too late. Finns didn't want to invest in opening anew the already closed factories, especially when the trade partner was so unreliable. What guaranteed that Vladimir wouldn't pull the same show all over again?

Here, things would be different, if Vladimir had tried to buy the technology and consultation and had formed a partnership with Finnish companies to that end. He would have gotten what he wanted in the first place, but he would have had to pay for it. Instead, he decided to get it for free by blackmail. Russians really would need to learn new, honest ways of doing things. Coercion and manipulation only works to a certain extent.

Examples can be found in abundance, but let's mention two more, briefly. First, the Russians took most of the export and import traffic on wheels by these same sort of tactics a few years back. Much of the export from Europe to Russia goes through Finland and 5-10 years back Finns did most of the transportation on wheels. Finns had great quality trucks and everything required, Russian trucks were very unreliable and oftentimes down right dangerous on the roads. However, Russian authorities at the border started to make things so miserable for the Finnish trucks, that soon Russians started to take over. Russian trucks got through the border with no problems, but Finnish trucks had to wait days on end, were punished with arbitrary and changing extra costs and regulations etc. At times the Russians authorities even demanded that Finnish trucks had to have an escort to drive to Moscow. With horrible costs, of course.

With all this happening, Finnish transportation suddenly became much more expensive and slow and business started to move to Russian firms. This even forced many Finnish companies to move their company's official headquarters to the Russian side to acquire Russian plates for their trucks. After that, they could circumvent the difficulties and costs that Finnish trucks had to absorb.

Finnish department store chains have also had their share of problems. Stockmann had to move one of it's department stores in Moscow after having no help from the police in a row with the owner. Stockmann had rented a building, which was later sold. The new owners wanted to extort a huge rent and cut off electricity when Stockmann didn't give in to their demands. The police was of no help, and eventually Stockmann had to find another location and move its store.

So, this seems to be the Russian way in business and I am afraid it's going to take decades before that changes. One thing that helps this change is the transparency provided by internet and other means of instant communication. It is no longer so easy to hide things, so even the Russian bureaucrats have to respect publicity...