Russia's future depends on direct investment, and the oligarchy
The Western assumption is that it's a determinable detail; the Russian, that it all depends - the future cannot be predicted.
Such ingrained thinking separates those outside Russia from those inside. Most of us feel comfortable planning a few years into the future. No one in the U.S. thinks his business depends on what happens to U.S. President Bill Clinton over the next couple of years. But in Russia, much depends on what happens to Clinton's Russian counterpart, Boris Yeltsin, and his successors. Of course, how it depends on what happens to Yeltsin is not clear at all.
What could possibly save Russia now? There's no quick fix. Whatever it takes is not something that can be done by governments or presidents. They can only urge the people to do the work, and try to reduce their interference.
The money that Western governments have poured in, for example, has poured out, or into individuals' pockets. The International Monetary Fund has helped to finance the government, but it has done little for the country overall. The most productive investments have created real value - such as buildings, factories, trained people - but they have been relatively small compared with overall capital flows.
From my vantage point, as a small investor in four Russian high-tech businesses, large companies such as IBM, Microsoft, Oracle and Hewlett-Packard (among others) have done a lot more for Russia and its people than any bilateral aid. (So have Coca-Cola, Masterfoods, ABB, and many other industrial direct investors.) Those companies didn't simply send money to Russia; they stuck around and trained people how to use it and invested it in offices and support programs for dealers and software partners. They built an infrastructure so that their products would be worth something to their customers.
Boris Nuraliev, for example, of 1C has a network of more than a thousand dealers who he has trained to sell accounting software and to train their customers, in turn, about how to use it. TerraLink sells networking equipment and document management systems, helping its customers to reduce paper and speed up processes. DPI sells equipment and software to Russia's newspaper industry; in Russia, where the Net is still a luxury and people are impressively literate, newspapers reach a broader audience.
Elsewhere, too much of the "economic restructuring" has been financial - the trading and re-allocation of assets. The big banks' impact on the economy has been largely negative. They have gained control of an economy that's largely worthless but with assets that can be sold abroad, and reorganized it only on a macro level. These "banks" don't lend money for constructive purposes, but rather trade in government debts. When Sergei Kiriyenko - who, as the joke has it, failed to do in five months what Mr. Yeltsin failed to do in five years, and was sacked as prime minister by Mr. Yeltsin in favor of Viktor Chernomyrdin - devalued the rouble, the banks dumped their roubles as fast as they could, accelerating the decline. Funds dedicated to saving the rouble mostly saved it for the bankers, who traded out of the currency more quickly than most normal citizens were able to.
A Russian friend of mine, who works for a Western high-tech company in Moscow, put it very well: "From the very beginning, I did not believe that any help for the government would be useful. By financially supporting Russia, the West helped to save the system we all hate in this country. Support should be targeted to specific people and businesses - which means direct investments. This is the only way to create an independent group of companies, which will be able to influence the political process in a positive direction."
It may be that the only way to save Russia is to let it save itself, spurred by impending disaster and no more life support from its government.
Chernomyrdin seemed to be a mere figurehead representing the interests of the old-style state companies. Worse, he seemed to be the hand-picked representative of the clique of seven bankers who control most of the economy. But he does have some understanding of how businesses work, and he probably feels more responsible for the country as a whole than they do.
The challenge he would have faced was to persuade these seven oligarchs to change their ways to rescue the country. And they, in turn, should go to the people with a legitimate proposal that could run along these lines:
"We, the bankers, believe in this country. We understand we need to use our assets to create real wealth and each of us is committed to creating real companies. We're going to use our financial assets to fund mortgages and revive the construction industry for single-family homes instead of office palaces. We're going to (re)build factories and create distribution systems for goods (possibly in co-operation with foreign investors who would provide training as well as money). We won't tolerate corruption. We will compete with one another to build the best companies. We will hire the best of our young graduates to build companies, so that they are not tempted to leave. We will start lending to small entrepreneurs who want to start small service and production businesses, and we will protect them from the mafia with our own mafia."
That's a tall order, and one that my Russian friends, at least, doubt is possible to achieve. But if Clinton wants to make real progress, he could do much worse than try to get such an initiative off the ground. And if he doesn't succeed with new Prime Minister Yevgeny Primakov, maybe he'll encourage Russian entrepreneurs and direct investors, instead of stock-market speculators, to build something real.
Meanwhile, whatever foreign aid is available should go directly into a legal system that would enforce contracts and protect the property rights of Russian citizens and of foreign investors. With a rule of law, both foreign investors and Russian businesses might feel encouraged to build new enterprises.
Back to reality - the oligarchs are in control, but are unlikely to start an enlightened investment program. I do see Russian companies understanding that they need modern systems to compete. The large state conglomerates are ordering enterprise-wide information management systems. Smaller companies are buying accounting software. Banks and businesses are getting hooked up to the internet because they know they need information and communications to run their operations.
People who are learning how to run a business or design software can't sell that talent for dollars quickly, but they can probably make a living out of selling their systems - accounting and networks, knowledge sharing and decision making - to the oligarchs' companies. No matter what happens, valuable skills can't be stolen and can't be devalued. Some people may emigrate; some will stick it out, perhaps with local investors, perhaps selling their services through the internet to customers overseas.
In my small world of the Russian computer market, the troubles matter a lot. Kiriyenko or Yeltsin, Primakov or the oligarchs don't affect us directly - we're too small - but they affect the customers whom we rely on to pay us.
Such ingrained thinking separates those outside Russia from those inside. Most of us feel comfortable planning a few years into the future. No one in the U.S. thinks his business depends on what happens to U.S. President Bill Clinton over the next couple of years. But in Russia, much depends on what happens to Clinton's Russian counterpart, Boris Yeltsin, and his successors. Of course, how it depends on what happens to Yeltsin is not clear at all.
What could possibly save Russia now? There's no quick fix. Whatever it takes is not something that can be done by governments or presidents. They can only urge the people to do the work, and try to reduce their interference.
The money that Western governments have poured in, for example, has poured out, or into individuals' pockets. The International Monetary Fund has helped to finance the government, but it has done little for the country overall. The most productive investments have created real value - such as buildings, factories, trained people - but they have been relatively small compared with overall capital flows.
From my vantage point, as a small investor in four Russian high-tech businesses, large companies such as IBM, Microsoft, Oracle and Hewlett-Packard (among others) have done a lot more for Russia and its people than any bilateral aid. (So have Coca-Cola, Masterfoods, ABB, and many other industrial direct investors.) Those companies didn't simply send money to Russia; they stuck around and trained people how to use it and invested it in offices and support programs for dealers and software partners. They built an infrastructure so that their products would be worth something to their customers.
Boris Nuraliev, for example, of 1C has a network of more than a thousand dealers who he has trained to sell accounting software and to train their customers, in turn, about how to use it. TerraLink sells networking equipment and document management systems, helping its customers to reduce paper and speed up processes. DPI sells equipment and software to Russia's newspaper industry; in Russia, where the Net is still a luxury and people are impressively literate, newspapers reach a broader audience.
Elsewhere, too much of the "economic restructuring" has been financial - the trading and re-allocation of assets. The big banks' impact on the economy has been largely negative. They have gained control of an economy that's largely worthless but with assets that can be sold abroad, and reorganized it only on a macro level. These "banks" don't lend money for constructive purposes, but rather trade in government debts. When Sergei Kiriyenko - who, as the joke has it, failed to do in five months what Mr. Yeltsin failed to do in five years, and was sacked as prime minister by Mr. Yeltsin in favor of Viktor Chernomyrdin - devalued the rouble, the banks dumped their roubles as fast as they could, accelerating the decline. Funds dedicated to saving the rouble mostly saved it for the bankers, who traded out of the currency more quickly than most normal citizens were able to.
A Russian friend of mine, who works for a Western high-tech company in Moscow, put it very well: "From the very beginning, I did not believe that any help for the government would be useful. By financially supporting Russia, the West helped to save the system we all hate in this country. Support should be targeted to specific people and businesses - which means direct investments. This is the only way to create an independent group of companies, which will be able to influence the political process in a positive direction."
It may be that the only way to save Russia is to let it save itself, spurred by impending disaster and no more life support from its government.
Chernomyrdin seemed to be a mere figurehead representing the interests of the old-style state companies. Worse, he seemed to be the hand-picked representative of the clique of seven bankers who control most of the economy. But he does have some understanding of how businesses work, and he probably feels more responsible for the country as a whole than they do.
The challenge he would have faced was to persuade these seven oligarchs to change their ways to rescue the country. And they, in turn, should go to the people with a legitimate proposal that could run along these lines:
"We, the bankers, believe in this country. We understand we need to use our assets to create real wealth and each of us is committed to creating real companies. We're going to use our financial assets to fund mortgages and revive the construction industry for single-family homes instead of office palaces. We're going to (re)build factories and create distribution systems for goods (possibly in co-operation with foreign investors who would provide training as well as money). We won't tolerate corruption. We will compete with one another to build the best companies. We will hire the best of our young graduates to build companies, so that they are not tempted to leave. We will start lending to small entrepreneurs who want to start small service and production businesses, and we will protect them from the mafia with our own mafia."
That's a tall order, and one that my Russian friends, at least, doubt is possible to achieve. But if Clinton wants to make real progress, he could do much worse than try to get such an initiative off the ground. And if he doesn't succeed with new Prime Minister Yevgeny Primakov, maybe he'll encourage Russian entrepreneurs and direct investors, instead of stock-market speculators, to build something real.
Meanwhile, whatever foreign aid is available should go directly into a legal system that would enforce contracts and protect the property rights of Russian citizens and of foreign investors. With a rule of law, both foreign investors and Russian businesses might feel encouraged to build new enterprises.
Back to reality - the oligarchs are in control, but are unlikely to start an enlightened investment program. I do see Russian companies understanding that they need modern systems to compete. The large state conglomerates are ordering enterprise-wide information management systems. Smaller companies are buying accounting software. Banks and businesses are getting hooked up to the internet because they know they need information and communications to run their operations.
People who are learning how to run a business or design software can't sell that talent for dollars quickly, but they can probably make a living out of selling their systems - accounting and networks, knowledge sharing and decision making - to the oligarchs' companies. No matter what happens, valuable skills can't be stolen and can't be devalued. Some people may emigrate; some will stick it out, perhaps with local investors, perhaps selling their services through the internet to customers overseas.
In my small world of the Russian computer market, the troubles matter a lot. Kiriyenko or Yeltsin, Primakov or the oligarchs don't affect us directly - we're too small - but they affect the customers whom we rely on to pay us.
