Doing business in the former Soviet Union
Project Management in Action
From The Executive Suite
Ivars Avots is president of Trans-Global Management Systems, Inc. and director general of Latvian Management Partners Ltd., a management consulting firm in Riga, Latvia. He shares his time between Boston and Riga where he is developing a local staff to deal with privatization and joint-venture support issues in the Baltic States.
Previously, he was with Arthur D. Little, Inc., where he consulted for companies and government agencies throughout the world. He was active in PMI as chairman of the Technology Committee, vice president for member services and founding president of the New England PMI Chapter For many years, he also represented PMI in INTERNET, International Project Management Association, where he held the positions of director and vice president for projects. He was named PMI Person-of-the-Year in 1979.
Mr. Avots has published many articles and contributed to books on project management in the U.S. and in Europe. He received the McKinsey Award for his contribution to management literature. He holds an MBA degree from the Wharton School, University of Pennsylvania.
The new republics left in the wake of the breakup of the Soviet Union offer exciting possibilities for Western businesses. Russia, as the largest and the wealthiest among them, attracts most of the attention, but businesspeople often find that the opportunities in the other republics are just as interesting and possibly subject to less competition. However, getting something actually done in any of them is another story.
Two major problems affect the development of sound business relationships in the former Soviet Union (FSU). One is the continuing political uncertainty and changes in government attitudes toward business. The second is the Soviet-era mentality that affects the way business is conducted. The only advantage this mentality presents is the fact that once the Westerner has successfully learned to deal with partners in Moscow, the experience can be applied in Minsk, Tashkent or Vilnius.
Several characteristics of the old Soviet system have shaped the existing attitudes:
- Since private property did not exist, everything was seen as belonging to the people and no respect was given to property or ownership. Today, officials still intermix private and state interests without a guilty conscience.
- In the Soviet system, everyone was assured a job and collected a salary without much regard to results. Now, if someone is expected to produce to a given quality, an extra payment is often wanted.
- For many years, products that were in short supply could be obtained by cultivating the right connections through favors, gifts, or mutual exchange. Shortages still exist, and this principle holds.
- For those who were not members of the Soviet elite, bureaucratic actions and services were often unavailable without appropriate bribes. This practice is still alive and widespread.
For the Western businessperson starting” on a first project in the FSU, life can be full of snares. For employees of the large companies, local bureaucracies provide a degree of protection. However, most project managers work at the people level, and they face the world much like entrepreneurs. For a start, they are likely to be misled by a new class of businesspersons, generally known as the mafiosi. Earlier known for their extortion and drug rackets, many of them have turned into business tycoons or bankers taking over failing state companies and garnering licenses for top Western products.
Know your partners and make sure they are principals.
Focus on the long-term opportunity.
Get involved on a full-time basis.
Here are some principles that will improve the Western manager's chances to remain whole:
Know your partners and make sure they are principals. The FSU is teeming with entrepreneurs who will sell anything from girls to submarines for hard currency. Despite solid appearances, official-sounding organizations and well-placed connections, most of them cannot be trusted. Yet, since it may be impossible to carry through a project without their participation, the Westerner's dilemma is how to tell a good partner from a bad one. But even after solving this problem, you often cannot be certain that the partner actually has the authority to act that he/she believes he/she has.
Some directors of state-owned enterprises seek foreign partners for personal reasons. By sidetracking production, they may have accumulated wealth while bringing the company into bankruptcy. Either they or their friends can take advantage of the privatization process and acquire shares in the company at a depressed price. However, to make use of the illegal gains, they need a foreign bank account, a matter in which a foreign partner is most valuable, but one in which you should not get involved.
Focus on the long-term opportunity. Most of the people making fast money in the FSU are the various mafiosi, and it would be foolish to try to compete with them on their own turf. For others, like McDonald's, it has taken years to carve out a successful niche. For the most part, Americans have been at a disadvantage in this game because their stockholders demand short-term profits. Japanese and Europeans, on the other hand, have been making long-term investments that will establish their presence but will not yield a payoff for a number of years.
There are exceptions, however. An American building materials manufacturer studied the situation in the Baltic States for more than a year before committing to setting up a plant. Instead of manufacturing complete products as initially planned, it was decided to produce only selected parts and use them in the company's United States operations while awaiting the development of an adequate local market. This company was able to act decisively because it was privately owned and did not have to justify its actions to public stockholders.
Get involved on a full-time basis. Starting a business in the FSU is subject to so many fluctuations that it is difficult for a manager to do a good job without complete involvement. For example, a Venezuelan developer managed a hotel project in Riga with a small group of experienced partners, one of whom was always at the site. However, there was no true continuity, the project went from one crisis to another, and the costs went out of control. After a significant investment, the project was aborted. At the same time, a New York developer became highly successful when the developer closed down American activities and moved his family to Riga to build luxury homes for the nouveau riche.
Be alert to differences in local customs and mindsets. The Westerner must be sensitive to the fact that a Russian will look at a business situation from a different perspective than that of the Westerner. A Georgian or an Estonian will see it still differently. More importantly, the local businessperson's mindset and therefore the reasons for specific actions will often remain a mystery. For this reason, it may be wiser for the Westerner to step back in negotiations and leave the initiative to a trusted local associate.
It can be most frustrating for the Westerner to find that a project idea, painstakingly developed with ample hard work, has been clandestinely offered to competitors. But the local partner may be only trying to maximize return and, since there are no established business ethics, does not realize that this behavior is destroying a valuable relationship. “Isn't this how the capitalistic world works?”
Be alert to differences in local customs and mindsets.
Develop the work force and suppliers.
Expect obstacles, changes, delays, shortages and overruns.
Develop the work force and suppliers. Since project management systems in the FSU are rarely seen, it may come as a surprise that they are well-known and elaborated in various universities. The reason they are not used is simply the fact that on most projects neither the labor force nor the suppliers are sufficiently reliable to keep to any sort of schedule.
Under the Soviet system, workers were able to increase their income by holding two or more jobs. At the same time, they took time off from work to stand in lines for food or articles while many managers took long lunches with their “sweeties.” This resulted in a negligent attitude toward work. While much of this is changing, an attitude towards performance is still missing.
A major problem, particularly on construction projects, is alcoholism. Workers may arrive at work on a Monday morning still drunk from the weekend and continue drinking into the week. Managers of foreign investment projects have sometimes alleviated the situation through more careful personnel selection and incentives paid in hard currency. This, however, can increase labor cost as much as tenfold.
Supply of materials is another serious problem, since many items may be nonavailable or very expensive. For example, some builders find it advantageous to import windows from Germany and sheetrock from the United States. Lumber should be available in abundance locally, but it is usually of poor quality. If a foreign manager appears at the supplier hoping to make recommendations for improvement, the price jumps at least fivefold.
Expect obstacles, changes, delays, shortages and overruns. In general, the more public officials involved in the project, the greater the potential for problems. The Scandinavian investors in a hotel project were shocked when the municipality suddenly imposed an “excise tax” of several hundred thousand dollars on their partially completed building. Often, such situations can be resolved with bribes-an approach that is not acceptable to American companies.
Another example is the privatization law in Latvia that encourages anyone to take initiative in designing an investment project or offering a state-owned enterprise for sale to a foreign investor. Seeking the compensation offered for a successfully completed project, numerous firms or individuals can act independently with regard to any given enterprise. Since their proposals may be challenged by any of several ministries, the result can be much wasted effort.
Delays can occur throughout a project's life cycle for various reasons, not the least of which is pilferage. Truckloads of materials disappear on the way to the site, and newly laid brickwork is stolen overnight. Software programs and entire databases are clandestinely copied by experts called in to help with system problems. Elaborate alarm systems have to be used and armed guards hired for security.
After considering these potential traps, the Westerner may want some help. You would be well advised to start with an extended trip to the selected area and plan to spend as long as a month getting to know the people and their culture. The United States and other Western embassies are usually one of the first sources of information, followed by the U.S. Chamber of Commerce and various offices of the major accounting firms and other Western-based consulting organizations. As far as the local assistants are concerned, it is wise to remember that most of those whose temperament and ability best match the requirements are already hustling for themselves or for one of the mafiosi. This is why some Western managers prefer to work with former artists, doctors or university professors who have an interest in business but who have not as yet become involved in shady manipulations.