The vestiges of getting to know the person with whom you want to transact business remains strong in Russia, perhaps more so than in the US or Western Europe
This post first appeared on Russia Insider
I often hear statements when I travel outside Russia like “you can’t trust those Russians in business, they’re always looking to screw you”, or “How did you get those contracts finally signed and paid, who did you have to grease?”
It is as if there are vastly different standards of expectation, and these differences are the excuses given as to why some non-Russian businesses fail in the Russian market. The fact is that vastly more succeed in Russia than fail, but failure is always more stimulating to read about, much as horror movies attract a squealing goggle-eyed audience.
Perhaps happy ends just do not tickle the cash register sufficiently at the box office. Therefore, dwelling on these standard preconceptions and pat opinions I tried to remember how it was that I did some rather successful business in Russia over the years, as well as some failures – that is life, we deal with it.
The business environment of 2017 is certainly far different than it was in 1992 — after all, 25 years have passed and the country has come together at a remarkable pace despite all the headwinds, real or imagined. Some aspects of the economy have adapted and been established faster than others, just like in any other country.
What makes Russia different is the sheer magnitude of change it has experienced since the fall of the Soviet Union and the rise of a growing market-oriented society.
Therefore, to look at today more clearly it helps to look back — to 1992. In those years I lived mostly in Moscow and ran a microwave medical device manufacturing company with a factory in Antwerp, Belgium. When starting sales and distribution to Russia, at first it was only the large hospitals who had the budgetary chance to buy the latest medical systems using federally allocated funds.
This was still a holdover from the Soviet structures and that business culture. I spent countless hours, week in and month out, going from one office to another, waiting, questioning, and speaking with those in the health ministries to gain some clarity about their actual needs and financial wherewithal. Eventually, my face and name became known, and before too long I was invited to social affairs, some public, some private, and in return I hosted evenings which were a mix of medical business gossiping and a bacchanal.
What was happening was actually quite simple and very human — my partners wanted to know whom they will be doing business with and the quality of my personal and business word. All told, I must have invested about ten months of time, effort and energy with one lucky chance sale during that period. My partners and investors who did not know this emerging Russia or the new Russians were getting understandably impatient, and we all were wondering how long this costly acquaintance process would continue.
Apparently, the bureaucracy appreciated persistence and sticking to ones guns, as between the years 1993 and 1997 my sales just at the federal level topped $35 million. No contract was for less than $650,000, and almost all were 100% prepaid. Throughout this time, I had genuinely grown close to the key decision makers whom I consider friends and finally I asked why was so much time wasted up front?
The answer was simple: “how else do people get to know each other? It takes time, it requires patience, and disappointment is a wonderful barometer of a man’s character… and it makes success so much sweeter. You know us, we now know you, and the business will happen smoothly if it is truly worthwhile”. That turned out to be true.
Another vignette from that era was trying to sell directly into the regions and not through the federal ministries in Moscow. Many of Russia’s regions had at least one major industry which was profitable, in some cases tremendously so. It often happened that the budget available to the regional government (oblasts) was simply not enough to make ends meet, or obtain needed products such as medical equipment.
In such cases, the oblast would ask the local industry to assist if they could. In the west, we call it “social responsibility”; in Russia, it was called doing the right thing locally. In this case the local industry was a large petrochemical refinery, and they said they would assist the region in obtaining needed medical devices. The company would buy the equipment only after the regional government did their due diligence, market research and all the attendant bells and whistles as the accountable party to the transaction.
I was asked, along with several competitors to visit the capital of the oblast (which shall remain unnamed). I was told that my meeting would be at 2100 hours at my hotel. The hotel was clean, but on the well-worn side of basic. At the appointed hour, I expected the usual gaggle of officials. Instead, a burly dangerous looking fellow knocks at my door and tells me to come with him, “some people are waiting”.
It was a dark night, about 20 below zero and he tells me to get in the back seat of a black Volga sedan. We drive out of town for about 20 minutes, and then pull into a snowed-in back road leading to what looked to me to be an abandoned, dark two-story structure in the middle of the woods.
We get out, I am frankly a bit concerned as the fellow was not a conversationalist, and we trudge to a metal door. I notice next to the door is a plaque “Morgue – Criminal Affairs”. My escort flicks the light switch and one dingy low wattage bulb comes on. In that gloomy light we walk through the subzero morgue, passing several well-chilled examples of the criminally deceased. I would be lying if I said that at this point I was not feeling uneasy — I most certainly was.
My escort smiled, which didn’t help matters as the light reflected off his golden incisors. When we reached the rear of this corpse storage, a red light glowed above yet another metal door; my escort announced we had arrived! Opening the metal door a gust of warm humid air blew onto my face along with bright light and music from a basement into which we descended. My nose told me I had entered Zabar’s, but my eyes said no-way. There must have been about a dozen naked men of middling to advanced years huddled around a table arguing, smoking, snacking and drinking. Some had sheets wrapped around them, some did not…. it was a Banya (Russian sauna).
I knew only one of the men there from the administration, who warmly introduced me to the rest. One was the head of the local liberal democratic party, another a high functionary of the communist party, a third from the regional hospital, the bishop of the church, and so on. They were collectively responsible in coming to a decision and selecting the supplier for the oblast's medical equipment needs.
Cutting to the chase, the next six hours were spent naked wrapped in a sheet, pummeled with birch twigs, steamed, cold and hot plunged, then filled with marinated pickles, garlic, smoked fish and mushrooms, all chased with beakers of vodka and samogon (moonshine). Throughout this was continuous conversation about everything under the sun, medical, political, and just life in general. From what I can remember, all judging from my head, the following two days were a grand time.
I got the contract, which in time grew to six contracts for the region, a total of about $3.9 million all of which happened with no problems. Later I learned that because of their month of due diligence the German representative refused to get in the car until his questions were answered; they were not, he blew it. The Japanese representative (a Belgian national) demanded to be taken back to his hotel immediately upon entering the morgue. I am just saying…
Fast forward to 2017. Getting to know your counterpart in business has changed in most respects. The international norms of due diligence are mainly the same be it Moscow, New York, or Johannesburg. Credit checks, D&B, and all the research possibilities of the web. However, to some extent the vestiges of getting to know the person with whom you want to transact business remains strong in Russia, perhaps more so than in the US or the countries of Western Europe.
After all, long-term business is a covenant between people, so if at all possible it is better to know the quality of the individual you are dealing with sooner rather than when it is too late.
While contractual relationships now are well covered by applicable commercial laws, the function of business is not to be put in the position of having to go to the law to arbitrate conflicting views through lawyers; that is not business, that is a costly liability.
While developing personal rapport does not prevent misunderstanding or fraud, it does go quite a way in making it personal and therefore perhaps more accountable for those involved.
Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
This post first appeared on Russia Insider
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