Technology Market Strategies has been active in the Russian economy for over 12 years and been heavily involved in the transitional process. Work has covered a wide range of industry sectors, as well as government ministry projects.
Our consultants have worked in Moscow regularly, but also in over 40 other cities such as Novosibirsk, Kemerovo, Krassnayarsk, Novokuznetsk, Volgograd, Yaroslavl, Tula, Ulan Ude, Kirov, Perm, Chelyabinsk, Ekaterinburg, Rostov on Don, as well as working widely in Ukraine, Poland, Romania, and Estonia. The following paper is drawn from our project experience.
Contents
Russian economy
Characteristics of the Russian industrial economy
Privatisation
The Business Opportunity in Russian Industry
Project proposals
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Russian economy
There has been a drastic shift of emphasis in economic thinking and analysis in the management of the Russian economy in recent years. This has been due both to the welcome change from a command to a market economy within the Russian politic, and to the nature of western economic policy advice and credit conditions.
Former dominant concepts of central planning for the military - industry complex have given way to the creation of enabling environments for the operation of a decentralised commercial private sector market economy. Micro-economic thinking has addressed issues of competitive market economy trading relationships and production decisions, whilst macro-economic work has focussed on questions of money supply, inflation, and privatisation. In this scenario of policy and thought, productive industry has been largely left to sink or swim, and monthly data has long indicated massive reduction in industrial output. Often well equipped factories stand heated and lit, but with a tiny remnant workforce producing virtually no output. Not only does this apply to the loss of military output, but also to tractors and combine harvesters.
This paper therefore looks towards a new synthesis which will address strategy for industry sectors, whilst setting this within the framework of a functioning market economy. There is therefore a rich opportunity for western companies to develop business in the Russian economy, but with a clear awareness of the factors to be overcome in the process of business development.
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Characteristics of the Russian industrial economy
the high concentration ratios of Russian industry
The structure of Russian industry which resulted from the administrative economy is very concentrated compared to more dispersed industrial structures found in market economies. Production of materials and commodities was allocated to a few large plants to gain advantage of economies of scale often at the expense of large transport costs. This inevitably led to the inefficiencies and market distortions of severe monopoly. The vertical integration model of Russian industry also follows a model of vertical integration, rather than the horizontal integration found in market economies. For example. it is very typical to find every factory operating its own foundry, rather than allowing a separate foundry industry to develop able to specialise and deploy more advanced casting technologies supplied down the value chain. The vertical integration of the industrial value chain also meant that valuable technologies were often developed for singular applications without exploiting their wider generic market potential, a factor which left Russian industry increasingly lagging in price/performance output measures.
the effect of FSU/Comecon geographical concentration on Russian industry
This pattern operated across the whole of the former Soviet Union and even into the former Comecon economies. National economies and manufacturing plants within them thus frequently produced a massively large output to supply requirements across this large FSU/Comecon market.
With the virtual breakdown of inter-republic trade, companies in each national economy have become bereft of their former markets. One example of this can be found in the steel industry where Russia and Ukraine shared production of 150 million tonnes of steel annually, but where each country specialised in specific steel types, so that now each national economy faces an imbalance in steel demand and supply by steel type. Equally in the coal and energy industries, Russia supplied gas and oil whilst Ukraine manufactured the bulk of Russia's coal mining equipment, again from huge concentrated plants - a pattern which has also broken down with huge capacity lying idle.
the low priority of consumer goods in Russian industry's production
Within Russia itself, large enterprises usually focussed on some military-industrial output with a nominal allocation of consumer product responsibility. For example, the plant at Uzlovaya south of Moscow is typical of this with its main output of rocket launchers and coal mine roof supports supplemented by production of 100,000 children's bicycles and several million of a 1950's UK style metal bread bin annually! Russian industry's focus on primary commodities compared to manufactured goods The Russian economy also concentrated on production of primary commodities - Norilsk's nickel and other metals, Krassnayarsk's aluminium, Gazprom and Lukhoil's gas and oil are typical of this. Production of value added manufactured products were therefore left to its Comecon partners - Latvia's Ruff minibus supplied the whole of the FSU, whilst Czechoslovakia's Skoda electric locomotives provided the traction requirements of nearly all its railways, Goerlitz of the former GDR much of its passenger rolling stock, and Astra of Romania much of its freight wagon requirement.
the relative absence of manufacturing output in the Russian economy
There are many anecdotal examples of the failure of Russian companies to continue in viable production. A large and modern combine harvester plant near Tula is largely idle, the Nizhny tractor plant still struggles to reach viability, the Kamaz lorry company is in difficulty, and the Mytishi underground metro train plant has a dearth of orders. It is noteable that very few Russian labelled products reach western markets, compared for example to the rush of Chinese labelled products to do so - one of the few exceptions is a fridge/freezer but from Minsk, Belarus, rather than from Russia itself. In the meantime, hidden technology and capability often can be found within Russia's manufacturing industry - one example is the potential production of infra-red night glasses capable of being produced from one former military plant in Novosibirsk for $400 yet selling in the US market for $5,000! Also the turbine plants around St Petersburg have the potential to benefit from moderate technology transfer to regain a strong market position.
the absence of commercial transactions in Russian industry
The market economy has foundered in the face of the emergence of very substantial non payment. This has been particularly severe in the energy sector of the economy, but has affected all sectors with frequent occasions of wages remaining unpaid for several months - the fact that such employees still report for work demonstrates the comparative lack of normal market economy income and consumption relationships! Inter-enterprise debt also has a disabling effect on competition - competitive pricing becomes redundant if no price is effectively paid at least for several months.
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Privatisation
Privatisation is a concept of uncertain meaning in the context of the Russian economy. We read of the huge 'progress' made in privatising small, medium, and now large industrial enterprises. But we need to dig a little deeper to ask what has really transpired and what objectives have been achieved or purposes realised. The classic aims of privatisation in western economies includes
• wider share ownership
• raising of government revenue
• de-politicisation of decision making
• liberalisation of competitive product markets
• strategic collaborative benefits for the industry
• the injection of fresh management expertise
• the raising of or tapping into sources of further equity capital investment.
It is very soon clear that Russian privatisation initially achieved little more than a stalemate or gridlock in industrial management and performance. Essentially the process was one more of collectivisation rather than privatisation. Shares were either given or sold at very low prices to employees and to the general population until the swap of debt for equity when many banks acquired large shareholdings in Russian industry for a relatively low price.. So wider share ownership was certainly achieved, but at what cost to any other possible objective of meaningful privatisation? In the traditional model of a market economy, a company seeks joint stock listing primarily to raise capital for its further defined strategic development, or else to realise its commercial corporate worth by selling its equity. This fundamental has been lacking in Russian privatisation - no equity was raised by the immediate privatisation, and the stock was in the hands of employees usually lacking any financial resources to contribute to further rights issues. Corporate management's hand was strengthened rather than entering into any new commercial market disciplines by the process, since management was allowed major stakes and other shareholding was extremely fragmented. Overseas corporate acquisition of stock was not developed, so that strategic alliances to exploit world markets or transfer technology were also missedopportunities.
The consolidation of much shareholding into banks' hands now offers a more realistic opportunity for business development since the new bank owners do have sources of capital investment funding to be able to build industry's prospects in the setting of a market economy.
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The Business Opportunity in Russian Industry
Whilst the above picture is dire, the opposite side of the coin is the opportunity which it represents. An economy of nearly 150m people cannot be expected to prosper based on the export of primary commodities to finance the import of manufactured goods and even of much of its food. These opportunities need the support of an investment oriented banking sector to exploit the latent demand in the economy, a commercial circle which does also require demand management in the macro-economy to enable effective demand to be available to meet new product supply whether from direct consumer income or from hire-purchase type facilities.
There are clear shortcomings in Russian industry which identify functions requiring support in any new commercial banking initiative. Market economy management skills are rare, particularly in areas such as marketing, purchasing, human resource management and financial accounting. To operate effectively, company management needs to be relieved of responsibility for a range of social provisions from nursery education to catering - all of which may well need to continue to flourish but under separate management.
Competitive understandings need to be built as monopoly structures are dismantled by legislative action and the sclerosis of inter-enterprise debt needs to be broken and payment flows released and enforced. Russian company management will need assistance in managing the business interface where market priced demand and cost engineered production supply meet.
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Project proposals
From the diagnosis presented above, various types of project suggest themselves as having commercial market potential. These could include
Creating independent manufacturing and marketing companies around the consumer goods facilities usually added on to large military-industrial enterprises. Examples of children's bicycles and bread bins have been quoted, but a multitude of similar examples exist.
Creating generic horizontal business units to improve on low quality vertically integrated units replicated in every factory. A specialist casting and forging sector business is a promising example, but other service businesses, for example in transport could work well.
Enabling businesses which replace disrupted supply from former republics within the FSU. This could offer scope to trading businesses or manufacturing businesses. Coal industry equipment is one leading example of this type of opportunity.
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