The UBS/Campden Research Russian Entrepreneurs Report provides a unique insight into the critical issues facing entrepreneurs, their firms and their families, reports Katie Barker.
The opportunities and challenges facing Russian entrepreneurs are relatively unknown to those outside Russia. Because Russian entrepreneurs have experienced such a different business and economic environment to many of their peers elsewhere in the world, their strategies and businesses have developed to suit those conditions, while they have unique expectations for their personal wealth.
Perhaps the most important finding of this research is the reluctance of Russian entrepreneurs to engage in succession planning and wealth transfer. Due to the age of the survey respondents, who were all in their 30s to mid-50s, such planning should be at the forefront of their minds if they hope to turn their first-generation companies into multi-generational family legacies. There are various reasons why Russian entrepreneurs are reluctant to plan for the future, however if they do not begin the process soon they risk eroding the wealth they fought so hard to create.
Background to the report
In order to understand the unique opportunities and challenges facing Russian entrepreneurs, it is first important to understand the background to the current business climate. Russia represents a very different operating climate for entrepreneurs to that of the western European states. Its recent history is dominated by state control and communism, which shapes the way its entrepreneurs view their businesses.
Since the fall of communism in the early 1990s, Russia's growth story has been extraordinary and owed in no small part to its entrepreneurs, who began as young graduates, faced with unemployment and economic turmoil. Many of Russia's most successful business people today managed to create wealth from these difficult conditions. Some entrepreneurs in the survey made their money in the early 1990s by driving vans of scarce foreign foods into Russia from Poland or Hungary, or working their way up through the ranks of companies.
"Given the huge demand and the scarcity of many things, most entrepreneurial careers started by importing goods that were bought cheaply abroad," said one 41-year-old respondent. "As it was widely unregulated, importing was not such a big problem. In the 1990s it took me half a day to bring a truck from Poland with goods through customs. Today, two weeks would probably not be enough."
From such comparatively small beginnings, they managed to build successful companies in what was often a harsh business environment, rife with corruption and, until recently, very much unregulated. The lack of employment opportunities acted as a catalyst to starting a business. "We were young and had nothing to lose – so why not try something on our own?" said one 42-year-old businessman.
Corruption forced many entrepreneurs to forge strong links to those in positions of power and influence. "In the mid-1990s it became more important who you knew, which minister or which agency, in order to get approvals. So the entrepreneurial focus was distracted, the better your relationships were, the more successful you were," said one 41-year-old entrepreneur from southwest Russia.
Business environment today
Less than two decades after the fall of communism, Russian entrepreneurs have accumulated vast wealth. However, they were not immune to the economic turmoil that shook the world in the past 18 months.
This is illustrated by the dramatic reduction in the number of billionaires in Russian between 2008 and 2009: Forbes figures for 2008 put the number at 87, a figure second only to that of the US. The subsequent year of crisis meant this number more than halved to 32 in 2009, owing to the fact over 40 of those on the list made their money in real estate or construction.
The majority of respondents (88%) said the global financial crisis did have an impact on Russian business, with 76% stating the crisis impacted their own business, but to a lesser extent.
In light of the crisis, the biggest challenges faced by Russian businesses are slowing demand (64%) and access to credit (52%).
The crisis also caused many Russian entrepreneurs to reassess their business strategy and refocus their attention on their core business. "After many years of double digit growth, entrepreneurs are now in consolidation or survival mode," said one 40-year-old entrepreneur whose company currently has sales of $300 million.
"They have to focus on their core business. In times of rapid growth of demand and easy credit, many entrepreneurs lost focus and built up a portfolio of businesses, often unrelated to each other."
Although much has been done to address the issue of corruption, it is still one of the greatest challenges facing these entrepreneurs. One respondent said: "I still fear the unpredictable nature of the authorities. During the conflict with Georgia in 2008, the tax authorities came twice to raid my office. It was clear it was because I am a Georgian businessman."
Russia's serial entrepreneurs
The first generation of Russian entrepreneurs are still very actively involved in their businesses and have an appetite for high risk, high return domestic business opportunities.
Despite the apparent difficulties imposed by the economic turmoil and corruption, Russian entrepreneurs are still keen to expand their businesses within Russia (56%). And, unlike many of their counterparts elsewhere in the world, they are not attempting to enter foreign markets. Seventy two percent said they were not considering developing a global presence in the near future. This propensity towards their domestic market has several motivations; there are still many business opportunities in Russia, the entrepreneurs understand the markets there and already have a business network that is crucial to success in Russia.
Knowing who to trust is another key issue to Russian entrepreneurs. Personal recommendations are very important to Russian businesspeople and hold more weight than reputation. "Trust plays an important role. If a friend recommends a bank or lawyer to me, I tend to follow his advice," said an entrepreneur. "But only if he worked closely with them before, not just because he heard they were good. That is not enough for me."
A family culture
Education is paramount to Russian families. Eighty percent of respondents said that their children received education both abroad and in Russia (See Figure 3). For many of the respondents, this is so their children can gain an appreciation for Russian culture and values as well as being exposed to a more international education.
"I want my kids to get their basic education and first degree in Russia," said an entrepreneur in energy distribution. "If they want to continue, then it should be at an international school abroad. But the basic education should be in Russia. I want my kids to feel and understand our own culture before I send them abroad."
Some of the entrepreneurs voiced concern about the impact of their wealth on their children and this was another reason to send them abroad to school. "My kids are now at boarding school in the UK which is helpful at instilling values," said one respondent. "In our environment back home this is more difficult because everybody around us in Rublovka has a lot of money and likes to show it off. You can see the way kids talk about Bentleys and Ferraris. That is when I realised I had to do something."
A strong matriarchal tradition exists in Russia, meaning women are involved in many aspects of decision making especially concerning the family. There are also examples of wives becoming involved in the business.
From wealth creation to wealth preservation
Due to the fact most of the entrepreneurs are still actively involved in running and growing their business interests, they have spent little time actively planning for succession and wealth preservation. A majority of respondents (56%) do not currently involve the next generation in their family business. Most respondents are in their late 30s to mid-50s, so their offspring are still too young to look at taking over and many of the entrepreneurs cannot see beyond their own leadership.
This might explain why many take a relaxed view to succession. "I would be happy if one of my three kids would like to join the family business and grow it further. However, if they don't want to, I can't force them," said one entrepreneur in his late 40s.
In addition, the entrepreneurs' short-term attitude towards wealth creation is a contributing factor in their lack of succession planning and long-term plans for the family wealth.
This is further enforced by the turmoil of Russia's recent past, as explained by one respondent. "I don't plan for the future. I know I probably should do a bit more of it, but that is our culture. Our history has taught us that there is not much point in planning ahead. I think this will only change if our society becomes more stable and reliable."
And it is not just the lessons of the past that makes the Russian entrepreneurs reluctant to initiate succession planning; the challenges they face in the present also play a part. This is particularly evident when talking about corruption, with some respondents explaining they do not want to burden their children with the complexities of dealing with the Russian domestic market. "I still don't feel very safe with my business," said one respondent.
"Therefore I cannot plan for the long term, for generations. I don't have this vision. I would rather sell my business and give my kids the choice of what to do with their money when they are old enough."
Despite this, there is some early evidence that the entrepreneurs are starting to switch from wealth creation to wealth preservation. For example 64% said they were separating their business and personal wealth. This separation could be regarded as the first step towards a family office style structure common among multi generational business owning families in Europe and the USA.
One way in which the entrepreneurs in the survey protect themselves against the sometimes unpredictable nature of the Russian business environment is to use offshore structures and diversify their assets outside Russia.
"Assets are like oil reserves," said one respondent. "You shouldn't store all the reserves right next to the oil well. If your oil well suddenly dries up or is taken away from you due to unforeseen circumstances, you will have other reserves stored far away so you are free to move on and look for a new oil source."
There is a discrepancy between the returns Russian entrepreneurs expect from their onshore and offshore assets. As already stated, many have amassed their fortunes engaging in high risk, high return business opportunities onshore, however they understand this is not likely with their offshore assets.
Due to their propensity to invest in domestic markets, Russian entrepreneurs have had little experience in capital markets. "Currently, there are so many opportunities where you can buy interesting business at very low valuations. Why should I play in the financial markets?" said one entrepreneur.
The preferred asset classes of the entrepreneurs were local and international real estate and local stocks and bonds. None of the respondents invest in hedge funds. Trust was again shown to be an important issue with regard to wealth management. "I don't trust other people, I want to control things myself. Therefore, I don't invest in stocks, I prefer to invest in my own business where I know what happens," said one 53-year-old entrepreneur.
This preference for the domestic market and lack of interest in stocks and capital markets may start to erode as the second generation, who received their financial education abroad, begins to work in their family businesses.
In terms of service providers, over two thirds of respondents (72%) work with both Russian and international banks. Many highlighted the differences between the two institutions. "I want to work with international banks if I need access to international markets. Our local banks simply do not have the international network yet," said one respondent.
However, the level and quality of service provided by international banks was not always high enough for the entrepreneurs, as one entrepreneur explained. "Private banking is a personal thing, it is important to find the right person as your relationship manager in a large bank. I think the people are more important than the bank."
Only 28% of respondents said they use wealth management services frequently. Because personal recommendations hold much weight in Russia, one entrepreneur said he would be reluctant to recommend his wealth manager to a friend. "You have to be very careful about recommending a wealth manager to your friends or business partners. I did it once, in 2001. The bank lost a lot of money for their clients after the internet bubble burst. And then the people turned on me, asking for their money back. And if you live in the same city, have your children there, you better do it."
All respondents said confidentiality and trust were their highest priorities when selecting a wealth manager. Other important criteria were flexibility, reputation, recommendation and personal touch. An understanding of the Russian financial and business climate was also critical to the entrepreneurs. It is no longer good enough for international banks to simply employ a Russian speaking relationship manager. "It is not enough to put a Russian speaker in front of a Russian client as it was maybe 10 years ago," complained one entrepreneur.
The family office structure was not one many of those in the report were familiar with, again highlighting that Russian wealth is not yet multi-generational. While many did not refer to family offices, some employ professionals who perform the functions of a family office either as a corporate treasurer, lawyer or education consultant.
Passing on the legacy
Through drive, ambition and perseverance, Russian entrepreneurs have successfully achieved vast wealth in challenging conditions. They have created a more secure business environment and ensured their children have a thorough understanding of Russian culture, while still reaping the benefits of a foreign education.
However, it is vital they begin addressing issues of governance, wealth preservation and most importantly, succession if their legacy is to be passed successfully onto the next generation. These changes cannot happen overnight and the sooner Russian entrepreneurs address these issues and begin succession planning, the easier the transition process will be.
Profile of the respondents
The research looks at three main areas:
The 25 respondents all either live in Russia or have a core business in Russia and have: