Overcoming growth problems

Speaking at the annual conference Russian Business Week in London, that has at a large extent become a painful discussion on corruption, he focused on 'real life' of Russian business, acknowledging both a great potential and fundamental problems the country needs to solve immediately – modernisation, attracting and retaining best people.

Mr. Vardanian, you are always very optimistic about Russian economy. Is it still the case?

I’m very optimistic in the short-term. One year from now, we can expect to see inflation and unemployment going down, currency stable and predicted GDP growth of 5%.

In five years time, however, Russia will face increasing challenges. There will be a shortage of people. With more people reaching pension age, the pension system will be under severe strain, gas prices will fall if Shell continues to develop its current oil fields and natural resources will become less crucial.

What are your views on modernisation of the Russian economy, announced by President Medvedev?

This is one of the most important tasks for Russia. We need to understand that this is not solely up to the government, but also to the business community. We inevitably have to become a more modern, technological, innovative and efficient country since eternal dependence on natural resources revenues is not going to work. To compete globally we must be ready for the new challenges.

My major concern regarding Russia is that we are losing time to change, to become more ambitious, more open-minded, more creative and willing to take risk and be competitive on a world-wide scale. In the coming years, the main competitive advantage will not be natural resources but people. The country that provides people with the best living conditions, education system, benefits will win. In the 21st century, medicine, education, the creative and technological sectors will be the most important. If we want to keep our people and attract the best talent to compete on a global level, we are all responsible for creating such conditions and it is pointless to lay this responsibility solely at the government. The modernisation programme has been initiated by the government, but its success will largely depend on whether it can be managed efficiently.

Do you find that the trend towards nationalisation of more and more companies in Russia is hurting the economy

I think it is a natural evolution process that has been experienced by several countries in the past. As Troika Dialog points out in its monthly forecast, since 2004 the economic diversification has been primarily state-driven with the state supporting a number of 'national champions' which didn't deliver impressive results. I do not doubt that in the next three years we will see part of state companies privatised.

Any chances for mid-sized investors to participate in this big game?

Russian capital markets are continuing to develop and have been subject to significant volatility. If you compare the market in Russia and China in 2000, ten years on the return on securities in Russia is around 700% and in China 170%. Unfortunately, while the Chinese market grew steadily without any stress factors, in Russia it has been going up and down. Mid-sized investors really have to be patient and need to adopt a long-term investment horizon.

Are you referring to the proclaimed policy of the Kremlin to limit the number of short-term and speculative investors?

Hedge-funds are responsible for creating turnover and volatility and the current community is clearly dominated by short-term investors. The main driver of market growth should come from local investments which are still quite small.

You are one of the founders of an ambitious international business school of management, Skolkovo in Russia. There has been a lot of scepticism about the ability of Russia to create a high quality business education program. Any progress so far?

Indeed, five years ago nobody believed Russia could create a top level business school that would be internationally recognized. Today, we partner with world leading schools including MIT, and this summer we open the campus building.

About 40% of the first group of students who had already started their MBA in December 2009 are foreigners – from Germany, Finland, US, India who come to Moscow to learn about emerging markets. They spend nine months in Russia, and another three each in China and India.

They will also carry out a large entrepreneurial project since the ultimate goals of this school is to create entrepreneurs, not managers. We have even established a special venture fund that would finance their projects.

I am still in doubt, why would people come to Russia to study for an MBA?

We believe that it is more beneficial than reading case studies on emerging markets or learning about them in a business school in London or in the US. You have to experience these markets, see the reality of what is going on.

Do you teach your students about the role of Edinaja Rossija (United Russia) party in Russia then?

No, but we show our students the realities of doing business in emerging markets. For example, we do tell our students a lot about corruption which unfortunately is an element of the economy. One of our courses is called ‘corporate riders’: we show real case-studies and explain how your competitors might use it to gain competitive advantage. It is down to personal choice as to how you compete in this environment but in order to be successful, you need to understand the reality.

Are you teaching your students to get along with corrupted system?

No, we are definitely not advising them to be corrupt, but we outline how this is an issue. All founding members who include top Russian businessmen personally interview candidates. My favorite question is: let’s assume you’re playing a card game and at one point, you find out that one of the partners is cheating on you. What is your reaction? Will you continue to play, stop, cheat yourself, litigate? It is your choice, I am interested in your reaction.

Do you think it is possible to be successful in such a corrupt market? A recent example of IKEA shows that not all the companies are ready to agree with it.

I don’t know all the details of the story so I can’t comment on it but there is a lot of opportunity in Russia as well. However, judging from our experience in helping different companies to invest in Russia, margins are higher here compared to China (excluding oil\gas and natural resources sector). Over 80% of our beer industry is controlled by foreigners. The banking industry does not face any restrictions either. These industries are smaller than our natural resources industries and that is why people talk less about them, but there are plenty of success stories here that highlight the contribution of foreign investment.

There has been a lot of negative publicity on Russia after the lawyer Sergei Magnitsky died in prison.

It is indeed very sad that this happened and I believe that this has seriously hurt Russia’s image. Our country is a very complicated and varied country and we are in the transition period and we still have a long way to go before a sound legal system is created.

The perception of many foreign businessmen is though that the rules of the game are more clear in China than in Russia and they prefer to have business in China.

This is the difference. The problem in Russia is that you have so many different interest groups and the rules of the game are less clear. So it is not really a question of a corrupted vs non-corrupted state but rather making the rules clear.

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