The Boyden Report: Russia...report explores how this will come about through the growing capabilities and influence of Russia’s executive population. Our understanding of Russia

The Boyden Report: Russia

Russia’s Executives Lead an Economic Renaissance

The Boyden Report: Russia

At Boyden we work closely with global companies to craft their executive strategy. But that strategy must be continuously re-evaluated – what works in one country may not be effective in another.

As the world’s only genuinely multicultural executive search firm, Boyden has a strong commitment to capturing the most effective approaches in different markets. Through our Thought Leadership research program, we explore the issues of most concern to our clients, enabling us to share our perspectives on a changing commercial environment and the impact on executive talent.

The Boyden Report series provides a context for the advice that Boyden consultants give on making strategic decisions about your executive team. The series includes reports on India, China, Brazil and Latin America, available on www.boyden.com.

In this report we look at Russia – a complex market undergoing rapid transformation in its corporate landscape and among its executive population. The country’s economic, political and social history is rich, interwoven with various cultural influences. For those who invest time in understanding the nuances of its commercial environment, doing business in Russia is a unique and compelling experience.

We hope this report gives you an informative and captivating look at a country that has come a long way in a short time and whose people have the potential, once again, to achieve world-class recognition.

The Boyden Report

Welcome to the sixth edition of The Boyden Report, a series designed to provide a deeper understanding of the global market for talent.

Cover image: the Zhivpisny Bridge, Moscow

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Our Research Panel Executive Summary

Introduction: A Rich and Complex Market

Exploding the Myths, Understanding the Opportunity

Myth one: Russia’s defining characteristic is that it is the world’s largest hydro-carbon producing nation. It is unlikely to excel in other industries in the future.

Myth two: The slow development of Russia’s institutional infrastructure prevents international businesses from achieving worthwhile returns on investments.

Myth three: No country has yet found a way of pursuing fruitful commercial ventures in Russia.

Myth four: Russia’s education system is not aligned with business requirements, in part because its students and executives do not participate in the international education system.

Myth five: Outdated HR practices and the consequent lack of coherence with commercial objectives have a major impact on corporate growth prospects.

Myth six: With experience working in Russia and ability to speak the language, assessing and hiring executives in the market is not too challenging.

Myth seven: Russia is such an unpredictable and insufficiently rewarding market, it is not an attractive career destination for expatriates.

Myth eight: Despite Putin’s focus on creating an innovation economy, progress still lags behind other markets competing in global commerce.

Conclusion

The Boyden View

Sources

About Our Research Panel

The Boyden Report Series

About Boyden World Corporation

Contents

Cover image: the Zhivpisny Bridge, Moscow

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• KirillAndrosov,ChairmanofAeroflotandRussianRailways;

Managing Partner, Altera Capital

• PaulHerbert,ChiefExecutiveOfficer,IlimGroup

• RuslanIlyasov,long-termHRexpertinRussia;formerHRDirector

atEldorado

• TatianaKozhevnikova,HRDirector,X5RetailGroup

• AnatolLieven,Professor,WarStudies,KingsCollegeLondon;

SeniorFellowoftheNewAmericaFoundation,WashingtonD.C.

• PaiviMinkkinen,SeniorVicePresident,RussiaandInternational

Business,VRGroupLtd,Finland

• AlexeyPopov,ProgramDirectorEMBAGeneralManagement

andFacultyMember,StockholmSchoolofEconomics(SSE)

in Russia

• RodionShishkov,VicePresident,YotaandDirectorof

Development,YotaLab

• Matthew“Max”Tucker,GeneralManager,Young&Rubicam

This report was developed by Boyden World Corporation

in collaboration with Joyce Renney and Maximise Resources.

The content was created from secondary research and a series of

interviews with the above business leaders.

For further details on our panel participants, please see

the Appendix.

Our Research Panel

We sincerely thank members of our panel for so generously sharing their experiences and valuable perspectives on the Russian market.

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Executive Summary

Russia is poised for an economic renaissance that will reshape its role in global commerce. This report explores how this will come about through the growing capabilities and influence of Russia’s executive population.

Our understanding of Russia is too often flawed by the corporate scandals and failures of the past, reinforced by a Russian tendency to churn over negative experiences. Stridentmediaheadlineshaveobscuredtherealityof a country that has changed enormously over the last few years.

What brought this about?

At the turn of the millennium, Russia changed from being an insulated energy provider to a more open business society seeking closer integration with the globalbusinesscommunity.ThedissolutionoftheSovietUnion, privatisation, dogged multinational expansion and opportunitiesforSiberianbusinesswithChinaalertedtheexecutive population to a shift in trading relationships. A multi-polar world was emerging that resonated with Russia’sEuropeanandAsianroots.Amorepositivemindset began to take hold among Russia’s executives.

While the younger, aspiring generation embraced social media, global integration was strengthened by the digital economy. Previously isolated groups of managers, government officials and state employees found themselves in a new bloodstream – regional connections and personal relationships began to flourish as new trading organisations, multinational subsidiaries, government authorities, international business schools, collaborative partnerships, HR experts and entrepreneurs linked together inanewcommercialenvironment,asshowninExhibit1.

Russians are becoming much more positive in their thinking and international perceptions are changing.

Exploding the Myths

Myth one:Sovietdependenceonhydro-carbonsstartedtodissolve with the breakup of the Union. Russian executives are shaping careers in other industries, partly driven by an increasingshareofservicestoGDPrelativetoagriculturaloutput and low-end industry. This is spreading economic wealth across a broader range of industries, rebalancing the economy.

Along with this, Russia’s new relationship infrastructure is providing the momentum to open the country up to trade and change the structure of the economy. We see this happeningalready,withRussiabeingoneofthetop10recipients of foreign direct investment, buoyed by growing transparency and political stability.

Myth two: Russia’s institutional infrastructure, slow to develop and lagging behind commercial progress, is not a significant limiting factor. While some industries benefit from state protection, in other sectors international companies thrive through expansion or collaborative partnerships that enable them to reach a burgeoning consumer market and secure high returns on investment.

The most effective way of handling Russia’s developing institutional infrastructure is to adopt the right mindset and align expectations and corporate behaviour to the vagaries of the market. Planning for change and acting intuitively are key elements in the Russian mindset.

Myth three: Fruitful ventures in Russia are very much the norm, despite media reports showcasing difficult experiences for multinationals. A lot of companies have been enormously successful in Russia. Turning opportunity into tangible returns depends on having the right Russian leaders and investing time and energy in relationships across the whole relationship infrastructure.

I Executive Summary

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ExecutiveSummary

Myth four: Russia’s higher education system is seen as outdated.However,thestrengthoftheSovieteducationsystem provided a very strong foundation for today’s business leaders to evolve their capabilities in finance, marketing, sales, HR and other areas of corporate expertise.

The increasing participation of international business schools offers exposure to global best practice, as well as valuable introductions to regional and international executives. Corporation participation in business schools is growing in line with a more coherent HR strategy in Russian and international businesses.

Myth five: The assumption of outdated HR practices misses the point that HR is changing rapidly from a technical function to a source of strategic expertise for corporategrowth.Threemainchangesareevident:(i)theextent to which HR drives internal communications and thereforetheimplementationofcorporateambitions;(ii)the development and use of key performance indicators fortheHRfunction;and(iii)anewperspectiveonpeoplenotashumanresources,butas“co-creators”.

Myth six: Assessing and hiring executives in and for Russia is challenging. There are a number of complexities based on unique combinations of skills, experience and economic heritage. Best practice in assessment

Exhibit 1: Russia’s economic renaissance: based on a new relationship infrastructure

Global integration

Digital economy

Regional connections Personal relationships

Social media

Regional tradeorganisations

Russia’s economic

renaissance

‘Corporateuniversities’

MNC expansionrepresentative

offices

International business schoools

Joint ventures/ collaborativepartnerships

HR-led executive

development

Entrepeneur-ledchange

Government/agency relations

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ExecutiveSummary

involves both quantitative and qualitative elements. Three challengesemphasisedbyourparticipantsare:(i)theconcentrationoftalentinMoscow;(ii)fewcareerpathswith critical mass that provide an element of predictability inhiring;and(iii)limitedmajorcapitalinvestmentprojectsoverthelast20years,requiringsupplementedexpatriates,adding another layer of complexity in assessment and hiring.

Myth seven: For expatriates, Russia can be highly rewarding, offering good return on investment for individualsaswellascompanies.Successfulexpatsareable to read the market and adapt their behaviour to certain expectations in professional relationships. Western expatriates need to exercise their intuition, overcome a tendency to be overly logical and believe in the impossible.

Myth eight: Russia’s development of an innovation economy is buoyant, but obscured by a lack of fanfare in

Russia,unlikeinChinaandIndia.Skolkovoisaverygoodexample,housingmorethan500start-upsinarangeof sectors and generating new conceptual thinking in innovation, resulting in products based on affordability and practicality. Russia’s renaissance will benefit from three areas of innovation: blended innovation, iterative development and innovative leadership.

To conclude, it is our assertion that Russia’s executives will lead the country’s economic renaissance. We see a growing body of managers and business leaders with astrongbeliefintheirabilitytobringaboutchange;opportunity is being turned into tangible results through theevolvingrelationshipinfrastructure;andRussia’srichhistory is a deep source of answers and solutions to commercial challenges in the future.

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II Introduction: A Rich and Complex Market

Since the Revolution in 1917, Russia has undergone social, economic and political transformation at a remarkable rate. Having been one of the most underdeveloped countries in the world, by the end of WWII Russia had become a modern, industrialised, developed economy – one of the world’s military and economic superpowers.

Inthe1980s,onceagain,thespeedatwhichtheSovietsystem was transformed and the Union broken up astonishedtherestoftheworld.InMarch1985,MikhailGorbachevsucceededKonstantinChernenkoasGeneralSecretaryoftheCentralCommitteeoftheCommunistPartyoftheSovietUnion.Lessthansevenyearslater,in1991,theSovietUnionsplinteredinto12independentstates(includingRussia)andthreeBalticRepublics(Estonia,LatviaandLithuania),asshowninExhibit2.

Business leaders from the West, including Russia’s expatriate community, expected Russia to become dramatically different within a decade. As commercial hopes increased, they anticipated the adoption of Western habits, such as long-term planning, proactive business approaches and the creation of a more open society. But change was limited. Why?

First, because such Western expectations were based on a socio-economic history so different to that experienced inRussia.Secondly,expectationscontinuetobebasedon a false dichotomy – that Russians must be either “European”or“Asian”.

ThishasledVladimirPutinalternatelytorefertoRussiaas“Eurasian”oras“thethirdWest,”alongsidetheUnited

Exhibit 2: TheformerstatesoftheSovietUnion


Armenia Population:3.09mGDPpercap:$3,200

AzerbeijanPopulation:9.05mGDPpercap:$5,330

BelarusPopulation:9.49mGDPpercap:$5,950

BALTIC - EstoniaPopulation:1.34mGDPpercap:$14,460

GeorgiaPopulation:4.45mGDPpercap:$2,690

KhazakhstanPopulation:16.32mGDPpercap:$7,590

Kyrgyz RepublicPopulation:5.36mGDPpercap:$840

BALTIC - LatviaPopulation:2.24mGDPpercap:$11,620

MoldovaPopulation:3.56mGDPpercap:$1,810

Russian FederationPopulation:141.75mGDPpercap:$9,900

TajikistanPopulation: 6.88mGDPpercap:$800

BALTIC - Lithuania Population: 3.32mGDPpercap:$11,390

TurkmenistanPopulation:5.04mGDPpercap:$3,790

UkrainePopulation:45.87mGDPpercap:$3,000

UzbekistanPopulation:28.16mGDPpercap:$1,280

Armenia Population:3.09mGDPpercap:$3,200

AzerbeijanPopulation:9.05mGDPpercap:$5,330

BelarusPopulation:9.49mGDPpercap:$5,950

BALTIC - EstoniaPopulation:1.34mGDPpercap:$14,460

GeorgiaPopulation:4.45mGDPpercap:$2,690

KhazakhstanPopulation:16.32mGDPpercap:$7,590

Kyrgyz RepublicPopulation:5.36mGDPpercap:$840

BALTIC - LatviaPopulation:2.24mGDPpercap:$11,620

MoldovaPopulation:3.56mGDPpercap:$1,810

Russian FederationPopulation:141.75mGDPpercap:$9,900

TajikistanPopulation: 6.88mGDPpercap:$800

BALTIC - Lithuania Population: 3.32mGDPpercap:$11,390

TurkmenistanPopulation:5.04mGDPpercap:$3,790

UkrainePopulation:45.87mGDPpercap:$3,000

UzbekistanPopulation:28.16mGDPpercap:$1,280

Source: World Bank, 2010 data

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StatesandEurope.Inseekingtocreateanewcontext,RussiahasjoinedbodiessuchastheAsia-PacificEconomicCooperation,theShanghaiCooperationOrganisationandtheOrganisationforSecurityandCooperationinEurope.ButRussiansarenotEastern;theyarenotWestern.TheyarenotEuropean,noraretheyAsian.

The challenge for business leaders therefore is to understand Russia and Russians in their own context. What is this?

The Road to Renaissance

To answer this question, one has first to explore what Russia’s journey has meant to its population, because

Russia is a market that even for its own people defies rational comprehension.

Russia’s story is complex. It is a country that is globally assertive but at times insulated, triumphant but also traumatised, ambitious but enigmatic. This has led to the complex Russian personality, our understanding obscured by the extraordinary journey of a people who led the world in scientific advancement – putting the first man in space inthe1960s–beforefindingthemselvesinfoodqueuesinthe1990s.Asamilitarysuperpowercopingwithwhatseemed like domestic chaos, it was almost impossible for Russians to make sense of what had happened to them.

YetthroughoutRussia’shistory,artists,musiciansandwriters have tried to do this, their creations questioning

andinconclusive.The20thCenturyhadbeenatortuousexperience.Asamusicalhistoriancomments,“Whowould not have wanted to communicate on the edge of theabyssin1916?RachmaninovwrotetheVesperswhenthe future of Russia, through the Revolution, was about to becomeaprolonged,dehumanisingcatastrophe”.1

Lost Between East and West?

But the historic formation of the Russian psyche goes backmuchfurther.In1054theseparationofEasternandWestern churches – and consequent development of the RomanCatholicandEasternOrthodoxChurches–setthe scene for Russia’s secular seclusion, with far-reaching consequences.

The most significant of these, in socio-economic terms, was the fact that the Italian Renaissance2 did not reach Russia, resulting in artistic, intellectual and creative seclusion. This insulated Russia from the foundations of future beliefs relating to egalitarianism, democracy and collectivephilosophicalthoughtacrossEurope.

Attheturnofthe17thcentury,PetertheGreat3 resolved toaddressthis,movingthecapitaltoSt.Petersburgasa“windowtoEurope”.HeregularlysentRussiancountsand duchesses to live on the Continent, insisting that they blend in, adopting modes of dress popular in the Netherlands at the time.

Despite such efforts, the legacy of Russia’s insulation hasledtowhatmanydescribetodayasa“dogmatic


1Dr.M.R.Brett-Crowther,The Meaning of the Rachmaninov Vespers. 2TheItalianRenaissance,whichfromthelate14thtothe17thcentury,connectedartisticandintellectualachievementacrossEurope,themostcommonthemebeingthehumanisticbeliefthatman was the centre of his own universe. 3PetertheGreat,TsarofRussia1682-1725.

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culture”.Thisrevealstheunderlyingfrustrationoftryingto understand Russia in the wrong context, with global executives assuming inappropriate shortcuts to business relationships.

One cannot understand Russia’s culture through standard reference points, such as the physical appearance and behavioural protocols that guide Westerners in countries such as China.

Russia, and its executive population, must be understood in a more empathetic way. This means understanding first that Russia is on a complex journey – a journey that our participants agree is hard to define and without an end in terms we might recognise.

However, there is plenty in Russia’s history that offers stepping-stonestoanewfuture.AsKirillAndrosov,Managing Partner of Altera Capital says, “Everything that you need to draw upon to solve challenges has already happened because Russia has such a rich history – the answers are already there. We just need to view them in a new context”.PaulHerbert,GeneralDirectoratIlimGroup,agreesatapersonallevel.“In Russia today just about everything I have ever done before is needed to fulfil my role”.

Asthe21stcenturyunfolds,whatwecanrecogniseisa pending economic renaissance for Russia. This will taketime.Just20yearsonfromtheendoftheplannedeconomy, Russia is one of the youngest capitalist economies in the world, on the cusp of defining its new national identity.

As Daniel Triesman says in Russia’s Journey from Gorbachev to Medvedev, “The new Russia will find its place in the world. To increase the chance that the role it defines for itself in coming decades is compatible with Western interests will require an approach [from the West] that combines patience, humility and a painstaking attention to the facts as they are rather than as we have imagined them”4.

In exploring the facts as they are, we expose some of the most potent myths that have spread among the executive community. In addressing these, we seek to understand how some companies have achieved outstanding success in Russia, and explore the role business leaders will play in Russia’s economic renaissance.


4The Return: Russia’s Journey from Gorbachev to Medvedev,DanielTreisman,FreePress2011.

III Exploding the Myths, Understanding the Opportunity

Russia’s Economic Renaissance

1.Russiaisinthetop10rapidgrowthmarketsin termsofrealGDPgrowth,showingannualised figuresfor2000-2010ofmorethan2%aboveglobal GDPgrowthforthedecade.Ernst & Young Rapid-Growth Markets Forecast, October 2011.

2. In terms of FDI inflows per capita, Russia ranked 10thin2010,aheadofcountriessuchasBrazil, HongKongandMainlandChina.Ernst & Young Rapid- Growth Markets Forecast, October 2011.

3.Moscowranks11outof36ofthebestcitiesfor “easyaccesstomarkets,”upfromarankof19in 2010.Accessisthemostimportantfactorfor companies deciding where to locate their offices for the third year running. Cushman & Wakefield, European Cities Monitor 2011.

4.Moscowisexpectedtoseethelargestinfluxof companies building on an existing presence in Europe,with57companiesconsideringfurther expansiontherein2011-2012–anincrease of10(justunder22%)comparedwith2010-2011, and eclipsing London as the most popular location for expansion. Cushman & Wakefield, European Cities Monitor 2011.

5.M&Aactivityisexpectedtoincreasein2012-2013, with domestic and international investment in consumer markets, retail and agriculture, plus sizeable transactions from the privatisation of large statecorporationsandsmallerstateownedoil&gas assets. KPMG, M&A in Russia 2011.

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III Exploding the Myths, Understanding the Opportunity

Myth one

Russia’s defining characteristic is that it is the world’s largest hydro-carbon producing nation. It is unlikely to excel in other industries in the future.

As governments, business leaders and international bodies consider the scarcity of resources in the 21stcentury,thephrase“resourcecurse”becomesincreasingly inappropriate. At this stage in Russia’s journey, generalisation obscures reality.

ThereareindicationsthatRussia’srelianceonoil&gaswill change as the socio-economic picture continues to develop. Russians are motivated by reclaiming their past glory in scientific and technological advance by creating something new and unique and by activating the groundswell of determination to bring about positive change for their country. With food queues long behind them, the personal focus cannowchange,asRodionShishkov,VicePresident,YotaandDirectorofDevelopment,YotaLabexplains,“When people were first able to make money, it was the driving force behind living life, or doing a job. Now money is less of a driver for many of the talented people I know. The money is not as good as it used to be – work tends to be less lucrative – and this makes people want to change their own commercial landscape”.

We have seen the determination among Russia’s people to develop careers beyond oil, in areas that will broaden Russia’s economy. In big picture terms, as in most emerging market economies, increasing the share of servicestoGDP,relativetoagriculturaloutputandlow-end industry, will help break a cycle of low-pay and hard physical work. This will drive economic wealth across a

broaderrangeofindustries,comparabletotheUSandEuropeanUnion.Exhibit3showsthatRussiaisalreadyonthis journey, at a similar stage to Brazil and ahead of India. Exhibit 3: Rebalancing the economy – less manual labour, more services

European Union –servicesastrongshareofGDP

Agriculture1%

Industry24%

Services75%

Brazil – mid-way between the developed world and emerging economies

Agriculture6%

Industry25%

Services69%

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ExplodingtheMyths,UnderstandingtheOpportunity

Russia’s evolving relationship infrastructure is therefore criticallyimportanttothecountry’sfuture.StephenKing,ChiefEconomistatHSBCsays,“The incentives to connect are incredibly strong. Opening up a country to trade can considerably change the structure of the economy, allowing levels of specialisation previously unattainable”.

HepointstotheUS,whichmeasuredbyshareofexportswithinGDPisalotmoreopentodaythanin1950.Exportsmeasuredbyvaluethenstoodat4%ofGDP,whereastodaytheyareupto12%ofa(muchhigher)levelofGDP5. MeanwhilethestructureoftheUSeconomyhasshifted.Kingsays,“The US has managed to retain its preeminent economic position in the world, underscoring the need for countries to be open to change, whether driven by internal or external influences”.

If we look at Russia’s ongoing journey, from seclusion to greater international connectedness – strengthened by a growing belief among its executive population in their ability to bring about change – Russia is in a strong position to lessen its dependence on hydro-carbons. The big picture is therefore very encouraging and implementation at the individual level is vital.

Entrepreneurial drive

Entrepreneursplayamajorrolehere.Russiaisachallenging environment for commercial trailblazers, particularly given that some business leaders would feel more comfortable with an institutional infrastructure that more rigorously protects their business interests.

Nevertheless, executives with the most potential are bypassing the oil industry to focus more on information technology as the sector producing the most innovation, particularlyingreenenergy.AsShishkovexplainsthistrend, “The talk in the café is different to what it was 10 years ago – it revolves much more around bringing about change than making money for the sake of it”.

So,itisnotthemoney,butthelevelofengagementinthemarketthatisthepowerfulnewdriver.Shishkovsays,“It is a question of being strong enough to fight. As soon as you start fighting you have the ability to win, whatever it is you are competing in”.

For Russia to excel in industries other than hydro-carbons, it needs this deeper engagement and determination to bring about change, particularly in an era when Russia is less globally secluded and more open to opportunity. The potential danger is that entrepreneurs will leave to go abroad.

“It is partially true that entrepreneurs perhaps get more investor, mentoring and peer support outside Russia, together with access to innovation clusters,” says one entrepreneur. “But on a personal level, a lot of entrepreneurs have a strong affinity to Russia. We like the people here and we speak the same language, literally and figuratively”.

Somebusinessfoundersaccesssupport,contactsandpeer groups by creating a strong base in Russia before expandingintoothermarkets.Shishkovexplains,“It is a question of proving yourself at home before expanding into markets where there are more defined paths to success”. This is preferable to leaving to start a business in a location

5The Southern Silk Road: Turbocharging ‘South-South’ economic growth (HSBC Global Research, Global Economics June 2011)byStephenKing.

Russia – mid-way between the developed world and emerging economies

Agriculture5%

Industry33%

Services62%

India – still some way to go

Charts extracted from The Southern Silk Road (HSBC Global Research, Global Economics June 2011).

Agriculture17%

Industry28%

Services55%

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6 United Nations UNCTAD

that is more favourable, but where you don’t know the people, speak the language or have any cultural affinity.

For larger companies, foreign direct investment is seen as a critical success factor for the future.

Foreign direct investment

Inrecentyears,Russiahasemergedasoneofthetop10globalrecipientsofFDI,asshowninExhibit4.In2011globalinflowsofFDIroseby17%toUS$1.5trillion,ofwhich just over half went to developing and ex-communist economies:FDItoRussiawasup23%6.KirillAndrosovsays, “Foreign direct investment is very important for Russia because it is more than money – it brings experience, corporate governances and other corporate practices, but this is not country-specific”.

Despite improvements in FDI inflows to Russia, business leaders have been frustrated by the lack of an agency comparableto“InvestinChina”andthesignificanttimelag between the direct investment programmes run by Brazil,ChinaandSingaporeandthelaunchofRussia’sfundinQ32011.“Fast growth markets such as India, China and Brazil are competing for foreign direct investment. Russia’s business capabilities are possibly more efficient, but the country needs to pay attention to promoting itself as a destination for foreign direct investment”.

As Julia Nikitina, Managing Partner, Boyden Russia, also acknowledges, “Russia is not good at sharing success stories and we have to work harder to gain recognition for historic reasons. Other countries have old colonial relationships that mean they are on the radar for foreign investment. Russia doesn’t have this, so we have to

ensure that Russia’s profile for foreign direct investment is maintained in the Western world”. The Russian government is supporting foreign direct investmentbyreducingthenumberof“strategic”industries to which foreign investment is restricted, and the explicit blessing of PepsiCo’s acquisition of Wimm-Bill-Dann by President Putin sent a strong, positive signal. SeeExhibit5.

Changes in the corporate infrastructure are also gaining momentum, particularly a move to greater transparency. Paul Herbert comments, “As more of the infrastructure and corporate base of Russia and government entities are privatised, and more of them want to become targets for FDI, they are gradually moving to IFRS accounting. This is clearing the opacity from Russian business”.

Greatertransparencywillremovemuchofthecautionthat previously constrained corporate growth among all but the largest multinationals. Another business leader adds, “Compared with Germany or the UK, Russia today probably has much lower transparency, but there will be a very quick transition. My peers anticipate that 60 percent

Exhibit 4: Top10recipientsofFDIinflows(US$m)

Rank 2000 2009

1 UnitedStates 313,997 UnitedStates 129,883

2 Germany 198,277 Germany 95,000

3 UnitedKingdom 118,764 UnitedKingdom 59,628

4 Luxembourg 88,739 Luxembourg 48,449

5 Canada 66,795 Canada 45,676

6 Netherlands 63,854 Russian Federation 38,722

7 HongKong 61,938 HongKong 35,606

8 France 43,252 France 35,514

9 China 40,715 China 34,613

10 Spain 39,575 Spain 33,782

Source: UNCTAD

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Challenges for Chinese ExecutivesExplodingtheMyths,UnderstandingtheOpportunity

7ModernRussiaisanonlineforummanagedbyKetchumonbehalfoftheRussianFederation.

of the economy will be relatively transparent in five years’ time, rising to 80 percent by 2020”. Russia’s future growth

Transparency will significantly enhance interest in growing industries such as commercial agriculture and food processing. While global political concerns will increasingly centre on food and fresh water security, Russia’s potential is attracting further investment by companies with a long-term commitment to the market.

According to Modern Russia7, the country is already one of the world’s top wheat producers and exporters, and it has substantial arable land that can be brought into production. A major requirement to upgrade aging machinery presents a significant opportunity for agricultural machinery manufacturers, such as John Deere.

Commentingona£32billion(US$49.6billion)plantoexpand its production capacity in Orenburg, in a company announcementattheendof2011,MarkvonPentz,PresidentofJohnDeere’sAgricultural&TurfDivisionsaid, “We believe Russia will continue benefiting from demographic and macro-economic trends that require increased food production from global agriculture. Russia has the agronomic potential to become a pan-Eurasian breadbasket”.

At present, hydro-carbons may currently form the backbone of Russia’s economy, but this will evolve while enabling the country to make progress based on the proceeds of oil. “Russia may no longer be in the lead in many areas, but I have an absolute belief that she will make a comeback,” concludes Alexey Popov, Program DirectorEMBAGeneralManagement,StockholmSchoolofEconomicsinRussia.

Exhibit 5: Top10transactionsontheRussianM&Amarketin2010-Q12011

Target Acquirer Industry Transaction value (US$m)

Type

1 Weather Investments VimpelCom Mobile telecoms 20,655 Outbound

2 Lukoilshares(19.2%),owned by Conoco Phillips

Lukoil Oil 8,968 Domestic

3 Rosneft Oil Company (9.5%)

BP Oil 7,910 Inbound

4 Silvinit Uralkaliy Mining 7,800 Domestic

5 Novatek (12.08%) Total Oil 4,000 Inbound

6 Wimm-Bill-Dann PepsiCo FMCG 3,800 Inbound

7 INTERRAOUESOJSC(20%)

FederalGridCompanyUES

Energy 3,598 Domestic

8 BankofMoscow(46.48%);Capital Insurance

VTB Financial services 3,536 Domestic

9 Norilsk Nickel Trafigura Mining 3,500 Inbound

10 Gazpromshares(2.7%) Vnesheconombank 2,656 Domestic

Transactionvalueoftop10M&Adealsin2010-Q12011

Percentage of inbound investment

66,423

28.92%

Source: KPMG M&A in Russia 2010-Q1 2011

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Myth two

The slow development of Russia’s institutional infrastructure prevents international businesses from achieving worthwhile returns on investments.

While business leaders would welcome a faster pace for an evolving institutional infrastructure, this is not the central issue in achieving return on investment. In fact, contrary to expectations, a lack of institutional infrastructure can allow for higher returns in a market where there is less costduetofewerrestrictions,less“redtape,”compliancerequirements and other issues.

However, continuing progress in the development of an institutionalinfrastructureisapriority.AsKirillAndrosov,Managing Partner of Altera Capital says, “For Russia to achieve an industrial rebirth, we need to see more effective infrastructure, more extensive development and also faster progress in building institutions to support our commercial society and compete in the global economy”.

SectorsthathavestrongStateinvolvementfarebetterinan environment where the institutional infrastructure is not yet fully mature. The competitive landscape is uneven and return on investment depends largely on sector.

Prominent news stories on the withdrawal of international bankssuchasBarclaysandHSBChavehighlightedadifficult competitive environment in retail banking, with RussianStatebanksprotectedbysomelucrativetermsandsupportfromtheState,whileinternationalbanksmaintaina presence primarily to provide services to international clients.

Inoil&gas,AlexeyPopov,ProgramDirector,EMBAGeneralManagement,StockholmSchoolofEconomicsin Russia, comments, “It may be difficult for international players to enter a market where State-owned companies have some State protection – and therefore a competitive advantage – but international businesses that enter joint venture relationships, particularly with State-owned companies, can make excellent returns,” pointing to Rosatom/AlstomandRussianRailways/Siemens.

Excellentreturnsaremorechallenginginconsumerandretail, with numerous international players like Procter &Gamble,PepsiCo.,MARSandUnilevercrowdingthemarket and firing up competition.

Corruption, transparency and political risk “Corruptionisanissue,butitisnotsomethingthatstranglesbusiness. It exists not to put you out of business, but to have a share of your success. This has a practical dimension, primarily based on historic challenges and the fact that theStateownedeverythingintheplannedeconomy.”(Anonymousparticipant)

This comment on corruption in Russia resonates with the continuing debate over corruption, ranging from those who claim that corruption has practical implications in circumventingbureaucraticinefficiencies(asinSouthKorea),tootherswhoinsistthatnothingjustifiesasystemdetrimentaltothepublicgood(asinthe“SuhartoModel”inIndonesia).8

Corruption exists in different forms across the developing and developed world, and is more tolerated where there is higher predictability in the level of bribes and their likely results, together with overall contribution to economic growth. However, payments factored in by companies almost as ‘taxes’ in a corrupt system are paid to individuals as bribes, whereas genuine taxes are paid into the public purse.

InRussia,Dr.FrançoisValérian,headofprivatesectorprogrammes at Transparency International in Berlin says, “TheSovietsystemprovedtobeasystemwhichpoorlyservedthepublicgood”.As the Federation moves towards greater transparency, the environment is much closer to SouthKoreathanitistothePhilippines,andintimewillbealigned more closely with transparency levels in developed countries as Russia benefits from capitalist longevity.

Julia Nikitina, Managing Partner at Boyden in Russia says, “Itisimportanttoacknowledgethatitispossibletoconductbusiness and grow revenue in Russia today without resorting to bribery. However, this requires a greater investment of time. Multinationals hit by scandal were, typically, trying to pull in big money, too fast. Leading a transparent business takes longer and executives need to be prepared for this. But the reward is great: building a reputation for transparency will lead to major long-term advantages in terms of access to executive talent and support at state level, together with the abilitytodevelopglobalpartnerships”.

As Russia’s international connections grow, external pressure will therefore continue to rid the system of corruption that with its associated risk of anarchy brings political risk. Following Putin’s re-election, foreign investors monitoring signs of political instability are focusing on the medium term, keen to ensure that Putin and the ruling establishment can unite to stand firm against corruption.

8Seehttp://www.financialtaskforce.org/2010/07/30/the-very-questionable-case-for-good-corruption/forDr.FrançoisValérian’scommentaryon‘Theveryquestionablecaseforgoodcorruption’.9ModernRussiaisanonlineforummanagedbyKetchumonbehalfoftheRussianFederation.

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However, it is a big market and in a country the size of Russia, distribution companies in particular achieve strong returns. As Popov says, “The consumer market in Russia is a big pie and everybody has a part of it”.

One sector that is more closely aligned with international markets is the telecoms industry, where three or four major players compete with each other on a more even playing field. These companies can “struggle in the more normal, open market,” says Popov, with comparable licence terms, requiring them to innovate and fight for share of wallet.

Consolidate, build and grow

At this stage in Russia’s capitalist evolution, consumer companies are sharpening their focus on joint ventures and collaboration. “Consolidation is definitely the name of the game now,” saysMaxTucker,GeneralManager,Y&R.“Buying a company might be more expensive in the beginning, but it gives you quicker entry into the market and avoids the risks associated with trying to do greenfield projects”.

Market entry or expansion based on building greenfield projects requires significant resources, with size usually the key element. Large automotive companies such as Ford,HondaandVolkswagenhadtheresourcestogetStateapprovalandachieveasalesvolumethatjustifiedbuilding greenfield production facilities.

The attraction is the potential return on investment, also the case for acquisition of local competitors. “Consumer companies such as Pepsi, Procter & Gamble and Unilever are growing fast, investing in the market by buying local companies such as PepsiCo’s acquisition of Wimm Bill Dann,” says Max Tucker. “As the institutional infrastructure evolves, these companies are building factories and showing faith in the system – faith that their assets will be protected and their business will grow”.

These companies demonstrate a major commitment to the market in terms of finance, money and people. The consensus among our participants therefore is that achieving a significant return on investment is possible, butnoteasy.Sizeoffersnoguarantee.Multinationalshave also failed not because of uneven competition, the approval system, or infrastructure, but because of their style of business. “I have seen some companies that were far too cautious in a market where growth is so fast, being reticent doesn’t work. You must act,” says Tucker. “It’s not the system but the fact that international corporate processes typically don’t match the way business is done in Russia… or any other emerging market”.

Acting without caution can be counter-intuitive for companies with shareholders used to long-term planning. While acquisitions and joint ventures can shorten the time to expansion in Russia, getting the approvals to build factories takes too long in a market requiring fast action. How do companies address this?

Planning for change

“You need executives with a lot of determination,” says Tucker. “Your people on the ground are going to be told that things are not possible when they are. You just need to find a way to work around them. So the leadership team has to be very flexible and understand that the plan they had might change”.

The need to accept change is based on the rapid transformation evident in a very dynamic market. Julia Nikitina, Managing Partner of Boyden Russia, confirms this. “Determination and flexibility are key characteristics not only at the individual level, but also at the organisational level. International companies need to devise specific approaches for Russia. There is great opportunity here, but only if the market is approached in the right way with the right people. Otherwise, as we have seen, tentative expansion can result in a costly withdrawal”.

So,adoptingtherightmarketapproach,actingfastandbeing prepared to change are key tactics for growth. However, business leaders who craft growth plans around proactive market activity will find that such elements need to be re-interpreted in Russia.

Tucker explains, “I have learned that sometimes the best plan is a reaction. You act without a plan with the purpose of reacting – that can take a long time to adapt to for someone not used to this approach”. For senior executives used to pursuing growth that is linear, iterative and geared to a certain timeframe, Russia can feel like a reversal of fortune as plans are thrown out or continually changed. “It is like playing chess on three separate boards,” says Tucker.

How would a Russian go about this?

Tucker explains, “Russians are much more intuitive. They would do the scenario planning that a Westerner might do and then ignore it. They would also have a fourth scenario that is not written down. For Russians, so-called ‘scenario planning’ is not as formalised. Russians would do it more intuitively, more emotionally”.


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Myth three looks at international companies that have achieved success by interpreting the market in a Russian context, adapting their national approaches to engage successfully in collaborative ventures.

Myth three

No country has yet found a way of pursuing fruitful commercial ventures in Russia.

There are numerous examples of nations whose companies are engaged in fruitful commercial ventures in Russia, and they have one major element in common: they have turned opportunity into successful outcomes through their understanding of relationships.

As Alexey Popov says, “Opportunity is chance, like luck, but turning this into something concrete depends on good relationships”.

A new relationship infrastructure is evolving in Russia, awayfromsingular,State-ledcommercetowardsmultiplerelationships encompassing big brands, government agencies, business schools, social media and other special initiatives.

It is a move away from formal to informal relationships, through which more balanced, commercial collaboration can be achieved. Popov explains the contradictory nature of relationships in Russia, “The human element is part of the Russian culture: on one hand Russians are looking for very good, trusting relationships, yet on the other hand they are very pragmatic”. Hecontinues,“Russians see the benefit of good relationships, but it is difficult to build a win-win approach, because the Russian side will always try to gain a better deal. Therefore, it is very important to establish good working relationships – probably informal relationships – with Russian partners”.

Julia Nikitina comments, “There is a very pressing need for professional relationships to change. We look very carefully for executives who show an unusual mindset – one that doesn’t revolve around winner-loser, but partner-partner in a deal. This is one of the major differences that international executives experience in Russia and it is important that the new relationship infrastructure in Russia is built on a win-win attitude”.

An expatriate business leader confirms this, saying, ”It is important to bring understanding and patience to working with Russians. Establishing a good, trusting relationship with the Russian side results in a much better perspective and a greater likelihood of a win-win approach”.

Finnish correctness

FromFinland,PaiviMinkkinen,SeniorVicePresident,RussiaandInternationalBusiness,VRGroupLtd.,explainstheapproach taken by the organisation in expanding its transport infrastructure in Russia. “As a foreign business, one of our challenges is adapting local models and ways of doing things in a transparent and ‘morally correct’ way. We do this by establishing contact with civil servant offices, city government and agencies in order to engender support for expansion and growth plans. It is not enough to function purely as a business unit – you have to seek local support and become known in order to build trust and acceptance that you are going about things in the right way”.

Chinese confidence

However, it is not all just about relationships. Investment and practicality are also key drivers, particularly for the Chinese, who are not put off by bureaucracy, focusing purely on whether or not deals can be done. Paul Herbert explains, “Russia recognises that the development of its Eastern region needs more capital than it can attract from the West, so it needs Chinese direct investment”. Chinese confidence in doing business in Russia is growing. “There was never an issue around whether Russia wanted to collaborate commercially with China,” says Herbert. “Chinese confidence was the key factor and as this grows, together with the level of trust in the Russian government, we will see more results in the Eastern region.”Exhibit6showstheshareofRussianexportstoChinain2010atmorethanaquarter–26.4%–oftotalRussianexportstoG5andotherBRICcountries,forecasttorisetomorethan60%in2050.


Archaic barriers – the Mafia A seasoned business leader explains why the Mafia is probably the biggest myth but still the biggest barrier. “The issue is Russia does not have a great reputation because of past associations with the Mafia. Everyone thinks that the Russian Mafia is still here, that the market is dominated by people with guns. People are simply afraid – they have bought into whatever reputation was being built for Russia in the West. Therefore they are worried about their personal safety but this is completely wrong.

Yes, there was a power vacuum in the early 1990s. The Mafia filled that vacuum, but by the end of the decade the government had sorted all that out, regained its strength and pushed the Mafia out”.

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Exhibit 6: RussianexportstoG5countriesandotherBRICs9

IlimGrouphastransformeditsrelationshipwiththeChinesefrom sales to strategic collaboration. Herbert explains, “We are now considering Chinese investment in Siberia, not previously seen as possible. So, rather than just selling to China, we are taking the relationship to the next level and actively engaging our Chinese counterparts as participants in investment to more rapidly grow the manufacturing footprint and supply chain to China”.

It is clear that the evolving relationship infrastructure – connecting individuals, organisations, regions and global markets – will play a major part in Russia’s renaissance.

Myth four explores other elements that attract foreign companies to Russia: a well-educated population and growing integration for the executive community through national and international business schools.

Myth four Russia’s higher education system is not aligned with business requirements, in part because its students and executives do not participate in the international education system.

The alignment of skills and business requirements must be understood with reference to the legacy of a planned economy and evolving global development. From the 1970s,Russia’sachievementsinindustrialdevelopmentandmanufacturing were overshadowed by international iterations of technological progress geared to evolving global markets and customer demand. For example, the British-made Comet inthe1950sformedthebasisforthedevelopmentoftheBoeing707.Travelbyjetplaneswasthewayahead,buttheseairlinerswereinefficient.By2005,theAirbus380,

combiningdifferentstructuralsectionsmadealloverEurope,wasthreetofourtimesmoreefficientthantheComet410.

The point is, such international, collaborative developments took place during Russia’s ongoing seclusion from the rest of the world. A strong education system was not refreshed by new ideas and business approaches from other countries. The development of Putin’s innovation economy will therefore take time.

Paul Herbert explains, “The Soviet education system was oriented to producing people well suited to manufacturing and did not produce innovative thinkers. It produced people who could implement a plan and perform basic functions with skills necessary to make a very well organised manufacturing footprint work”. He continues, “The disadvantage was that they did not emphasise problem-solving capabilities. It was not a system that had the ability to continuously improve, it was not profit-motivated and did not capture customer input”.

However, that was compensated for by the fact that the new economy has absorbed people with an academic background, proving that Russia’s education system had major strengths thatarestillhighlyrelevant.EkaterinaIlyina,AssociatePartnerat Boyden says, “Those educated in the Soviet system – now in their mid- to late-40s – had deep theoretical knowledge that provided them with a robust academic background resulting in the development of strong analytical skills. High, inner executive discipline, combined with utter results-orientation enabled such executives to achieve the highest professional results. This came not from long-term academic training, but was mostly due to an instinctive, goal-orientated approach. Examples we notice in today’s market include executives with linguistic talent who are running banks and heading up marketing and HR functions, while those educated in maths and physics have become excellent finance directors”.

Today, Russia’s students and executives learn problem-solving and critiquing skills through the tertiary international education system, gaining exposure to evolving global practices.

One of the sectors that has changed most is financial services.KirillAndrosovsays,“Already there is a new generation of Russian leaders who have been educated and trained abroad in Europe and the United States, providing new management standards”.

However, change will not happen overnight. It would be unrealistic to expect Russia’s tertiary level education system to match that in Western markets. Alexey Popov says,


Source:IMFDirectorofTradeStatisticsfor2010,HSBCcalculatorsfor2050ChartextractedfromTheSouthernSilkRoad(HSBCGlobalResearch,GlobalEconomics June2011).

9The Southern Silk Road: Turbocharging ‘South-South’ economic growth (HSBC Global Research, Global Economics June 2011)byStephenKing. 10SeeLosingControl–theemergingthreatstoWesternprosperity,byStephenD.King,publishedbyYaleUniversityPress,2010.

Share 2010 (%) Share 2050 (%)

US 2.7 6.5Japan 1.8 4.1 Germany 19.8 9.6France 8.5 4.2UK 11.3 6.3China 26.4 60.5India 8.0 7.0Brazil 1.4 1.7

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11Skolkovoisacentrethatconcentratesinternationalintellectualcapital,stimulatingthedevelopmentofbreakthroughprojectsinIT,biomed,energy,nucleartechnologyandspace/telecomstechnology.

“It has taken some time for Russian educational institutions to introduce management courses relating to business needs in the market, but this now has a lot of momentum”. A more integratedapproachisevidentintheSkolkovoprojectinMoscow11, backed by a leading business school and funded by Russian business people. “We expect to see Skolkovo and a couple of other schools included in the next Financial Times ratings of global business schools,” Popov concludes.

While the business education segment is developing well, the market as a whole is still under-developed in terms of the kind of companies that participate. Popov explains, “This is because the majority of Russian companies are not accustomed to being involved in education, compared with best practice in the West. This can lead to sporadic engagement among HR managers who are not yet experienced in being facilitators between a company and an educational body, although this is beginning to change”.

What kind of engagement are we seeing at present?

“The typical MBA applicant at Stockholm School of Economics is quite senior – commercial directors and deputy general managers,” says Popov. “Their motivation is not just to get an MBA to boost their careers. They are looking for new knowledge, new relationships, networking opportunities and new contacts”.

As we saw in myth two, a developing relationship infrastructure underpins the importance of turning opportunity into tangible success through relationships. Business schools provide a means by which executives can make important contacts geographically – both national and international – with government bodies and agencies and also suppliers.

Popov comments, “In Russia the country manager is not like his counterpart in Sweden, for example, because the Russian manager must fly over nine hours from one end of the country to the other. So, networking at a country level is very important”. He continues, “It is also important regionally, because if your company is in Siberia, the south or north of Russia is almost a different country. So, if you want to enter that region or need to secure government contacts, you are looking to a business school as a way to develop your leadership expertise and networking as well”.

Companies used to facilitating education are helping to increasemomentum.PaulHerbertatIlimGroupsays,“Our emphasis, as a company, is to put pressure on the regions to adapt their education systems to start producing talent with the right kind of minds. Within Ilim, we are

reviewing our internal systems to identify talented executives who would enjoy rapid development in the region where their roots are and improve their quality of life by leveraging a new skill set”.

Popov corroborates Herbert’s approach. “The MBA profile is changing. We now have participants from more companies in Siberia and the Russian regions”. Five years ago MBA participantswerefromMoscowandSt.Petersburg,representing primarily multinationals able to make this educational investment. “Now we see a big change due to the development of Russian manufacturers, banks and companies that have a strong HR element in their management,” continues Popov. “We see a direct correlation between a company that has a well-established HR policy including specific initiatives and development plans to help executives advance”.

Myth five explores the challenges involved in dealing with a well-educated workforce in a post-planned economy.


Status still important There are big differences even within what may be considered basic elements of a relationship, as our participants explain. The handshake “In Russian culture it is not common to shake a woman’s hand. This is considered a very manly gesture and women’s hands are seen as rather delicate. With the evolving business culture today, a lot of Russian businesswomen expect to have their hand shaken, so you have to play this very carefully”. Email vs. telephone “As Western influences increase, Russians embrace different protocols. Whereas a Westerner would telephone first, then follow up with an email, Russians will send three emails from cold and be perturbed by not getting a response, which they take personally. They are good at using email, but picking up the phone after three emails doesn’t occur to them”.

The importance of status People tend to treat those whose status is higher with more respect. Even if the higher status executive is very democratic, he would be both offered, and he would expect to receive, service in special canteens, a car with a driver, business class in aeroplanes, 5-star hotel accommodation and so on”.

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“Large Russian corporations are very efficient in building corporate universities. They understand better the skills they need and they develop and master special programmes to develop such skills”. — Kirill Androsov, Managing Partner, Altera Capital

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Myth five Outdated HR practices and the consequent lack of coherence with commercial objectives have a major impact on corporate growth prospects. As we have seen in myth four, there are a number of companies using HR experts to support Russia’s renaissance. However, the importance of strategic approaches to HR – to align people to business needs and integrate these more effectively – is a challenge in every market, particularly in a shifting global economy.

Ratherthanbeing“outdated,”RussiaisabroadlandscapeintermsofHRbynatureofitsevolvingcommercialfabric.Giventhe kind of business models and sheer size of the country, companies still need a strong administrative HR function, as well as a more strategic team. While some companies focus on integrating HR for strategic growth, the HR head must still retain an administrative team to help run the factories.

From our research, we see the emergence of three major transitions in making business and HR practices more coherent: first, the extent to which the function drives internalcommunications;secondly,thedevelopmentofkeyperformanceindicators;andthirdly,theroleHRplaysininvolving people in the creation of new products.

1. HR drives internal communications

HR in Russia is increasingly focused on communications, relating to the importance of relationship-building among colleagues and with clients, customers and suppliers, as exploredinmythtwo.AtX5RetailGroup,theHRteamensures that employees are treated well so that this is reflectedinhowtheytreatcustomers.TatianaKozhenvnikova,HRDirectoratX5RetailGroup,callstherelationshipbetweenacompany,itsemployeesandcustomersthe“magiccircle”.

Customer service is also a top priority for HR expert Ruslan Ilyasov. “As soon as you achieve quality of service, a company will be ahead of its competitors. But it is a question of changing the mindset”. The value of modifying the employees’ approach to relationships also makes HR thecentraldriverforpeople-ledchange,asKozhevnikovaexplains: “X5 is moving to a multi-format company, so we review each role, assign new responsibilities and train all our people. A major part of this is communicating the changes. Management changes are also a major opportunity to reshape the business, so HR leads the implementation of the new structure and new business processes”.

Alignment through “corporate universities” Kirill Androsov, Managing Partner at Altera Capital, draws attention to the value of corporate universities, saying, “Large Russian corporations are very efficient in building corporate universities. They understand better the skills they need and they develop and master special programmes to develop such skills”. The increasing prevalence of corporate universities is a sign that the internal HR workforce is developing at a very high level, enabling the company to think strategically about developing executives through more senior levels to face future challenges. Here Ruslan Ilyasov describes the approach he took to corporate training in his former role as Vice President of HR at a retail company.

“Below the CEO position, one or two levels, we grew our own talent – store director, division director. We trained 100 people a year to take the position of store director.

We did all the training ourselves in-house. We had an assessment centre to assess the level of competence and performance, then those who did well we invited to join the pool of talent, which went through several training programmes in business training centres. These focused on leadership and finance. The biggest challenge for senior executives is that they don’t know how to lead people having been in a command economy. They don’t have the finance background because of the centrally planned economy and they only focused on the volume of production and not the bottom line.

In addition, we focused on best practice in the retail market, and gave trainees exposure to how processes in the central office work, with a week spent in the central office and 3 weeks shadowing the directors in our retail chain. They were developed in 4-5 different areas, by senior directors and a pool of internal trainers. We did this both live and online through distance learning programmes: we were in 100 towns in Russia with 350 stores, so a lot of people learned through our long-distance distance programme”.

HR-driven results Ilyasov continues, “We have increased revenue by 15 percent every year for the last several years. We have increased profitability by 200-300 percent, EBITDA margin has grown from below zero to more than 6 percent over the last two years, and we have reduced headcount from 31,000 to 13,000 people”. “Corporate universities are a valuable means by which to rebuild Russia’s specialisation,” comments Julia Nikitina. “Presently, companies have to play a key role in developing talent because it is this blend of learning in a corporate environment that teaches the commercial application of expertise”.

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2. Development of key performance indicators

Reshaping the business and making HR practices more coherent includes the development of outcome-oriented performancegoals,notedbybothKozhenvnikovaand Ruslan Ilyasov.

ThedevelopmentofKPIsisparticularlyimportantinanenvironment where spiralling salaries are prompting more widespread introduction of performance-related bonuses. Kozhenvnikovasays,“The business looks to HR for increased productivity, improved operational excellence and the development of KPIs to support performance-related reward”.

While Ilyasov comments, “The HR team does a lot of business modelling together. When we review the results, I assess our trainers not on how many courses they run, but on the conversion rates in our stores or improvements in mystery shopper assessments. That is what they will get their bonuses for”.

3. People are not “human resources,” but “co-creators”

Russia is an economy in which people tend to be seen more as resources and less as co-creators, leading to limited possibilities of involving people in the creation of the company’s products.

The kind of approach this needs is not yet widespread. RodionShishkov,VicePresidentofYotaexplains,“This is understandable because it is almost more efficient in companies with standard products that don’t require much development – as in an oil company”. He continues, “However, the same approach is noticeable among companies involved in innovative technologies, which cuts out enormous potential from their people.” Yotatakesadistinctive approach to HR, facilitating the involvement of its people in product development by making HR responsible for most of its internal communications. The integration of HR with its product development function is unusual. “The primary objective of HR is to engender a culture that makes our people co-creators in product development, capturing their input across the business and feeding it back to the development team,”saysShishkov.

These three transitions – particularly the shift towards involving people as co-creators – bring value to the market as a whole. In the face of spiralling salaries and multiple opportunities, remuneration is not an effective tactic forretention.Shishkovexplains,“The most successful companies do not use financial reward for retention. Instead, they tune into a major Russian characteristic: the desire to be involved in something unique. Russians are attracted to

new developments – they want to invent something. This really drives them and strengthens their relationship with the company”.

ShishkovhopesthatgreatercoherencebetweenbusinessandHRobjectives–particularly“co-creator”employeerelationships – will gain more traction in the market, given today’s more favourable socio-economic climate. He says, “There are more and more people who share Yota’s approach. To me, it is a natural cultural shift because we have better prospects now than in the 1990s, when the basics of life dominated day-to-day living. Today, people have the mental space to think differently about business and build a stronger moral platform”.

Myth six broadens the HR focus to look at assessing and hiring executives in the new socio-economic environment.

Myth six With experience working in Russia and ability to speak the language, assessing and hiring executives in the market will not be too challenging. Our participants are adamant that a broad-brush approach to Russia paves a path to failure. The attraction of Russia and what can be achieved there is magnified by the variety of opportunity. Different sectors have different competitive dynamics;typesoforganisationvary;andexecutivesfrom different economic eras offer diverse professional characteristics. Therefore, there are no shortcuts to understanding the market and its people. This is reflected in the challenges of assessing and hiring executives in and for Russia. While in other markets a strong track record, peer recommendation and industry stature are reliable indications, in Russia the focus on personal detail and commercial circumstances must be sharp.

TatianaKozhevnikovasharespartofherapproach,saying,“I believe strongly in using a combination of quantitative and qualitative elements. Relying purely on quantitative inputs such as KPIs or sales figures is too limited. They are a good indication, but we also need to understand executive behaviour – their reaction to teamwork, developing success in others and so on. So, I prefer a balance of about half quantitative and half qualitative inputs”.

Paivi Minkkinen shares a view from outside Russia. “As a foreign company, we have to think very carefully about hiring VR Group’s managing director in Russia”. Like many foreign


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organisations,VRGrouphashadarepresentativeofficeinRussia for many years. The decision for these companies is to either bring in an expat from HQ, promote a local from the representative office, or hire someone new. Minkkinen says, “The latter is more difficult, because first you need reciprocal trust and secondly, a belief that this leader can hire the right people for the company over the long term. This is very challenging, even for a Russian who can read the market”.

Why is it so challenging? There are two reasons cited most frequently by our participants.

First, there is a concentration of talent in Moscow and many executives are reluctant to move. Moscow is also a distinctive executive market with talent pools that don’t necessarily fit the variety of businesses further afield. Secondly,despitethedevelopmentofpeopleindifferentregions, repatriation of nationals from foreign business schools and the growth of corporate universities, experience and learning is still highly subjective. There are few paths carved out that have the benefit of critical mass and thereforeanelementofpredictability.Successinonecompany incorporates specific skills and experience, personal characteristics and cultural heritage, blended with the timing of sector transformation, the corporate context and economic era. It is hard to assess future performance against such a unique combination.

Attheindividuallevel,theSovietlegacyhasresultedinalackof familiarity in developing one’s own career. Russia’s size and geographic variety has further polarised different working populations. “The notion of flexible career development is a feature of the market system with which executives in St. Petersburg and Moscow are conversant,” says Paul Herbert. “But, in parts of Siberia, in larger cities, there is a huge percentage of people who do not recognise this and have not adjusted to the new system”.

Career development in a free market is therefore a huge change and currently meaningful for a minority. “We have to offer career opportunity and professional development to our people in Moscow or St. Petersburg, otherwise we will lose them,” says Herbert. “But we need to go at a different pace in Siberia. So, our assessment, development and hiring approaches are not yet consistent across the organisation, but we are making a difference”.

The difference is always personal, as Max Tucker explains: “It’s not about just learning the language and history - you need to understand a lot more about what motivates Russians”.

First, Russians like to be involved in creating something new and unique.

Secondly,itisimportanttorememberthatwithsomuchchange in Russia’s history, personal attitudes make an enormousdifference.Executiveswhoembracetherealityofchange and have a positive mindset are highly sought-after. Somecompanies’observationsrevealthatthemajorityofbluecollarworkers–85%–havenegativethoughtpatterns,whereas60%oftheexecutivepopulationhavepositivethought patterns.

ElenaSurmeyko,ManagingPartner,BoydenRussia,comments, “I agree with research on behavioural competences among Russian managers that shows positive thinking, relationship building – networking – and self-development are specifically required in Russia today. For example, positive thinking is necessary to handle the speed of change in Russia. Such changes are happening more quickly than the supportive technologies and processes. So, in situations of uncertainty, the executive needs to concentrate on positive opportunities rather than difficulties in order to inspire people”.

With the right attitude, the speed of change is so fast and dramatic, executives can develop their careers very fast. Julia Nikitina says, “This is particular to Russia and not something we hear from our global colleagues at Boyden. We are very clear that fast, impressive career development is not a bubble. A lot of people have pursued a tough career, assimilating a lot of experience in a short time, building their knowledge and developing their maturity. However, each situation is different and requires in-depth consideration and investigation to understand the nuances of how a career has been developed”.

In this market, executives have to make careful career decisions. As Tucker says, “I explain to the next generation the danger of rising too fast, peaking too early and therefore not being able to sustain a long-term career,” says Tucker. In a market where there is no shortage of opportunity, executives are easily lured away by the promise of status and more money. However, those who move too often end up several levels below the one they would have reached, had they developed the expertise required to work through challenging periods. There is so much opportunity in Russia that as soon as a hard time hits, people can easily move to another company. As Tucker says, the result of this is that “these executives miss the chance to hone problem-solving skills and learn the rigors of corporate life”.

Myth seven looks at the role of expatriates in helping to address this and their experiences of working in Russia.


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Myth seven Russia is such an unpredictable and insufficiently rewarding market, it is not an attractive career destination for expatriates. Russia is a challenging market for executives used to a more linear, predictable approach to business. However, with low personal tax rates and the offer of adventure, Russia can be a very rewarding and satisfying career destination, on one condition: that an expatriate has a mindset that provides them withtheabilityto“read”themarket.

Professional reward and success in Russia is a major achievement for an international executive. As Max Tucker says, “I stayed in Russia because I climbed the mountain and it was such an achievement I was reluctant to give it up”.

Whatdoestheabilityto“read”themarketentail?

First, expatriates need to know what they are agreeing to when accepting a posting either to one of the cities, or regions, in Russia. Tucker says, “For Russia to be rewarding, an expatriate must be able to adapt to the environment. People just can’t imagine what they are going to get until they are here”.

Secondly,readingthemarketrequiresahighlevelofintuitivethinking and behaviour. In an environment where business planning is iterative and constantly subject to change, intuition is an important personal attribute.

Intuition also enables expatriates to develop stronger relationships, by being able to share feelings, going beyond the transactional nature of Western-style business deals. But this takes time, as one expatriate explains. “I was able to speak Russian, but I couldn’t express feelings. It made living and working there very difficult”.

The expatriate experience can also be unrewarding for those onthereceivingend.Expatriateswhodonotdevelopstrongrelationships spend a finite time in the market.

“The trend now is to have more local managers,” comments Paivi Minkkinen, from her base in Finland. “Expats can be helpful at the beginning, but it is not a permanent solution for management. Local Russians have very different skills in terms of networking, compared to any foreigner and this is important in Russia”.

The other important attribute is acceptance of the market. Someexpatriatesexpecttobeabletocomeinandchange

things, as they do at home. Tucker says, “Their favourite question is ‘why?’ Why is it this way, why is the restaurant closed, why do we have to go abroad to film the TV commercial… always expecting a logical reason. But Russia is not a logical market. Even if you had an answer, it wouldn’t change the situation”.

Believing in the impossible

For Ruslan Ilyasov, there is no question that Russia is an attractive career destination for expatriates. The speed of change, coupled with the ability to do something new, offer enormousopportunities.ExpatriatesworkinginRussia10years ago say that Moscow is now a different world. Ruslan Ilyasov says, “In business and in Russia today anything is possible. We have done so many things, so rapidly, that would have been unforeseeable a few years ago. In Russia, you can believe in the impossible”.

However, there is a strong message coming from business leaders within Russia and those expanding their commercial operations from outside the country. The magnitude of business – coupled with not being able to start from scratch, but adapting what is already there – means that major change cannot be achieved overnight. Both Ruslan Ilyasov and Paivi Minkkinen stress the importance of incremental progress, which Ilyasov describes as, “every day adding one drop into the ocean of change”. One of the most effective ways of creating an ocean of change is to review the management team. Ilyasov says, “For example, when I was HR Director at Eldorado, one


Reliability – a different mindset An American expatriate shares an anecdote. The head of procurement for a big consumer company - a Brit - was owed an order of oats. After waiting six months he took an eight-hour train journey to the factory, knocked on the gate and asked to see his contact. They went out together for a drink and the customer stayed an extra two days eating, drinking and spending time with the factory head. By the time he got back, the oats were on their way.

“The fact that he got on the train and personally connected with the supplier over food and drink secured the order. But if an expat is not prepared to do this and thinks it is outside the scope of his role, they will not be successful. Securing the order involved going beyond what would be expected in a ‘Western’ market, but the head of procurement did what he thought he had to do, to get a solution”.

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of Russia’s prominent household retailers, we set out to hire executives with diverse backgrounds from Russian companies and multinationals in Russia, as well as from those outside. We significantly raised the management strength from the top down three levels through evaluation and training”.

“Expatriates need to be open-minded, intuitive and tolerant,” comments Julia Nikitina. They can be frustrated in any market, because they are unfamiliar with the systems. Tucker adds, “Frustration comes not from the fact that you are in Russia or in America, but because people are expecting Russia to be a European country and they are shocked that itis not. People are not frustrated in China because they expect it to be different”.

The most successful expatriates are those who have, themselves, become different. One American expat says, “I am cautious about what Americans say, in business and in general, because I don’t know how to read them anymore. Russians I know how to read, because I have worked with them for the last twenty years”.

Myth eight looks at how international interaction is changing the economy in Russia.

Myth eight Despite Putin’s focus on creating an innovation economy, progress still lags behind other markets competing in global commerce. To say today that progress lags behind other markets is an unhelpful generalisation. The world’s largest country by area, Russia has too many economic, industrial, organisational, management and demographic variables to define its innovation status in the world at this stage.

In reclaiming Russia’s position as an innovation economy, one of Putin’s goals for the future is to strengthen Russia in a multi-polar world. We see this through the strengthening of external commercial ties, closer alignment of interests with theUnitedStatesandacautiousstrategyinrelationtoChina,particularlyforEasternSiberia12.

As with many countries trying to turn scientific achievement and potential into economic success, the rate of policy-making at the government level lags behind innovative progress among commercial trailblazers. “The fact is although the government has what feels like a focus on an innovative economy, it doesn’t yet have strong enough policies to support it,”saysRodionShishkov.

Despite this, companies are managing to build assets and products through well-trained IT specialists, particularly those who see their people as co-creators, as referred to in myth five. There are numerous examples in software development andIT,includingYotaTelecom.“We are working with our people to bring new concepts to the market – shifting mobile telecoms from voice services to data services,” says Shishkov.“We look forward to being among the first in the world to create the business model to support this stage of telecoms evolution”.

Russia’s innovative advances are not just based on technology. Julia Nikitina explains, “The companies attracting the most attention in innovation tend to be very big technology companies important to the growth of the economy, but there are a number of mid-sized companies adopting innovative approaches, for example, for low energy products, and others that are making a lot of progress. One of the biggest innovative projects is Skolkovo, which has more than 500 start-ups in IT, energy, biotech and other industries”.

New conceptual thinking in innovation

Far from lagging behind other markets competing in globalcommerce, emerging markets, and Russia in particular, are ushering in a new era of innovation – one based on

12SeeUS-Russia Relations and the Rise of China, by Anatol Lieven


27

affordability and practicality rather than comprehensive functionality. This has been driven by rising per capita incomes and specific consumer needs.

StephenKing,ChiefEconomistatHSBCsays,“Whetherit’s Internet usage, broadband subscriptions or mobile subscriptions, BRIC nations appear to be at a demand ‘sweetspot’wherethemixtureoflow(butnottoolow)levels of income with large populations appears to be particularlypotent”.Hegoesontosaythatadigitalsurgewill create more economic connections that will lift trading activity across countries, and encourage the development of innovation.

Exhibit8showsthatRussiahasoneofthehighestratesofmobile connectivity in the world, and the highest among BRIC nations, together with per capita incomes higher than India and China.

There is some concern that the potential to grow through innovation is more aspirational than tangible at present, but, “having been a leader in scientific development, psychologically Russians want to reclaim that,” says Alexey

Popov. “This is a very strong driver and, coupled with a belief in the ability to drive change, makes the whole spirit of the nation very strong”.

We saw this peak during web-enabled political unrest in December2011overparliamentaryelectionresultsandprotestsatPutin’spresidentialvictoryinMarch2012.Politicalcommentators view this as a positive indication of the future transformation of Russian local politics. As Anatol Lieven, ProfessoratKingsCollege,Londonsays,“To transform the Russian political system there needs to be a social-economic transition. This will evolve through the rise of new middle classes encompassing independent small- and medium-sized property owners getting together at a local level14”.

Innovating for Russia’s renaissance

At this stage in Russia’s journey, there are significant pockets of profitable innovation coming from commercial trailblazers. Thesefallintothreeidentifiableareas:“blendedinnovation”;iterativedevelopments;andinnovativeapproachestoleadership through Russia’s more intuitive relationship infrastructure.

13TheSouthernSilkRoad:Turbocharging ‘South-South’ economic growth (HSBC Global Research, Global Economics June 2011)byStephenKing 14Russia’smiddleclassaccountsfor25%ofthepopulation(upfrom15%in2000)and40%oftheworkforce,accordingtoTheEconomist,2March2012


As mobile phones spread, so will the emerging world become connected

IndiaChina

Brazil

Russia

1000.0

Mobile subscritions per 100 people (log scale)

GDP per capita (constant 2000 US$)

Source: World Bank, HSBC

2007

100.0

10.0

1.0

0.1

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Exhibit 8: Mobile connections reduce Russia’s seclusion13

ChartextractedfromHSBCGlobalResearch,TheSouthernSilkRoad,GlobalEconomicsJune2011

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Blended innovationTheStatehasrecentlystartedtodrawattentiontoinnovationamong small- to medium-sized enterprises. Particularly inadigitaleconomy,Shishkovpointsto“very simple, commoditised assets relating less to physical technologies and more to mathematics and information technology, created by educated, well-trained IT experts”. LeadingSMEsarepursuinginnovationbyusingtheseassetstoblendtogetherdifferentsectors,suchasYotamobilewithtelecomstechnologyandfinancialprocessesandSvyaznoywith mobile phone retailing and credit cards.

Shishkovexplains,“At Yota, our impact on the market is achieved through blending different disciplines. Other innovative companies are doing the same and it is certainly an evolving trend. It provides a strong competitive edge and creates a shift in the market”.

Iterative developmentsPaul Herbert describes the innovative environment in Russia, which for industrial companies involves the connection of materials to markets using available resources and existing industrial technology. Ilim implements only the most essential modern tweaks to allow it to progress. He says, “This is a unique opportunity in Russia. I have also worked in China and Brazil and there you are starting from scratch, creating a new manufacturing footprint wherever you build. Here in Russia, you are not creating a new footprint. You are letting it be reborn”.

“Some might not see this as innovation per se, but it’s definitely creating a shift in the economy,” says Max Tucker. “This is particularly true in an Internet economy where there is a Russian version of, for instance, Amazon, Zapos, Facebook and Foursquare, a location-based social networking website. Russians are very good at seeing what works, replicating it and launching it in Russia”.

Innovative leadership Innovative approaches to business leadership are driving much greatercoherencebetweenHRandbusinessstrategies.KirillAndrosov shares his views, commenting, “Russian companies are competing in a global market, so innovative leadership is one of the key competitive advantages for business models and product development”. He continues, “As long as we operate in an open market, we can only achieve success through innovative leadership, which needs to evolve through organic development in Russia”.


Innovative leadership at Yota Telecom Rodion Shishkov, Vice President of Yota and Director of Development, Yota Lab, shares his approach, which underlines the motivating power of involving people in developing something new and unique. “At Yota, we focus on people’s beliefs in their own abilities to change and more broadly, the actual possibility of change. This is what we are building in the company – it is almost the main (intangible) product we are creating with our people. A belief in being able to bring change to the market is what our culture delivers.

“This is very important, because the pace of change in Russia is driven very much at the individual level. As owners of Yota, we believe in an ability to bring enormous change to the world. A major part of our role is sharing this belief with our people. We talk about it to every single person in the company.

“Part of our success is also our size. We make every effort to stay small. Compared with competitors who have similar operations, we are 10 times smaller. This is a deliberate policy, so that we can reach everyone in the company and involve each individual in bringing about change.

“Any operation that is standard or easily understandable is outsourced. We don’t have a single person in the company whom we couldn’t involve in innovation – we are not trying to transform anybody. All our people must be excited by innovation and believe in its power to change.

“Our type of company is also creating a shift in the employee mindset. There was a perception in the market that nothing is truly created or unique to a company; each organisation simply offers a different means of sharing money and value. Most executives see Russia not as a market offering new ideas in which they can participate, but as a market growing in value in which they want a share. So, executives are typically not aiming to build on what already exists, but rather to gain a piece of the pie.

“Yota is not a leader in terms of remuneration; however, we are one of the most sought-after employers because of our inclusive, innovative approach. It is very rare for us to lose people. Yota’s drive for innovation-led change, together with a culture that supports it, resonates with the personal beliefs and drivers among those attracted to the business”.

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Julia Nikitina shares her perspective, commenting on two very different demographic groups. “We see innovative leadership talent coming from two areas. First, executives in their 30s, who have grown up and been educated in a very different, post-Soviet environment. They are highly aspirational, entrepreneurial and keen to make their mark in business. “The second group includes senior executives from multinationals, who have excellent training, but who have grown tired of replicating corporate processes from headquarters. They have a strong appetite for more innovative, intellectually challenging work. They are excited by the prospect of applying technological developments to new projects in Russia. They have the leadership skills, the competencies and an understanding of modern manufacturing”.

The need for innovative leadership is crucial in being able to maximise the potential of a well-educated workforce, but one that needs exposure to best practices and the confidence to step into less familiar territory.

Exhibit9showsthestrengthofRussia’seducationsystemandthecountry’sproductivitypotential.HSBCanalystKarenWard notes the importance of the level of education as an indicationofproductivity.Butshecautions,“It’sallverywellhaving the latest technology, but if a workforce hasn’t been sufficiently trained it won’t be able to use it. And once ‘copy and paste’ growth is complete, it seems likely the most educated workforce will be the one able to innovate and drive technologicalprogress”.

This underscores the importance of training, whether formal (corporateuniversities)orinformal(mentoringonthejob),asdiscussed in myth four.

15The World in 2050: Quantifying the shift in the global economy (HSBC Global Research, Global Economics June 2011)byKarenWard.

Exhibit 9: Beyond“copyandpaste”totrueinnovation15

ChartextractedfromTheWorldin2050:Quantifyingtheshiftintheglobaleconomy(HSBCGlobalResearch,GlobalEconomicsJune2011).

The more educted a nation, the more likely an economy will be able to catch up and innovate

2 4 6 8 10 12 140

NorwayUS

AustraliaS. Korea

GermanyIrelandJapan

SwedenCanada

Hong KongThe Netherlands

IsraelGreece

BelgiumFrance

SpainSaudi

MalaysiaDenmark

FinlandIran

SwitzerlandPolandChina

RussiaUK

AustriaItaly

ArgentinaMexico

SingaporeColombia

BrazilThailand

EgyptVenezuela

TurkeyIndia

Indonesia

Average years of male schooling

Source: Barro-Lee

30

“It is every individual’s job to start to build society around ourselves”. — Rodion Shishkov, Vice President, Yota and Driector of Development, Yota Lab

31

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There are three strong pillars supporting Russia’s pending renaissance:

First, we see the emergence of business leaders with a strong belief in their ability to bring about change as individuals and through their teams. This indomitable, more internationally focused group is driving growth from Russia’s roots – its highly-educated and intuitive executive population. This aspiring group needs exposure to best practices so that commercial leadership can be developed at all levels.

This is recognised by a new generation of business leaders that is already very different, as Paul Herbert explains, “dominated by a much higher percentage of professional managers, rather than entrepreneurs who got lucky. They will, because they are not individually ‘new wealth,’ be less dictatorial and autocratic”. Their prevailing ambition is to build Russia’s future, by creating commercial momentum for its people.

Secondly,opportunityisbeingturnedintotangibleresultsthrough an evolving relationship infrastructure. This is strengthening international and cross-border connections between companies, business schools, the international workforce and formal commercial bodies.

The relationship infrastructure is critical to Russia’s future prospects, as Max Tucker reiterates, “In Russia, personal contact – socialising – is very much expected and to not do it alienates people”.

Thirdly, those working in Russia’s burgeoning commercial landscape can draw upon the country’s rich and complex history.AccordingtoKirillAndrosov,thisismorethanjustanoptional advantage. “My successor and all future corporate leaders need to pay more attention to history, where they will

find hints to what they need. Russia has experienced a lot of dramatic events”.

The next phase of powerAs the West embarks on a prolonged period of low growth and global economic reconfiguration, it is hard to identify the end of Russia’s journey, because the whole world will have changed by then and the global business community will be living in a different dynamic.

The major change for Russia today is for individuals to understand their potential and their economic impact in a newera.AsRodionShishkovsays,“It is not about big state defining the central characteristic. It is every individual’s job to start to build society around ourselves. This needs to be a collective exercise approached through education. I am talking about education in the general sense – through exposure to an evolving world and an understanding of how individuals now relate to Russia’s commercial fabric. This needs serious investment not in terms of money, but in terms of effort, coming from personality not the state. This is the driver of the next phase of power”.

This phase is about being open to new thinking, creating a shiftinbusinessleadership.RodionShishkovexplains,“We are all in the process of creating something and the very rich end game we are aiming for is the co-creation of people and the shaping of people’s minds as we continue our journey of development”.

As Russia’s executives create the kind of environment in which they want to work and live, we will see the renaissance that Russia’s people deserve.

IV Conclusion

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V The Boyden View – How to Read a Russian Executive

As we saw in myth six, the assessment of Russian executives is only effective when done in the Russian context – the professional profile of a Russian executive cannot be compared to that of an executive from a mature market. A business leader from outside Russia may come across various unexpected issues when exploring the experience of a Russian executive. While these may seem peculiar or be difficult to understand in an international context, they are often regarded as completely normal in Russia.

It is essential therefore to engage a hiring partner who has a deep knowledge of the market, together with insight gained over many years of hiring for different types of businesses in Russia. Following are the most common misunderstandings, among foreign business leaders in particular, when trying to read the Russian market and its executives. 1. Professional profiles tend not to be aligned with executives’ educational backgrounds

An executive’s educational background may not necessarily correspond to their current professional occupation. This is not unusual or a matter for concern.

• Forindividualsintheir40s,thisislikelytobetruein90% of cases and should be considered normal and logical. For youngerexecutivesintheir30s,thisisequallyvalid.

• Bewareofprofessionaltrainingfromhighereducational institutions, which launched business education courses in theearly1990s.Theygenerallyofferedarather“light”and not very high-quality professional education, resulting in a generationofcareer“bubbles”.Itismuchbettertorely upon a solid academic background in a major discipline at one of the prominent Russian universities, which provide a proven educational foundation.

• MostgraduatesfrommajorRussianuniversities,suchas LomonsovMoscowStateUniversity,St.PetersburgState UniversityorMoscowStatePhysics-TechnicalInstitute, have pursued a second business education. Those who have chosen not to have generally focused on developing their professional careers through on-the- job experience and commercial training within major multinationals.

2. A fast-track career lacks depth

Overthelast20years,changesinRussiahaveresultedinunusually quick career developments within the Russian market compared to mature markets.

• Itwasonlypossibleforindividualswithuniquepersonal qualities – such as leadership and motivational skills, the ability to embrace change and to learn fast – to pursue a fast-trackcareer.Still,particularattentionshouldbepaidto the industry in which a fast-track executive works.

• Industriessuchasinvestmentbankingandconsultingare usuallypopulatedbyyoungexecutivesintheir30stoearly 40swhoareverywelleducatedandhaveassimilatedthe right knowledge and an international outlook. While they sayalltherightthingsandareinternationally“readable”, they can lack personal maturity due to the rapid developmentoftheircareers.Their“softskills”werenot fully developed within a short timeframe and their “brilliance”thereforeworksonlywithinthisenvironment.

• Thequalityofassessmentisparticularlyimportanthere, given that young, talented executives score very well in all mainstream tests. Their lack of maturity is compensated for by the fact that they are responsible for managing the same type of people, so there is no tension among what are broadly homogenous teams in these sectors.

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3. Executive churn is driven by money

There is a trend within the Russian market for Russian managers to change jobs regularly, switching from company to company and from position to position. However, this does not necessarily mean that their sole motivation for job change is to increase their remuneration package.

• Jobchangesareoftendrivenbyanexecutive’sdesirefor professional growth and development, leading to executives searching for exciting project work, rather than day-to-day routine.

• SpecificallyamongRussiancompanies,thegoalsoftopand mid-level managers tend to be based on project execution, while the company owners drive strategic issues without sharing any authority. Once managers achieve their goals, for example within a two- to three-year time period, they leave the company.

• Executivechurnisnotnecessarilyabadthing.Asidefrom the issues above, some executives transfer from one industry to another and even from one function to another very successfully, which reflects how the market is growing and changing at a rapid pace.

4. Salaries should be lower in less mature markets

Insomeareas,particularlyoil&gas,retailandprivately-owned Russian companies, candidates’ salary expectations can be higher than they are in mature markets.

• Thisisusuallycausedbyminisculecandidatepoolsand a high level of demand for competencies possessed by established and mature executives – usually accompanied by a good understanding of the realities of the Russian market.

• Russianbusinessesarenowmoreinterestedinbuying executives with knowledge, expertise and a fluency in international best practices in the market. Therefore, they now compete with Western companies, while the executives themselves are attracted by greater autonomy in decision-making and a more entrepreneurial spirit inherent in Russian companies.

5. Once relationships are secure, so is an executive’s position

International businesses are paying more attention to the strong“relationshipculture”thatcharacterisesRussia,most notably the importance of good connections with governmental bodies.

• Businessleadersneedtobeabletodistinguishbetween executives who can create good relationships with government officials and those who rely too much on specific connections and contacts. Turnover rates are also high among government officials and it is the generation of relationships that is important, rather than a dependence on previous contacts that may simply not be there tomorrow.

6. Markets at a certain stage of development require a certain kind of leadership

Thereisnostandard“blueprint”forleadership.Executives’leadership styles can be very different, depending on specific situations and specific industries. A clear understanding should be developed of which leadership style is most effective in certain situations and in certain industries.

• Incertaincircumstances,anauthoritativemanagement style – considered typical in Russia – is not at all a bad thing, given that it generates healthy discipline practices.

• Anauthoritativeleadershipstyleshould,however,be accompanied by an ability to develop a new culture within the company, ensure efficient interrelations with Headquarters, and ability to communicate effectively and nurture the development and growth of executives within the company.

• Iftheyaremostcomfortablefocusingpurelyonfinancial results, leadership candidates should think very carefully before engaging in situations relating to post-merger and partnership integration.

7. The best strategic approach is to compete for the best talent in the industry

In Russia, it is often crucial to look beyond a company’s own sector to find the most appropriate talent in the market.

• Withmanyindustriesstillatanearlystageintheir development – compared with their global peers - there may be a limited pool of candidates within the current industry, prompting a necessity to look at the bigger picture.

• Inconsideringthemarketmorebroadly,businessleaders need to identify the areas where the competencies they require are more highly developed and create a tactical plan to attract executives who demonstrate them. A more effective solution often lies outside the industry.

TheBoydenView–HowtoReadaRussianExecutive

35

Sources

RT(RussiaToday)Modern RussiaKremlinArchivesThe World BankHSBCGlobalResearchatwww.research.hsbc.comBBC NewsFinancial TimesTheEconomistFree Press: The Return: Russia’s Journey from Gorbachev to Medvedev,DanielTriesmanISBN-13:978-1-4165-6071-5YaleUniversityPress:Losing Control: The emerging threat to Western prosperity,StephenD.KingISBN978-0-300-15432-0


Kirill Androsov, Chairman of Aeroflot and Russian Railways; Managing Partner, Altera Capital

Kirill Androsov has held a number of prominent positions in thegovernment,mostrecentlyDeputyChiefofStaff,OfficeofthePrimeMinisterVladimirPutin2008-2010.Previouslyhe was head of the Investment Projects Management Team, DirectoroftheEconomicsDepartmentintheCityPropertyCommitteeofSt.Petersburg.

Mr.AndrosovisChairmanoftheBoardofAeroflotOJSCandRZD(RussianRailways)OJSCandamemberoftheBoardofLSRgroupOJSC,Channel1(TV)OJSC,A3LLCandAlteraInvestment Fund. He holds an MBA from the University of Chicago, an MA with high honours in Industrial Management fromSt.PetersburgStateMarineTechnicalUniversity,andaPhDinEconomicsfromSt.PetersburgStateUniversityofEconomicsandFinance.

Altera Capital Group,co-foundedbyKirillAndrosov,EvgenyAstakhov,ViatcheslavPivovarovandPhilippKindt,generatesinvestment ideas and executes strategies through the Luxembourg-basedAlteraInvestmentFundSICAV-SIF.Thefundhasapproximately$525minassetsundermanagement(at1January2012).

Altera Capital advises the Russian special situations and event-driven investment sub-funds of the Altera Investment FundSICAV-SIFfocusedonthreeareas:PrivateEquity,PublicSecuritiesandRealEstateDevelopment.Altera’sstrategic objective is to generate consistent superior absolute

risk adjusted returns with limited downside volatility. Altera’s philosophy is to leverage its differentiated position in the market and apply a fundamentally-driven investment framework across the public and private domains, focusing on large scale businesses with solid fundamentals, undergoing significant transformation not reflected in their current price. This enables Altera to highlight or unlock intrinsic value, and enable business growth and transformation. www.alteracapital.com

Paul Herbert, Chief Executive Officer, Ilim Group

Paul Herbert was born in London, and has worked in the pulpandpaperindustryfor42years.HavingoriginallystudiedpapermakingandengineeringatEastLondonPolytechnicUniversity, he earned an MBA from Texas Agricultural and MechanicalUniversity.In2007,Mr.Herbertleda50:50jointventurebetweenInternationalPaperandIlimGroupandbecameCEOofIlimGroup,ultimatelyleadingthecompanysuccessfullythroughtheeconomiccrisisof2008-2009andlaunching the biggest investment program in the Russian pulpandpaperindustry.In2011,Mr.Herbertwasnamed“CEOoftheyearintheworld’sPulpandPaperindustry”intheprestigiousPulpandPaperInternational(PPI)Awards.In addition, the Russian Managers Association declared Mr. HerbertthebestCEOoftheindustryinRussia.

Ilim Group,headquarteredinSt.Petersburg,leadstheRussian pulp and paper industry in terms of output volume, financial stability, corporate governance efficiency and technology,withmorethan19,000employees.ThestrategicfocusofIlimGroupistomakeashiftfromproducingonlysemi-finished goods to also manufacturing higher value products-paperandpackaging.IlimGroup’sprioritiesincludecustomer needs, advantaged technologies, effectiveness, people development, a reduced environmental impact, industrial safety, social responsibility and shareholder returns. www.ilimgroup.com.

Ruslan Ilyasov, long-term HR expert in Russia; former HR Director at Eldorado

Ruslan Ilyasov has pursued a distinguished international career in HR with leading brands such as The Coca-Cola Company,UKOSRM,SUNInterbrew,Alfa-Bank,AlcoaandmostrecentlyEldorado,aleadingconsumerelectronicsand domestic appliances retailer. He has worked in Finland, Kazakhstan,Moldavia,RussiaandtheUnitedStates.HeiscurrentlybasedinRussiaasaboardmemberofAKBARSBank.

SourcesandAboutOurResearchPanel

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Mr. Ilyasov has served several terms as Chairman of the HR Committee for the American Chamber of Commerce and one year as Chairman of the Russian HR League. According tomassmediaatingsheisrankedamongthetop10successful HR managers in Russia. Mr. Ilyasov graduated as a translator from the Military University of the Russian Defense Ministry and received an MBA in International Business fromWeatherheadSchoolofManagement,CaseWesternReserveUniversityinCleveland(Ohio,USA).http://ru.linkedin.com/pub/рр-рр/24/792/2a1 Tatiana Kozhevnikova, HR Director, X5 Retail Group

Tatiana Kozhevnikova is responsible for all human resource issueswithinX5includingtalentmanagement,compensationand benefits, labour relations, organisational effectiveness andemployerbranding.ShewaspreviouslyDeputyGeneralManager for the state corporation Rosatom, one of the largest companies in the world in the nuclear energy industry with285,000employees.

Priortothis,Ms.KozhevnikovaworkedforsevenyearsasHRDirectorandboardmemberforMETROC&CRussia,duringwhichtimeshebuilttheHRfunctionatMETRORussiafromscratch,contributingtotheopeningof48METROstoresacrossRussia.Shestartedhercareerintheearly1990sintrainingatCoca-ColaandlaterjoinedMARSLLCasanHRgeneralist.ShethenbecameanHRandProfessionalDevelopmentDirectoratErnst&YoungCIS.Ms.KozhevnikovaholdsaPhDdegreeinEconomicsfromLomonosovMoscowStateUniversityandstudiedstrategictalentmanagementatLondonBusinessSchool.

X5 Retail Group N.V. is Russia’s largest food retailer in termsofsalesandemploys90,000people.Thecompanyoperates several retail formats: a soft discounter chain under the Pyaterochka brand, a supermarket chain under the Perekrestokbrand,ahypermarketchainundertheKaruselbrand, and convenience stores under various brands. The company strategy is to increase its market share of the Russian retail market by developing and promoting modern retail and become the undisputable leader of the Russian retail industry. www.x5.ru

Anatol Lieven, Professor, War Studies, Kings College London; Senior Fellow of the New America Foundation, Washington D.C.

Anatol Lieven holds a BA in History and a PhD in Political SciencefromtheUniversityofCambridge,UnitedKingdom.For12yearsheworkedasaBritishjournalist,mainlyintheformerSovietUnionandSouthAsia.Heiscurrently

aProfessoratKingsCollege,London,wherehisspecialinterestsincludeRussiaandtheformerSovietUnion.Hewrites a monthly column for the Financial Times, and is published frequently in other newspapers and journals. He is a member of the editorial board of the National Interest and a convenoroftheRussiaandEurasiaSecurityResearchGroupatKingsCollege.www.kcl.ac.uk

Paivi Minkkinen, Senior Vice President, Russia and International Business, VR Group Ltd. Finland

Paivi MinkkinenwasappointedSeniorVicePresidentforRussiaandInternationalBusinessin2008.Sheisresponsibleforstrategy,developmentandcoordinationoftheGroup’sinternationalbusinessandisamemberoftheGroupManagement Team. Ms. Minkkinen has pursued a career in internationalrailwaytrafficsincetheearly1980s.

In2001Ms.MinkkinenwasappointedHeadofVRGroup’sInternational Affairs Unit, with responsibility for coordinating VRGroup’sinternationaloperationsandaffairs,includingEUtransport policy monitoring, cooperation with international railway organisations and Finnish-Russian relations. A Russian speaker, Ms. Minkkinen has a large contact network among Russian railways, foreign trade and transport companies, and a broad range of railway services customers in Finland and abroad.

VR Group is a versatile, eco-friendly company with responsible operations offering passenger transport, freight transport and logistics and infrastructure engineering services. TheGroupalsoincludescompaniesthatprovidecateringandrestaurant services and telecommunication services.

VRGroup’smainmarketareaisFinland,withasignificantproportion of international freight service carryings, especially toandfromRussia.TheGroupemploys11,500professionalsand has annual net turnover of€ € 1.4billion.VRGroupLtdis wholly owned by the Finnish state. It was incorporated in 1995tocontinuetheoperationsofFinnishStateRailways(VR),established150yearsagoin1862.www.vrgroup.fi

Alexey Popov, Program Director, EMBA General Management and Faculty Membe, Stockholm School of Economics (SSE) in Russia

Alexey PopovjoinedtheSSEteamin2007.Hecombineshis academic expertise with a commercial career that has involvedseniorexecutivepositionsintelecoms(BCLandLucentTechnologiesRussia),cargoservices(EastlineAirlines)andbusinessmedia(‘TopManager’businessmagazine).Drawing upon his broad industry experience, he has held


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executive roles in general management, strategic marketing and strategy consulting for regional development projects and some of the largest international companies in Russia. Mr. PopovholdsanExecutiveMBAinGeneralManagementfromStockholmSchoolofEconomicsandalsostudiedattheUK’sChartered College of Marketing. His earliest studies were in aircraft radio-engineering.

AtSSE,Mr.PopovworkscloselywithkeyclientsoftheSchool,rangingfromtopRussianbusinessestoleadingglobal companies, drawing upon his extensive management experience to understand more clearly the educational needs of business executives. As a Program Director he leverages his professional expertise to maximise the effectiveness of the learning process for executive participants. As a Faculty Member, he delivers lectures and facilitates business simulations and strategy workshops at open and corporate education programmes. His particular interests are in the application of business tools to real business issues brought by customers, thus combining theory and practice for valuable outcomes experienced in class. www.sseru.org

Rodion Shishkov, Vice President, Yota and Director of Development, Yota Lab

Rodion Shishkov graduated with honours in Commerce andMarketingfromtheSaintPetersburgStateUniversityofEconomicsandFinance.HejoinedYotain2008,becameheadofthemusiccontentcompanyMore,andin2009becameDirectorofYotaLab,whichencompassesthreebusinesses in video-on-demand, telecoms and virtual banking withinYota.

Yota is a high-growth Russian Internet company, providing 4GmobileInternetservices.Yotawasthepioneerofcommunicationsofthe4thgenerationLTEincitiesofRussia.YotaPlayserviceisanewwaytochooseandwatchmoviesonTVs,mobilephones,tablets,andPCs.ItcoversthewholeofRussiaandworksviaanyInternetprovider.YotaPlayworksonTVs,andBlu-rayplayers,andSmartTVproducedbySamsungandLG.www.yota.ru

Matthew “Max” Tucker, General Manager, Young & Rubicam

Max TuckerwasbornandraisedinNewYorkandhaslivedinRussiasince1992.HebeganhisadvertisingcareerinRussiain1995andparticipatedinthephenomenalgrowthof the advertising industry and the success of Russian advertisers such as Wimm-Bill-Dann, PepsiCo, Lebedyansky, andVimpelcom–companiesthatbecameindustrygiants.He lives and works in Russia, is fluent in Russian and gives

seminars and lectures on doing business in Russia for foreigners.

Young & Rubicam (Y&R) became the first network to open itsdoorstotheUSSRin1989,withColgate-Palmoliveitsfirstclient in Russia. Other international accounts soon followed, suchasDanone,PhilipMorris,Xerox,LandRoverandnowCitibank,Campbell’s,andLG,alongwithmajorlocalclientssuch as Baltika brewery and mobile operator Beeline. Today Y&RbrandshaveapresenceinUkraine,KazakhstanandAzerbaijansupportedbyY&RRussia.TheMoscowofficeemploysover150people.Y&RRussiaisacknowledgedasa leading creative agency distinguished by awards such as CannesLions,EPICAandaGoldenDrum.www.yr.com

The Boyden Report SeriesOther reports in the series:• TheBoydenReport:China.Multiculturalism–China’sgiftto the global economy?• TheBoydenReport:Brazil.Executiveswalkingonthe big stage• TheBoydenReport:LatinAmerica.Multi-latinasdriveLatin America’s destiny• TheBoydenReport:India.ThesunrisesontheIndian executive

About BoydenBoyden is the world’s only genuinely multicultural search firm,withmorethan70officesinover40countries.Foundedin1946,Boydenspecialisesinhigh-levelexecutivesearch,interim management and human capital consulting across a broad spectrum of industries. For further information, visit the firm’s website at www.boyden.com


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The Boyden Report: Russia...report explores how this will come about through the growing capabilities and influence of Russia’s executive population. Our understanding of Russia