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Family business emerges in Russia

The collapse of the Soviet Union in 1991 has left the Russian markets wide open and made room for new family-run enterprises to prosper in a nation of eager consumers

There is no tradition of family business in the 'new' Russia. Establishing and running an entrepreneurial business was not permitted for most of the 74-year history of the Soviet Union, as the central government owned and ran all assets and enterprises. Although some individuals and groups of friends started small cooperative efforts during perestroika in the late 1980s, not enough time has elapsed since then to produce the kinds of multigenerational patterns of family relationships that are readily observed in western European and American family businesses.

As Anders Aslund, Swedish economic advisor to the Russian government from November 1991 to January 1994, observed in his book How Russia Became a Market Economy(The Brookings Institute, Washington DC, 1995), "When the Soviet Union broke up in December 1991, the Russian economy was in a crisis as complex as it was profound. The old communist system had proven increasingly inadequate and had caused ever greater wastage and inefficient use of resources. All cheap sources of growth, such as abundant raw materials, had been exhausted. The ill-conceived reform policies had brought on a macroeconomic crisis, reflected in a growing budget deficit. The excessive issuance of money while prices were controlled and as production plummeted had bred a monetary overhang and had exacerbated shortages, a portent of high open inflation".

With the initiation of economic reforms in the early 1990s, individuals could begin to consider generating income from private ownership. According to Aslund, "One of the most fundamental communist principles had been the nationalisation of the means of production to abolish the exploitation of man by man". This was one of the last communist dogmas to go. With a new privatisation law adopted in July 1991, Russia initiated the free distribution of property. Suddenly, thousands of small kiosks, selling cigarettes, alcohol, odd items of clothing, small appliances, food and souvenirs, appeared in cities and towns all over Russia. Many of them, as well as the fresh fruit and vegetable stands in open air markets, were undoubtedly 'mama-and-papa'operations.

Crime, corruption and protection
The economic environment of the new Russia in the early 1990s revealed a powerful energy and enthusiasm for creating domestic consumer markets and for joining the global economy. At the same time, enforceable systems of law and order, effective banking systems and other regulatory infrastructures were lacking. According to Aslund, "the most worrisome development in Russia in the 1990s (was) the rise in crime, particularly murder, robbery, and corruption. A feeling of lawlessness spread. People in general (were) worried about run-of-the-mill criminals and hooligans, while business executives (were) pestered by racketeers and forced to bribe officials to be able to stay in business".

Vast numbers of black marketers, who operated during the Soviet period, continued to exist in a grey world of crime and corruption that touched all entrepreneurial enterprises. The kiosks, the fruit stands and more substantial new businesses all had to pay bribes to the criminal gangs that threatened their success and even their very existence. As Stephen Handelman, author of Comrade Criminal: Russia's new Mafiya, wrote of this period, "By 1992, crime had become the first post-Soviet growth industry. The Russian public prosecutor reported a 33% increase in crime between 1991 and 1992. Murder and aggravated assault accounted for more than half of the 2. 7 million crimes recorded".

The expectation of threat led people in business to expect that they would have to pay 'protection money'to feel safe, and that expectation continues to exist to some extent at all levels of private business today. A similar need for protection developed among fledgling entrepreneurs who had more educational sophistication (though no more actual business experience) than the kiosk owners and who saw a broader range of business possibilities, beyond street sales of popular consumer items. Almost everyone in business today has a krysha or a 'roof', as the expression goes in Russian.

Runaway entrepreneurs
In spite of the harsh realities of crime and corruption in the early 1990s, thousands of start-ups were launched by young people with enough energy and risk tolerance to jump into Russia's 'Wild West' economy. They gathered a group of friends and/or relatives to pool their resources, sought additional investors, divided the responsibilities and launched businesses. These weren't multigenerational businesses, but many were clearly family owned and operated. In this sense, family business has a broader definition in the new Russia, as it includes spouses, siblings, in-laws, cousins and even best friends. The relationships are intense, and the boundaries between home and workplace are highly porous. While Russian 'family' business has reflected the economy's volatility and unpredictability over the past ten years, many of these businesses have become extremely successful.

A case example
An example of a family business based in Moscow is the one that Sergey and Tania Ivanov put together some nine years ago (the names and some identifying details have been changed for purposes of confidentiality). Today the Ivanovs are both in their mid-forties. Sergey, from Tula, south of Moscow, and Tania, from Irkutsk in Siberia, married in 1978 and have two young adult daughters, Natasha and Olga.

Sergey's original career was in the military, where, over a 14 year period, he worked his way up to a high level as a military officer. The family lived in closed military towns and camps all over the Soviet Union, and Tania always found employment as a teacher. During the economic stresses of perestroika and the early 1990s, however, military salaries were reduced drastically. By then, the Ivanovs were living in Moscow, where Sergey worked for the Ministry of Defense, but they were still unable to maintain themselves and help Sergey's mother financially. It became apparent that they would have to find an additional source of income to cover the costs of living in the city and raising their daughters.

Tania contacted some of her old school friends in Siberia and together they established a mineral exporting business, identifying products in Siberia, developing markets in the former Central Asian republics of the Soviet Union, and setting up a headquarters office in Moscow to coordinate sales. Sergey resigned from the military service and joined Tania in this exciting new family enterprise. Tania managed the financial aspects of the business and Sergey provided interface with the unpredictable regulatory systems of the Russian central government.

Two of their closest friends, Nikolai and Misha, were among the original founders and investors in the business, but Nikolai, a heavy drinker, was killed in a car accident in 1997, and Misha was accused of sexually abusing a 15 year old girl and fled the country. Without them, Sergey and Tania became the sole directors of the business.

As the business grew, it became the main link in a large chain of investors, exporters and importers, connecting Siberian resources with markets in Central Asia. Today, the Moscow office provides the central controls for the business and holds all the decision-making power. The Ivanovs'personal connections with political and bureaucratic authorities in Moscow, as well as with competitors, affect the success of the business.

But running the business has been challenging. First, the Ivanovs saw a dramatic change in their social environment. When Sergey was a high ranking military officer, they were considered people of status and privilege, and their circle included other respected career military officers. But they found that, to survive in business, they had to deal directly and socially with the grey criminal underworld known as the Russian 'mafiya', and this led to considerable fear and unpredictability for the whole family.

Additionally, Tania, although a founder, was the only woman involved with the business at the leadership level, and she felt she had to be extremely assertive to be accepted as a decision-maker by her male colleagues. Finally, in the export business, the male partners and many of their colleagues, including some 'mafiya'elements, routinely go out drinking after work. On weekends, they frequent saunas and massage parlours that are also prostitution centres. Fearing for her marriage and the potential for blackmail in those settings, Tania insisted either that she accompany her husband to all these events or that he not go. The other partners ridiculed Sergey for his absurd 'loyalty'to his wife and they told him he was, as the Russian expression goes, 'too much under the heel of his wife's shoe'. Ultimately, as Tania took on more and more of the decision-making in the marriage and the business, Sergey did less and less, avoiding the basic managerial decisions. This kind of reciprocal tradingoff of responsibility happens often in family business when both members of the couple do not function equally as leaders.

The couple realised that their personal relationship was having an impact on their effectiveness as owner-managers of the business, and that the business was profoundly disrupting their marriage. They sought consultation with Dr Anna Varga, a Moscow psychologist with special training and experience in working with family and business systems. Initially, the consultant focused on identifying the emotional and functional overlaps in the Ivanovs'complex family business. She then helped them clarify their individual responsibilities in the business and in their relationships, both with each other and with their daughters. On-going work focused on managing their relationships with business partners, employees, clients, providers and the wider network of business associates.

Like most of the start-ups in Russia in the 1990s, this was a one-generation family business, with no prior generation involvement and no immediate prospect of involving a second generation in ownership and management. What, then, was uniquely Russian about this spousal family business? The intensity of the relationship between the spouses and the close friendship circle that launched the business. That is, the business mirrors other Russian businesses in its dependence on a depth of trust and sharing, which are characteristic of Russian friendships. Additionally, the porousness of social boundaries and the intensity of personal involvement in the business are typical of Russian family businesses. Nikolai's death and Misha's disappearance created a significant gap in leadership as well as a loss in friendship and trust that the Ivanovs could not easily fill, and pushed them toward more dependence on each other.

A number of factors generated enormous anxiety for this couple.

- Although the Ivanovs were socially 'high status' professionals, they faced significant economic hardship when they started the business and they had a great need for financial success.
- They took a large risk in leaving their professions and starting a business when the country was socially, politically and economically unstable.
- They leveraged this turmoil to establish themselves in a niche market that would not have been available to them as private entrepreneurs if Russia had had a more systematic management and regulatory infrastructure. Their business is still vulnerable as governmental controls for these exports are put in place.
- They used their former professional and friendship connections to establish and maintain the business since their business relationships were based on long-standing trust, sometimes an elusive commodity in the Russian business scene. But they must constantly validate this trust, based on changing economic circumstances.
- They accepted the necessity and attendant dangers of cooperating to some extent with the 'mafiya'when starting the business and, indeed, they would not have survived as a business if they had not cooperated with these black market elements.
- Tanya was forced to deal with the realities of gender discrimination in a business that does not accept women as leaders and decision makers.

As these factors converged, the Ivanovs' anxiety led them into what might be described as an excessive focus on their relationship. While Tania's worries about her husband's social behaviour with colleagues and the 'mafiya' seemed well grounded, they irritated and embarrassed him, and he lashed out at her, rather than examining his own responsibility. Instead of focusing on managing their relationships with clients and colleagues, they began to threaten each other with divorce, which would have disrupted the company even further.

The Ivanovs sought help with their marital relationship before it began to undermine the company's success. They also received assistance in addressing the difficulties of shared management of the company before those difficulties undermined both the business and their marriage any further. Other Russian spousal family businesses have not been so lucky. Many are extremely volatile for reasons similar to the Ivanovs' issues and they can go under quite easily. As in every family business in every country, family relationships and business relationships are reciprocal. They are complexly intertwined, and clarifying roles and professional boundaries at work is as important as sorting out marital issues for the long term success of the business.

The big picture
Aslund has noted that Russia enjoyed many economic advantages as well as disadvantages during the 1990s: "The country possessed a wealth of highly marketable natural resources. Its population was well educated. As a big country, Russia had a large domestic market and considerable clout in international affairs. Unlike other newly independent states, Russia had reasonably well-developed national institutions and a large elite. The country was peaceful, with a notable lack of social strife and strikes".

In this climate many spousal family businesses have succeeded. What are the reasons for their resilience?

- Markets have been wide open in the post-Soviet period. Governmental enterprises folded, making room for experimental new enterprises in a nation of 150 million eager new consumers.
- Many of those creating enterprises for the first time are highly educated, young, adventurous and energetic; they are problem solvers on a vast new playing field; they have been accustomed to working under conditions of scarcity and are motivated to be successful.
- These businesses are established within family and friendship circles based on deep mutual trust. It is also possible to find cheap, skilled and educated employees who do not want to work for the low wages offered by government enterprises.

Although the cultural norms of Soviet communism are still deeply embedded in Russia's business systems, a number of developments over the past ten years can be encouraging to family businesses outside the country that wish to explore the Russian market. For example, Russia continues to offer a vast market of consumers who have felt deprived and cut off from western products for many decades. Additionally, its regulatory systems are now much more effective than they were at the beginning of the 1990s. Under President Putin, the Russian economy is increasingly stable, and crime and corruption are not as rampant as they were earlier.

The biggest problem with working in Russia is finding a reliable business partner. Because Russian businesses are so often based on deep, life-long relationships, a business agreement based on a contract is not as binding as one based on a promise between friends or relatives. Building solid, long term relationships with potential Russian business partners is the most important aspect of this process. Family business people know how to do this because they live and work inside their own closest relationships. And Russians understand this.

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