Marc Smith spoke to UBS's Martha Bigliardi about family business and family wealth in Russia, and what she is advising entrepreneurs to do as they look to the twin challenges of succession planning and wealth management.
When prime minister Vladimir Putin told a banking forum in September that the Russian state must step back from the economy and let private enterprise take the lead in pulling the country out of recession, it marked the latest stage in the evolution of the former communist powerhouse.
According to the World Bank, a decade of high growth (Russia averaged 7% during 1999-2007 and reached 5.6% in 2008) has come to an end amid a recession brought on by the global financial crisis. And although Russia's real GDP is likely to contract about 7.9% in 2009, the repercussions of the former president's statement for Russia's business elite are clear to grasp.
"As increasing internationalisation of the competitive environment is likely to bring new opportunities and challenges, Russians are set for a higher profile role globally," says Martina Bigliardi, Managing Director at UBS Wealth Management International in Zurich.
Running concurrently alongside changes to the economic and business climate, Russians themselves are going through a period of change. With 25 years experience at UBS, Bigliardi is currently responsible for Ultra High Net Worth clients in Russia, Ukraine, Kazakhstan, Germany, Austria, and the UK, and has seen firsthand the change that Russia and its businesspeople have undergone.
"As a large number of state-run companies have been privatised, new entrepreneurs have emerged. They are younger, often educated abroad at the best universities, they have an international outlook and bring much of that best practice and experience back to Russia," she explains.
"They are highly ambitious, fast learners and tend to operate in more contemporary business structures. They see opportunities both at home and abroad and their attitude towards risk has also tended to be more assertive until recently. As a result their investment behaviours differ substantially from the more conservative, older business elite and encompass a far broader range of products and services."
The watchwords of this new generation, who tend to be aged between 30 and 55 years of age and have built up their businesses in the last decade, are speed and flexibility. In particular, Bigliardi claims that Russian entrepreneurs have a special talent for identifying niches.
"Many very wealthy Russians started small, for example by trading consumer items imported from the West. They are also very creative and innovative, primarily because they had to learn how to survive in a "pure planned" (ie, communist) economy and still found a way to develop."
However, living up to their reputation as serial entrepreneurs, they have now reached a stage where many either wish to go public or sell their existing businesses in order to start new ones. The result of this is that two principal challenges now face them: succession planning and wealth management.
As with elsewhere in the world, family business is a vital component of the Russian economy. However, the new entrepreneurs are only now starting the transition from the first to the second generation – a key stage in the evolution of a family business. Experience shows that less than 30% of family businesses survive beyond the second-generation, and Bigliardi is keen to stress that Russians need to begin their succession planning early if they are to buck this trend.
"Planning is often postponed by the senior generation until it is too late and the risk increases that the family and the business suddenly need to cope with the impact of the death or mental incapacity of the senior. We therefore advise clients to actively think about succession planning as early as possible," she explains.
Unsurprisingly for such an entrepreneurial nation, talk of succession planning is particularly remote among Russian businesspeople, but Bigliardi remains convinced that it is a significant factor in any successful long-term strategy.
"Time matters! Succession planning is successful if it is borne out of agreement and discussion with the succeeding generation and should not be a decree from the senior generation. It requires the setting of clear objectives, agreement within the family, flawless and constructive communication and an agreed family and corporate governance structure," she says. The natural inclination of Russians to quickly come to the core of a problem and make decisions could be crucial when deciding on the importance of succession planning. It could also be helpful when making decisions on how to address their wealth management issues.
"The idea of family wealth is well developed in Russia and the increasing number of single family offices servicing these families is a good demonstration of this," says Bigliardi. "But a central challenge for new entrepreneurs will be the preservation and smooth transition of wealth from one generation to the next."
Whereas families in the West have studiously followed a philosophy of conservative wealth preservation in light of the financial downturn, Bigliardi believes Russians have a philosophy that combines both preservation and growth.
"What these families have built is precious to them, and quite rightly so. Having built the wealth themselves, they want to ensure that their wealth will endure. However, as entrepreneurs, the current market environment presents them with opportunities for growth and expansion. They are strong negotiators and almost always want to be ready to act quickly on a possible deal."
Early planning with regard to the distribution of wealth between heirs is, says Bigliardi, the single most important act that Russian families should do to help them successfully manage their wealth. In particular, Russians need to overcome their predilection for relying on their personal network and seek out independent advice.
"A neutral advisor should be consulted to work out solutions which will enable the business and the family to maintain their current wealth levels. Furthermore, families should ask for professional advice on how to protect their assets such as strategic asset allocation and diversification," she says. Amid the current stockmarket volatility, low interest rates and the increasing pressure from international fiscal authorities, Russian families naturally share many of the same concerns their counterparts elsewhere in the world.
However, Bigliardi says the added complications of Russia's recent history – the social and economic transition of privatisation plus the economic crises of 1995 and 1998 – means Russians look at the current economic turbulence through a different lens.
With the business opportunities provided by a reduced state set to increase, the importance of how Russians plan and manage both their companies and their wealth for the future is pressing. The time is ripe to make the right decisions for what promises to be a prosperous and successful future.
UBS in Russia
UBS has been active in Russia since 1997 when it entered into a joint venture with Brunswick Capital Group. In 2004 this JV was converted into a wholly-owned subsidiary of UBS Investment Bank.
"Russia is among the countries with the fastest growing wealth and rapidly developing markets. Our clients appreciate the fact that UBS was one of the first foreign banks on the scene and stood by the country during a period of crisis in 1998," says Martina Bigliardi, who has worked for UBS for almost 25 years in several international locations (New York, Frankfurt, London, Zurich) in various management positions.
Currently Head of Ultra High Net Worth Clients International covering Eastern and Northern Europe, Bigliardi has extensive experience in international corporate banking, project and structured finance, as well as wealth management. She says UBS is ideally set-up to meet the needs of entrepreneurs, their businesses and their family offices throughout Russia.
"Such people expect to have access to the services of the entire bank and request one point of contact which opens the doors to our expertise and know-how," explains Bigliardi. "The depth and breadth of our offering, as well as a commitment to bring the entire bank to our family office and ultra high net worth clients, is the primary focus of our activities."
Part of this focus is philanthropy, an increasingly important topic for Bigliardi's current crop of clients. "Russians retain a distinct sense of social responsibility and this is the major motivator when discussing the topic of philanthropy. There is often also a desire to create a legacy of philanthropy within the family – not in order to be seen to be giving something, but rather to create shared experiences for the family and bring the next generation along," she explains.
However, as hardened business owners and operators, Russians are results driven and this shows in their approach to philanthropy. "They want to see an impact and they want to know that their involvement has made a tangible difference," says Bigliardi.