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Young market matures

Since deregulation of the market, private business has mushroomed in Russia. But now family firms face issues such as succession and governance. The editor of the Russian version of Families in Business, Shamil Magomedov, outlines the situation

As a managing editor of the Russian edition of Families in Business, I  ask myself: What would I say about my own country? A country of great history and culture. It is a melting pot of change with amazing opportunities.
 
Family businesses flourish in Russia and, according to official statistics, constitute at present 70% of all small and medium-size companies. A lot of large Russian conglomerates are family-owned as well.
 
After 20 years of the market economy Russian family companies are approaching their second generation, and family business owners start to ask themselves the same questions: "What should I do with my business?" Shall I pass it to my son?" If no, how should I create a mechanism independently from the owner?"
 
As everywhere in the world, this is caused, on the one hand, by the need to reduce the time expenses in owning and managing the company, and, on the other hand, by the necessity to choose a successor for the business. Thus, Russian family businesses inevitably face challenges related to succession planning, transfer of ownership, management responsibilities and knowledge. Corporate governance, foreign investments, mergers and acquisitions are no less important items on the agenda for them.

Russian family business came back into existence in the end of the 1980s. The wave of crisis in state and government structures pushed many Russian civil servants (funktsioners), to go private and start their own businesses. Many underground private businesses of the Soviet era turned the free market to their advantage as well.

No wonder that a good part of these businesses are family-controlled companies. Of course, Russians like many others strongly believe in the negative effects of nepotism. The assumption that close relatives could work in the same state-owned enterprise or organisation was was discouraged.

The situation in the economy started to change dramatically. It gave birth to a new business mentality, and the successful Russians won a title of "New Russians" (Novye Russkiye).

The market turmoil (bespredel), which was there in the first years or even a decade till 1995, together with imperfect and weak legal base, simply pushed many to start businesses, totally controlled by a single family or by close relatives. Attachment to family values was a cornerstone of corporate life for the overwhelming majority of companies at that time; it greatly influenced the system of management and decision-making technologies.
 
Another interesting feature is the level of participation of managers from outside and the degree of authority they enjoy. Russian family business owners are reluctant to give them a free hand, due to legal weakness, gaps in the stock market and so on. For the most part, the post of general manager or CEO is held by the owner or by one of them. The factor of such a careful approach in hiring "top-outsiders" along with other factors make the issue of succession planning critical for many Russian family companies.
 
The sons and daughters of the New Russians are well-educated, as many of them get their degrees from the best universities in the UK and USA. They are energetic and have a strong business grip. However, the mechanism for succession planning is not developed in Russia. Or, in other terms, the mechanism that worked in pre-communist times, in tsarist Russia, is lost, and the new one is not yet created, its legal, financial and educational parts being just formed.

Corporate issues also contribute to making Russian family businesses an interesting phenomenon. In many cases the corporate structure is not transparent. Even simple book-keeping records are closed and complicated. A fear of bureaucratic turmoil often prevents many successful businesses from diversification or developing long-term strategic plans.
 
Being an optimist, I feel that family businesses in Russia have a bright future. If you navigate in the waters of Russian family business, sometimes it will be calm and predictable, sometimes it will be stormy and uneasy. But it will always be  attractive and breath-taking. 

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