Russia


Billionaires

From Moscow,Cameron Sawyer writes: "Who should decide who much CEO's earn? Shall we pass a wage and price control law regarding CEO's salaries? Isn't that a question between the managers and the company owners -- shareholders -- themselves? Why should society interfere, if it is glad for entrepreneurs to become billionaires?

And that is actually the point -- CEO's of large public companies have skill sets more or less coextensive with those of entrepreneurs. To attract those talents, large public companies must give such people the chance to earn money. My friend and next door neighbor Dmitry Zimin, a retired university professor of radio engineering, started a cellular telephone provider company, Vympelcom, basically on his kitchen table, just 11 years ago. Six years later, he floated it on the New York Stock Exchange (its symbol is "VIP"). A little after that, he retired for the second time, selling most of his shares for, reportedly, more than a billion dollars. Today the company has a market capitalization of $5 billion dollars.

Such a person has obviously done a great thing for the Russian economy, and for the thousands of highly paid employees of Vympelcom, and for the millions of telephone subscribers. Furthermore, he did it absolutely honestly and while paying all his taxes. I don't know anyone who begrudges him his billion; he is considered to be something of a hero. But did Stan O'Neal do really so much less with his turnaround of Merryl Lynch? Year for year, O'Neal earned ten times less than my friend Dmitri. Why would a talent like O'Neal take on a job like that for, say, a hundred times less than he could earn as an entrepreneur? We would kill public corporations if we in some fit of madness decided to regulate CEO salaries.

You can't compare CEO's with scientists or presidents. Presidents do it, unfortunately, because they are power-mad or because they believe they can save the world. I can't imagine any normal person wanting to be president -- you would have to have some kind of serious mental problem, in my opinion. I don't think you would have to pay even one dollar of salary in order to attract all of those sick people. Air force generals and scientists earn just as much as are needed to attract the people who are needed. CEO's are different -- they are lynchpins of the economy. Their mission is to create billions of dollars of wealth. It's what they do. People who have the talent of creating wealth simply have to share in it; otherwise they will just do it on their own.

Apropos of this, the headline of today's Moscow Times (www.themoscowtimes.ru) is"Russian CEO's Paid Most in Europe", citing a new study by management consultants Watson Wyatt. This is just as one would expect since Russia is a highly entrepreneurial place with a limited pool of management talent, which makes it very difficult for public companies to hire such people away from entrepreneurial pursuits.

Forbes last month put out its annual list of billionaires. Eleven more Russians have been added to the list, bringing the total of Russian billionaires to 26, putting Russia ahead of Japan and after only the U.S. (277) and Germany (52) in number of billionaires. 23 of Russian billionaires live in Moscow, making Moscow home to more billionaires than any other city in the world except New York, which has 29 billionaires. Russia's 26 billionaires are almost all in their '30's and '40's, and tend to be Jewish, self-made, and highly educated, with many PhD's and former professors represented. This is quite different from German billionaires, who tend to be in their '70's and '80's, and to have inherited family fortunes. Note bene: only two of Russia's billionaires earned their fortunes by managing public companies"

RH: I think it is unfair to say that Presidents are`power mad. That certainly was not true of Herbert Hoover or Jimmy Carter. It would be truer to say that billionaires are money-mad, especially those who in the process fired thousands of workers. While I am non-partisan, I note that the Democrats say the taxation system is rigged in favor of the very rich. They do not propose a pay scale for CEOs. I hope that the system Cameron commends leads to a happy, peaceful society. But remember: Après moi, le déluge. Remember the Great Depression, if you lived through it as I did. And remember the divine eye which appears in many churches.

From Moscow,Cameron Sawyer wrote:: "Who should decide who much CEO's earn? Shall we pass a wage and price control law regarding CEO's salaries? Isn't that a question between the managers and the company owners -- shareholders -- themselves? Why should society interfere, if it is glad for entrepreneurs to become billionaires?
Tor Guimares comments: "That makes sense except in many publicly-held companies most shareholders are poorly represented by a Board of Directors strongly influenced by top management itself. So most shareholders have no representation; thus we end up with Enron, WorldCom, Global Crossing, etc, etc ad nauseam".

RH: Parable of the squirrels: A squirrel needs 100 nuts to survive the winter. A dominant squirrel and his 100 subordinate squirrels collected 200,000 nuts, easily enough the survive the winter. But the dominant squirrel decided he no longer needed the other squirrels and banished them from his turf. Now he had 200,000 nuts all to himself. He sated himself on them, but when he had eaten 1,000 nuts he could not stay awake. He fell from the tree and was killed. Moral: Like Pride, Greed comes before a fall.

Telephone Service

Randy Black, who lived in Omsk in the last century, says of poor telephone customer service in Russia: "I never had this problem in Russia, since 1) There was no customer service to call, and 2) 90 percent of Russians don’t have phones". From Moscow, Cameron Sawyer counters; "Randy, in 1998, when you left Russia, there were 30 million fixed telephone lines in Russia, covering probably a third of all households in the country, with a higher percentage of households "telephonized" in big cities. Since you left, the number of fixed telephone lines has increased by a third, and Moscow has been completely rewired with all digital exchanges (you can get DSL everywhere; I wish that were true in my old hometown of Nashville). What is more remarkable is that in Russia mobile telephone lines now exceed fixed lines in quantity -- mobile phone users in Russia doubled in 2003 to 42 million users as of April, 2004, or nearly one for every three people. Moscow has more than 12 million mobile phone subscribers, which means that nearly every single Muscovite -- man, woman, child, and babushka -- has a mobile phone. Moscow is thus the largest mobile telephone market in Europe, and has a higher rate of mobile phone usage than any U.S. city (for comparison, the New York area has 11 million subscribers and a penetration rate of 54%, compared to 70% in Moscow).

In the village where we have our country house, a real farming village where most residents do not have indoor plumbing, an hour from Moscow, the village council itself offers DSL lines and digital phone lines, competing with two commercial firms.

As to customer service, since Randy left, Russia has already passed through the phase of merely having it, and already into the phase of outsourcing it -- to Ukraine, Moldova, and Central Asia. In 1998, there was virtually no production of consumer goods in Russia (thanks to the IMF's destructive currency policies), and imported goods were largely bought in Soviet-style stores with the bill counted up on an abacus and the goods wrapped up in newspaper with string. Today, the retail market in Moscow looks much like any other European city, and already regional cities like Kazan and Samara are getting mega-malls.

It is very dangerous to get too attached to stereotypes about countries which are in such a rapid period of change".

Randy Black, who once lived in Omsk but now lives in Texas (the American Omsk) gave a withering account of telephones in Russia. Cameron Sawyer, who lives in Moscow and is an enthusiast of the new Russia, countered with an account of the dazzling way that telephone service has improved. Randy is not convinced: "While I appreciate Cameron’s telephone stats report, especially judged by the fact that he is there and I am not, I have to question part of his report. Several other sources state that there are only 19 million cell phone accounts in all of Russia. By Cameron’s account, with 12 million in Moscow, this leaves 7 million for the remaining 132 million Russians, spread across nine time zones. Further, Cameron rightly states that there were 30 million fixed phone lines in 1998 (per the CIA Fact Book, I presume) which of course works about to nearly one phone line per household, considering that Russians live several generations to one apartment or home in the nation of 144 million. I had not realized that things had improved to that degree.

Finally, DSL and other modern conveniences are fine and well, but who can afford such amenities in Russia? In Texas, DSL runs in the $35-$75 per month range depending upon your add-ons and home outlets. Russian pensioners receive something in the range of $20-$50 a month to live on, pay bills, eat, buy bus passes and so forth. How many can afford a PC (OUTSIDE of the largest cities), a modem, DSL service, etc? Who is buying all the Russian DSL services? Cameron echoes the sentiments of many I have contact with, that Moscow resembles any other European city, but…. What about the tens of thousands in Vladivostok who have not had water to their flats in months, if not years? What Cameron and others more or less confirm to me is that there is still TWO Russias. There is Moscow/St. Petersburg, and then there are the rest, waiting for something to trickle down to them. From December 2003: Vladivostok: The presidential envoy to the Far East, Konstantin Pulikovsky, observed that only 23% of the city's residents get a regular supply of cold water. That no one has hot water is a fact officials seemed to have ignored.

Note: From the CIA Fact Book -- general assessment: the telephone system has undergone significant changes in the 1990s; there are more than 1,000 companies licensed to offer communication services; access to digital lines has improved, particularly in urban centers; Internet and e-mail services are improving; Russia has made progress toward building the telecommunications infrastructure necessary for a market economy; however, a large demand for main line service remains unsatisfied domestic: cross-country digital trunk lines run from Saint Petersburg to Khabarovsk, and from Moscow to Novorossiysk; the telephone systems in 60 regional capitals have modern digital infrastructures; cellular services, both analog and digital, are available in many areas; in rural areas, the telephone services are still outdated, inadequate, and low density international: Russia is connected internationally by three undersea fiber-optic cables; digital switches in several cities provide more than 50,000 lines for international calls; satellite earth stations provide access to Intelsat, Intersputnik, Eutelsat, Inmarsat, and Orbita systems

From Moscow, Cameron Sawyer gave a glowing account of the telep`hone service in the new capitalist Russia. Randy Black demurs: "While I have total respect for Cameron’s facts about cell phone penetration percentages in Moscow, there seems to be more to the story. Since Cameron’s positive portrayal of the cell phone situation in Russia, I have spoken to, or written to several Russians who said that, while the numbers of users is high, the usage is beyond the financial ability of many users in Russia. To wit: One guy said, Yes, I have a cell phone but by friends and associates are forbidden from calling me on the cell unless it is life or death. The minutes charge is so high that most of my friends have the same rules. My Russian wife also echoed that thought. One of her girlfriends returned from Moscow last week, and she told us that cell phones are everywhere, confirming Cameron’s story, but she added that calls are very, very brief. Something about calls of less than six seconds being free and so forth".

Randy Black rejected Cameron Sawyer's report on cell-phones in Russia, saying that they are little used because that costs money. Cameron replies: "Well, Randy, you'll also find some people in the U.S. who use their cell phones as you describe. But the simple fact is that Russians have similar numbers of cell phones per capita as Americans (45 million of them; the number has doubled twice in the last two years and is supposed to hit 60 million by the end of this year) and spend similar amounts of money per month on them (billions of dollars a year). People from all walks of life chatter on them incessantly, just like anywhere in Europe. They even wired up the Metro in Moscow so that your conversation won't be interrupted when you go underground. The babushka who cleans our office in Novorossiysk wears one on a lanyard around her neck, and I'll tell you, does not limit her calls to six seconds. And why should she? Incoming calls are free, as is usual in Europe, calls to other mobile phones cost 3 cents per minute including VAT, and calls to regular telephones, whether local, intercity, or even international, cost 19 cents a minute including VAT. (http://www.megafonmoscow.ru/tariffs/plans/olite/). Here too things have changed a lot since Randy left Russia in 1998, when there were only 50,000 mobile phones in the whole country, a minute of conversation cost $.60, and a monthly subscription was $60.

Officially measured GDP per capita in Russia is still near the bottom of the European range; about $10,000 per capita at PPP in 2002, less than Portugal, and less than even Greece. But Russians have disposable income somewhere near the European average -- no one is quite sure why, but it seems to be a combination of a large shadow economy (widely supposed to be equal to or even greater than the official economy) and low monthly housing costs (mortgages are not yet widespread in Russia, and almost no one rents). Retailers have discovered this and are pouring in, and not just into Moscow. A $1 billion mega-mall has been completed in Samara, and was reportedly fully leased before completion and is now overflowing with shoppers. The Swedish furniture and housewares retailer Ikea, one of the world's largest retailers, has made Russia its number one global priority, and is investing several billion dollars (including a billion of its own capital) into construction of stores and factories, with its focus not on not Moscow or St. Petersburg, but on ten large regional cities. Ikea's first Russian store, located in the town of Khimki near Moscow, has the largest turnover of any Ikea store worldwide. Other retailers have come to similar conclusions. Metro, the large German retailer, has allocated 1 billion euros of its own capital for investment into expansion of its hypermarkets throughout the country, again, not just Moscow and St. Petersburg, and is already building a store in Nizhny Novgorod (http://www.e5.ru/english/media_inpress4.phtml; see also http://www.themoscowtimes.com/stories/2004/04/15/053.html). The biggest problem for retailers in Russia is considered to be spiraling wages and labor shortages across the country; A.T. Kearny considers that this will lead to a crisis in the next few years (http://www.ancor.ru/en/articles/article/?iArticleID=149). Moscow's unemployment rate is currently less than 1% and without guest workers, the Moscow economy would instantly collapse.

Randy is right to focus on the Russian regions for the real picture of the Russian economy. Moscow is, as he rightly perceives, just the foam. Before 1998, Moscow was apparently booming, but the country was falling apart. But today the picture is completely different, with the larger regional cities growing even more dynamically than Moscow. Most notable of these is Krasnodar, capital of the Cossacks, center of Russian food processing, with much manufacturing besides, which attracted more foreign investment than St. Petersburg last year, Samara, center of Russian automobile manufacturing and associated light and heavy manufacturing (kind of a Russian Detroit), where a multitude of new factories have been built, Novosibirsk, Russia's "Science City", a great center of high technology manufacturing, software development, and technical education, Rostov-na-Donu, Ekaterinburg, Ufa, Kazan, Chelabinsk, and Nizhny Novgorod. These large cities (all one million plus population) are centers of manufacturing and trade, and they are all doing very well. The only parts of Russia which are not doing well at the moment are those which were dependent on the state sector -- the artificial cities of the Artic, and military centers like Vladivostok. The state has cut them off and left them basically to die (which in my opinion is the correct approach). Even agriculture is functioning in Russia and making a profit, something no one expected, so what used to be called the "Red Belt" -- the depressed agricultural belt across the south of Russia -- has ceased to exist as such.

This is the Russian heartland, and the engine of Russian economic growth. Note that of the above-mentioned booming cities, only Ufa is directly dependent on the oil business (Krasnodar to a lesser extent because of all the pipelines that are being built nearby to get Caucasus and Central Asian oil onto ships in the Black Sea). The flood of petrodollars is a great bonus to the Russian economy, but the heavy lifting is being done by the growing manufacturing sector, which accounts for fully 40% of Russian GDP (compared to less than 30% on average in the EU) (http://www.balticdata.info/russia/macro_economics/russia_macro_economics_russia_GNP_GDP_summary.htm). It is easy to forget, perhaps, that Russia has an essentially industrial economy; the Soviets built it up like that and the end of Communism and the revolution of the '90's has not changed that.

Randy's picture of the Russian economy is just a few years out of date. He should go to Novosibirsk, sometime, an uncommonly pleasant city not far (by Siberian standards) from where his mother-in-law lives in Omsk. Novosibirsk has a population of nearly 2 million, and is growing rapidly. There are 75 fixed telephone lines per 100 households, and 40% of the population owns a mobile telephone. 27% of the population have internet access, of which fully half of that is DSL. The Chkalov Aircraft Factory is working three shifts making Sukhoi fighter/bombers (http://www.aeronautics.ru/sukhoi/su34004.jpg) for export. The local airline, Sibir, has become the second largest in Russia and has broken into the top 100 of world airlines. After the end of next year, he will be able to stay in a hotel I am developing there. It will not be built by Russians, by the way, since the building boom in Novosibirsk has occupied all available construction labor, and in fact there is a general labor shortage in Novosibirsk, which is causing me no end of problems. We will probably have to use Turks or Central Asian guest workers".

 

 

Ronald Hilton -


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