Russia: Clawing Its Way Back To Life
Russia is fighting another war in the breakaway region of Chechnya. More than $1.5 billion in flight capital is spirited out of the country every month by Russian mobsters and businesspeople. The stock market is down 28% since July. But the outlook is not completely bleak. Thanks to rising oil prices and a weak currency, Russian industry is clawing its way back to life. In October, industrial production was up 10% compared with the same month a year earlier. Economists are predicting that gross domestic product will grow by 1% to 2% in 1999, after plunging 4.6% last year. It's far too soon to say Russia is on the verge of a sustained recovery. So far, the government has resisted the temptation to print money and reignite inflation. But with parliamentary elections set for December, the pressure is on to fund pork-barrel projects. And no real recovery is possible until Russia tackles its institutional problems of corruption and tax evasion.
Russia is fighting another war in the breakaway region of Chechnya. More than $1.5 billion in flight capital is spirited out of the country every month by Russian mobsters and businesspeople. The stock market is down 28% since July.
But the outlook is not completely bleak. Thanks to rising oil prices and a weak currency, Russian industry is clawing its way back to life. In October, industrial production was up 10% compared with the same month a year earlier. Economists are predicting that gross domestic product will grow by 1% to 2% in 1999, after plunging 4.6% last year.
It's far too soon to say Russia is on the verge of a sustained recovery. So far, the government has resisted the temptation to print money and reignite inflation. But with parliamentary elections set for December, the pressure is on to fund pork-barrel projects. And no real recovery is possible until Russia tackles its institutional problems of corruption and tax evasion.Nevertheless, the ruble's 80% devaluation since Aug. 17, 1998, has acted as a life raft for many Russian industrialists and entrepreneurs. Imports are now out of the reach of most Russians, and have dropped 50% in the last year. They have turned to local suppliers, who are happy to pump out household products, food, and cars. Here are the stories of three companies that are seizing the opportunities.
PERM: CLEANING UP IN DETERGENTS
At 8 a.m., the mood at Pemos is brisk, like the air rattling the trees outside the Spartan detergent factory in the western Siberian city of Perm. The 12-member sales team barks out weekly results to General Director Konstantin Voloshuk, who replies with encouraging nods. He has been having a great time since the ruble crashed last year. For the first time in its 19-year history, Pemos got out of the red in 1999, reporting a profit of $15 million.
When the crisis first hit, shoppers stocked up on detergent and other staples as a hedge against expected shortages and hyperinflation. Since then, thanks mostly to the weak ruble, sales have continued to soar. The company has tripled production and increased its market share from 6% to 20%. It's operating around the clock and paying its 1,200 employees on time, unlike most Russian companies. Flush with cash, Voloshuk paid off the factory's $16.5 million debt.
The turnaround was a long time coming. Pemos was famous in Soviet times for its Lotus detergent, an abrasive powder that housewives disliked but bought anyway because it was one of the few detergents available. Sales slumped after the factory was privatized in 1992, and production dwindled to less than 10% of capacity by 1996.
FLIPPED MARKET. The detergent market was growing. But Russians preferred to buy the higher-quality products being offered by foreign companies such as Procter & Gamble Co. By August, 1998, foreign imports accounted for 85% of the estimated $200 million laundry detergent market, according to the Russian state statistics committee.
One year later, the market has flipped. Now, 53% of detergent sold in Russia comes from local manufacturers. Companies such as Pemos have improved quality dramatically by using imported enyzmes. But price is the key factor. P&G's Tide sells for $4.75 per pound, while Pemos' Liposystem detergent goes for $1.20. "It's cheaper and works just as well," says Natasha Gurova, a 43-year-old housewife.
P&G is doing what it can to cut costs. Since August, 1998, it has shifted production of laundry detergent to a Russian factory. "We are certainly facing strong Russian competitors in all fields," says Vice-President Laurent Phillippe, who heads P&G's Russia division.
Despite the turnaround, Voloshuk knows he can't afford to be complacent. The edge he is getting from the weak ruble won't last forever. So he's doing what few Russian CEOs care or dare to do--put cash back into the company. He is spending $10 million installing a second, more efficient, production line that will increase capacity by 25%. Look out, Tide.
MOSCOW: IF AT FIRST YOU DON'T SUCCEED...
Rick and Stacy Komendera, seven-year Moscow veterans who saw their first business fizzle in 1998, have stopped listening to the doom-and-gloom talk about Russia. Since June, when the first of their new Pizza Picazzo restaurants opened on Moscow's Mozhaiskoye Shosse, their ears have been filled with the ringing of cash registers.
One year after Moscow's markets crashed, the city's restaurant business is booming. "People in the capital are spending less, but they are still going out [to eat]," explains economist George Pavlov from the Russian-European Center for Economic Policy. According to AC Nielsen Russia, the number of restaurants in the capital has grown by 10% from May, 1998 to May, 1999. Fast-food businesses and cafes have expanded even more rapidly, with 400 new enterprises opening in the same period, a gain of 30%.
The Komenderas were primed to seize the opening. Part of the wave of young expatriates who came to Russia straight out of college in the early 1990s, the couple jumped into the corporate world without any formal business background. Both now 29, they began life in Russia as advertising consultants for multinationals in 1992. By 1994, they were selling imported medicines under their own brand name, USA Upteka International Inc. By January, 1998, their company was thriving, with annual sales averaging $2 million. But when the ruble plunged that fall, USA Upteka collapsed with it. The company's customers had bought on credit and refused to repay the loans. "We were sinking fast, but we wanted to ride the next wave," recalls Rick.
RISK-AVERSE. They're hitching a ride with a close friend. The Komenderas persuaded another American, a six-year veteran of the Moscow restaurant scene, to spin off his successful pizza-delivery business as a lower-price cafe franchise. Few investors have been willing to put money into Russia this year. But the pizza company's well-established distribution and supply network was a major plus. "Since people after the crisis are more risk-adverse, they want to put money in a system that works," Stacy says.
The Komenderas found their first interested franchisee in BP Amoco. The oil giant pioneered 24-hour gas stations in Russia, equipped with well-stocked, attractively priced minimarkets. Negotiations started in February, and the first cafe opened in June. BP spent nearly $100,000 to re-outfit its existing gas station on Mozhaiskoye Shosse. The Komenderas receive a 6% cut of pretax sales.
After 12 weeks, the Mozhaiskoye cafe, which profits from the daily stream of 2,000 customers at the BP station, rang up $8,000 in sales, surpassing its eight-month projections. Three more cafes have opened, and plans are in the works to place Pizza Picazzos in the remainder of BP's 14 Moscow stations. The better-than-expected demand has meant the couple spends 14- and 15-hour days on the job, usually standing behind the cafe counter tossing dough, as they scramble to hire more employees. For the Komenderas, the rewards are more than monetary. "It's a shot in the arm to see something work," Stacy says. They should know, because they've suffered that sinking feeling when everything comes tumbling down.
EKATERINBERG: MAKING HAY FROM BIG STEEL
Postcrisis Russia looks to be a renaissance era for Uralmash, the industrial giant whose metals helped build the Statue of Liberty and the roof on the British House of Parliament. Thanks to favorable exporting conditions brought about by low ruble costs and high world commodity prices, Uralmash's main customers--Russia's oil, steel, and mining companies--now have more cash to reinvest in their own enterprises. "We're looking quite good right now," says Kakha Bendukidze, the general director of Uralmash Industries.
Bendukidze, an imposing man with an easy smile, is considered one of Russia's leading industrialists. After 1994, when he took over Uralmash, the factory's losses steadily declined. But it never managed to break out of the red--until this year. Production in 1999 is up 15%, and sales are averaging $20 million per month. What's more, over half of the goods are now sold for cash, compared with 20% in 1998. The rest were paid for in bartered goods or IOUs. As a result, Uralmash reported pretax profits of $2 million in the first half of 1999, based on international accounting standards.
GOOD FORTUNE. A scientist by training, Bendukidze paid $500,000 for an 18% stake in Uralmash Zavody in 1993. Shortly after, he bought the rest of the company for $1 million and snapped up 25 other Russian companies for peanuts in an aggressive merger-and-acquisition spree. The largest of his deals was the splashy $35 million combined cash and stock-swap purchase in early 1998 of Uralmash's St-Petersburg-based competitor, Izhorsky Zavody, whose assets and sales were almost double the Siberian plant's. Within one year of the merger, Bendukidze slashed the combined workforce at Uralmash and Izhorsky to 31,000 from almost 80,000 and streamlined production. He has also spent time and energy cultivating the very best of Russia's blue-chip companies, such as Gazprom and Surgutneftegaz, as customers. "They're worth hundreds of millions of dollars in orders, and they are now coming to me first," he pronounces proudly.
Bendukidze admits that most of his good fortune this year is due to devaluation rather than restructuring. He estimates it will take at least five years for his restructuring efforts to give a big boost to profits. With the government in shambles, Uralmash can't reach its potential. But it will survive. Most Russian oil is extracted with Uralmash drilling rigs. Russian steel is fabricated using Uralmash presses. Nuclear power plants in Russia and throughout the developing world largely rely on Uralmash machinery to keep in good repair. "As long as [our customers] do well, we will," Bendukidze says.