The Russian Oligarch Hustle
There’s been a lot of interest lately in Russian Oligarchs because of the banking troubles in Cyprus, a small country in the Mediterranean. Apparently, Cyprus became a haven for many rich Russian Billionaires to stash their money. And, when the banks in Cyprus came upon some money trouble, it caused massive concern since Cyprus apparently holds a significant amount of wealth from European countries. So, not just Russian Oligarchs are affected, but European corporations as well.
All of this interest in Cyprus, a tiny country of only 1 million people, got me interested in the Russian Oligarchs. What is an Oligarch? Who are these Russian Oligarchs.
So, I did some research. And, it turns out, they have a lot to teach us about hustle, how to work super hard, and have it pay off in billions of dollars. While we may not all turn out to be Russian Oligarchs in the end, we can learn a lot from how they’ve conducted business.
Boris Berezovsky came to the business world of Russia by an odd route. He was a software engineer. He was born and raised in Moscow and received a high quality education in electronics and computer science at an institution that was involved in the Soviet space program. Berezovsky went on to graduate school at Moscow State University where he earned the equivalent of an American Ph.D. in the 1970’s and finally a Russian Ph.D. which is more advanced than an American Ph.D. in 1983 at the age of 37. He worked for twenty five years at the Soviet Academy of Science in the field of decision-making and in the field of computer automation of industry.
He decided to enter the business world. At the Academy of Science he had worked with the Avtovaz, an enterprise the Soviet government had set up to produce automobiles for the mass Soviet market. The Soviet government contracted for the Italian automaker Fiat to build a large scale auto plant 700 miles east of Moscow. The city in which the plant was located was named Togliatti after the head of the Italian Communist Party. The plant was not a technical triumph. It was vastly overstaffed and the quality of the product was low. The labor productivity was approximately one thirtieth of labor productivity in the American and Japanese automobile industries.
Berezovsky Hustle – What We can Learn
Berezovsky proposed to Avtovaz that he provide help to the enterprise for automation and computer control of operations. The structure of the arrangement was that Berezovsky would set up a company in Switzerland that would create a joint venture with Avtovaz. This would gain the benefit of the Soviet government program set up to encourage foreign investment in the Soviet economy. One special feature of a joint venture is the foreign partner could take some profits of the enterprise out of the country.
Once the legal structure for the foreign partner in Italy, Logovaz, was set up Berezovsky became involved in operating a car dealership to sell the Ladas produced by Avtovaz. Car dealerships extremely profitable and were a favorite target of organized gangs demanding protection money. Berezovsky arranged his own protection from the Chechens and tried to keep out the other gangs demanding a shakedown.
The Russian gangs were not easily discouraged. Gang warfare raged. Berezovsky left the country. When he returned he was the target of more than one assassination attempt. The most serious one involved a car bomb. Berezovsky was riding in his chauffeur-driven Mercedes with his bodyguard. As his vehicle passed a parked car a bomb in that car was detonated. The chauffeur’s head was blown off, the bodyguard was severely injured and Berezovsky was seriously burned. There was other assaults on Logovaz’ operations, but when the leader of the Russian gangs was killed by a car bomb the assaults stopped.
The car dealerships were extremely profitable, in part, because of a process Berezovsky called the privatization of the profit of a state enterprise. Avtovaz produced Ladas at an average cost of about $4700 but sold them to auto dealers at $3500 per car. The dealers then sold the cars for $7000 each. The under pricing of the cars by Avtovaz came as a result of the control of its management. Thus Berezovsky moved the potential profit of the state enterprise out of the enterprise and into the private enterprise of the dealerships. Since such a money-losing enterprise would not have much market value it would be cheap to buy ownership. This is the scenario proposed by Berezovsky.
So, he bought really low, and sold really high. He focused on margin and set up the business to maximize his profits. Simple, but it shows hustle.
In his twenties during the 1970’s Vladimir Gusinsky started his business career as a cab driver, one without official sanction and thus called a gypsy-cap. He also engaged in black market trading. But by the 1980’s he developed some close ties in the Communist Party. He organized events for the Communist Youth League. Gusinsky also developed a working relationship with Yuri Luzhkov, the mayor of Moscow. The City of Moscow was not just a city government. It owned an controlled an extensive system of economic enterprises. Under Luzhkov these enterprises functioned efficiently and profitably.
In 1989 or shortly thereafter Gusinsky created a bank called Most Bank, from the Russian work for bridge. As result of the connection with Luzhkov, Gusinsky’s Most Bank was a very important institution in the Moscow economy and one of the biggest conglomerates in Russia. To protect his interest Gusinsky created a security division employing about 1000 people, many of them formerly employed by the KBG.
Once Gusinsky had created the basis for his financial success he began to create a media empire. In 1994 he had a newspaper, a weekly news magazine, a television guide magazine, a radio news station and the crown jewel of an independent television network.
Learning from Gusinky
Gusinky teaches us the importance of networking. Who you know really matters and learning to work with others is key to success.
As a child Mikhail Khodorkovsky had humble desires and wanted to be a factory director when he grew up. Factory directors were probably the most powerful figures in the lives of ordinary Russians. But being a factory director was not just an idle dream of Mikhail Khodorkovsky. He pursued his career goal rather diligently. He showed focus by studying engineering in Moscow and simultaneously was active in the Communist Youth League, called the Kommosol, to the point of being deputy head of the Kommosol governing committee for his educational institute. He learned the protocols of dealing with Communist Party functionaries and he developed connections in the Party organizations.
Lesson 1 from Khodorkovsky: He had a goal and he set a course to obtain the goal.
Despite his careful preparation Mikhail Khodorkovsky was denied the opportunity to work toward a directorship in the Soviet defense industry. He felt it was because of the Jewish origins of his family. He then decided to enter the private sector. His enterprise was named the Center for the Scientific-Technical Creativity of Young People, which was soon abbreviated to MENATEP. It first existed as a cooperative, the only officially sanctioned form of private enterprise, but later became a bank. Like many other entrepreneurs Mikhail Khodorkovsky sought the quick, high profits that could be gained by importing and reselling computers. MENATEP also engaged in various currency exchange transactions.
Lesson 2 from Khodorkovsky: When met with adversity, bounce back quickly.
Although some in the Communist Party blocked his road to becoming a factory director Mikhail Khodorkovsky was on good terms with many Communist Party officials and went into business with their approval. He was appointed as an economic adviser to the prime minister of the Russian Federation in 1990, in the days before the collapse of the Soviet Union. This was a prestigious position and one that gave him important contacts.
Lesson 3 from Khodorkovsky: Make important contacts and nurture relationships.
Alexander Smolensky grew up poor and didn’t come from normal Russian roots. His mother’s father was an Austrian Jew who fled Vienna for political refuge in Moscow. But Stalinist Russia did not treat such political refugees as true comrades or true Russian brothers. Because of his ethnic and religious lineage, his mother was scared that they would receive tremendous persecution.
As a consequence, she was right. So Alexander Smolensky’s mother, who had been born in Austria although she was raised in Moscow, was excluded from most jobs and opportunities for training. Life was very hard for the family especially since Alexander Smolensky’s father divorced his mother and left her and their children to survive on their own. Alexander Smolensky developed a lifelong resentment and defiance of the system. He seemed constitutionally incapable of cooperating with the system.
When he applied for his official identification document, the Russian version of the American Social Security Card that the Russians call the internal passport, he could have listened his nationality as Russian on the basis of the nationality of his father but he chose instead to designate himself as Austrian on the basis of that of his mother. This was a clear act of defiance and by doing so he excluded himself out of any career other than as an entrepreneur. But entrepreneurship in the Soviet Union was illegal and Smolensky lived a hard life.
Lesson 1 from Smolensky: Make you decisions and stick to them, despite the consequences.
He then served a two year service in the Soviet Army in Tiblis, Georgia. He fought the system in the army but while doing so he and a friend used their access to the army newspaper’s printing facilities to start an underground business in printing business cards. The business was not much but it enabled them to learn type-setting and the crafts involving in printing.
Lesson 2 from Smolensky: Make good friends and use ingenuity to create value.
After the army, Smolensky continued in the printing trade. He found a job as a supervisor of the printing department of an industrial ministry. He had to work two jobs to survive and was on the lookout for ways to make money. He realized that in the days of the Soviet suppression of unsanctioned literature was an opportunity that perhaps had a market.
People were publishing writings by the laborious process of typing documents a few copies at a time, one original and as many carbon copies as the typewriter could produce. In addition to being tedious this was dangerous but people were willing to do it. Access to a printing press relieved the underground writers having to type and retype works. Smolensky printed Bibles among other things. Bibles were not technically subversive material but it was a criminal offense to use State facilities for private enterprises as Smolensky was doing.
Lesson 3 from Smolensky: Find a better way to do something, and find a market that will pay you.
During this time Smolensky developed and refined his skills at finding and acquiring materials. In the socialist economies shortages are chronic and there is no problem selling production but gathering the raw materials is the limiting factor. So that while the salesman is the key figure in western businesses it is the raw material acquirer, the procurer, in the socialist economies that is the key figure.
Lesson 4 from Smolensky: Understand the supply chain well, and optimize it.
Smolensky’s illegal printing operation was reported to the authorities and he was arrested. He was sentenced to two years of work in a construction crew outside of Moscow and prohibited for three years of having access to money and valuable materials. His career as a printer was effectively ended, but his introduction to the construction field was a valuable substitute.
After his sentence was served Smolensky continued in construction. His ability to get things done earned him an acceptance as a valuable, effective construction operator. In part, his effectiveness in construction depended upon his skills in acquiring the required materials for construction. Although authorities recognized that Smolensky was a rebel against the system they realized that his organizational skills were valuable for them to have access to.
Later, the Russian Government made into law that individual labor activity was permissible. This opened the flood gates and made entrepreneurship accepted and allowed. It was now officially permitted for people to set up stands on the street to sell goods. It was not a free market revolution but it was a step in the right direction.
It would be alright for a group of people to engage in enterprise if they constituted a cooperative. The drafters of the 1988 Law on Cooperatives did not place as many restrictions on the nature of the permitted cooperative enterprises as might be expected. In particular the Law allowed for the creation of financial services cooperatives.
Smolensky built a cooperative that procured construction supplies, reduced lead times, and obtained better pricing structure. Smolensky’s cooperative eventually overtake the current government-run program of materials procurement. Smolensky effectively wiped out a competitor – the government. From there the cooperative went into the business of building such things as country houses, dachas. Business was good.
Lesson 5 from Smolensky: Find a quicker and cheaper way to do something, and money will follow.
He eventually created a bank and years and billions later, he’s a famous Russian Oligarch.
Vlaminir Potanin was fortunate to be born into the Russian hierarchy. In this respect, he didn’t show hustle – he was handed success. But, later he did show some courage and initiative. Vladimir Potanin started two banks, the Onexim Bank and the MFK. Many of the state enterprises transferred their account to these two banks which became the third and fourth largest banks in Russia.
In 1995 Potanin saw an opportunity. The Russian Government badly needed funds. So, with support from other oligarchs, he proposed a “loans for shares” plan to the Council of Ministers of the Russian Government. This plan traded ownership interest in unprivatized state industries in exchange for loans. The Russian Government welcomed the plan because they badly needed cash money.
Learning from Oligarch Potanin
Get super lucky and be born into a powerful and rich family.
Toward the end of the Soviet era Vladimir Vinogradov, then an employee of a state bank, established in 1988 a commercial bank, Inkombank. Vinogradov and his friends bootstrapped a bank operating on a shoe string until they secured a number of reputable investors. Among these investors were Sokol (the association of aircraft manufacturers), Transneft (a gas pipeline operator) and the Plekhanov Institute. These investors gave Inkombank enough credibility to apply for credit from the Central Bank of the Soviet Union. Against all odds, Inkombank did obtain 10 million rubles in credit.
Lesson 1 from Vinogradov: Sell the product first, then create it. True Entrepreneurship.
Over a ten-year period Inkombank grew in deposits and acquisitions. By the time of the financial debacle of Russian in August of 1998 Inkombank had become the second largest private bank in Russia in terms of private deposits and third largest in terms of assets. It played a significant role in financing Russia’s foreign trade. Under Vinogradov’s direction Inkombank engaged in some high flying financial transactions. Inkombank acquired financial control of some of the businesses that made investments in it, including Sokol in aircraft manufacturing, Transneft, the gas pipeline operator, and Magnitagorsk Steel.
Lesson 2 from Vinogradov: Acquire cash rich business, and then grow them.
Mikhail Friedman came from the western Ukrainian city of Lvov, a formerly Polish city acquired by Soviet troops in the partition of Poland by Stalin and Hitler in 1939. Mikhail Friedman came from a Jewish family, as did four of the six other oligarchs. Mikhail Friedman enter a Moscow institution of higher learning in Moscow. In the 1980’s, the declining years of the Communist system, the necessities of life were available without much effort.
The Theater Mafia
This period of a low level of responsibility combined with the assurance of the necessities for survival is one that some look back on nostalgically. While the luxuries of life were unavailable there was the leisure to read and discuss literature and the arts. In the Soviet system there was support for theater dance and so forth, but the tickets were distributed on a political basis rather than through the market. People who wanted tickets had to have contact with someone who could obtain them or who could wait in line to acquire them from the official sources. Some students were making money by acquiring tickets and reselling them or waiting in line for other people. The students engaged in this black market ticket business were known as the Theater Mafia. Mikhail Friedman saw the opportunity to systematize these processes. He made the black market ticket operations into a real business.
Lesson 1 from Friedman: Find an informal lucrative workaround and systematize it and profit from it.
He not only acquired valuable business experience but he made business partners that joined with him in forming the Alpha Group, a conglomerate dealing in oil, finance, and industrial goods trading. He also learned to payoff the political establishment to get the things he wanted.
The Alfa (Alpha) Group was not formed immediately. Instead Mikhail Friedman was involved in small business ventures in the form of cooperatives. Cooperatives were permitted under Gorbachev’s perestroika policy. One of the first major successes was in providing window washing services for state companies. No one had thought to create such a business before. From this success Friedman and his associates moved into importing and exporting. It was very profitable to export oil since the purchase price of oil in the Soviet Union was far below the international price. It was also very lucrative to import computers.
Lesson 2 from Friedman: Expand your horizon by finding other adjacent and lucrative opportunities.
Rybolovlev began his career in the medical industry. He and his dad developed some magnetic gizmo that apparently did well. It well, but instead of remaining in that field, he chose to move to Moscow and learn the art of stock trading.
This was perfect timing because he was the first person to earn a license to trade. He opened a financial services firm, raised money, traded, used his profits to buy up other companies, and now he’s a Russia oligarch.
He eventually got into the Potash business, which is a form of agriculture. I have no idea what Potash is, but it made him billions of dollars. I guess Potash is a form of salt used in most fertilizers. Who knew? Anyways, pretty amazing and shows that money can be made from areas most people didn’t even know existed.
Abramovich is known for his ownership in the Chelsea Football Club, which is one of the best soccer teams in Europe. His story is fascinating because it shows true hustle.
His parents both died before he was 4 years old. He began in entrepreneurship by first selling gasoline to other soldiers while he was serving in the Russian army. Later, he got into the smuggling business, bringing in goods from elsewhere and selling them in Moscow for a huge profit. He operated like this for a while until the privatization of Russian government assets.
At this time, Abramovich was able to legitimize his smuggling business. So, he opened a factory to build plastic toys and virtually owned the plastics toy category in Russia. He used his wealth to invest in other companies. And now, he’s a massive billionaire, but he started out poorer than some of us can imagine.
Deripaska is apparently worth $14 Billion Dollars. That’s a lot of money. He runs a company called Basic Element, which is a holding company that has businesses in energy, manufacturing, financial services, agriculture, and construction.
He started from humble roots as a small metals trader. Over time, he had accumulated ownership of 20% stake in a Siberian aluminum factory. That’s where he got his start; from there, he moved into adjacent businesses, but with the same gusto and hustle as when he first started in business.
Prokhorov owns the Brooklyn Nets, among other things. He made his billions by taking advantage of the unregulated privatization of Soviet assets, such as nickel and palladium mining, as well as in acquiring and running smelting companies.
He then later went onto Banking, where he made the rest of his billions.
Malkin made his fortunes in banking. He and his business partner founded Rossisskii Kredit, which later became the third largest bank in Russia.
Malkin is one of the top 30 wealthiest people in the world. He was a Russian senator, but recently resigned from the Russian senate.