Russian Study Trip Group in front of the Hermitage.

GSBers never pass up an opportunity for good alcohol. The group samples some fine Russian vodka over dinner.

      Since above all else, this trip was about great people, we thought we’d help our readers get to know the group by playing a little game. In left-hand column below, you’ll find a list of various group members from the trip. One the right hand-side, you’ll find a list of things that they did or we would like to start rumors that they did. Try matching the two.

 

The Meetings

      The trip was much more than just great people, of course. In our time in Russia, we met with over a dozen government and industry leaders. With economic growth of 8.4% in 2000 and an approximately 5% in 2001, the tone in the meetings and in the country in general was noticeably optimistic. Below, we’ve offered summaries of a few of the more interesting points discussed in the meetings.

Illarionov on economic growth

      Andrei Illarionov is Russian President Putin’s top economic advisor. He met with us in the Kremlin to offer his perspective on Russia’s economic situation. Like most of the individuals we spoke to, he attributed part of Russia’s current economic success to the devaluation of the ruble that resulted from the August 1998 economic crisis.

      However, he disagreed with another frequently cited cause of Russia’s economic growth: the high oil prices of recent years. The argument, as articulated to us in Moscow by a group of investment banking economists, is that high oil prices have enriched the country’s oil companies, giving them more cash to invest in the nation’s economy. Illarionov disagreed with this perspective, taking the position that not only did high oil prices not contribute to economic growth in Russia, they actually interfered with it by generally increasing the cost of production.

      He surprised us again when he argued that Russia did not need more capital.  In fact, Russia had too much capital and not enough places to put the money. Comparing America’s high growth yet abysmal savings rate during the 1990s with the low growth Japan experienced during the same period in spite of its very high savings rate, Illarionov argued that more capital is not always a good thing. He claimed that the limiting factor in Russia today was not the availability of capital but the existence of good business opportunities in which to efficiently invest that capital. 

      It is worth noting that the Stanford Business School students enjoyed tea during their meeting in the Kremlin with Iliaronov, accompanied, of course, by Gummi Bears.  What else would they serve? 

Anatoly Karachinsky on Business in Russia post 9/11 and Corruption

      Anatoly Karachinsky, founder of the largest Russian IT conglomerate, IBS, spoke to us about the current business climate in Russia, including the effect of 9/11. His perspective was that while the collapse of the Soviet Union technically ended the division with the west that had persisted since World War II, forty-five years of rivalry and suspicion is a difficult thing to overcome. With the September 11 attacks, the world has seen the emergence of a new enemy that has brought the former East and West together. He sees the post-9/11 world as being divided more along the lines of North v. South. As Russia tries to position itself as a source of cheap, high-skilled labor, this realignment could be particularly advantageous for its businesses since many of its low-cost competitors lie in the South. In an example particularly relevant to IBS’s business, Karachinsky believes that post-9/11, companies will be less willing to be completely dependent upon a country like India for low-cost software development. He sees Russia as particularly well positioned to benefit from the ensuing diversification.

      Karachinsky also spoke to us about corruption in Russia. His position is that Russians are no more or less corrupt on average than the people of any other nation in the world. In the early ‘90s, corruption in Russia received heavy media attention because Russians were unusually bad at being corrupt and kept getting caught. Because corrupt Russians have become more sophisticated over the last decade, today it appears from the press coverage that corruption has declined. The truth, Karachinsky would argue, is that throughout the whole period, the base level of corruption has been about the same as you would find anywhere else in the world.

Investing in Russia

      Representatives from the Hermitage Fund, a hedge fund investing in Russian equities founded by GSB alum Bill Browder, met with us in Moscow to discuss the current climate for investing in Russia. Russia clearly has enormous problems with internal corporate control. The good news is that Russian companies are beginning to learn that investing in corporate governance initiatives can have huge payoffs in terms of market capitalization. For example, Russia has several oil companies like LukOil that are sitting on some of the largest reserves of crude oil in the world. Relative to their Western counterparts with comparable reserves, these companies have tiny market capitalizations. In large part, these differences in valuation are due to problems with corporate governance.  Investors are concerned that management may make unilateral decisions that are highly dilutive and destructive to their investments.  

The Summary

       So as you can see, the trip was filled with many characters and much learning.  And to think we haven’t even begun to discuss the other elements of the adventure, like the vodka.  Ah yes, the vodka.  Five shots at dinner is a good way to start the evening.  But perhaps we should save those stories for another day.  What happens in Russia stays in Russia.  Of course it does.  Do Svidaniya.   

 

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