Chapter 2
Western Investment in Russia during the 1990s, and the Issue of Trust

'To do business with the Soviets... it is essential to build up mutual trust. Too many problems, both large and small, have to be overcome... many issues will arise which could not be anticipated by the agreement... once the joint venture has been officially registered... our dealings with each other will be guided entirely by the quality of our personal relationships'

(interviewee quoted in Boisot, 1994: 110).

Trust During Transition in Russia

This book investigates the development of trust in relationships between expatriate and Russian staff working in east-west enterprises in Russia. 'Interpersonal' and 'interorganisational' trust are co-joined in this analysis, as the view is taken that the interorganisational relationship is effected through the interpersonal ones. This view echoes that of Child, who states that: 'trust is actually an interpersonal phenomenon, upon which the quality of interorganizational relations is founded' (1998: 253).

A number of researchers investigated the inner workings of western-invested enterprises in the former Soviet Union during the 1990s.1 Such research is notable for the consistency of its findings - in many cases, reading one set of research results feels uncomfortably like reading another. Researchers at this time were able to take advantage of a rare opportunity to observe and record the workings of cross-cultural business ventures in a brand-new, evolving market system. This was an environment with data subjects aplenty. Barnes et al (1997: 541), looking at the reasons for this investment explosion, are able to aggregate a number of data set2 to set forth the advantages and challenges perceived by western investors entering Russia:


  • abundant, relatively low-cost, and educated work force;
  • abundant raw materials;
  • enormous market potential;
  • building space for manufacturing;
  • relatively low-cost energy resources;
  • world's largest source of natural resources.


  • many and changing rules of conducting business with western partner firms;
  • political instability;
  • corruption and bribery;
  • insufficient suppliers and distribution channels for raw materials;
  • underdeveloped financial markets and institutions;
  • complex and unfair taxation policies;
  • massive and contradictory bureaucracy;
  • lack of suitability of experienced Russian partner firms;
  • difficulty repatriating profits;
  • cultural value differences.

This is a list that covers, largely, the business case for entering Russia (advantages), and the hard business realities of working in the emerging business environment (challenges). The 'softer' research into western investment in Russia falls, extremely broadly, into the final challenge on the above list - that of cultural differences. Researchers in this area commonly recognise that: 'Western firms considering partnerships in Russia need to invest the time necessary to develop trusting relationships, understand cultural differences, and manage those cultural differences for alliance success' (Barnes et al, 1997: 550).

Investigations typically concentrate on the challenges that western personnel working with Russian partners find themselves facing, and, as noted above, there is a good deal of consistency of findings. The following is a list of 'challenges' of work-related cultural differences frequently identified by researchers investigating western executives' experiences with Russian investment partners:

  • orientation towards hierarchy and bureaucracy - subsumed under which are:
    • responsibility avoidance;
    • failure to take initiative;
    • poor communication skills;
    • culture of the technocratic expert, rather than a generalist manager;
    • misinterpretation of participative management styles.
  • low work ethic - subsumed under which are:
    • lack of urgency;
    • lack of service mentality;
    • lack of loyalty to organization;
    • failure to accept compensation schemes linked to performance.
  • lack of business knowledge and skills - subsumed under which are:
    • younger workers are preferred as more enthusiastic and less constrained by working habits of the old system;
    • meetings that are long and philosophical, with little fast or sure resolution of issues under discussion, unsuitable information being presented, and where participants may be expected to drink in large quantities;
    • well-educated staff but with no practical application.
  • national pride and suspicion of westerners;
  • disregard for laws and regulations - subsumed under which are:
    • use of blat - ie contacts and networking;
    • mutual protection valued;
    • reliance on personal relationships and trust.3

The implications of the above elements for everyday business reality will be developed during this chapter. An update on the business environment facing investors in Russia in 2003 is provided in Chapter 15.

The Imperative to Understand the Context of Western Investment in Russia

The various pieces of research described above and a good deal of similar work have recognised the vital importance for western companies embarking on investment activities in Russia of understanding the Russia of today, and 'in order to understand Russia today, you need to understand where Russia has come from' (Holden et al, 1998: x). This is because western companies entering the Russian market, at least during the early and mid-1990s, found themselves: 'managing ties with organizations still carrying characteristics, philosophies and values aligned with traditional Soviet society' (Barnes et al, 1997: 540). Indeed, in the earlier stages of the reform process, there was a belief among many ex-Soviet officials that enterprises with foreign investment should be run just like native firms (Tullar, 1995: 47-48).

In such a situation, effective cooperation between the Russian and western sides of investment activity will be inhibited, simply because western and Soviet companies were formed and developed in very different environments, leading to very different organizational structures and communication patterns (Tullar, 1995: 46), and consequently different modes of cooperation. Trust in a context that cuts across cultures in such a way assumes an important role: 'Cooperation based on a well-developed mutual trust is the only way for a partnership to survive in the Russian business climate where western standards and norms of ethical business have not yet been established' (Barnes et al: 1997,545). Failure to address the need for cooperation through mutual understanding and trust between cultures results in the well-documented abundance of 'stories of business failures resulting from lack of understanding of local firms' (Peng and Heath, 1996: 493).

Yet understanding the context of investment in Russia is a key point frequently overlooked at least by the early western texts. Referring to work by Quelch et al (1991), Culpan observes: 'much attention has been paid to political and economic reforms at the macro level but less concern has been given to organizational requirements of effective business enterprises in formation. Most of the business publications on postcommunist economic liberalization deal with business opportunities in the region and designing appropriate corporate strategies for Western firms' (Culpan, 1995: 1).

In a similar vein, Shekshma (1996: 239) and Tullar (1995: 46) both quote statistics showing that little more than 20% of registered ventures with foreign capital participation, in the first half of the 1990s, became operational in Russia. Both authors cite such difficulties as currency problems, a constantly changing or even anti-western legal system, crime and corruption, bureaucracy, economic chaos, and political instability, as possible reasons for this failure: 'These are mostly factors that an interested organization cannot change' (Tullar, 1995: 46). Shekshnia develops the cultural theme with the point: 'Without questioning the importance of these reasons... one of the major causes of problems many foreign companies face there lies in the area of human relations, in the interaction between Western managers and Russian employees, in the ways 'West meets East' on a daily basis' (1996: 239).

This researcher would agree, taking the viewpoint that cross-cultural relationships within a western-invested enterprise in Russia demand attention because they are such an important factor in the performance of such business ventures (Shekshnia, 1996: 245) and the development of trust. This is reflected in the views of, for example, Arino et al (1997) who explicitly investigated the question of building trust in east-west business collaborations during the 1990s, and found that: 'Interpersonal relationships become the cornerstone of trust building' (1997: 35).

Western Investors Entering Post-Communist Russia

Researchers exploring western business activities in Russia during the 1990s generally reported that western investors found the long-term, personal trust that characterises family and friend relationships, rather than the formal, arm's-length contacts and contracts so prevalent in 'rational economic thought' (Vlachoutsicos, Bogatova and Holden, 1997 in Holden et al, 1998: 240), was the best way forward: 'there is deception in business dealings, but fealty in friendship' (Puffer, 1996: 25). Mutual trust, in fact, was identified by many as the only basis for effective cooperation, and in turn was the only way to survive. This need to show commitment to Russia in a very personal way is commonly put down to a historical legacy of high personal trust relationships between managers and employees all of whom behaved like an enormous extended family (Puffer, 1996; Holden et al, 1998).

For western investors entering the post-Soviet business environment, the need to rely on personal trust was complicated by political chaos, and the frailty and fractiousness of an emerging system of institutional guarantors such as contracts and the courts, property rights, banks, reputation and educational qualifications. In fact, investors were entering a huge, unknown market 'given to violent lurches - a coup attempt, a besieged parliament, four-digit inflation, presidential heart attacks and a ...presidential election that showed the Communists [were] still ever present' (Barnes et al, 1997: 540). In conditions of such obvious risk and uncertainty, could serious western businesses, answerable to shareholders, banks and other stakeholders really be expected to invest on the basis of personal trust? Surely exactly those institutional guarantors already in short supply and widely suffering from inexperience and political lobbying had to be properly in place before any investment decision could be made.

Even so, the western investors, full of hopes for what reform could achieve, poured in.4 As shown above, they saw enormous advantages to be gained from entering the Russian market. Key objectives included perceived opportunities for: 'increased corporate growth and quick improvement of their own market positions in the post-communist countries, overcoming tariff and nontariff trade barriers, and spreading of business risk over several countries' (Reineke, 1995:90).

However, western investors were not so blinded by the brazen glow of the Russian goldrush as to be prepared to enter the market on the basis of trust alone. Rather, they brought with them an extensive shopping list of needs to be fulfilled before serious business undertakings could be made: 'A legal system should be created in post-communist countries to allow not only private ownership but also regulations on contractual arrangements, labor relations, and other commercial relationships. A tax system encouraging savings and investments and promoting business ventures and entrepreneurship should be adopted. Banks are desperately needed to give credits to new entrepreneurs and existing enterprises.... Telecommunications networks should be developed to allow information exchange and fast and reliable communication... Transportation systems should be improved to carry goods from producers and manufacturers to retailers on time. Intermediary agencies besides banks, such as wholesalers, retailers, brokers, and sales representatives, are needed to conduct market transactions. Education and training systems should be restructured to create new business values, ethics, knowledge, and skills' (Culpan, 1995: 10).

These are expectations based on advanced market economies - something that the emerging Russian market of the 1990s was not. The following section outlines the reform process and Soviet legacy in, which foreign investors entering Russia during the 1990s found themselves embroiled: a legacy which, even in 1998 - a decade after Gorbachov first instituted the reform process - left Russia still adrift amidst a 'raw, rudderless capitalism' (Holden et al, 1998: 110).

Western Investment and the Gorbachov Reforms

Before the Russian Revolution in 1917, western investment had been relatively common in Russia. Following the Revolution, during Lenin's New Economic Policy in the 1920s, foreign firms continued to be allowed to invest in Russia, but Stalin stopped the majority of joint ventures with western countries from the 1930s onwards, although those with eastern European countries continued. However, some business activities did persist between western businesses and the Soviet Union, as evidenced by the fact that a small number of the respondent companies had been active in the country for some 30 years. Foreign companies during this period were not permitted to own Soviet enterprises: instead, they were required to operate through the central Ministry of Foreign Trade, first in Moscow, and then, if appropriate, the local region.

When Mikhail Gorbachov came to power in March 1985, 'the grip of the old men [was] finally broken' (Hosking, 1992: 447), and the Soviet Union was near its end. The country's economic stagnation was one of the spurs to the Politburo taking 'its courage in its hands' and electing 'a member of the younger generation' (Hosking, 1992: 455). Within two years, and with the economic system on the verge of collapse, Gorbachov had introduced his now famous rebuilding programme for the economy - known as perestroika - and western investment in the USSR once again became legal through the Law on the Soviet State Enterprise and the Law on Joint Ventures, both enacted by the Council of Ministers in 1987.

Under the changes, Soviet enterprises were permitted to establish joint ventures directly with foreign partners, and indeed, the foreign economic activities of Soviet enterprises were foreseen to be an important component of overall economic performance. Initially, foreign ownership of joint ventures was limited to no more than 49% of total equity, and the head of the operation had to be a Soviet citizen. By 1988, these restrictions had been rescinded, thereby allowing increased foreign ownership and control (Shekshnia and Puffer, 1996: 228). Joint venture enterprises would involve shared ownership and joint management, as well as shared risks and division of profits. Foreign invested joint ventures were accorded special legal status and were granted special privileges as well as exemptions from certain laws affecting domestic Soviet enterprises, including tax exemptions (McCarthy, Puffer and Simmonds, 1996: 214).

Foreign companies investing in Russia during the late 1980s did not find the requirement to set up joint ventures an ideal entry mode. But the lure of a huge market opening up was too strong to resist: 'As a result of the unprecedented opportunity to invest in the USSR, the late 1980s witnessed a flurry of activity as Soviets and foreigners eagerly signed joint ventures and other forms of business agreements. Beginning with only 23 foreign joint ventures in 1987, by January 1990 American firms alone had signed more than 140 joint venture agreements in the USSR, the third largest number after Germany and Finland' (Puffer, 1995: 214, citing "Strangled by Red Tape", 1990). But: 'the benefits expected by the partners were not as great as had been hoped, and the difficulties were far greater than anticipated. In fact, it was estimated that in 1990 fewer than 40 of the 140 registered US-Soviet joint ventures were in active operation' (McCarthy, Puffer and Simmonds, 1996: 215).

While the floodgates opened, the economic crisis deepened. In August 1991 the attempted coup against Gorbachov betrayed the painful tensions being felt deep within the Soviet Union. As Holden et al describe it, the Communist Party no longer held its monopoly of power, Gorbachov resigned as president, and the Soviet era was over; on 31 December 1991 'the Red Flag over the Kremlin gave way to the Russian tricolour. There were few onlookers and no euphoric applause. The Soviet legacy was too heavy, the future too uncertain, for celebration' (Keep, 1996, cited in Holden et al, 1998: 92).

The Pain of Reform

So-called 'shock therapy' in 1992 saw the introduction of price liberalisation and privatisation, along with the implementation of tight financial and fiscal policies, legalisation of land ownership, a reduced budget deficit, the opening up of foreign trade, and firm guarantees for foreign capital. As a result, prices across the board, between December 1991 and August 1993, saw a rise of 8,825% (Lowenhardt, 1995, cited in Holden et al, 1998: 120). While the western investment and 'aid' flooded in, and while many of the interviewees who took part in this research were negotiating their entry into Russia, '[widespread fears prevailed both in Russia and abroad of imminent famine, widespread freezing to death, and mass emigration. It was a truly formidable crisis' (Aslund and Layard, 1993, cited in Holden etal, 1998: 110).

For western investors, this crisis was made real when, in 1992, the Russian government froze their bank accounts - the state bank had run out of cash and simply chose to withhold payments owed to Russian and foreign enterprises. But the optimism, though dented, continued, and in 1997, five years after this unilateral government action, Business Week was able to report 'investors are swarming to buy Russian equities even in the face of rampant crime, corruption and a 6% economic decline in 1995' (cited in Holden et al, 1998: 146).

Moynahan characterised the new Russia in the first two years of reform as a tale of two countries: 'Inflation rocketed out of control. The dollar bought 32 rubles the month after the attempted coup [which took place in August 1991]; by the start of 1992 it had reached 90 and it hit 1,000 in mid-1993. Two societies were spawned. Ruble Russia squatted in the ruins of the Soviet Union, immense, impoverished and angry. Above it was another world, Ru$$ia, small and sleek, peopled by those with access to dollars - tarts, touts, taxi-drivers, traders. Security guards kept the two sides apart. Bulky young men in tight-fitting uniforms defend the Ru$$ian settlements: $350 a night hotels, casinos, nightclubs with $150 Scotch, Mercedes concessionaires, stores packed with perfumes, cashmeres, video cameras' (1994, cited in Holden et al, 1998: 121). Four years after this resonant description, when the researcher was in Moscow in December 1998, a leading Russian businessman who was permanently surrounded by body guards was shot dead at Pushkin Square metro station; in that same month people literally froze to death overnight on Moscow's streets.

The Legacy of the Soviet Union as Shown Through the Post-Soviet Manager

In the early part of the 1990s, before full foreign ownership of enterprises was permitted, investors would often find themselves negotiating with largely unreconstructed post-Soviet managers in whom many of the tensions of the Soviet legacy were personified and embodied. Even as the 1990s progressed, finding Russian partners or companies with managers that had a western mentality and managerial skills remained very difficult, with a large number of western firms believing they would have to wait for the next generation of young people if a western mentality in business was required (Arino et al, 1997). To understand many of the difficulties experienced by foreign investors, and to. obtain an overview of the post-Soviet business environment generally, it is helpful to look in more detail at the make-up and legacy of the post-Soviet manager.

The Technocrat in the Centrally-Planned Economy

The Soviet enterprise manager, from the 1960s onwards, was a technocrat. Management was not considered a profession, and enterprise managers were educated first as for example scientists: 'If one inquires as to their profession, most of them will respond: "engineer", "chemist", or "economist"' (Tullar, 1995: 50).

The planned economy in which they worked was managed according to centrally set and determined one-, five-, ten, and fifteen-year plans. The government decided what to produce, and the proportion of output to be devoted to consumption and investment; it was responsible for fixing the price of inputs and outputs. While the government directed the economy according to its own policy priorities, committees on all aspects of the economy undertook the detailed planning, and ministries ensured that the plans were carried out. Gosplan was the state planning committee responsible for coordinating the various plans (Lane, 1985: 5-6). Each enterprise was provided with detailed production and output plans by their relevant ministry, covering amount and mix of output, quantities and sources of inputs, delivery obligations etc. The enterprise director was answerable to the ministry: 'At all levels, success and promotion follow "plan fulfilment'" (Lane, 1985: 9).

The problem was, the system did not work. David Lane, writing at the end of the Soviet period, produced Soviet estimates that some eight to nine million prices had to be fixed by state planners, and that in the mid-1960s, the Soviet apparatus performed some 10,000 fewer operations than were needed for efficient management (1985: 5). The result is graphically described by Kotkin (1991): 'Soviet firms are not allowed to purchase steel from other firms. Instead, they put in "bids" for metal to the State Supply Commission (Gossnab). Because a firm knows that it will receive less than it requests, the firm logically asks for more than it might otherwise need, secure in the understanding that it will not suffer for higher costs because an enterprise does not need to make a profit to stay in business. Gossnab tries to anticipate this upward bidding and almost invariably allocates less than requested' (cited in Holden et al, 1998: 65).

The Networks Underpinning the Centrally-Planned Economy

The above description shows how, in conditions of shortage, the Soviet enterprise manager had to be a very resourceful animal: 'behind the scenes, many managers showed exceptional initiative and creativity by finessing problems in order to meet planned targets' (Puffer, 1996: 23). It was largely the need to partake in such activities that led Soviet managers to be 'engaged in ... blat, the use of connections or informal influence to break through bottlenecks and grease the wheels of the state. Managers would make informal deals to get things done, such as to obtain scarce parts or obtain authorization for an activity. Personal gifts or needed goods or services produced by the enterprise were the customary methods' (ibid). As a result, 'behind the formal administrative structure lay important relationships among firms, and between firms and government, that may fairly be said to have formed the real basis for actual business transactions' (Hertz, 1997: 10-11). As a result, informal networks between enterprises emerged.

Raiser explains how these: '"old boys networks" of managers of state-owned enterprises, party members and other members of the communist elite have, in many instances, provided the basis for the formation of new business organisations' (1999: 5). This is a point confirmed by Hertz: 'Relationships forged under the centrally planned system formed the basis for those that prevailed after the enactment of the 1992 Law on Enterprises and Entrepreneurship, even though from that point on firms were free to choose their own partners. Indeed... firms still maintain their relationships with their former suppliers and customers' (1997: 95).

For western investors entering the Russian business environment during the 1990s, this historical legacy was of tremendous importance. For example, blat.

'is a deeply rooted and widely spread phenomenon that affects how business develops in present-day Russia. Westerners generally value fairness and equal opportunity in business transactions. In contrast, Russian managers openly resort to blat to facilitate business exchanges. While such behaviours may be practiced by Westerners, it is traditionally not openly condoned. For Russians, however, blat is a form of "networking" for building a mutually protective social umbrella

(Barnes et al, 1997: 544).

Western investors entering Russia often found themselves dealing with the opaque structures arising out of previous networks between managers and the old state bureaucracy. As Hertz comments: 'With regard to the question of who was in control of the enterprises, it would be true to say that by the end of 1991... Russian enterprises had essentially become insider-controlled firms... Gorbachev had essentially licensed managers and given them de facto ownership rights' (1997: 11). Mutual protection in the emerging environment continued to be a key consideration: 'closely related to blat is the perceived need to mutually protect one another. These two characteristics illustrate the strong need for personal trust built on private connections in business exchanges.' (Barnes et al, 1997: 544).

Hertz confirms this, noting of her case study companies: 'it appears that there has been a considerable entrenchment of pre-reform relationships' (1997: 117). She proffers a number of possible explanations as to why the former Soviet networks have continued to be active, and indeed are perhaps stronger, in the wake of reform:

  • the state has left the domain of business transactions, but there has been no corresponding rise of any other exogenous devices, such as the legal system;
  • business organisations want to stay closely connected to each other, fearful that the whole economic system may collapse;
  • in this uncertain business environment, long-term relationships offer advantages to economic actors;
  • enterprises are trying to hold on to and recreate the glue of business life which the state had previously provided;
  • lacking information about alternatives, with no recourse to legal support, and still suffering extreme shortages, businesses find themselves locked into the old systems from which they stand little chance of escape.

The fact of the matter for western investors entering the Russian environment of the 1990s was their non-membership of these opaque networks, and the potential entry barriers these networks could constitute: '[W]hatever the reason for their persistence, persist they do, and this will undoubtedly have implications for new firms emerging in the Russian market that are not tied in to one of these networks' (Hertz, 1997: 117).

Observing the Hierarchy

Another significant legacy of the Soviet era for western investors is the tradition of hierarchy. The enterprise manager, although subject to direction from above on all matters, and all the while indulging in informal bargaining to reach plan targets, in turn directed those below him on a top-down basis: 'Decision-making power is still generally in the hands of one man or woman at the top. Soviet law called for strict adherence to and observance of the hierarchy (Ivancevitch, et al, 1992). This concentrates power at the top and makes many of these organizations resemble the classic machine bureaucracy' (Tullar, 1995: 50).

The result of this hierarchical structure is that employees are: '[a]ccustomed to receiving and executing orders from the boss, Russian employees including senior managers are often reluctant to make decisions, take initiative and assume responsibility. They are looking for instructions even in the simplest situations... As one corporate director for Russia told the author [Shekshnia], the General Manager of one of his joint ventures there used to say: "George, I need from you detailed instructions. Tell me what to do and I'll make sure you'll get it done'" (Shekshnia, 1996: 244). Barnes et al find this causes certain practical problems, because: 'Within this hierarchical society, knowledge and information are considered sources of power. Obtaining but withholding information from others gives individuals an advantage' (1997: 542).

Although Soviet managers were highly autocratic in their leadership style 'the product of custom, culture and tradition' - they were also expected to be paternalistic 'involving themselves in such non-work matters of concern to employees such as housing, medical care, education and family decision making' (Puffer, 1996: 25). Shekshnia (1996: 224) points out that you would never see workers openly question their boss. However, this coexisted with certain collectivist values that permitted them to feel free to make their opinions felt; indeed: 'The tension between, and the coexistence of authority and collectivism is an enormously strong theme in Russian history' (Holden et al, 1998: 79), which is commonly traced back to the old village communes (mir).5

Vlachoutsicos (1996) presents the following insight on the implications of this for the reform process: 'The movements of the "invisible hand" of the nascent market economy are still being thwarted by the "invisible fist" of the stubborn collectivism' (cited in Holden et al, 1995: 58). And so, 'the Russian manager sees himself as protector of the kollectiv. In the days of socialism, he might have goaded his kollectiv ruthlessly, but he still looked after it: there was an implicit contract' (Holden et al, 1998: 127).

The Assumptions of the Kollectiv

The final point about goading the kollectiv ruthlessly is an important one, and is significant in understanding the 'they pretend to pay us and we pretend to work' attitude commonly joked about (by Russians) as existing among Russian employees. Russians were loyal to the boss, whose personal approval they regarded as a decisive factor for their well-being in the company and far more important than their own performance (Shekshnia, 1996: 244). However, they were not passive recipients of orders, rather 'workers and professionals would deceive managers about production quality and output, and the managers in turn would deceive ministry officials.... It was a game in which virtually everyone tacitly participated' (Puffer, 1996: 23). This was a game made possible by the enormity of many Russian enterprises and the assumption that a job is an entitlement: 'Although the decision-making power lies at the top of the Russian organization, it is still often impossible for the general director to have a good grasp of all the business his or her enterprise is in. Consequently, the many workers work badly, come to work infrequently, and idly walk around much of the time they do come to work' (Tullar, 1995: 52).

Such attitudes arise out of the underlying assumptions of the communist system: '[the] centrally-managed system of compensation... established links between levels of compensation and a hierarchy of jobs rather than individuals' contributions. It rewarded people with perks (free cars, housing, medical aid, vacation dachas, etc) rather than money and promoted an ideology of equality... Brought up under such conditions, local employees often expect their compensation to be dependent on the job they hold and not on the contribution they make to the company' (Shekshnia, 1996: 242).6 He goes on to explain how they had no real worries about losing their jobs, because: 'everyone had a job, regardless of motivation or qualifications. However, maintaining a job did not necessarily mean one had to work. A lack of productivity and absenteeism were common. Russian workers have recognized little reward for job performance since promotions were tied to more socio-political considerations than on-the-job effort. As a result, there was no reward for efficiency or quality of work and virtually no penalty for shoddy products or grudging service' (Shekshnia, 1996: 242).

Foreigners setting up joint ventures with Russian partners in the early stages of the reform process would find that local employees 'take level of social benefits and protection state-owned companies grant to their employees as something given, not a disputable safety net. When joint ventures do not provide them with free child care, or subsidized vacation or do not participate in housing construction, local employees refuse to understand and accept it even in exchange for higher pay' (Shekshnia, 1996: 243). So: 'while many major Russian enterprises are struggling for their very survival, the Russian government and private individuals resist the prospect of massive layoffs and unemployment, and fear their impact on political and social stability' (Puffer and McCarthy, 1996: 310).

The Implications of this Unique History for Western Investors

This chapter has surveyed some key features of the Soviet and post-Soviet system as it impacted on foreign investors entering Russia in the 1990s - the assumptions upon which the old system rested and that it embodied, and the behaviours it engendered both under communism and thereafter. Through attempting to specify every single economic action and need, the planned economy set itself an impossible task, and it was the enterprise manager who largely 'ducked and dived' to make it work: 'activating his party contacts, pressing for a modification to Gosplan output targets, playing off the local politicians, petitioning a minister, using all his native ingenuity to get supplies by hook and by crook, wheedling his network of "pushers", or browbeating his workers, then sorting their accommodation, and even marital problems. He is an accomplished networker, fostering close personal relationships with those who dispense favours and radiate influence. He has tenacity, low cunning, various skills at playing the system, a record of commitment to the party, and a very strong liver' (Holden et al, 1998: 84).

As mentioned previously, the need for informal networking led to the development of old boys' networks, which were much in evidence in the early stages of the reform process, but perhaps not quite in the way intended. As a result, these were the individuals that many western investors had their first contacts with, at least during the first decade following the Gorbachov reforms, because many existing business networks in transition economies grew out of former bureaucratic bargaining relationships (Raiser, 1999: 2).

Puffer observes, '[m]any enterprise managers have endeavored to retain the autocratic grip on power that they have enjoyed for decades' (1996: 20). So westerners, in their business efforts, found themselves dealing with managers exhibiting: 'all the characteristics one would like to avoid: they have little knowledge of the outside world; their purpose for coming into power is to gain wealth for themselves and their narrow constituency' (Aslund, 1993, cited in Holden et al, 1998: 115). Aslund goes on to describe how such post-Soviet managers 'insist that they possess extraordinary competence as business people', although these are in fact just the 'knowledge and connections' to get state subsidies and get rich. They are also convinced that the experience of other countries cannot apply to Russia with its '"unique" set of intractable problems' (ibid).

A related yet powerful mental stereotype for foreign investors to deal with was significant xenophobia. Puffer and McCarthy observe: 'Negative feelings about America have intensified during the 1990s, and the influence of American-type values has been blamed by many for the increasing levels of crime, social inequalities, and economic ills of the people. The Russian media's depiction of the unmitigated selfishness and ostentatious behavior of many nouveaux-riches businessmen as "Cowboy Capitalists" is a direct indictment of American capitalist values and casts them in an unethical light' (1996: 312). Other researchers echo similar findings, for example, Barnes et al quote one of their interviewees as saying: 'They [Russians] think that Americans come to Russia only to take advantage of "poor Russians" - to ride on their backs, to drive all their secrets out of them, and to squeeze them as lemons and throw them away... I have heard that phrase so many times, I can't count them!' (1997: 547). Such perceptions on the part of the Russians led to them feeling patronised, mindful of their former position as a superpower, and proud of what they had achieved. They simply could not understand it when westerners coming to Russia had to be lured by high salaries, luxurious living arrangements in expatriate 'compounds' and a hardship allowance.

Such resentment of foreigners was no doubt fuelled yet further by the fact that old communitarian assumptions characterised merchants, and notions of profits and individual betterment, as derogatory, linking such activities to exploitation. The 'wild east' which emerged in Russia during the 1990s would have done little to allay such views, and the foreigners would be an easy target of blame: 'Russians look around themselves and see an ever-soaring death rate, a sharp deterioration in their diet, a rise in contagious and sexually transmitted diseases, an increasing number of abortions, stillbirths and birth defects. Add to this the steady devaluation of pensions, the failure of the government to pay its employees for months on end, the layoffs, the bankruptcies, the organized crime. All these terrible things are more associated in the Russian mind with the consequences of introducing western-style capitalism into Russia than with the legacy of 70 years of communist rule' (Holden et al, 1998: 122).

All in all, then, westerners investing in Russia during the 1990s did not find themselves operating in a wholly hospitable environment. Yet despite that, academics researching the emerging Russian business environment were suggesting that they must forge ahead with investment on the basis of friendly relationships and personal trust. Apparently discounting the importance of institutional safeguards, functioning banks, an independent judiciary or even helpful customs officials, observers of business development in Russia during the 19909s would counsel: 'Cooperation based on a well-developed mutual trust is the only way for a partnership to survive' (Barnes et al, 1997: 548).

1 Significant among these are: Sheila Puffer's collection of writings, in cooperation with numerous authors, in Business and Management in Russia (1996); Max Boisot's collection of writings by various authors in East-West Business Collaboration (1994); a survey by the School of Slavonic and East European Studies investigating cultural differences in east-west joint ventures, published in People Management in 1995; Carl Fey's doctoral research on the management of international joint venture conflict in Russia, published in the latter part of the 1990s in various publications; and Holden et al's survey on 'Developing effective business relationships', published in their 1998 book Dealing with the New Russia.

2 Drawing on Kranz and Brady (1996), Levintan (1994) and McCarthy, Puffer and Simmonds (1993).

3 The list was derived by the researcher from Arino et al (1997); Barnes et al (1997); Channon and Dakin (1995); Holden et al (1998); Michailova (1997); Puffer (1996); Reineke (1995); Shekshnia (1996); Tullar (1995).

4 In 1997, Business Week reported: 'big global investors have poured $1.2 billion into Russian utilities since January 1 alone' (cited in Holden et al, 1998: 146).

5 Puffer describes how: '[villagers would discuss issues in an open forum in such a way that suggestions and criticisms were lost in the din and could not be pinned on any individual... it was the elders' task to sort through the comments, define the consensus of the group, and make recommendations to the chief elder... the village elders who were the leaders in traditional Russian society wielded unchallenged power and bore full responsibility for the welfare of the group. In addition they behaved paternalistically toward the members of the community' (1996: 19).

6 This could have its roots even further back in traditional Russian society pre-dating the Soviet era: '[In traditional Russian society] such individualistic traits as achievement striving, ambition and initiative were considered to be socially undesirable and destructive for group harmony. The norm was to blend into the group and avoid challenging the standard way of doing things.' This was reflected in a 'deeply rooted view that social justice consists of everyone subsisting at the same level' (Puffer, 1996: 21). Indeed, Puffer and McCarthy go on to observe: 'Under the communist regime, work was an entitlement as well as an obligation... There was an implicit contract that workers would be provided for in exchange for passive compliance with authorities who directed their work' (1996: 310).

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