Chapter 15
Addendum – Russia in 2003

In many ways, the Russia of the 1990s and its movement through reform represented a typical movement from, in the early 1990s, a romantic love idealisation (Boon and Holmes, 1991, cited in Lewicki and Bunker, 1996: 118) of what reform could achieve for both Russians and westerners, through to anger in the middle and latter part of the 1990s as economic actors and society evaluated and came head-to-head with the harsh realities of dealing with the demands of Russia's new age. In the romantic love model of trust, this is the evaluative stage parties to the relationship are taking a good hard look at each other and deciding whether the relationship will survive and move on to a deeper plain. If this deeper level is reached, then the final stage ensues - parties at such a stage in a relationship, having evaluated their options, choose not to end it, but to accept their differences and take up a more accommodative level (ibid). In a business sense, partners have learnt and accepted each other's differences, and are in it for the long haul.

In 1997, when this data-gathering was complete, the evaluative stage had been reached in most of the business relationships recorded here, and was ongoing people on both sides were still looking carefully at each other and sizing up their options, but generally they were getting on with the job and accepting each other's foibles as they developed their business relationships. The buzz from the western investors was pretty positive as they did their best to look forward to a long-term commitment in this feisty market. And then came the economic crash of 1998.

Could it really be that those western investors whose views are documented here were to go through yet another era of economic chaos in the emerging post-Soviet business environment? From both the Russian and the western perspective, they had seen it all before - as interviewees for this research have made so very clear. Despite their well-intentioned words of being committed to the Russian market, would they be prepared to go through it all again, or would this be one storm too many for Russia's beleaguered investment community to weather?

The 1998 Crash and its Consequences

To fill in the gaps - in early 1998, one year after this research was completed, economic collapse loomed as a real possibility, and an international package of emergency financing and economic reforms was put in place. This was nowhere near sufficient, and in August 1998, Russia was forced to devalue the rouble. All official domestic currency debt obligations falling due to the end of 1999 were restructured, and a ninety-day moratorium was imposed on the repayment of private external debt, to help the country's ailing commercial banks. The rouble went into freefall, output declined, banks failed and inflation for the year as a whole reached 84%, compared with a target of 8%. Fears of economic disaster were further stoked by Sergei Kirienko's reformist government being dismissed following the devaluation, which led to concerns over policy reversals and resurrected the old spectre of hyperinflation (Kharas et al, 2001). That year, when large quantities of emerging-markets hedge funds were wiped out in the financial crash, foreigners' mistrust of Russia could be said to have peaked (Chazan, 2002).

It was to be another four years until the economic downturn was to show sustainable signs of recovery. By the end of 2002, financial indicators showed that Russia had experienced robust economic growth for some three years in a row. However, during that period, foreign direct investment went into decline, and out of 80 countries ranked by the World Economic Forum for international competitiveness, Russia was ranked only 64th on its growth competitiveness, and 58th in relation to its microeconomic competitiveness (Global Competitiveness Report 2002-2003). Vladimir Putin was in a difficult spot - his accession to power set growth goals for the economy of 8% a year for 15 years just to catch up with Portugal - the country's dire straits were to be eradicated by a rise in economic growth and bringing western capital on board. But western investors, once again deeply distrustful of the Russian market, were not about to pile in at the first signs of recovery: 'renewed interest in Russia has yet to translate into big inflows of foreign direct investment. FDI stood at a minuscule $1.9 billion in the first half of this year - down 25% from the year-earlier period. In contrast, China reeled in nearly $47 billion in foreign direct investment in 2001' (Chazan, 2002).

By 2003, however, there were clear signs that Russia could be described as a story of economic turnaround, 'staging a remarkable recovery. Foreign investment is starting to pour in and last Thursday a consortium led by Shell announced the biggest single foreign investment in Russia, unveiling a £6 billion project on the island of Sakhalin' (Kemeny, 2003). Indeed, foreign investment was recorded as growing by around 65% in the first quarter of 2003 (Doyle, 2003). In the first half of 2003, Russia had a net capital inflow, according to official figures - its first ever, and a sharp turnaround compared with previous years.

Russia After the Crisis

What lay behind this improvement in Russia's fortunes? The factors are of course complex. Oil prices in particular had a major role to play, along with the fact that the post-crisis real depreciation of the rouble created a harsh domestic environment which, nonetheless, translated into a boost to growth through the improvement this fostered in Russia's international competitiveness. These twin factors of a strong rouble and buoyant world energy prices were key to the Russian financial markets being among the best performing in the world for a second consecutive year in 2002, with rating agencies subsequently performing a series of upgrades.

But there were other factors at work too. During 2002, when western investors were eyeing the Russian market only tentatively again, it was the tenacity of the reformers, and the reform process, as well as the influence of young up-and-coming business people, which were being credited with playing a major role in the stabilisation of the Russian market. As Anne Krueger of the International Monetary Fund described it, talking in 2002: 'fundamentally, reform is working because it is owned and driven by Russians themselves'. That crucial ingredient Russian ownership of the creation of the market system, which seems to have been such a struggle during the reform process - was showing signs of finally working for, rather than against, the creation of a market economy.

The 'New Blood'

Krueger, in talking up the Russian contribution, is not referring to the Russians of old - those feathering their own nests, protecting their own interests and promoting corruption. She is referring to the 'new breed' of Russian entrepreneurs who recognise that for the market reform process to succeed, certain fundamental mechanisms need to be in place - although it will still be the market system with a Russian twist. And that is not to say that the 'old' Russian problems do not still persist. In 2002, foreigners were still being put off entering or staying in the Russian market by high levels of corruption, government bureaucratic controls and a profound distrust of outsiders. As Oleg Yugin, deputy chairman of Russia's Central Bank put it: 'You have to fight for investment, and Russians didn't understand that for a long time... The government always told foreigners, "Here are the conditions: If you don't want to work here, then don't"' (Chazan, 2002). Vested interests, in particular, continued to be a major brake on the reform process, but in the ongoing efforts towards stabilisation and reform this was recognised as a key area for improvement: 'Every opportunity to loosen their grip through greater transparency, institutional reform, market liberalization, and the removal of unjustified privileges should be taken when it can' (Krueger, 2002).

However, to permit this new generation of Russian business people to be the harbingers of change, some elements of the past had to be overlooked in the hope of a brighter future. This state of affairs continued to cause ructions in 2003 when the government's escalating battle with the former oligarchs, and their apparent heirs and beneficiaries was seen to be undermining the generally positive assessment of what the new entrepreneurial classes could do for Russia. Any reinvestigation that could lead to the undoubtedly questionable privatisations of the 1990s being declared void could seriously undermine the new-found confidence in property rights, the independence of the judiciary and institutional reform. This could create an uncertain business environment for the future.

In their favour, the new breed of entrepreneurs, putting aside for now questions of how they reached their positions, were seen as hard-headed, but realistic about what needed to be done, and to have 'plugged the leaks and cleaned the companies up to international standards. They run their companies efficiently, stop the most egregious asset-stripping and pay their taxes' (Johnson, 2003). The dilemma reaching its peak in 2003 was that of whether to let people go unpunished, or to attempt to retroactively impose the law. The consensus was in favour of drawing a line in the sand and, through this process, hopefully maintain investor confidence: 'Russian President Vladimir Putin lets bygones be bygones and does not pry into how post-Soviet assets were so ruthlessly corralled into so few hands. And by reestablishing the rule of law, Putin has made Russia a safer place to do business... In doing so, this process has finally begun to deliver some of the promise of an economy so long snowed under by mismanagement, corruption and unenforceable laws. And that has finally made large sections of the Russian economy attractive enough for foreign investment' (Johnson, 2003).

The Old Guard Refuses to Give Up Without a Fight

Despite the many crucial changes - such as tax refor1, and the introduction of a Western-style judicial system better able to protect property rights, so long a bugbear of western investors - and following 15 years of developing the market system in the country, the frankly sluggish pace of reform continued in many key areas (Chazan, 2002). The IMF noted in May 2003 that the electoral calendar and 'strengthening opposition from vested interest' had slowed the reform process. Notable along the laggards was the much-diluted reform of the electricity sector, and efforts to make progress in other areas of natural monopoly reform, deposit insurance, and the strengthening of public administration and the civil service. Further, corruption continued to represent a major obstacle to private sector investment and activity (IMF website, 2003). It seemed too that the major initiative to reduce government interference in business was encountering strong and entrenched resistance from the very bureaucracy it was aimed at eradicating (Chazan, 2002). Concerns were also being aired that even if energy prices were to remain high, structural reform efforts would need to gain greater impetus and would be vital to some form of sustained, broad-based economic growth that was less dependent on the energy sector (IMF website, 2003). Optimism was present, but guarded - uncertainty about the future still could not be assured.

Foreign Investment in 2003

In many ways, the above accounts of Russia following the 1998 crash read very similarly to accounts being written a decade earlier of the promise and problems of entering the post-Soviet market after the fall of communism. Fifteen years after the Gorbachov reforms that kicked off the whole market process, commentators were reminding us that 'under Mr Putin's predecessor, Boris Yeltsin, the country was renowned for its lawlessness, political chaos and thuggish business practices' (Chazan, 2002). Replace 'under Mr Putin's predecessor, Boris Yeltsin', with 'under Gorbachov's predecessor,...'2 and the sentence could remain unchanged in all other respects. Yes, Russia has made enormous strides down the road to market reform, and the underlying infrastructures, assumptions and behaviours are all gradually shifting into place. But only gradually. Deep in Moscow, and deep in the regions, the barriers of old remain to a greater or lesser extent; Russia, as always, insists on taking its own path.

Those with good solid relationships in Russia prior to the crash would have found themselves more strongly placed than others to stay - if they wanted to. And for those that stuck it out through the 1998 crisis and beyond, the relationship would end up being all the stronger for it. Many investors in Russia, though, would have left as a result of the growing economic hardships - business, after all, is business, and that money has to come in from somewhere. An estimated $20 billion a year capital flight was haemorrhaging out of Russia up until 2000. Such figures show how many foreign investors chose not to weather this latest Russian storm, and withdrew. The Moose joint venture documented in this research is one such example. In early 2000, Mammoth, the UK partner, sold its 50% shareholding.

In 2003, most of Russia's new FDI was taking the form of paper investment rather than a true bricks and mortar commitment to the market. However, multinationals, much as they did a decade earlier, were reported to be sending in big fact-finding missions again - whether this would translate into major inflows of FDI, and how long the process would take, was entirely another matter. However, the good news this time around was that Russia was not starting from ground zero, and so, neither were the resultant east-west business relationships so vital to business success. The good news was that there were many Russians who knew what needed to be done and how to get it if they wanted to hold onto their altogether modern vested interest of the upholding the market system.

For foreign investors entering the country post-1998, there was a well-schooled pool of potential staff and partners experienced in working for western organisations and within western-style systems with whom communication and relationship building was much easier than had been the case for the early pioneers. There was at least recognition of the need for fundamental elements in the institutional environment external to the enterprise, and in a good many cases these existed, and were enforced through the rule of law. As a result, in business relationships, some common ground, some common language, some common expectations, some common behaviours and some common assumptions were finally present. These had the potential to form the bases for trust, and long-term business relationships into the future.

Russia and Trust at the Macro Level

This research has concerned itself with the establishment of trust in cross-cultural joint ventures. The 'laboratory' for the research was the emerging Russian business environment of the 1990s. This chapter has shown how, following this author's data gathering, Russia experienced a spectacular economic crash, leading to many foreigners exiting the market, including some of the respondents recorded here. Further, in the notably positive Russian business environment of 2003, many causes for concern still seemed to be ongoing in a variety of areas, and in many aspects appeared little changed from a decade earlier. This has implications for the development of trust.

If we refer back to the definition of trust used in this research, trust is viewed as a matter of expectations in which past, present and future interact, and in which exogenous factors at the macro and meso levels, far from being 'assumed away', are viewed as a key element. If this is the case, then trust in the 2003 Russian business environment would be fragile. Regarding the exogenous factors that this research has shown to be so crucial in their impact on cross-cultural business relationships, although institutional reform at the macro level was being properly recognised as a central tenet of building a successful market system in Russia, vested interests and uncertainty around key players at the meso level meant that the shadow of the past continued to be cast in this area - particularly in relation to the dubious practices of the privatisation process in the early 1990s, and the resultant entrepreneurs it spawned. Bureaucracy and the bureaucrats continued to fight every inch of the way against any attempts to reduce their sphere of influence. The rule of law, though much vaunted and far more reliable than at any point in the previous decade, still seemed to be up for grabs on a number of fronts.

Focusing now on the dynamic nature of trust that is recognised in the definition of trust used here, it is clear that past, future and present all interact to create expectations - what expectations are likely to arise out of the Russian experience after 15 years of market reform?

The past teaches us to be cautious: it tells us that Russia is a high-risk place to do business and we may lose our investment; it warns us that this is a very different economic environment in which our rights may not be protected; it suggests our partners will not be the same as us, although 15 years into the reform process, there is a good chance they will be much closer to us in beliefs and attitudes than would have been the case a decade ago. The present fills us with high hopes, but cautions us to be wary. How did the 'new breed' of entrepreneurs get to where they are? If their means were morally suspect, are they to be trusted? Will they stay in place, or are they not part of the future? With vested interests, corruption and bureaucracy, to name but a few, still evident and powerful, how much can the law be relied upon, how much has really changed? And what does all of this add up to regarding our expectations for the future? Surely uncertainty remains the key word here.

The key interchange that this research has focused on is the interpersonal relationships between Russian and western partners in strategic alliances, and how they have promoted, or inhibited the development of inter-partner trust. Six factors are identified which are likely to create or destroy such trust. How are these likely to operate 15 years into the reform process? The good news is that key elements which in the 1990s were putting a definite downer on the development of inter-partner trust could be said to be definitely on the up in 2003.

Interpersonal Trust

In 2003, functional competence in Russian partners was ever-growing in the western sense - there was a large pool of potential staff schooled in western techniques and market behaviours with experience and knowledge to bring to investors seeking out opportunities. The new entrepreneurs, whatever their past infelicities and future outlooks, had set new standards for business that would have been unthinkable even five years previously. Expectations for appropriate 'market' type behaviours had therefore been raised - at the interpersonal level within the enterprise, as well as the institutional level external to it. Russian and western staff should be capable of speaking similar languages of business and bringing to the relationship more compatible expectations. Outside of the enterprise, certain institutional mechanisms had been created and strengthened, particularly since the crisis of 1998. These factors are bound to pay dividends and make building business relationships that much easier.

Local competence no doubt remained a tricky issue. The past preference for network-based business relationship using old ties and informal activities was a yoke that would not be thrown off easily - as evidenced by the slow pace of reform. But those business partners who were twentysomethings when reform began, and who in 2003 were either experienced executives at a variety of levels, or in positions of power themselves, would potentially have more of an arm's-length relationship with such practices than their predecessors - or at least would recognise western partners' aversion to such business behaviour. However, this would remain something of a matter of degree - in comparison to western notions of arm's-length business practices, even the 'youngsters' may leave something to be desired, and there would be many areas of economic life and geographical location where such ideas had yet to trickle down.

On a positive note, those westerners and their representative organisations who had been in Russia for a number of years would in many respects have paved the way for others coming in behind them, so the entry points of local competence could become more accessible. One subtle point here is that with the rapid development of essential services across Russia, it had become less necessary to have a local fixer just to get the lights switched on or a phone line installed, so there may well have been less reliance in some respects on such micro-levels of local assistance. However, at governmental and bureaucratic level, the slow reform process taught that there were many inroads still to be made if transparent, level-playing-field type processes - rather than opaque lobbying, grudging attitudes, anti-westernism, and a continuing protectionist attitude - were to be any kind of achievable goal.

Where does this leave interpersonal competence? Reports from Russia between 1998 and 2003 did little to allay fears that Russia was still a very different, unwestern place to do business. Economic collapse of itself imposed great poverty and difficulty on large swathes of the population. Western investors going there would be seen as a breed apart from everyone else, and perhaps even blamed for the collapse. Western investors during this time would almost certainly have continued to live as a breed apart, spending their time with their 'own' people, in western-style apartments and bars, and speaking their own language. This is probably true, though, of cross-cultural ventures anywhere in the world.

But by 2003, there was a very fundamental difference in place. Business partners were able to at least speak a similar business language - not necessarily the same one - but the Russians, schooled and experienced in market-based techniques, assumptions and attitudes in business life, were capable of facilitating the achievement of a common understanding amongst business partners. Clearly it seemed to have been the Russians who made the running in this regard in their moves towards developing a market system. Yet westerners would still be sorely tested in their interpersonal skills - for example, local competence issues, expectations about proper business behaviour and so on would still remain to a good extent - but perhaps they would not be quite SO sorely tested as previously. The market with a Russian twist it may be - but at least there was a market to speak of.

Monitoring was the big bugbear in the Moose joint venture. In some ways, Russia's modern business environment will permit some changes to this, in others things will remain the same as before. Monitoring is more likely when partners are unknown to each other, and obviously 'different'; it is also more likely when reasonable to high levels of risk are perceived. Well, on the latter point of risk, Russia continues to prove itself to be a very risky place to do business. Inevitably, western businesses entering the market will wish to protect their investment as much as possible through comprehensive contracting, careful procedures, institutional safeguards, and a strong on-site presence. Luckily for them, the institutional environment has become less knotty than was the case 10 years previously, and therefore, hopefully, more trustworthy. The better news is that with functional competence much increased among Russia partners and staff, and with an apparently more reliable institutional environment in place, then handover to local personnel should be achievable in shorter timeframes than previously.

All of the foregoing are good news for the two final trust determinants of outgroup and motives - both of which depend, in one way or another, on social similarities that permit more rather than less positive assessments to be made of each party. By 2003, Russian and western partners had come closer together in outlook and expectations in business life - the potential was there, at least, to see each other less as an outgroup of each other, because in certain respects social similarities were increased. This would permit greater understanding, and more importantly, less misunderstanding. When the symbols and language have similar meanings for both parties, each other's motives should be easier to understand and judge in the absence of such a large-scale knowledge vacuum as existed previously. This is not to idealise the situation. Each side will always be different but the space between them should at least have reduced somewhat.


This research, in proposing an improved business model for trust relationships in Russian-western strategic alliances, has put interpersonal competence and monitoring at either ends of a continuum, with success more assured at the interpersonal rather than the monitoring end - outgroup perceptions are reduced and motives more positively ascribed when the interpersonal is stressed over the formal.

Russian partners do not do business in a cultural vacuum and 15 years of reform cannot possibly have wiped out the vestiges of the country's communist past - it is as much part of the business history and paradigms of the country as our grandparents and parents are part of our own individual histories and worldviews. The sluggishness of the reform process is ample testament to this fact. Many Russian partners still want to be part of closed networks of contacts and acquaintances, they still want to protect the interests of those closest to them above all others and they still want to hold onto what power sources they have available to them.

In this context, the Russian deputy of the Moose joint venture was perhaps the personification of Russia's 'new man' in the business environment - proud of his country, and proud of what he and those like him could achieve. Westerners, in his mind, had little to offer, despite their 'victorious capitalist' assertions and behaviours. He laughingly described the westerners whom he believed saw him as an 'ardent' socialist, but he probably misunderstood their concerns. More likely they saw him as thoroughly ingrained within his local business networks - in which many of the assumptions of the Soviet era were perpetuated and in which certain 'old Soviet' ways undoubtedly prevailed, however much he may have refuted it. Socialism, in common with any political system, was far more than just that: its vestiges created a cultural and psychological mindset that could not be expected to just go away, whatever the architects of the market system - whether western or Russian - thought. It is in this vein that Vlachoutsicos's comments made in 1996 continue to have resonance and relevance: '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).

It is this which is at the base of the mistrust felt by western partners of their Russian ones, and vice versa. Fundamentally, the two sides simply do not share the same worldview on the role of ongoing networks of relationships and trust in business life. Westerners still work from the rational, economic model - objectivity rules, arm's-length business is perfectly sufficient, and the prisoner's dilemma is an apt metaphor. Russians come at it from a different direction - collectivism, paternalism, networking - all continue to have their place in the 'reformed' market system.

Local competence, as described in the research, appears to best capture this dichotomy between all that seems (more or less) wrong to the westerners, and all that seems (more or less) right to the Russians. It is the breaches of expectations regarding how local competence works that seem to sow the seeds for the breakdowns in trust so evident in this research. And from these small seeds of local practices - so imperfectly understood in both their causes and consequences by both sides - grow those tall weeds of mistrust which, as the Moose joint venture has shown, can overwhelm the business relationship.

The good news, however, is that westerners, eyeing up a seemingly more robust institutional environment and perceiving business partners who at least appear to speak some degree of the same business language, may be more disposed to embark on the more knowledge-based areas of business life when setting up their relationships in Russia. Western partners will still want to be sure that their ethics policies are not being breached, that their integrity is not being compromised, and that their procedures are in safe hands - amongst other things. As a result, their standard formal guarantors will remain in place as they do in all business dealings. There is no reason to believe they will change to any great extent in this regard.

Will the Russians change their position? They already have in some degree. And some have changed a lot. This time around the Russians know more about why these policies and procedures are there, they witness around them and maybe are even an active part of an institutional environment that is taking these matters more seriously: they will be able to choose to respect this and understand it, if they wish to. And many will want to. But there will always be those who still want the Russian twist on running a business - that is their legacy. It can only be hoped, then, that the westerners can now become more confident in the attitudes being expressed at the formal level, and can find more common ground with partners at the business level, and can perhaps then be more disposed to developing relationships at the informal level. Perhaps. But nothing short of structural transformation will make this truly work. While the nature and existence of Russia's networks, and their opacity to outsiders, may not derail the reform process, they certainly have the potential to give Russia's brave new business world a special look and feel all of its own in the world economy. This Russian twist will remain the crux of the problem for many years to come, and will continue to have the power to undermine the east-west relationships that are so closely linked to the reform process. And even when it stops being a 'problem', it will always remain a 'difference'.

Traditional definitions of trust have 'assumed away' the issue of the external environment. The laboratory of the emerging Russian market system is proof, if it were needed, that in cross-cultural business at least, the institutional context in which business takes place is an absolutely key variable. In particular, this research has shown very clearly that in the absence of a functioning institutional environment, the development of interpersonal trust becomes precariously balanced on the quicksand of often opposing values and beliefs. It is only through the strength of personal relationships between partners that these shifting sands can be shored up. In international strategic alliances, where each side has significant amounts invested, and where differing institutional environments are the norm rather than the exception, it does indeed become more, rather than less important, to bank on trust.

What this research has also shown, is that culture, too, should never be assumed away, and so this writer is prepared to accept the market with a 'Russian twist'. And in Russia, if the institutional environment continues to develop in the way that so many hope it will, if Russians show a desire to respect it at the same time as making friends with - rather than enemies of - their western business partners, then perhaps it can function as a springboard for relationship development and future confidence, rather than being, as it was in the past, a source of relationship destruction, business uncertainty and the consequent distrust that cut right across business life in all its aspects.

1 However, see, for example, Fort, R (2001), 'Russia drags its feet over profits tax', International Tax Review, 12 (1), 34-38.

2 Chernenko/Andropov/Brezhnev... take your pick - here they are put forward as representatives of the old Soviet era.

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