A Dialog between Mr. Douglas Keene and Dr. Pyotr Joannevich

Dr. Pyotr Joannevich

Whenever institutes or governments pay American consultants to provide consulting services to third party Russian companies there arises a conflict of interest because the consultant is not working for the Russian company but for whomever is financing his work. Accordingly to meet his performance requirements, as dictated by the funding source he must act in the best interest of the party who is paying him rather than that of the Russian company, who is not his client , but rathe ris receiving a free service, paid for by a third party who is in fatc the consultants client. Generally such Russian organizations do not become self supporting since the practiceof providing fre consulting services institutionalizes 'free' services. While the Russian company neds advice from the consultant, a situaiton develops where the consultant starts to solicit suggestions from the Russian company. The consultant is trying to learn from The Russian company the answers to questions the person paying the consultant wants the answers to.

Mr. Keene

Even in private practice, if the consultant is working for a Western partner in a venture with a Russian company, the agenda is controlled by the Westerner, not the Russian entity. This is not necessarily bad, but it can cause the consultant to ignore what he knows is the best answer to an issue and pursue the bias of the client who is paying him. I have certainly been in this position myself several times, and it is a frustrating position, but to be realistic it was an economic necessity for me to pursue this track (though I try to negotiate my way out of these tight places).

A good consultant, however, and I consider myself in this league, finds a way to satisfy both parties with intelligent compromises, and spends as much time "selling" the correct solution to the Western contractor as he does to "sell" his solutions to the Russian management. This is the nature of business, not a moral issue. However, many consultants will take the easy route and simply do what he is told to do by the contractor. This is the norm with the contractor is either the government or his financing comes from a quasi-government body.

I might point out that when a consultant works for a Russian company (a rarity, indeed) then the same "bias" can arise and the consultant's good advice can be polluted or may not even be presented if the plant applies too much pressure to follow the Russian viewpoint or the consultant is weak and tries too hard to please the Director. A consultant should be hired to give advice and opinions, or to guide in the solution to specific problems. He should always be encouraged to state his true views, regardless of whether they are popular ideas or not, as he is a consultant, not the boss. It is the management's responsibility to listen to the information and then make up their own minds and make their own decisions after they have added this consultant's data to the information bank that the managers are using to make their decision. If a broad range of opinions is necessary then more than one consultant should be brought in and this will widen the range of data and MAY provide better background for a final decision.

The only exception to this consultant independence is when the consultant is actually a contractor ,paid to manage a program or accomplish a specific task (introduction of a new process, training, design, engineering, trouble-shooting, etc.). In this case the consultant is just another employee and should follow the leadership of the contractor's management, whoever is paying his salary..

Dr. Pyotr Joannevich

Frequently quantity becomes the milestone of performance rather than tangible results. The ultimate objective of finding investors becomes subservient to the "project" of pushing papers and recording milestones of "partiicpation". When a government contractor establishes crtieria for a hypothetical investor and then assigns a consultant to a Russian company the work done is often uselss to a potential invetsor. Since no investor was involved in determining the relevant criteria, the project when "finished" doesn't attract investment and can at best attract a potential investor who must then repeat the process to fit his criteria. The obvious solution would have been to give the consulting money to the potential investor to begin with to defray his due-diligence expenses. Government policy conflicts with this logical solution.

Mr Keene

Exactly correct observation

Dr. Pyotr Joannevich

Distributing financial intangibles in Russia is not a substitute for economic re-development of manufacturing. Exploration for minerals is not a subsitiute for resumption of utlization of existing tools of production. Neither can $1.5 million in golf club production support the "inhabitants "of a Russian company, let alone the region. Neither will industry, predicated upon absent raw, materials solve anything.

Mr. Keene

Absent OR unreliable sources of materials.

A Western investor or customer expects there to be multiple sources of 100% of all materials (a kind of insurance that there will always be a supply), and expects the deliveries to be on time, day after day, without large fluctuations in price. This expectation often forces the investor to spend as much time evaluating the "supply chain" vendors, including their financial health and stability, as it spends on evaluating the factory itself. This is the single greatest weakness in the Russian Industrial environment today. I might add that in Russia there really is no history or precedent for what we in the West would define as a healthy and effective procurement methodology. Virtually all purchasing agents in the U.S. are certified by the APICS organization which requires a minimum amount of training and experience, and holds these guys to extremely high standards of conduct. Russian plants, by and large, currently have only "allocation" departments, not true "purchasing" departments by Western standards. This falls back into the problem of the lack of a true competitive business environment in the marketplace, and particularly in the raw materials environment.

Dr. Pyotr Joannevich

The approach has to be to take existing people,and facilities and skills and materials and devise a means of putting them back into production. This is the normal entrepreneurial process. As I read the descriptions of the barriers to each potential development provide by various Russian companies, it is apparent that they are not the place to seek the answers. These are elements the investors and their representatives should supply. Unfortunately they are left out of the diagnosis process when governemnts employ consultants. I do not envision the future of Russian being built upon bullet proof vests unless that market becomes so large as to make Russian uninhabitable. > Neither is import a solution to idle domestic production capacity and human resources. Yet in the quest for "milestones" established by governments, the consultants they engage bring me these types of projects.

Mr Keene

Every successful country in the last 100 years, that has moved from a poor economy to a healthy economy (China, Korea, Japan, Singapore, Thailand, India, South America, etc.) ,has done it by first building an aggressive export program that virtually dominated the economy for several decades. This brought in much needed cash, put people to work, built the industrial infrastructure, and increased the overall value of the countries in the eyes of the rest of the world. Only after this level of economic competency was acquired did the countries mentioned then start focusing their efforts on self consumption with some decrease in emphasis on export. Russia has not learned this lesson yet, and that is why they have not made much industrial progress in the last 8 years. There is still a major resistance to export as an option in Russia, both by government and by the individual company directors and financial institutions, and until this is overcome, little progress will be made. The capital that is required is outside Russia and can only be made available efficiently through purchase orders for goods. Investment can provide some cash, but certainly not enough to make any significant overall difference. In single product industries like gas and oil, the investment of outsiders may be significant, but this is a unique situation and has no relationship to general industrial growth.

I read monthly probably 50 to 100 proposals requesting investment from Russian companies, but it is rare indeed for any of these companies to show any understanding or evidence of any commitments from customers to purchase their products. Without orders there is no business, and in the absence of orders investment is a waste of time and money. One of my clients spent more then a year going around the U.S. collecting purchase commitments from potential customers, and only with these commitments was he able to borrow enough money to start his process of finding plants in the FSU to build the products. By having guaranteed purchase orders he could feel that he was safely investing fin some capital equipment purchases for the Russian plant. His risk was almost zero. And that is what a Russian company must provide his Western customers or investors. An almost Zero Risk. To do otherwise is simply gambling, and please note that gamblers are some of the most unreliable, insincere, quick-to-run-away people on earth. Would a Rusisan company want this kind of person as a partner?

Just as I could never be as efficient as a Russian in finding Russian customers for American plants, a Russian would have similar difficulties selling in our marketplace unless he has considerable experience here. One of the advantages of offering plant facilities and low cost labor as a "job shop" for building western products for export is that the Western customer is probably not going to even approach the Russian plant until he has some purchase commitments in his pocket. Then the only "selling job" necessary for the Russian factory is to make sure that it has a clean and smooth operating plant, well trained workers, a very good supply chain, an agreeable management, and a demonstrated desire to give the buyer exactly what he wants with a minimum of modification. Believe me, this is much easier than direct selling in the U.S., and much less expensive. In many cases these kind of orders can be acquired without any need for new equipment, additional investment, or any plant expansion. In many cases the buyer can be convinced to provide a small "stipend" up-front to get production moving (initial raw material purchases, etc.), but with the purchase contract in his hand, a Russian director should be able to get some short term loans to do the same, including covering early wages until the first order is payed for. My client, after he gained the confidence and trust of the Rusisan plant (and after he had me in place to make sure that product was built properly) ,agreed to pay upon loading at the Russian port for shipment, which shortened the normal payment cycle by over 2 months.

So, this is why I continue to place emphasis on this type of business rather than the approaches that seem to dominate the scene these days., which are to get equity capital and worry later about a product line and market.

Doug Keene

Dr. Pyotr Joannevich

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