Vladimir Yakunin - The Treacherous Path - An Insider's Account of Modern Russia

Eventually we were able to use the knowledge of the Russian business environment we were acquiring as the basis for a consultancy project we established in the International Centre for Business Cooperation, the imitation of the World Trade Center we set up in St Petersburg. We rented office space to foreign companies, as well as providing advice on Russian rules and laws and the prevailing conditions, and effecting introductions to local businesses.

I can see now, with the benefit of two decades of hindsight, how flawed the whole trade centre project was. It bore no relation to the kind of endeavour someone who had been to a business school would have embarked on. Our ambition was to help attract Western companies (and the expertise they possessed) to St Petersburg, but we had only the vaguest sense of how to achieve this. We would learn that being aware of the existence of the World Trade Center in New York, and having a basic understanding of how it operated, did not translate into anything that resembled a strategy. We had no comprehensive business plan, we never set out long-term targets for how much we needed to earn if we were to carry on trading. We thought that it would simply be enough to open our doors, offer basic services such as cleaning, security and consulting, and then foreign businesses and money would flood in. I barely gave profit a thought, at least until the day our partners demanded a return on their investment and I realised I would have to run around like a madman if I was to repay them. Suddenly having 5,000-odd square metres of empty floorspace on our hands did not seem like a very good idea. After a good deal of work I was able to strike a deal with a pair of businessmen who I’d already had some exchanges with previously, Vladimir Potanin and Mikhail Prokhorov, who leased space in the trade centre for their fledgling Onexim Bank. This bought us the time we needed.

It would be difficult to overstate how provisional our arrangements were. Staff were generally recruited in a fairly unceremonious fashion, usually via a personal connection. You might remember someone whom you’d worked with before, or a friend would hear that you were looking for a new secretary and suggest someone they knew. We did not have proper contracts; instead we would create a letter of employment that simply confirmed the individual’s job title and salary. And our staff were all paid in cash; it would be a long time before anyone was set up with the capacity to pay their employees by BACS, or even by cheque.

Temp was organised on similar lines. We did not have any written agreements stipulating how much each of us was owed at a particular time, or how much of the business we owned. Instead, when we met we would have a discussion and then agree what sum we would each be paid. The International Centre for Business Cooperation was actually a joint venture between us and two Israeli citizens, but we did not draw up a formal agreement; the whole enterprise was essentially founded on a handshake.

We used similar informal channels to find customers and investors. The better connected you were, the better your chances of securing capital or business opportunities. Access to political contacts in particular was hugely important; indeed, it would be possible to argue that if you did not possess these then your enterprise was doomed before it had taken its first step. Precisely because the Soviet state had such far-reaching influence in every corner of life, those people who had previously worked within it possessed an enormous range of connections and influence. You could use former state officials to help you with practical issues such as banking and registration, but where they excelled was their ability to pick up the phone and make contact with others who might be useful, whether as clients, investors, customers, partners or suppliers.

What was also significant in this context was that, in a country in which the rule of law had collapsed, where neither business nor individuals were protected by the kinds of safeguards we now take for granted, these former officials could act as guarantors of your integrity. It is difficult to understand the extent to which trust underpins any business transaction unless you have seen what it is like to try and work in an environment where there were no tribunals to settle disputes, no means of redress if you had been cheated. There were criminals everywhere. As soon as they could smell money on somebody they would descend on them, demanding ‘protection’ money, making them offers they could not refuse. If, on the other hand, you had been vouched for by a man who until recently had been a senior party boss or an officer in either law enforcement or the special services, then it meant that potential investors knew you were somebody they could do business with. You could call it an alternative economy of trust.

We certainly benefited greatly from our connections both in the secret services and the scientific community. As much as anything else, a huge number of transactions originated from word-of-mouth recommendations. For instance, one day in 1991 I received a call from a friend of mine, who knew I’d been part of a scientific research institute. He told me that there was a director of a state-owned military factory who needed to dispose of a highly valuable quantity – 900 kilos, a substantial amount – of germanium, a semiconductor material, but that he was worried it could potentially fall into the hands of the bandits who circled those enterprises like vultures. Many were far less scrupulous than this guy; where he tried to dispose of his surplus in a responsible way, others would have simply sold the materials to the first crook who knocked on their door, and pocketed the profit.

I’d never been involved in something like this before, but then that was true of pretty much any business transaction one entered into at the time, so I agreed to meet the director. He said to me, ‘Listen, I don’t really care what price you end up paying for this material, but you were recommended to me as an experienced and decent person, so I feel I can rely completely on you.’

Because of the conference I had attended in Malaga all those years previously, and my work at the Ioffe Institute, I already understood something of the qualities germanium possessed. And though there was not an established market for it, after speaking to a few friends from the scientific community I came to understand that we would be able to sell it for a substantial price. We then discovered that because it was a substance used in laser technology, it needed to be given a ‘passport’ by a special laboratory, otherwise it would be worthless. Again we called upon scientist friends, who helped us find a laboratory in Moscow who could provide the necessary certification.

Next, I found a buyer who offered a price far in excess of what I had anticipated, though I knew that I was far from being home and dry. There is a famous Russian anecdote about two guys who meet in the road. ‘Hey,’ says the first man, ‘I want to buy a wagon of sugar. Do you know anyone who might be willing to sell me one?’ ‘That’s strange,’ says the other guy, ‘I just happen to have a wagon of sugar I need to shift.’ Flushed by this happy coincidence, they waste no time in reaching a deal. As soon as they shake hands, the second man sprints off to find a wagon of sugar and the first guy runs in the opposite direction to try and rustle up the cash to buy it.

I was in almost precisely the same situation. Luckily, I was able to persuade the vendor to sign a contract committing to deliver the germanium two days before I paid him. I then arranged a deal with the buyer agreeing that he would pay me two days in advance of the goods. This bought me four days in which the staff in the laboratory worked like hell, day and night, to issue all the necessary documentation.