After leaving Sberbank, Russia’s largest bank to which he had previously sold Troika Dialog, Ruben Vardanyan founded Vardanyan, Broitman and Partners – a boutique investment company, PHILIN (Philanthropy Infrastructure) – a project that builds infrastructure for charity organizations, and Phoenix Advisors. The latter addresses wealth curation and succession planning – an issue that troubles Vardanyan, a former investment banker who has two decades of experience in the field. Many Russian businesspeople of the first generation are now aged between 50 and 70, and in 20 years they will face the problem of transferring their wealth. This will be a first in Russia’s recent history.
Fitting the interview into Vardanyan’s busy schedule proved to be tricky; it took us a month to finalize the date. He explains that, while he is involved in 62 projects, he only has five staffers to manage his affairs. The world keeps changing at an ever-increasing pace, and Vardanyan tries to facilitate the changes while staying two steps ahead. He believes that in the future, money and resources will give way to people and connections as the most sought-after assets, making networks more valuable than institutions or even states.
While the fear of drastic changes drives many to seek refuge in nostalgia for the good old times, Vardanyan looks to the future to find solutions.
- You’re involved in many projects: SKOLKOVO [business school], help with handing over of businesses, charity work, etc. In your own words – what do you do now?
- I’m having a déjà vu right now. In 1991, when I would call myself an investment banker, people would ask me, “Are you a commercial banker? Will you give me a loan?” I would say that I didn’t give out loans. To that, they would reply, “You’re not a banker then. So who are you? How about you invest in me?” And I’d say, “No, that’s not what I do either. I am a professional intermediary whose job it is to help close a deal.” I remember how difficult it was to explain what an investment banker is and what I used to do.
These days the words I say are once again met with confusion: I am a social entrepreneur and a venture philanthropist. Most people don’t understand how one can be a venture capitalist and philanthropist at the same time.
- That’s perfectly sensible.
- Starting from the idea that the world is becoming more and more interrelated, what I am trying to say is that we are moving away from the model of “here I make money, and here I give to charity” to a society where both things are mixed together. It is quite challenging to build up this new mentality. The term “impact investment” was coined in 2007, so it has been around for just ten years in the West and even less than that in Russia. There is lots of conjecture about the topic and many different takes on what the term actually means itself. However, I currently work on 62 projects that, one way or another, have something to do with impact investment.
“We’re moving toward a completely different world”
- Did I get that right – 62?
- Yes, to various extents, I am currently engaged in 62 projects. Of course, people ask me how this is possible. We are used to a hierarchy with a clear structure: there is the holding company head, the chairman of the corporation, and in that corporation, there are bosses, subordinates, etc. But the modern world is moving towards networking. Here I may be the boss, there – a subordinate; in one situation I’m a minority shareholder, in another, I don’t own any stock at all. All our projects are interconnected by the same themes and values and therefore create one shared network where they fit together perfectly. My role in all this comes from my intellectual and financial contribution, intangible support and my ability to connect a lot of very different people.
If we’re talking about projects individually, some of them will be more interesting to your readers than others, but overall, they form an ecosystem that addresses three key challenges simultaneously: global education, various forms of migration and a sustainable development program that has to be implemented in 148 developing countries.
We’re used to having tunnel vision, to a life with an industrial model of division of labor, niche expertise that is good for assembly line type of work: you are a journalist, I’m a banker, he’s a politician or government bureaucrat. This model is typical of industrial capitalism. What does it mean? One has to amass capital, build a huge factory for assembling tanks or aircraft, found a big bank, etc. This model has been in place for 200 years. It needed a powerful state, access to natural resources and a concentration of capital to guarantee a competitive advantage. But today the world is moving toward an alternative model that will be based not on wealth, but on talented people. The future belongs to well-rounded people who operate at the intersection of different fields of expertise. It won’t happen today, of course; it will be the trend in the next 20-50 years.
- So what went wrong?
- We’re in a perfect storm: an enormous number of changes are happening simultaneously, the total effect of which is growing manifold. People don’t trust institutions anymore, but they do trust networks. Social networks and cryptocurrency serve as an example of how networks are gaining more importance than institutions. There have been historical examples of how people have cooperated in networks to get things done. Take the Hanseatic League, for instance: German merchants carried on trade from Scandinavia to Portugal and Russia and couldn’t care less who ruled the Hanseatic member cities. The merchants signed their papers that could then be converted into large volumes of goods. This network existed for a few of centuries – without any email or other way to send instant messages. Today’s technological capabilities can speed up business operations, but at the core of it, nothing has changed. It has existed before and will exist in the future.
It turns out that money has lost some of its importance. I met a guy not so long ago, he’s 22 and has already made a few million dollars by playing virtual football. About 30 million people watch him do it. Can you explain that? Or the acquisition of WhatsApp for $23 billion – the company doesn’t even have a business model. When I was studying at Harvard recently, we examined this case: there was no revenue not only at the time when the deal was closed but afterward as well. We sat and discussed how a company like this could possibly warrant such a valuation.
We must accept that a bright person is more important than money. People have paid $250 million for the one-of-a-kind footballer Neymar, and they are willing to pay $500 million. This is not simply a mark of how the footballer’s value has skyrocketed; it is a sign of how money has depreciated. I think if Elon Musk decided to move to another country, someone would gladly pay one billion dollars for that. Perhaps Saudi Arabia would be willing to pay that much for him to move there.
Some argue that in the future only technical specialists will be in demand. I disagree entirely: well-read people with a profound humanitarian and technical education will be sought after.
We are moving away from organized processes and procedures toward systemic chaos that functions on agile methodologies. A need for new skills and professions will arise – interpreters and communicators that are able to explain a vision and translate it from one context to another. The creative part of decision-making will gain the upper hand, and creativity is born at the intersection of various fields and trends. So, for instance, a businessperson, biologist and an athlete should join efforts and come up with something brand new at the junction of their specializations. It is very complicated, and humans are not used to living like this.
After the fall of the USSR, the bipolar world transformed into a unipolar one at first, and now it has become multipolar. We are used to a standoff between two empires or the dominance of one of them. There have always been several clearly defined centers, with everyone else being mere satellites.
Developing technologies, social changes, multipolar world – all this leads to heightened uncertainty. We fear what the future may bring and cling onto the past because, however tough it may have been, we survived it. We have embarked on a course of simplification and protectionism, hence the rise of nationalist, populist and isolationist sentiments. Society has been getting more polarized, meaning not only materialistic issues or prosperity but also mentality. About 90 percent of Vedomosti readers travel the world, whereas the overwhelming majority of Russian citizens not only do not go abroad, they don’t even have any travel documents. They think differently, they see the world from a different perspective.
- So what’s the solution?
- To examine these trends and weigh in on the options. I can identify three. The first would be isolation. To build an abode or a castle of one’s own, create a closed world: here’s my family, my job, I write articles and, so to speak, minimize my involvement in what’s happening in the world. The second – to go with the flow, witnessing and accepting global changes, realizing that it is impossible to change anything. And the third option would be to try and change something. That’s what I choose – I’m trying to affect the current developments.
For instance, I’m curating educational projects. We’re currently considering a course at the Dilijan school that would teach kids about privacy. It turns out that the Facebook and Instagram generation has no idea what privacy is. They must be informed that they have a private space, a right to personal privacy. Or, for example, cyberbullying. If some troublemaker assaults you on the street, you know you can call the police or fight back. But what does one do when the assault is happening online? Where do you get this knowledge?
In the past, our families, society, religion provided a backstop for us. They developed and monitored the accepted standards of conduct and ensured that these rules were passed down through generations. We were taught to act in a certain way or risk becoming an outcast. Over time, the state assumed these duties. With the advent of nation-states, people started to identify themselves by nationality. Ideology gradually took the place of religion, and therefore the self-identification by party affiliation emerged. Then – by being part of a specific corporation. For instance, I work for Vedomosti and feel that I belong to a particular corporate culture, share a particular worldview.
And then all of a sudden the lines became blurred. We have found ourselves in an ideological vacuum: family, church, corporations – none of these serve as moral beacons and regulators for us anymore. The confidence in the state and other key institutions has been undermined; they exist in a perpetual crisis and cannot protect us. Humanity faces global challenges alone. The only hope is to unite with those you can trust, with whom you can communicate on a regular basis and coordinate your actions. It could be a small network of people from various fields, but those who are like you. The system does not have one center; there are only interconnected nodes.
Our projects are based on network cooperation. People ask me how many staffers I have…
- I wanted to ask that too.
- I say, well, I guess about five – my driver, assistants. But how many people work on the projects? About 2,500. How does one assess who is subordinate to whom? We are used to a clear system: you’re either the lion, a predator, or the giraffe, a herbivore.
In today’s world, this distinction does not exist anymore. Family, business, a legacy in a broad sense of the word – everything is connected. And one way or the other, it is all connected with the three key trends I’ve already talked about: global education, global migration, and sustainable development. In a nutshell, that’s exactly what I’m working on in Russia, Armenia and around the world.
Anchor projects unite
- Let’s move to specific issues. You talk a lot about migration – what kind of projects do you have in that area?
- Let’s start by saying that we live in a time of great migrations and demographic upheaval. Periods like this have taken place before in human history, and walls – either physical or mental – have failed to restrict the flow of migration. There are five types of migration and migrants. First, there are refugees not only because of military conflicts but also climate change. Second, there are economic migrants from developing countries that strive to relocate to more prosperous countries. Third, there is a ‘brain drain,’ meaning the emigration of highly qualified specialists to other countries, driven by a desire to realize one’s full potential and work among like-minded people. These migrants are the force behind changes. Fourth, welfare migration, when people wish to optimize the tax burden or seek a more compelling investment climate. Fifth, and finally, is migration in the ‘third age,’ when the elderly people choose where to spend the rest of their lives. These are completely different flows, and the concentration of a certain type of migrants in any given country seriously affects the situation there. For instance, the concentration of the best brainpower and talents leads to the creation of hubs like Silicon Valley. There are 400,000 French people living in London who chose to relocate because Great Britain has a more convenient taxation system. Let’s be honest, historically the French and the Brits have not been the greatest friends, but that doesn’t stop them.
Now to the second trend – sustainable development. Out of 210 states, 148 are developing countries. There is an immense disparity between them, and since the world is interconnected, migration flows can lead to noticeable imbalances. To avoid this, the UN has announced 17 Sustainable Development Goals. It would take $4 trillion per year to achieve them, but only $1.5 trillion has been made available. To make up for the shortfall, businesses and HNWIs must join the sustainable development effort. And it’s not enough just to raise $4 trillion per year, they money actually has to be used efficiently. How can traditional development institutions with their limited resources and agenda cope with this? All the more as they have to cooperate with governments, which often have a short-term approach and lack efficient mechanisms to tackle problems.
Finally, global education is both a global challenge and ground zero for reaching those 17 goals. As the world changes, ongoing education will be crucial. We partake in local and global educational projects. Armenia serves as an example of the new model we are building, where the partnership between the private sector and state – not vice versa – will be the driving force. The diaspora will play a major role in that.
- And where are you?
- I get asked that a lot and I say: everywhere. We are trying to build an ecosystem that would be attractive to several kinds of people. One group would be business owners with a capital of $50 million to $1 billion. There are very few services available for them: they are too big for private banking yet too small to set up their own family offices. The next group would be professionals, top managers that are going through a sort of a midlife crisis, and so they start pondering the meaning of life. And then there are millennials who have a different set of values and a new view on things.
In these trends that we’ve been talking about, we’re attempting to find interesting projects at the intersection of commerce and philanthropy that would have a multiplier effect. The projects have some factors to them, based on the participation of a large number of invested people that form the network. There is an exciting anchor project that has attracted these people. And then there is a platform that has to support all that, because one of the disadvantages of the network is its instability – it is prone to disintegration.
Let me explain. Can you guess which influential global organization is built on networking?
- You’ll be surprised – FIFA. It’s worth more than any other. And the International Olympic Committee too. Their platforms are used to organize sporting events, with the [FIFA] World Cup and the Olympic Games acting as their anchor projects.
- But there is clear hierarchy in place.
- They have a different issue. If there is no system of brakes and counterweights, no proper and transparent communication, without a hierarchy, the platform starts to dominate. The management gets a monopoly and controls money flows of such volumes that it becomes independent, beyond anyone’s control. Only the Americans can remove anyone, using their leverage.
- So you are looking for anchor projects?
- Take a look at our projects. The Aurora Prize is an anchor project, while the Aurora Humanitarian Initiative is a platform. The Wings of Tatev cableway is an anchor, its platform – tourism and cultural legacy development. The UWC Dilijan international school is an anchor, the educational cluster as a whole is a platform. SKOLKOVO school is an anchor with entrepreneurship for a platform. Or take our new project FAST with its academic and technological platform. And now look how many people we have united. The advisory board has 20 prominent people from different scientific and technological fields from around the world. Take a look! (Vardanyan opens the list of the board members on the platform’s website.) Here is [Lord Ara Darzi] who pioneered minimally invasive surgery and a former minister at Britain’s Department of Health. This is [Hovhannes Avoyan] who founded PicsArt in Armenia, a company that is worth hundreds of millions of dollars. [André Andonian] is a managing partner with McKinsey, he leads their office in Japan. This is [Yuri Oganessian], a physicist; the chemical element oganesson was named after him. Mikhail Pogosyan, David Yang… And more young scientists from around the world. They do not report to me, but all of them are part of the platform.
And then there are platforms for healthcare, philanthropy, finance, and urban development, as well as social entrepreneurship. Anchor projects are built on each platform in various places. These platforms need $20-25 million per year to operate.
- What drives these entirely different people from various fields to join forces on the platform?
- Anchor projects. For example, [the goal] to found a technological university of the 21st century, a unique think tank and business center in Armenia. An ecosystem, in general, that would draw the interest of talented people.
We believe that a talented person makes a decision to move to a certain country based on four factors. First, if he realizes that he will be able to fulfill his potential. He must be interested in working with equally talented and ambitious people. Second, if there is an outstanding education system available for everyone – because not only will his children need to study, he’ll need to as well. Third, a good public healthcare system. And finally, a comfortable environment: ecology, education, logistics, transport, security in the broad sense of the word. It’s not as much about the country as it is about the consolidation points of all resources.
In the past it was like this: university only meant education. Then research as well. Later commercialization was added to the list, and now there will be networking too.
Why was SKOLKOVO business school able to unite 18 very different founding partners? Certainly not by giving orders! It was a fascinating project, and they got hooked on the idea. Take a look at Aurora’s selection committee. Nowhere else will you find a panel like that, not even the Nobel Committee. [We have] Bernard Kouchner, the co-founder of Doctors Without Borders; Shirin Ebadi, the first-ever female judge in Iran and a Nobel Peace Prize laureate; two more Nobel Peace Prize laureates – Leymah Gbowee, a Liberian women’s rights activist, and Óscar Arias from Costa Rica, the only person who, having received the Nobel Peace Prize, managed to secure a second presidential term. Ernesto Zedillo, former President of Mexico who implemented democratic and social reforms in the country. Hina Jilani from Pakistan, she was the United Nations Special Representative of the Secretary-General on Human Rights Defenders. Samantha Power, a former United States Ambassador to the UN. There’s also Mary Robinson, ex-President of Ireland and former UN High Commissioner for Human Rights; Gareth Evans, former Foreign Minister of Australia and President of the International Crisis Group; Lord Ara Darzi and Vartan Gregorian, the president of Carnegie Corporation of New York and the co-founder of Aurora.
These people aren’t in it for the money. They are in it for the idea. And that is why it takes up so much of my time and effort, why I travel around the world all the time and can only spare an hour. Communication has become more important than your bank balance or a fancy office.
There is an illusion that only some things will change. I acquired Romanov Dvor [a business center] because I realize that even office spaces will change with time, according to the trends I’ve been talking about.
“I could break my neck time and again”
- So what does it look like, the office of the future?
- In my view, the future office has nothing to do with the industrial scheme, a place for employees work during business hours. The concept of the office, with executive suites and open spaces for everyone else, will vanish. Co-working spaces will be used not just by start-ups, but by everyone. There will be a communication space downtown, open 24/7, where people can meet and interact. Children could come and hang out with their parents. There will be movies, educational programs, development programs because the environment and the people you interact with are essential for creativity. People are hungry for communication, that’s why the likes of Allan [Chumak] and [Anatoly] Kashpirovsky are emerging. But as soon as the [confusion] passes, there will be demand for a serious discussion platform. Several locations for lectures will be set up in Romanov Dvor; it can host lots of exciting functions. We want to create a space where different ecosystems will intersect: SKOLKOVO business school graduates, former Troika employees. It will be a club where they can come to hang out, work together. The initial infrastructure is in place already: three movie halls, several cafes, a fitness center, cigar club, 250 parking spaces. There will be a venue for cultural events. We are planning major events together with the team that organizes the Atlanty business forum, headed by Mikhail Voronin, a SKOLKOVO alumnus.
- It must be about 300 meters away from the Kremlin. Are you trying to say that people will come to this ‘golden’ location just to hang out?
- People will pay for the opportunity to become a member of this club. The club will not take up the whole building, but I’m 100 percent sure that an office without public spaces, organized in a brand new way, will not be appealing. Companies will choose these kind of spaces; I’m positive. I travel a lot and can witness the transformation of the office space. Offices have always reflected corporate models. In America, it used to be like that: on the vice presidents’ floor, whoever had the corner office was the most important guy there. This concept is fading into the past. Right now the priority lies with flexible renting, hence the popularity of Airbnb and WeWork.
We’ve finished the third building stage of Romanov Dvor, the most lavish part overlooking a church, a fantastically beautiful place. At the viewing, potential Russian tenants said, “This will be the bosses office.” Western companies said, “We’ll use it for client meetings so that everyone will know how cool we are.” And recently one company said they would set up a “cafeteria, a recreational area.” Our manager asked who for, and was astonished when they said: “for employees.”
Nowadays people can come to the office at any time of the day. You, Borya, would be very difficult to keep on a leash. A talented person is a unique asset, and it’s pointless to make him live by job instructions. So please, come in and leave whenever you want, just do your work. All we ask for is creativity, one-of-a-kind products.
We’re still some way from this culture. We still live in an industrial model of “you’re the boss, I’m just a fool.” So I’m talking about trends only.
- How long will this take?
- About 25 years. Is it a long time? I don’t think so. You see, these trends are inevitable. How long will it take Gazprom to transform? I don’t know. And is it possible at all... Would Russia be able to fit into these changes? I don’t know. What I do know is the direction the world is moving in.
They tell me, “It won’t happen, we’ll just get some bad, twisted version of it.” So that means there’s no point in doing anything. Go into your shell, move to New Zealand or somewhere like that and wait there quietly until your pessimistic predictions are fulfilled. But if you believe that it is possible to bring about change, you try. Come to Romanov Dvor and attempt to make it into the best office space, so you need to change and evolve. OK, maybe it won’t turn out the way you want to, you could break your neck trying, and I’m positive that I could break my neck time and again, but you have to try.
- Sounds utopian. Don’t you think so?
- I do – because there is a chance it won't come true. In 1991, they said, “Market economy? What are you on about?” I started working in Troika Dialog in December 1990, back when it was still the USSR, and there were only two public companies in the country. On December 25, the first decree of the Russian Federation on the regulation of joint-stock companies and the securities market came out. And they told me, “Ruben, this is utopian. This thing you are doing will never exist in Russia. The state will always control everything and use its influence.” I must admit, both were right: 25 years later, well, you see how it is. I was right about the trend, but I’m sorry to say I was wrong about the scale.
Everyone will come together in Romanov Dvor
“We want to create a space where different ecosystems will intersect: SKOLKOVO business school graduates, former Troika employees. It will be a club where they can come to hang out, work together. The initial infrastructure is in place already: three movie halls, several cafes, a fitness center, cigar club, 250 parking spaces. There will be a venue for cultural events. We are planning major events,” said Ruben Vardanyan.
Twenty years ago, I was confident that there would be 20 million customers in the stock market in Russia, that we would have at least 10-15 companies where the largest shareholders would own less than five percent of stocks. But we’ve come a long way: back then, no one knew what stocks or bonds were, and now several million people work in the stock and currency markets. We have a stock exchange, and from a technology standpoint, it is quite good, there are several interesting companies with different positioning histories. Yes, no one believed in it – utopia.
Is it called for, to have doubts whether I’ll succeed? One hundred percent! Should you doubt that the trends I’m talking about will not come true? In Russia – it could very well be so. But I am certain that these are global trends.
“Trump killed the idea”
- You said you want to turn Romanov Dvor into a kind of a future office, so you bought it from your partner. But what I hear is, you couldn’t win the partner [Gagik Adibekyan, with whom Vardanyan invested in real estate] over, persuade him to share your vision.
- No, it’s a very long-running project. My partner is 17 years older than me, we have worked together for 20 years. He now lives most of his time abroad; he has children who are more interested in commerce than offices. So it was a long-term matter of choosing what was interesting. And again, offices make for a complicated business. For example, Sberbank CIB, former Troika, moved out of Romanov [Dvor]. So naturally, we’ll have to survive the near future, be patient for a while, put paying dividends on hold. This is unusual. We all remember how we lived until 2008 when money – hundreds of millions of dollars – used to just fall from the sky.
- So the divorce was his idea?
- No, mine, but he had a choice.
- Why did you decide to do it?
- Because I realized that the change would have to be quick and abrupt, so in this situation, it would be better to take such a risk upon myself.
- Tell me about your most fortuitous investment.
- I know I’ll get bombarded with rotten eggs for this, but I’ve never had more luck with any other deal than with AvtoVAZ. No one believed in this project, but everyone benefited from it. The company that provided one percent of the country’s GDP was dying. I’m not saying that AvtoVAZ has become a super-successful company, but by getting Renault for a partner, it has started to make better cars. It became part of the global conglomerate. The state recovered 25 percent for a penny. Financial investors made good money. The shareholders got a liquid market; the capital stock structure became transparent. The French got a share of the market, which they had dreamed about, it was vital for them to compete with the Germans. We got a fantastic experience and an opportunity to earn money. But the whole project took eight years.
- It was Troika’s project though. What about your best investment?
- I’ve never had a large private portfolio. I work with people, invest through funds and partake in club deals. I have investments in different countries – India, Germany, Brazil, but most of them are in Russia. Some have been successful, others – not so much. I invested a small sum in Tesla, $100,000, and got back $700,000. I got into it by accident; a friend suggested I participate, I did not believe in this company. I invested in another company and lost everything, because, unfortunately, Trump killed the idea. Even though the concept was brilliant.
- What was it?
- Development of industrial production of ethanol and components of diesel fuel. It was an investment in the green economy. But he did not give them a chance. I must say, I am not the thriftiest investor. I’d rather invest in people that do unique things. There is a curious little investment in an Indian private equity fund, but my primary investments are in Russia.
- In which projects do you have a subordinate role?
- UWC Dilijan. Veronika [Zonabend, Vardanyan’s wife] is the boss there. In FAST, which we’ve talked about, I may be the main donor but I’m not the chairman – that’s Artur Alaverdyan, entrepreneur and my colleague. Another would be Leadership Centre, a special center for leadership training. I’m one of the contributors, but it works under the leadership of Pierre Gurdjian, President of the board of directors of the Free University of Brussels. I’m also one of the 18 co-founders of SKOLKOVO; I don’t have any exceptional rights there. As for Ameriabank, a local team of managers makes all key decisions.
“Trust is an economic category”
- One of the main topics of the St. Petersburg International Economic Forum this year will be the issue of trust. You have been talking about it for years…
- …and everyone is tired of it. I’m like that rabbit with a hundred songs, but all of them are about carrots. I’ve said it before, and I say it now that besides the emotional factor, trust is an economic category. Mistrust increases transaction costs. When a million men in Russia who could increase the added value of a product, instead are engaged in security activities that do not really have anything to do with security, it is a direct economic loss.
Or another example: we could close a deal within two months, but it takes us eight just because we do not trust each other. That is, we spend six extra months, and lawyers earn five times as much. And this is a purely economic issue.
Finally, trust is linked directly with long-term projects. One can argue whether SKOLKOVO business school is a good project or not, but it is a long-term project spanning over 20 years; it’s a private investment in the country. How many more projects like that are there in Russia? It is immediately evident if people are ready to commit themselves for 20 years or not. For example, Nikita Mishin is creating New School. This is significant, it means that people want to spend part of their money to create something that will work in five, 10, and 20 years.
When you come to a new city, you can evaluate the level of business activity by the number of construction cranes in use – and you see the future of the country through the number of private long-term projects, and I hope there will be more of them.
- In one of your speeches, you listed the challenges that Russia faces. You noted isolationism in particular.
- I am not a macroeconomist, but, in my opinion, there are only four scenarios for Russia. First, Russia integrates with Europe. This scenario used to be a dream for many, including for me because it’s a win-win. Europe cannot compete with the American, Chinese and Indian markets alone. Both Peter I and Catherine II invited hundreds of thousands of Europeans to Russia, and this greatly influenced what happened in the 18-19th centuries. Unfortunately, this scenario is stalling, but I believe that we will find a way to get it back on track. The second scenario is that Russia integrates with China. There is an ongoing effort to do that, but it is necessary to find a balance, it is hazardous because 300 million people live on the border with Russia. What kind of integration process can there be? It’s a takeover. And Kazakhstan is afraid of this, and many others. The third scenario is trying to restore economic unity in the post-Soviet countries, to integrate Ukraine, Kazakhstan, Belarus and Armenia into an economic union or something like that. But it will be tough to do, given the current situation with Ukraine. The fourth scenario is to do nothing and live as we have lived up until now. But, without changing the size of the market and solving the demographic problem, it will be challenging for us to keep the country as it is today. This is the most dangerous scenario.
“People choose the ‘successor and heirs’ model”
- You have been talking a lot about the problem of the transfer of wealth recently. Why do you consider this to be so important?
- This is one of the challenges Russia is facing. It is connected with the concept of private property.
Many businesspeople of the first wave are in their 50s, 60s and 70s already. In developed countries, within the next 20 years, about $70 trillion worth of assets will change hands for various reasons. And it raises the questions: how can I make sure that my children and grandchildren continue the family line? What mark will I leave and how will I be remembered?
In Russia, this will be the first transfer of wealth in the last 100 years. This culture has been lost to us since the revolution of 1917. If the courts have to deal with 5,000 probate actions at the same time, we won’t just have the private issue the Orlov family has with Vozrozhdenie Bank; there will be an economic collapse.
- Five thousand lawsuits… What kind of money are we talking about?
- There is a wide range. One must understand that even an apartment within the Garden [Ring in Moscow] worth $1 million is a fairly large asset. This applies to several hundred thousand people around the country. We are interested in people not from the Forbes’ top hundred. The basic idea is this: you have $500 million in assets – relatively speaking, a factory, $30-40 million in real estate, $10-50 million in some liquid assets or private investments. But you are already 60 years old, and your children don’t want to continue your business. No matter how unique each family seems, the number of options is limited.
The first option is where you say: “After me, the flood. Do what you like and let everyone sort everything out between themselves.” In this case, you’ll make your loved ones unhappy, and there is a high degree of probability that they end up with practically nothing. The second option is when you decide to sell everything, and divide the money between your heirs. But it’s very difficult to sell now. It is difficult to exit via an IPO, and selling is hard too, there is no liquidity, there are no buyers, the business is built on bonds and flows that you cannot easily sell. The third option is assigning management that will manage the business and pay dividends to the heirs. But we remember the well-known saying that it is not the number of shares that matters, but who controls the cash flow and makes managerial decisions. So to implement this option, we need to build the right corporate governance, professional financial partners are important, I mean private equity funds, which are few, but I think there will be growth in the near future. The fourth option is to look for a successor among your relatives, but it could take from 3 to 10 years to make sure he’s prepared, this requires time, effort and a willingness from both sides. Usually the “Fathers and Sons” kind of relationship is not simple. The fifth option is where you say: “No one gets anything.” And you try to pass everything, for example, to your favorite cat or give it to charity. But Russian legislation makes it not so easy to pull this off, and it requires several years of preparation. And finally, the sixth option is where you spend everything yourself while you’re alive. People have a choice based on their goal.
- OK, say there’s a person who has structured assets. Partly in offshores, partly here. A situation of some kind arises in the family. He comes to you: “Ruben, give me a piece of advice!” What do you say to him?
- As I said, there are three issues: business and investments, family and your heritage, and what mark you will leave. They have to be solved in a comprehensive way: what do you want to do with the business, so that it continues to support your family and your charitable projects.
To us, it seems essential to create an Investment House built on family principles, and Romanov Dvor is just that, both physically and metaphorically – the entire business ecosystem that we’ve created. Veronika, my wife, and friends and partners are involved in our projects. I am very glad that our team of great professionals, which includes Misha Broitman, Oleg Tsarkov, Arman Jilavian, Sveta Garipova, was recently joined by Andrey Donskikh with whom I worked with at Sberbank CIB. We see that more and more professional managers want to join our idea.
For example, we now offer different options to businesses: from joining the board of directors, organizing proper corporate governance, protectorate to mergers and acquisitions club deals and much more. When it comes to charity, we build all the infrastructure for the operational management of funds. It is very convenient for family and private funds. The PHILIN team led by Ira Ikonnikova works on that, there are 52 funds among their clients.
- What do you mean by “joining the board of directors”?
- I myself am a member of boards of directors of many companies and understand that their work needs to be filled with a new meaning. We help to establish the routine work of the board. In the majority of private companies, a board of directors is either a status thing or simply a forced necessity. For a private owner who can at any time fire the board, this institution does not mean anything. But it performs a critical function, which for private business is still incomprehensible. We need to explain that if you plan to introduce children into the business, then there are two options: they either join management or the board of directors and then you need to set up a team around the board – together with advisers, protectors, mentors.
One should understand that many businesspeople have several partners; a lot is built on informal arrangements, processes are not clear. It is important to build these relations now so that it is easier for children to continue their work. There are partners who have worked together for 20 years, but there is not a single piece of paper to have everything in black and white. We help to make such relations more structured and understandable.
- Of the many people you talk to, how many give serious thought to it?
- This is a matter of maturity. In 2015, the SKOLKOVO Wealth Transformation Centre conducted a study of capital owners in Russia. Of those who have considerable assets, only a third have a business continuity plan, and another third do not even think about it. So we created Phoenix Advisors that deals with these issues and helps owners to think through the succession plan.
- “No one gets anything, ‘Après moi le déluge’ – these are not your clients. What do the others choose?
- There is a lot of philosophy, reflection; this is not a one-off step, it takes a lot of time. There is this illusion that once you write a will, it’s done. When people realize the scale of the problem, they understand that a continuity plan is needed so that the business can continue to work. In general, they choose the “successor and heirs” model. That is, they are still trying to prepare an heir who will be ready to assume the role of the successor, and all the others will be heirs. Very few decide to leave a small amount of money to the heirs, and give everything else to charity, to some projects. So far these are the two main scenarios.
- And what did you organize for yourself?
- It took me a few years. We have three scenarios in place: one in case something happens to me, the second if something happens to Veronika and me, and the third scenario – if something happens to our children and us. In this case, relatives and our close ones will get something, but the bulk goes to the charity fund. If something happens to me, Veronika will make decisions to dispose of everything in a reasonable manner. And if something happens to me and Veronika, then for the children there will be a protectorate of five people (one is a member of the family or a relative, the rest are not family members) who would make decisions on all my assets and have executive powers. I fully trust them, I understand that there is a risk of losing everything. But there are risks in any scenario.
- You said that 70-80 percent of our business people’s children do not want to go into family business. Why is that?
- They are not ready, don’t want to, they do not see themselves in this activity. Many are abroad. Many don’t understand business. As I’ve said before, the problem is that business in Russia is not very transparent and a lot is built on cash flows and connections. It’s impossible to hand down. And the owners do not want the children to work with this.
Another problem is the lack of respect for private property. There is no desire to associate yourself with it because tomorrow someone could take everything away from you. That’s why there is nothing to be proud about, no brands you identify yourself with, as in: I represent the fifth generation of this family. I believe that the way we treat private property is one of the key challenges of our society.
By Boris Safronov for Vedomosti