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It’s a tough situation right now; everything and everywhere must change at once

Ruben Vardanyan Troika Dialog Moscow School of Management SKOLKOVO UWC Dilijan College, Armenia Manager

Date: December 23, 2014


The former CEO of Troika Dialog founder of Skolkovo Business School and partner of investment company Vardanyan, Broitman and Partners speaks about new projects, the logic of current events and prospects.

Ruben Vardanyan scheduled the interview for eight in the morning. He says that he usually works from eight in the morning until eleven at night. Apparently, following the sale of Troika Dialog (in October 2011) and departure from the business of Sberbank CIB (in August 2013), Vardanyan’s work has scarcely slowed down.

An entrepreneur and philanthropist, Ruben Vardanyan dislikes speaking about politics and the economy, which is today inseparably tied to politics. This is not only because he is generally very cautious in his statements: he is truly much more interested by what he directly engages in and is able to impact himself.

– Of course we would like to speak in detail about your educational and philanthropic projects, yet following the events of last week the most interesting topic right now is the economy.

– We won’t speak about today’s situation; regardless, the interview will be published next week when everything may have changed.

– Yes, perhaps, yet explaining these events is still important. Most people are unclear about what’s happening, so speaking about it is important. You, to be sure, understand?

– No, I don’t understand either.

– Certain economists believe that the devaluation was worsened due to Rosneft receiving an unprecedented amount of 625 bln rubles from a bond sale and this money reaching the currency market.

– I dislike building conjectures and discussing rumors, so I won’t speak out; don’t want to… I’m sure that if major bids for currency purchases occurred, all of this is revealed in a half hour. And so if a mass attack happened or one of the major companies decided to forcefully carry out particular obligations, there need not be months of verification. And I think that sooner or later all this information will become known and accessible. If this is not the reason, this will also become known. Mere time is needed for everything to calm down a bit, because reactions to events right now are highly emotional. However, in comparison to our neighbor, the political and economic situations there are much worse.

– Politically as well, you think? Politics there in fact seem to have become livelier than here.

– Well, after all, civil war is taking place in Ukraine; this is likely the most correct term. And the country lacks currency reserves. Until there is peace, there is nothing to say.

– In a large interview you recently gave, you said that we must switch from saving owners to saving business itself. This is an elegant expression, yet what in particular do you have in mind? Where does one end and the other begin?

– This is very simple. When, for example, AIG had problems, their management was changed, the owners lost all of their investments, the state stepped in with a major bailout, implemented a reorganization, and the new owners began managing the business. This is not necessarily to say you’re awful; rather, the economic situation can unfold such that you lose all your property. This is considerable work – building such institutions. Here it’s different: in 2008-2009 owners were helped in preserving their assets, given the concern that Western creditors and other market participants would receive rights to their purchase and act outside of Russia’s interests or something else.

– That is to say a change of ownership through bankruptcy?

– Yes, changing through bankruptcy doesn’t work here. But a bankruptcy is no tragedy. People started a business; it failed – reorganization is necessary, selling unnecessary assets, leaving the best. It’s an intensive working process, very painful, but no tragedy. Moreover, I believe that one of the problems in Russia regards the fact that we lack a culture of perceiving a fall as not the end. A person can get up and move further. Let’s say that a person fell once; this doesn’t mean that they can be written off. So long as no ethical-moral rules were broken, they are entitled to a second chance. Such a person is also valuable because failure teaches success.

– Returning to the previous interview, you said half a year ago that a considerable leap and fundamental structural reforms will be needed in order to surpass the barrier of $15 thousand per capita. And you said that if we fail to surpass it, there will be a strong and lengthy retreat. This appears to be happening right now. Which reforms and structural changes were lacking? What prevented them?

– The problems abound; Russia is a large country with highly uneven levels of development. One of the key problems is insufficient institutionalization. We are a highly personified country; we lack institutions as a system that operates independently of personalities. Institutionalization means the possibility of working in conditions of a large circle of trust in the country overall and in institutions, and most importantly – certain other working institutions come together. Yet these are well-worn general words.

– And which institutions are lacking?

– All sorts. For example, institutions of property protection. Bankruptcy is also an institution, where you are unable to file and reach agreement, and there is simply a bankruptcy procedure that is used not to take away your individual business, but simply as a mechanism of healthy market functioning. Another institution is the court system, where decisions depend not how close or remote you are from the authorities. Thanks to this institution, if it functions properly, you feel yourself protected. We have a poorly-established mechanism for changing management in those same state companies. When extensive growth ends, fine-precision tuning is needed to increase efficiency.

– Why the problems with this?

– Because, unfortunately, relations are less than clearly defined between shareholders, including in the form of the state, and management, as well as the criteria of success or failure and how this is measured. When you approach the threshold of $15 thousand, your capabilities owing to cheap labor force and raw materials resources are depleted, and competition begins at the level of technologies, processes and work with personnel. And all of this requires simply another quality of management. And we have problems with management in the country overall, including private companies as much as state ones. This question regards not just state companies.

– What is the reason for this problem? The level of education?

– Amidst all else. We have a brief business development period: 25 years – this is seemingly a lot. Yet in fact, this is not much time. There’s an old English aphorism: a rising tide lifts all boats, but when it falls, you see at once who has run aground. Crises lay bare many problems. In Russia, generally speaking, the main thing was always who sits on the cash flow. That is, the P&L statement here was less important than the statement of cash flows, which constitutes a distorted economic model. People are accustomed to looking not at results, but at whether you have cash flow.

– How rationally, in your opinion, did we dispose of this money, this extensive growth?

– This is a major, complex question. Overall, it is hard to implement changes, especially painful ones, when all is going well. There were many sectors impacted during the 2008 crisis, and this was a cold shower for us; the rebound happened just too fast, and we failed to grasp what exactly had to change. It’s a tough situation right now; everything and everywhere must be changed at once. This is easy to say, yet very difficult to do.

– What does everything and everywhere mean? Where should it start first of all?

– I have no ready answer to that. I lack complete information and am not fully informed of all the problems of government officials.

– Looking not at the positions of officials, but the positions of business, what should be changed above all? The structural changes which you refer to? Which reforms are lacking? Clearly, you have answers.

– That’s a lengthy conversation…

– And yet a very important one.

– Quite simply, this is not a matter of public discussion, but a discussion among professionals, which sooner or later must occur. I am absolutely convinced that things exist that I fail to see, and there are things that are easily said yet hard to do. Of course, the key things are highly ordinary: stable and transparent rules of the game and system of government control are necessary. It is not my wish to make populist, declarative pronouncements without explaining the more nuanced things.

I have spoken with various people. Here the radius of trust between businesses and institutions is very low, which raises the costs of doing business. People take decisions and operate in a framework of a short-term planning horizon, which creates a distorted model of economic behavior. It is rational in the short term, yet inoperative in the long term.

– You devoted an enormous part of your life to the stock market, which, apparently, is now smaller than companies like Google. Is it hard for you to watch as what you worked on for 20 years unwinds?

– The question isn’t whether or not it pains me. The stock market very accurately reflects the state of the economy. In the Soviet Union you had a State Plan, which somehow assessed the effectiveness and work of capital and oversaw its reallocation. In a market economy, which, one way or another, we do in fact have, the reallocation of capital occurs through two mechanisms: the banking system and stock market.

And the size of the stock market reflects what stage we are in. We, unfortunately, are completely unable to overcome the ills of transforming one system into another; we’re back where we were six steps ago. We’re unable to grasp the model that allows companies operating in Russia to be valued by the capital markets. They should be valued by market methods, rather than the principle “ours – not ours”, “like – dislike”, when it turns out that a company can simultaneously be public and with total calmness violate certain basic things and go unpunished for this by market instruments.

Property redistribution should take place through stock markets. Here the vast majority of major companies are more than 70% owned by a single owner. We lack such public companies as General Motors where the largest shareholder owns several percentage points of its shares. Here the mechanism works differently if the company is public.

– Yet didn’t 70% of Troika belong to you?

– We were not a public company with listed shares. This was a private business.

– How long could the current crisis last?

– For quite some time. The issue is in readiness for changes and readiness to do everything quickly. In the U.S. a crisis occurred beginning in 1929 and ending in 1944. I hope that we are indeed living in a more dynamic time, but still…

– Following everything that is happening, how will it be possible to restore investor confidence?

– You know, after 1998 it was said that we had denied ourselves access to investors for 10-20 years. It turned out this wasn’t so. And back then we simultaneously brought about the default and devaluation. Yet investors nonetheless returned four years later, because favorable conditions and a precise plan of action existed, as well as trust in the authorities, and a feeling that everything was changing correctly. In the early 2000s, very many businesses were established. Investors look at opportunities and assess threats. And I see no major problems here if they feel that the economic system has regained its appeal for them.

– It seems that many investors would be happy to return right away, yet they are thwarted by political difficulties and sanctions.

– I don’t think they face any restrictions. It’s a question of risk assessment when taking decisions. Some investors are ready right now, and moreover, they will purchase when they believe it is correct to do so. Several years ago it seemed to us that a Greek default was inevitable, and that the country was totally devoid of economic prospects. It remained without prospects, yet Greek bonds rose in price, and much money was made on them. I think the investors will always be found. The famous Warren Buffett says that a falling market is in fact the time to buy, not a rising one. The question is when to enter, at which stage.

– In your opinion, when will be a propitious time to enter the Russian stock market?

– I am not this kind of professional investor. I have more long-term projects.

– Which projects currently fascinate you?

– I am fascinated by one topic. For the first time in one hundred years in Russia, a generation has grown that has something to leave to its children. And this is quite a big challenge facing our country, equal to economic reforms. I am not speaking of ultra-wealthy people, but about people who have apartments, homes, cars and small businesses. The question that will arise in the coming 20 years and that interests me is how succession will occur, in what format, how much money will simultaneously go to charity, how much money will remain in the form of family business, and how all of this will be redistributed. This is a very important and interesting topic for Russia.

People of my generation, aged 45-65, in 20 years will be 65-85, and this question will become much more relevant. I am interested in building a system that will help people think about this: what do I want to do in this life going forward, how do I want to handle my business, what do I want to leave my children, etc. This is all interrelated. And so, all of my projects are somehow or otherwise tied to this very generation and the infrastructure which can help them in all of these questions.

– How does this look in practice?

– We established the Wealth Transformation Center at Skolkovo Business School. We have a company which works in consulting, how to write a will, and how to think through these things with an orientation towards international experience. We also have companies which help in doing club business deals and implementing major charitable projects in which people may participate. After all, not everyone can allow themselves to hire managers to conduct their own projects, or these projects may not be very big.

There are three topics of interest for me. The first topic is education, while the second involves the professional charity industry. And, finally, the third: I am interested in witnessing through Armenia, a small country with a population of three million, a not very big territory and a not very high GDP, how by means of different projects it is possible to affect the economic model not from the top down, but from the bottom up. And the IDeA Foundation, of which I am a co-founder, implements such projects in Armenia. After all, this is very interesting – understanding what development the country may take regardless of what happens politically.

– That is quite interesting – how much private projects can change the whole. Let’s say that you build several separate good schools in Russia, even a dozen in Moscow, they still will not change the picture of Russia’s education system. And this is gradually acquiring certain dangerous details: religious topics, reducing unpaid hours.

– Well, the religious topics may seem dangerous to you, while to others, on the contrary, pleasing. I think that what is good in Russia is having everything. And there are very many good schools, albeit not loudly resounding, having good teachers. I think that interest in education will grow quite strongly; we see how attitudes have changed towards education on the elite’s part, and in this sense…

– Yet accessible education is falling.

– Once again this is an unproven statement. Accessibility of what education? Elementary school?

– Schools are reducing hours, while universities – places.

– Well, if I had the capability, I would reduce by half the universities in Russia, because they produce no knowledge, but manufacture diplomas. Yet what you are speaking of is a severe problem, and we as a private organization are not trying to change the entire world or all of education in Russia. We are striving to create the best examples and to introduce certain new standards, a certain new benchmark. I can only do what I am able to do. And in this regard, each of us must do however much we can.

– Is this a theory of small matters?

– Small or big, I don’t know. Skolkovo Business School, I think, is no small matter. The question also regards whether you are creating an anchor project, setting a standard. Relatively speaking, the international school in Dilijan constitutes a new standard for Armenia, and I am sure that it will have an impact on the 1200 schools existing in the country, amidst all else. Such anchor, breakthrough projects are, after all, no small matter.

– Do you plan to do something similar in Moscow?

– It’s another model in Moscow. Each country has its own features, and one need not try to do the same thing. Other problems exist in Moscow, which must be solved. These, it seems to me, are more serious areas relating more to teachers, their qualifications and motivation. And yet… please don’t press me; I won’t speak about this, not for now.

– When will we see this? When can I return to you with this question?

– In three years, I think. I like very long-term projects. My wife and I began discussing the Dilijan school in 2006, while it opened, as you know, in 2014 and will reach full capacity in 2023. So we have very long-term projects. However, one of the criteria for measuring success in any given country or society is the existence of long-term projects among the elite. You can count how many long-term projects the elite – not the government – is implementing in this country. This is a very good indicator of health.

– This is quite remarkable – regarding both the generation that has something to transfer and the planning horizon. These are very important things. Yet I am looking at those nearby, and those with something to lose, before they lose it, are trying to exit to cash and leave.

– And this will always happen; such exists in every country. But this is the visible part. In the invisible part many people aren’t doing this, aren’t leaving. This is a difficult, major process, a complex one: we are currently paying a heavy price for switching from one managerial system, which was called the Soviet Union, to a new system, one that is very turbulent, very unpredictable and for many people the risks are big. If you believe the Bible, Moses led the Jews through the desert for 40 years. Therefore we have to wait until 2025. This doesn’t mean all will be well here, yet a generation of people will emerge that will look at everything differently. That is, it was already born, although has not yet arrived to power or most of the companies.

I am one of the last who happened upon the very juncture: I even managed to enter the Party as one of the last ones, in 1988. This inevitably has an impact on systemic thinking and many things. This has its pluses and minuses. I am not saying that all was bad in the Soviet Union, but another system existed there. A generation of people must emerge that will receive inheritance, graduate from the best academic institutions in the world and return to Russia because they believe it is necessary to boost their country. I am certain that there are very many people who left to study in the West, and then decided to return, and they want all to be well in Russia. Perhaps these stories are less well-known, but they exist.

– Yet the problem lies in the opposite; another generation has already grown up which knows only of strengthening the state apparatus, which has seen 15 years of unchanged power, and they want to be officials.

– And this is true, but this is better than being a bandit. Surveys indicate that during the 1990s the majority of schoolchildren dreamed of being bandits. From bandits we’ve switched to government officials – and that is a step forward.

Interview: Karen Shainyan

Translated from Russian