Philanthropy is an inherent part of wealth preservation

Date: May 2014

Source: SPIEF Review, St. Petersburg International Economic Forum 2014

Ruben Vardanyan, head of the charity fund “Ruben Vardanyan and Veronica and friends” told SPIEF Review, as he understands charity and philanthropy, and what is the mission of organizations such as his foundation.

To what extent is the task of setting up private philanthropic foundations and managing philanthropic capital in Russia complete?

We all need to understand that developing philanthropy is essential to building a wealthier, healthier society. The maturation of the first generation of Russian entrepreneurs who created wealth in the 1990s has refocused them on succession planning and wealth preservation issues with philanthropy being an inherent part of this process. People are now thinking about the legacy they will leave behind and what to bestow to future generations. Russians have traditionally made significant contributions to private philanthropy. Before the revolution in 1917 it was common practice for wealthy individuals. A revival is now underway, though it’s going quite slowly. We are continually learning how to manage philanthropic capital. We do not have enough experience and knowledge, so we have to learn by doing, and also learn by the best practices. Incidentally, we decided to establish the Wealth Transformation Center at the Moscow School of Management SKOLKOVO precisely in order to make the best philanthropic practices available to Russia’s donor community.

Are the legislative questions here clarified? Could you articulate what should be added to or changed in Russia’s legislative base given the tasks of private philanthropy?

Several intractable legal issues stand out, such as low legal transparency, tax credit problems, and a dearth of specialized services providers and intermediaries. The regulatory environment needs to be changed. Mass philanthropy should be stimulated by introducing tax relief mechanisms like, for example, donor advised funds in the US and UK. As far as contributing various asset types (for example, real estate) to philanthropic causes, Russian legislation fails to address the full diversity of situations which may occur in the process of such donations. During the 1990s, many artificial foundations in Russia were used like mechanisms to receive funding from the government and other public institutions, thereby eroding the trust placed in the charity industry and creating lots of negative connotations surrounding the charity industry at that time. Hence we need to be very careful when developing legislation, reporting standards and infrastructure for the philanthropic foundations and how these are governed.

In your opinion, which organizational form of private philanthropy is most promising? Private companies perform certain charity activities. Some, like you, set up family foundations. How fundamentally different are the activities of such structures? Are there philanthropic tasks which the corporate philanthropic programs cannot address in principle, yet which the private family foundations may perform?

It does not matter. The more diversified the forms of philanthropy are, the better for the development of the charity industry. The key point is effectiveness evaluation. What is your social impact? How will you measure it? How effectively organized is corporate governance? How do you execute your projects? Moreover, it is about how you attract and bring the best people who work for you and your projects. A broad array of current examples has proved effective, ranging from personal charities like the Dynasty Foundation established by Dmitry Zimin to the corporate philanthropy programs implemented by Alfa Bank. It is encouraging to see such examples of fund organization and of how to deliver on founders’ promises.

In your opinion, what is the current relationship in Russia between private philanthropy and the social, cultural and educational activities of the government? What is the collaboration like, and are the tasks understood? Or do philanthropists “fill the holes” left open by the government?

Overall, I would say that yes, cooperation is underway between private philanthropy and government activities, but the process is ongoing and many things have to improve. Remaining endemic is the practice of “philanthropy on call”, that is at the government’s behest. Officials at different levels ask corporations or individuals to do certain charity projects, essentially imposing additional taxation. Meanwhile, it is a voluntary, self-regulating, competitive decision-making system which is an important precondition for the long-term, sustainable development of the charity industry. Yet we can also point to good examples and success stories of public-private partnerships, which should be disseminated and studied as best practices. One such example is Moscow School of Management SKOLKOVO, which has received very strong support from government officials. At the same time, it received no government funding, and it was really our desire to do the project. The government supplied moral support and help with creating a pool of dedicated stakeholders and strategic development, but was not involved in the decision-making process, a key fact to the project’s success. I am a strong supporter of public-private partnerships, but I believe it needs to be done in the right way and on the right basis. Going forward, we must further develop philanthropic and charitable infrastructure while striking a balance between simplicity, transparency and preventing abuse of such infrastructure.

As we see, the current context around philanthropy is complex and controversial. What are the motivations of major private philanthropists in Russia to continue their activities? Is it a moral imperative, certain ambitions or something else?

Russia finds itself in a quite unique situation in that many of the people responsible for wealth creation in the country are relatively young in age. I think now is a good time for people to try to do something on the philanthropy side. The desire to leave legacies and create reputations for following generations is a big driver for personal action. What’s more, the nature of the assets and the personal values we share are incredibly important for the future of our society overall. My family believes that the key to building a stable and successful society is to create efficient mechanisms for philanthropy so there are people who not only give money but have institutions and infrastructure and will hire the right people and bring management skills to help the industry and society in general.

To what extent, in your opinion, does today’s philanthropy presuppose a clear formulation of the tasks set and strategic vision, both of the activities carried out and the changes in society which may be achieved through such activities?

You know, there are two fundamental problems on all levels of our society, be it businesses, government or people: lack of trust and a very short planning horizon. Philanthropy development is one of the crucial impact drivers. A mature philanthropic tradition is essential for social stability and its long-term sustainable development. Once established, philanthropic foundations create additional social value from generation to generation. In Russia, where many people live in the short term and our society is short-term oriented in general, it is important to develop not only philanthropy but also social entrepreneurship and mechanisms of strategic planning with the goal of efficiently connecting resources, procedures, outputs, outcomes and social impact between each other. We are at least 100 years behind the US, whose modern philanthropic tradition dates to the early 20th century. I think we need to supplant “emotional” philanthropy with a more professional approach, where rather than one-off charity giving something more sustainable for many people is created – not just once so you feel emotionally in touch. It’s very important to build this long-term mechanism. What kind of mechanism will it be? It will be trustworthy, transparent, professionally organized and long-term oriented. All philanthropic organizations need to invest time and other resources to organize their activities professionally and strategically, just as we are doing in business.

You like to speak about a 20-year planning horizon in your work. Can you say the same about your philanthropic activities? What will require support in Russia in 20 years’ time? Which institutions will do this work?

Selection and implementation of all my philanthropic projects are guided by seven core principles:

Long-term vision and planning horizon for several decades ahead;
Magnitude and symbolic character of the projects;
Global scope and collaboration;
Multiplier effect;
Engagement of local communities and resources in the implementation of projects;
Best international practices and standards for design and realization of projects creating a new local benchmark;
Self-sustainability after initial philanthropic investment.

All of my major projects, including the Moscow School of Management SKOLKOVO in Russia, UWC Dilijan College and Tatev Revival Project in Armenia, have planning horizons of 20-25 years. Driving this personal commitment is the desire to leave a legacy for future generations. Hopefully, your projects will operate not only now, but also when you pass away. That’s why I think it will be very critical to make sure that sustainable mechanisms are in place. One of the goals of the Wealth Transformation Center is to facilitate discussion of these issues, look at different options and try to find the best one. We need to study best international practices and at the same time try to keep our own understanding of the best way it should be done in Russia.

There is a well-known maxim about “old money”, different in its behavior from “new money”. In an interview you said that one of the issues you would like to research as part of SKOLKOVO is the mechanisms for transferring large capital to heirs. In your opinion, when the capital actually reaches the heirs, how might this affect philanthropic activities? Will the heirs have any other reasons to engage in such activities?

Succession planning involves many complex issues, including that the respective culture has yet to evolve and the legal instruments haven’t been introduced. Wealthy Russians today are faced with many questions: should the heirs continue running their businesses and foundations or should it be a trustee model? Who will make sure that the person’s will is observed? Can the general vision be revised under certain circumstances? I think philanthropy is obviously an inherent part of succession planning and wealth preservation. Yet what is the best way to proceed? As I mentioned, the Wealth Transformation Center will offer educational programs on philanthropy for wealthy individuals, their families, family foundations and family offices. We are also preparing an academic research and interviews with members of the Russian entrepreneurial community to study the socio-demographic trends and agenda in the areas of wealth management, succession planning and philanthropy.