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Russia
Billionaires
From Moscow,Cameron Sawyer writes: "Who should decide who much CEO's earn?
Shall we pass a wage and price control law regarding CEO's salaries? Isn't that
a question between the managers and the company owners -- shareholders -- themselves?
Why should society interfere, if it is glad for entrepreneurs to become billionaires?
And that is actually the point -- CEO's of large public companies have skill
sets more or less coextensive with those of entrepreneurs. To attract those
talents, large public companies must give such people the chance to earn money.
My friend and next door neighbor Dmitry Zimin, a retired university professor
of radio engineering, started a cellular telephone provider company, Vympelcom,
basically on his kitchen table, just 11 years ago. Six years later, he floated
it on the New York Stock Exchange (its symbol is "VIP"). A little
after that, he retired for the second time, selling most of his shares for,
reportedly, more than a billion dollars. Today the company has a market capitalization
of $5 billion dollars.
Such a person has obviously done a great thing for the Russian economy, and
for the thousands of highly paid employees of Vympelcom, and for the millions
of telephone subscribers. Furthermore, he did it absolutely honestly and while
paying all his taxes. I don't know anyone who begrudges him his billion; he
is considered to be something of a hero. But did Stan O'Neal do really so much
less with his turnaround of Merryl Lynch? Year for year, O'Neal earned ten times
less than my friend Dmitri. Why would a talent like O'Neal take on a job like
that for, say, a hundred times less than he could earn as an entrepreneur? We
would kill public corporations if we in some fit of madness decided to regulate
CEO salaries.
You can't compare CEO's with scientists or presidents. Presidents do it, unfortunately,
because they are power-mad or because they believe they can save the world.
I can't imagine any normal person wanting to be president -- you would have
to have some kind of serious mental problem, in my opinion. I don't think you
would have to pay even one dollar of salary in order to attract all of those
sick people. Air force generals and scientists earn just as much as are needed
to attract the people who are needed. CEO's are different -- they are lynchpins
of the economy. Their mission is to create billions of dollars of wealth. It's
what they do. People who have the talent of creating wealth simply have to share
in it; otherwise they will just do it on their own.
Apropos of this, the headline of today's Moscow Times (www.themoscowtimes.ru)
is"Russian CEO's Paid Most in Europe", citing a new study by management
consultants Watson Wyatt. This is just as one would expect since Russia is a
highly entrepreneurial place with a limited pool of management talent, which
makes it very difficult for public companies to hire such people away from entrepreneurial
pursuits.
Forbes last month put out its annual list of billionaires. Eleven more Russians
have been added to the list, bringing the total of Russian billionaires to 26,
putting Russia ahead of Japan and after only the U.S. (277) and Germany (52)
in number of billionaires. 23 of Russian billionaires live in Moscow, making
Moscow home to more billionaires than any other city in the world except New
York, which has 29 billionaires. Russia's 26 billionaires are almost all in
their '30's and '40's, and tend to be Jewish, self-made, and highly educated,
with many PhD's and former professors represented. This is quite different from
German billionaires, who tend to be in their '70's and '80's, and to have inherited
family fortunes. Note bene: only two of Russia's billionaires earned their fortunes
by managing public companies"
RH: I think it is unfair to say that Presidents are`power mad. That certainly
was not true of Herbert Hoover or Jimmy Carter. It would be truer to say that
billionaires are money-mad, especially those who in the process fired thousands
of workers. While I am non-partisan, I note that the Democrats say the taxation
system is rigged in favor of the very rich. They do not propose a pay scale
for CEOs. I hope that the system Cameron commends leads to a happy, peaceful
society. But remember: Après moi, le déluge. Remember the Great
Depression, if you lived through it as I did. And remember the divine eye which
appears in many churches.
From Moscow,Cameron Sawyer wrote:: "Who should decide who much CEO's earn?
Shall we pass a wage and price control law regarding CEO's salaries? Isn't that
a question between the managers and the company owners -- shareholders -- themselves?
Why should society interfere, if it is glad for entrepreneurs to become billionaires?
Tor Guimares comments: "That makes sense except in many publicly-held companies
most shareholders are poorly represented by a Board of Directors strongly influenced
by top management itself. So most shareholders have no representation; thus
we end up with Enron, WorldCom, Global Crossing, etc, etc ad nauseam".
RH: Parable of the squirrels: A squirrel needs 100 nuts to survive the winter.
A dominant squirrel and his 100 subordinate squirrels collected 200,000 nuts,
easily enough the survive the winter. But the dominant squirrel decided he no
longer needed the other squirrels and banished them from his turf. Now he had
200,000 nuts all to himself. He sated himself on them, but when he had eaten
1,000 nuts he could not stay awake. He fell from the tree and was killed. Moral:
Like Pride, Greed comes before a fall.
Telephone Service
Randy Black, who lived in Omsk in the last century, says of poor telephone
customer service in Russia: "I never had this problem in Russia, since
1) There was no customer service to call, and 2) 90 percent of Russians don’t
have phones". From Moscow, Cameron Sawyer counters; "Randy, in 1998,
when you left Russia, there were 30 million fixed telephone lines in Russia,
covering probably a third of all households in the country, with a higher percentage
of households "telephonized" in big cities. Since you left, the number
of fixed telephone lines has increased by a third, and Moscow has been completely
rewired with all digital exchanges (you can get DSL everywhere; I wish that
were true in my old hometown of Nashville). What is more remarkable is that
in Russia mobile telephone lines now exceed fixed lines in quantity -- mobile
phone users in Russia doubled in 2003 to 42 million users as of April, 2004,
or nearly one for every three people. Moscow has more than 12 million mobile
phone subscribers, which means that nearly every single Muscovite -- man, woman,
child, and babushka -- has a mobile phone. Moscow is thus the largest mobile
telephone market in Europe, and has a higher rate of mobile phone usage than
any U.S. city (for comparison, the New York area has 11 million subscribers
and a penetration rate of 54%, compared to 70% in Moscow).
In the village where we have our country house, a real farming village where
most residents do not have indoor plumbing, an hour from Moscow, the village
council itself offers DSL lines and digital phone lines, competing with two
commercial firms.
As to customer service, since Randy left, Russia has already passed through
the phase of merely having it, and already into the phase of outsourcing it
-- to Ukraine, Moldova, and Central Asia. In 1998, there was virtually no production
of consumer goods in Russia (thanks to the IMF's destructive currency policies),
and imported goods were largely bought in Soviet-style stores with the bill
counted up on an abacus and the goods wrapped up in newspaper with string. Today,
the retail market in Moscow looks much like any other European city, and already
regional cities like Kazan and Samara are getting mega-malls.
It is very dangerous to get too attached to stereotypes about countries which
are in such a rapid period of change".
Randy Black, who once lived in Omsk but now lives in Texas (the American Omsk)
gave a withering account of telephones in Russia. Cameron Sawyer, who lives
in Moscow and is an enthusiast of the new Russia, countered with an account
of the dazzling way that telephone service has improved. Randy is not convinced:
"While I appreciate Cameron’s telephone stats report, especially
judged by the fact that he is there and I am not, I have to question part of
his report. Several other sources state that there are only 19 million cell
phone accounts in all of Russia. By Cameron’s account, with 12 million
in Moscow, this leaves 7 million for the remaining 132 million Russians, spread
across nine time zones. Further, Cameron rightly states that there were 30 million
fixed phone lines in 1998 (per the CIA Fact Book, I presume) which of course
works about to nearly one phone line per household, considering that Russians
live several generations to one apartment or home in the nation of 144 million.
I had not realized that things had improved to that degree.
Finally, DSL and other modern conveniences are fine and well, but who can afford
such amenities in Russia? In Texas, DSL runs in the $35-$75 per month range
depending upon your add-ons and home outlets. Russian pensioners receive something
in the range of $20-$50 a month to live on, pay bills, eat, buy bus passes and
so forth. How many can afford a PC (OUTSIDE of the largest cities), a modem,
DSL service, etc? Who is buying all the Russian DSL services? Cameron echoes
the sentiments of many I have contact with, that Moscow resembles any other
European city, but…. What about the tens of thousands in Vladivostok who
have not had water to their flats in months, if not years? What Cameron and
others more or less confirm to me is that there is still TWO Russias. There
is Moscow/St. Petersburg, and then there are the rest, waiting for something
to trickle down to them. From December 2003: Vladivostok: The presidential envoy
to the Far East, Konstantin Pulikovsky, observed that only 23% of the city's
residents get a regular supply of cold water. That no one has hot water is a
fact officials seemed to have ignored.
Note: From the CIA Fact Book -- general assessment: the telephone system has
undergone significant changes in the 1990s; there are more than 1,000 companies
licensed to offer communication services; access to digital lines has improved,
particularly in urban centers; Internet and e-mail services are improving; Russia
has made progress toward building the telecommunications infrastructure necessary
for a market economy; however, a large demand for main line service remains
unsatisfied domestic: cross-country digital trunk lines run from Saint Petersburg
to Khabarovsk, and from Moscow to Novorossiysk; the telephone systems in 60
regional capitals have modern digital infrastructures; cellular services, both
analog and digital, are available in many areas; in rural areas, the telephone
services are still outdated, inadequate, and low density international: Russia
is connected internationally by three undersea fiber-optic cables; digital switches
in several cities provide more than 50,000 lines for international calls; satellite
earth stations provide access to Intelsat, Intersputnik, Eutelsat, Inmarsat,
and Orbita systems
From Moscow, Cameron Sawyer gave a glowing account of the telep`hone service
in the new capitalist Russia. Randy Black demurs: "While I have total respect
for Cameron’s facts about cell phone penetration percentages in Moscow,
there seems to be more to the story. Since Cameron’s positive portrayal
of the cell phone situation in Russia, I have spoken to, or written to several
Russians who said that, while the numbers of users is high, the usage is beyond
the financial ability of many users in Russia. To wit: One guy said, Yes, I
have a cell phone but by friends and associates are forbidden from calling me
on the cell unless it is life or death. The minutes charge is so high that most
of my friends have the same rules. My Russian wife also echoed that thought.
One of her girlfriends returned from Moscow last week, and she told us that
cell phones are everywhere, confirming Cameron’s story, but she added
that calls are very, very brief. Something about calls of less than six seconds
being free and so forth".
Randy Black rejected Cameron Sawyer's report on cell-phones in Russia, saying
that they are little used because that costs money. Cameron replies: "Well,
Randy, you'll also find some people in the U.S. who use their cell phones as
you describe. But the simple fact is that Russians have similar numbers of cell
phones per capita as Americans (45 million of them; the number has doubled twice
in the last two years and is supposed to hit 60 million by the end of this year)
and spend similar amounts of money per month on them (billions of dollars a
year). People from all walks of life chatter on them incessantly, just like
anywhere in Europe. They even wired up the Metro in Moscow so that your conversation
won't be interrupted when you go underground. The babushka who cleans our office
in Novorossiysk wears one on a lanyard around her neck, and I'll tell you, does
not limit her calls to six seconds. And why should she? Incoming calls are free,
as is usual in Europe, calls to other mobile phones cost 3 cents per minute
including VAT, and calls to regular telephones, whether local, intercity, or
even international, cost 19 cents a minute including VAT. (http://www.megafonmoscow.ru/tariffs/plans/olite/).
Here too things have changed a lot since Randy left Russia in 1998, when there
were only 50,000 mobile phones in the whole country, a minute of conversation
cost $.60, and a monthly subscription was $60.
Officially measured GDP per capita in Russia is still near the bottom of the
European range; about $10,000 per capita at PPP in 2002, less than Portugal,
and less than even Greece. But Russians have disposable income somewhere near
the European average -- no one is quite sure why, but it seems to be a combination
of a large shadow economy (widely supposed to be equal to or even greater than
the official economy) and low monthly housing costs (mortgages are not yet widespread
in Russia, and almost no one rents). Retailers have discovered this and are
pouring in, and not just into Moscow. A $1 billion mega-mall has been completed
in Samara, and was reportedly fully leased before completion and is now overflowing
with shoppers. The Swedish furniture and housewares retailer Ikea, one of the
world's largest retailers, has made Russia its number one global priority, and
is investing several billion dollars (including a billion of its own capital)
into construction of stores and factories, with its focus not on not Moscow
or St. Petersburg, but on ten large regional cities. Ikea's first Russian store,
located in the town of Khimki near Moscow, has the largest turnover of any Ikea
store worldwide. Other retailers have come to similar conclusions. Metro, the
large German retailer, has allocated 1 billion euros of its own capital for
investment into expansion of its hypermarkets throughout the country, again,
not just Moscow and St. Petersburg, and is already building a store in Nizhny
Novgorod (http://www.e5.ru/english/media_inpress4.phtml; see also http://www.themoscowtimes.com/stories/2004/04/15/053.html).
The biggest problem for retailers in Russia is considered to be spiraling wages
and labor shortages across the country; A.T. Kearny considers that this will
lead to a crisis in the next few years (http://www.ancor.ru/en/articles/article/?iArticleID=149).
Moscow's unemployment rate is currently less than 1% and without guest workers,
the Moscow economy would instantly collapse.
Randy is right to focus on the Russian regions for the real picture of the Russian
economy. Moscow is, as he rightly perceives, just the foam. Before 1998, Moscow
was apparently booming, but the country was falling apart. But today the picture
is completely different, with the larger regional cities growing even more dynamically
than Moscow. Most notable of these is Krasnodar, capital of the Cossacks, center
of Russian food processing, with much manufacturing besides, which attracted
more foreign investment than St. Petersburg last year, Samara, center of Russian
automobile manufacturing and associated light and heavy manufacturing (kind
of a Russian Detroit), where a multitude of new factories have been built, Novosibirsk,
Russia's "Science City", a great center of high technology manufacturing,
software development, and technical education, Rostov-na-Donu, Ekaterinburg,
Ufa, Kazan, Chelabinsk, and Nizhny Novgorod. These large cities (all one million
plus population) are centers of manufacturing and trade, and they are all doing
very well. The only parts of Russia which are not doing well at the moment are
those which were dependent on the state sector -- the artificial cities of the
Artic, and military centers like Vladivostok. The state has cut them off and
left them basically to die (which in my opinion is the correct approach). Even
agriculture is functioning in Russia and making a profit, something no one expected,
so what used to be called the "Red Belt" -- the depressed agricultural
belt across the south of Russia -- has ceased to exist as such.
This is the Russian heartland, and the engine of Russian economic growth. Note
that of the above-mentioned booming cities, only Ufa is directly dependent on
the oil business (Krasnodar to a lesser extent because of all the pipelines
that are being built nearby to get Caucasus and Central Asian oil onto ships
in the Black Sea). The flood of petrodollars is a great bonus to the Russian
economy, but the heavy lifting is being done by the growing manufacturing sector,
which accounts for fully 40% of Russian GDP (compared to less than 30% on average
in the EU) (http://www.balticdata.info/russia/macro_economics/russia_macro_economics_russia_GNP_GDP_summary.htm).
It is easy to forget, perhaps, that Russia has an essentially industrial economy;
the Soviets built it up like that and the end of Communism and the revolution
of the '90's has not changed that.
Randy's picture of the Russian economy is just a few years out of date. He should
go to Novosibirsk, sometime, an uncommonly pleasant city not far (by Siberian
standards) from where his mother-in-law lives in Omsk. Novosibirsk has a population
of nearly 2 million, and is growing rapidly. There are 75 fixed telephone lines
per 100 households, and 40% of the population owns a mobile telephone. 27% of
the population have internet access, of which fully half of that is DSL. The
Chkalov Aircraft Factory is working three shifts making Sukhoi fighter/bombers
(http://www.aeronautics.ru/sukhoi/su34004.jpg) for export. The local airline,
Sibir, has become the second largest in Russia and has broken into the top 100
of world airlines. After the end of next year, he will be able to stay in a
hotel I am developing there. It will not be built by Russians, by the way, since
the building boom in Novosibirsk has occupied all available construction labor,
and in fact there is a general labor shortage in Novosibirsk, which is causing
me no end of problems. We will probably have to use Turks or Central Asian guest
workers".
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