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Email this citationCIAO DATE: 07/01
Creating a Climate for Democracy and Private Enterprise In Russia
George W. Handy *
February 28, 1995
Introduction
There's an old Russian poem, I don't know the specific words of it, but as it was related to me, the ending has a great sense to it. The poem seems to say that there is no reason to explain why Russia should exist. There are no measures which adequately describe Russia, it is only for one to trust that Russia is. I come to you this evening, as Gene has explained, from the directorship of an international action commission for St. Petersburg, Russia. This is a commission that is founded on trust. Trust between Westerners and Russians, trust between business and government, and with universities, and focused by a common vision for the needs and possibilities for economic development in St. Petersburg and Leningrad Oblast. Tonight, my goal is to convince you that change in Russia is not only a matter of what is going on at the federation level in Moscow, but it is also very much a matter of what's occurring in key cities and regions, the grassroots across Russia. When we get done talking, I hope that I will have impressed, and excited you with the progress and the potential particularly for change and reform in St. Petersburg city and the surrounding region.
I'd like to deal with four subjects. First I want to talk a little bit about the nature of change and reform in St. Petersburg and Leningrad Oblast. Then I want to talk a little bit about Russian/Western cooperation and how that assists the reform process. Next I'd like to talk about a few action areas that we feel are particularly significant in speeding this process of change. Finally, I'd like to offer a little perspective and a few lessons that seem to be emerging that are worth repeating and thinking about in this forum today.
The Nature Of Change And Reform In St. Petersburg And Leningrad Oblast
Now, for the first subject. What about the nature of change and reform in St. Petersburg Leningrad Oblast, and typically at the grassroots level across Russia? First, a few basics. St. Petersburg is a city of five million people, the fourth largest on the Eurasian land mass, it possesses an enviable geographic position, a great tradition for government leadership, for excellence in education, for commerce, and for business, most particularly, very definitely a reform minded leadership. The Leningrad Oblast–1.2 million people, governed separately from the city, surrounds the city. It has some great resources in wood products, poultry, dairy products, thing of this nature. It has rich possibility with its extensive coast line along the Gulf of Finland. It's about the size of Austria, and it too has reform minded leadership. Both the city and the oblast suddenly find themselves confronted with a new possibility in terms of their new position now, next to the European Union, or Community, with the decision by Sweden and Finland to accept membership. This is the setting. If you walk down the street of St. Petersburg, I think you would be immediately captured as I was by the fact of change. The scope of change is immediately obvious, but more significantly you are captured by the feeling that change is not only in motion, but the motion is occurring all at the same time. Some examples: privatization: early in 1992, 2% of the enterprises were privatized, by the end of 1994, 74%. At the same time, this region which was heavily dependent upon the military saw a two thirds drop in government spending for the military production that took place in this city and region. Clearly production has fallen. It seems to be at a low point, or final resting point this year, in 1994. The city planners anticipate that in 1995 the production levels will begin to stabilize and in 1996 you'll begin to see an improvement. If you look from this base at the official statistic of 1.5% unemployment, whether that's right or wrong, the implication is clear and very correct. That is that there is a tremendous social burden borne by business as well as government and affecting very much businesses' productivity and its ultimate competitiveness. Despite declining revenues, despite low production, the city has operated through the tenure of Mayor Sobchak with no deficit. It has probably the lowest local tax rate for businesses of any city in Russia. It is trying to compete.
Looking at the businesses you could walk over to the Kirov plant, a giant producing rockets, tanks, and today struggling to find a partner and markets that they can be competitive in. And you could do the same with the respective company Arsenal that produced munitions and rocket propulsion systems. But walk over to another direction and you find Anatoly Turchak, president of the Leninetz Concern, a holding company for fifty-one new profit centers, still a master in producing radar, but now producing refrigerators, dental equipment and vacuum cleaners. Or, you could walk to the other side of town, and you'd run into, Valentine Zenin, big strapping guy. His company, Signal, produced the intercom system for the BMP, the Russian infantry fighting vehicle. In the last several years, he's cut his work force in half. He's moved away from primary product production into remanufacturing. When I first talked to him, he envisioned himself immediately going into the global market and putting products in Europe, and the United States that everyone would want to buy. Instead what's he done? He bought up all the old telephones that he could find, he's used his smart people to remanufacture them, he's selling them at prices Russians can afford. He just recently moved into dental equipment doing the same thing, and shortly he's going to move into computers. In the center of town is a very impressive woman. Who owns and runs the St. Petersburg Clothing Exchange. She produces clothing that is of top quality but she produces it at a price that many Russians can begin to afford. She's begun to make contact with Europeans, she has a great contract now with a firm in New York City, and for 1996, she's booked all the orders she can handle, and is ready to expand. By the way, she moves people who work on her factory floor into her showroom to provide for upward mobility. This is also the kind of atmosphere that exists within the business community in St. Petersburg, and all of these people were Communists. All of these people were successful Communists. And all of these people are successful entrepreneurs.
In order for business to grow though, you can't just have a few large concerns or even a few medium sized concerns that are becoming healthy. (And I don't want to imply that enough of them are becoming healthy yet. St. Petersburg is still very much at the beginning of a curve of business growth.) What you do need also is small businesses. Small businesses that are effective, that are the engines of innovation and change. And increasingly in St. Petersburg and in the oblast, young men and women are starting up service and manufacturing businesses. They face tremendous obstacles. They pay much greater penalties for the inequities of government and for their vulnerability to the mafia than a large company does. And yet they're surviving. An example. The World Bank did a study on small businesses, and they picked St. Petersburg. About a year and a half ago, they looked through the service sector, they came back in December and did a survey. Of the 88 small businesses that they'd examined a year and a half ago, all had survived. And the majority of them said we're a little better off this year than we were a year ago. This kind of lower level movement, I think, is one of the most encouraging aspects of change in Russia.
In order for business– small or large– to work, there has to be a partnership with government. Anatoly Sobchak, the mayor, and Aleksandr Belyakov, the governor of the oblast have both listened to business; they haven't yet succeeded fully in improving business conditions, but they've progressed–and will succeed. They fully reorganized both of their governments trying to make lines of authority clearer, trying to make access cleaner. Just by the way of a baseline trend or statistic, birth and death in St. Petersburg has been out of balance for some time and the population has been declining. But in 1994, the birth rate for the first time showed a positive growth. In fact the 7% birth rate growth in 1994 was the highest that had occurred in the past 15 years.
In this mix of positives and negatives that I've given you across a sort of panoply of areas, I hope you get a sense of what the nature of change is, and its possibilities as well as its challenges. In terms of challenges, the obstacles that I would suggest are the most formidable are first of all, crime. Second, the unstable laws and regulations, particularly in the areas of taxes. Third, the need for systems of law that allow disputes to be arbitrated and settled. Fourth, a very simple area–the need for more information, so that whether you are government or business or universities, and you envision a new project, you can find out something about a partner, and the possibility that causes your policy or business decision to be a wise one. And last but not least, the need for a working physical infrastructure.
Russian-Western Cooperation To Assist Change And Reform
In order to tackle the obstacles facing St. Petersburg and Leningrad Oblast, and to increase the already building momentum for change and reform underway in this city and oblast, partnership with the West has seemed to be a good thing. A good thing if it provides a partnership among people. This focus on a framework for cooperation among people is the cornerstone of the International Action Commission for St. Petersburg. The 72 commissioners who are part of this commission have placed their time and effort into this city and region for their own gain and for the common gain from change and reform in Russia.
The commission is made up of 72 senior leaders from business, government, universities, from Russia and five other nations. The commission is co-chaired by Dr. Henry Kissinger and Mayor Anatoly Sobchak. The focus is on economic reform and growth. The work is done through a series of working groups, joint Russian/Western, co-chaired, co-manned by people who have either expertise or experience of one kind or another but in any case are committed to reform, change and growth. Also, within this commission is a university consortium. It contains thirty-one universities from four nations as well as from the eleven leading universities in the St. Petersburg region. They provide a base. They receive problems and ideas that come from the different commission working groups; and alter curriculum or build new elements of curriculum and even entirely new schools to better prepare Russia's business leaders. Key areas include small business growth, general management concerns, quality, productivity, and human relations.
Three hundred people are involved in the commission's working groups, and another 300 organizations have some sort of passing interest in what's going on in any one of the working areas. Joint Russian-Western working groups have been formed in areas such as energy, environmental protection, transportation, and harder areas from a business standpoint, like defense industry conversion and health care. Public information and education to support business growth and institutional improvement are still other targets for commission work.
Essentials To Speeding The Process Of Change
The operation of the commission involves people coming together with people. Dr. Kissinger said when he first took the leadership of this commission that he had dealt through his life primarily in problems of grand strategy and policy, but that this type of opportunity, this type of a commission, took these broad problems of strategy and policy and put them into human terms. Focused them on concrete, small, but meaningful steps, and built the kind of cooperation that he said, and I think we all agree, is necessary to Russian and Western relations if we are not to repeat the mistakes of the past fifty years. The principles that guide us, I think are the principles that would guide you, if you tomorrow were starting such a venture. First of all, respect for the fact that what's right for Russia ultimately has to be determined by Russians. What's essential for us is to gain the kind of trust and understanding through direct association, so first we can contribute in a supportive way to Russia's decisions, but most importantly that we can understand how to react to them and understand how our two systems should work together. Third, and a very interesting point, it's a time now, when business has the capability of doing more in this world than just profit and loss. It's a time when business leaders, and I've been terrifically impressed by all the business leaders that I've worked with from Europe, as well as the United States, bring a conscience for their role as corporate citizens, excuse me, their role as world citizens, as well as their responsibility to their shareholders as corporate leaders.
While people are central to change and reform, they must be unified around an agenda of actions. I want to talk for a moment now about the kind of actions that constitute the forty three actions that our commission has undertaken which seem to be particularly important to reform and growth in St. Petersburg and Leningrad Oblast. They fall into three areas: institutional, infrastructure, and business enterprise.
In the case of institutional, we're just about to complete all of the arrangements necessary to register an international arbitration court, where disputes can be settled in terms fair to all players. We're working with the cities of Los Angeles and New York in order to help St. Petersburg with an idea of what should constitute a good incentives program to draw Westerners into the city to become a part of their city. We're looking as well at an association, an independent association, which is a home base for small business growth and development and allows both for lobbying as well as for sharing and communicating. We have, in addition, the idea of working with the Oblast to have a one-stop shop. What and why? Well, a risk, an obstacle that I pointed out earlier, was that the problem that laws are unstable, regulations are changing. You make a deal and you think everything is fine. The terms of your deal enable you to pay your taxes and other bills next year, and, all of a sudden, you learn that the rules were changed. And suddenly, you owe the city twice as much as you originally thought you did. Well, this kind of confusion is growing less and less, but still, Russia has so far to go that whether you're talking about Moscow or the cities and regions, this kind of uncertainty and change is going to be a reality for business. How can you cut through? A one-stop shop says that in one place, you've got a representative of all the key departments and agencies of government that are going to affect many of the key elements involved in a business. When that deal is made, there is one place to go. When there are problems, there's one place to go back to. Simple, effective and useful.
In the case of infrastructure, there is a different story. We're looking at environment, energy, transportation, financial services, and a number of others. Let's start with environment. For those of you who had the opportunity to listen to Murray Feshbach (I wasn't so fortunate, but I do know of his thinkings and his writings), I'm sure he laid out the incredibly dismal picture that Russia faces today from the standpoint of environment. And in St. Petersburg, it's certainly no better. The worst drinking water in the world, a hot water system where the pipes, 6000 km of pipe are poorly insulated, and extend all through the city. As they're eroding they're now leaking into the sewage pipes which are likewise caving in.
If you think about nuclear energy, there are fifty nuclear power plants that have been producing nuclear waste for some time. Where is it going? Then there is also a Chernobyl-type reactor near St. Petersburg. Electric power stations are as much as 100 years old, and produce emissions into the atmosphere that are poisonous. The problems are, first, that it's difficult to make ventures to protect the environment into ones that are financially sound. Why? Well, one big reason is that most of these environmental problems are linked to services which are provided to average Russians at a rate which simply is so cheap, it will not allow the government to recoup the money payback the loans on any sort of timely basis. Most significantly though, the problem is time. The time to put together the good business plans that need to be created along with the time that continues pollution of the atmosphere, land and water. This is one of our top priorities, and probably one of the areas that if a university community was going to do some creative thinking on financing strategies and approaches, this ought to be right at the top of the list.
Energy, we're working on a hot water system, we're working on a project with the World Bank to re-do old power stations, the kind of problems I alluded to a moment ago. But we also have worked with the city to develop an independent energy company that acts as an honest broker for the city which both owns and operates the energy services. We've provided the assistance that has helped the city to establish a single point for control and direction within the city for energy activities.
The port development is significant because twenty five percent of Russia's exports and their imports come in and out of St. Petersburg seaport, and yet, at this point, corruption and inefficiency are forcing more people to off load at Riga and bring goods overland, or overland from Helsinki, than pay the risk and cost of coming into the port itself.
We're looking also at financial services. In the banking area, training for bankers who have not had the kind of full service requirement that we take for granted in our banks, but which Russians are now recognizing should be their right and a necessity to the operation of a twentieth, and shortly to be a twenty-first century country. We've worked with them on the forming of a central registry for liens so that property ownership can be recorded and the essential ingredient, for a mortgage bank can be put in place.
Health care, the entire system of health care is being reorganized. From a system that went through a queue of polyclinics to one where the reliance is on general practitioners who provide family-level care from clinics around the city and the oblast. Training, clinics, equipment, and also education of the individual on health care and good health care standards.
Food distribution, we're working with the oblast on the set-up of an agribusiness wholesale market to provide for a flow of products into and out of the city from the farms, and then going through the education process that helps farmers as well as operators understand how this whole farm to market process works.
Defense industry conversion is crucial as well. In this case, the target has been not to seek a global market position immediately, but, as I described in the example of the Signal Company and this fellow Valentin Zenin, defense industry companies seeking to convert should work in the local market first–work in an area where they have some strength and capability. Learn how to improve their productivity, quality and so forth. Then move into the global market with that know-how and that experience. And probably with a good partner.
Business plans are a key problem. Good solid business plans with financial projections and so forth. Then also, just simply the perception, the perception here in the United States that there are companies like Lenins, like Signal, like the St. Petersburg Clothing Manufacturing, and others that are potentially great partners. And the attitude and information within Western Europe and the United States is that those people are out there to find, if you've just got a little patience to go look for them.
A Few Lessons On Change And Reform In Russia
Now, a little bit of perspective in wrapping up what we have to say this evening. We're prone to think of Russia as a lesser nation, as we talk about the many problems that we've just chronicled this evening. But we will be in error, I think, if we don't recognize that roots of Russia's problems are more matters of context, not of capability. I spent some time in New York with the city government this past week and had the good fortune of listening to the Chairman for the New York City Planning Commission talk to Mayor Sobchak about what was going on in New York City. The Chairman of the City Planning Commission said that Mayor Guliani's first priority is to protect people from criminal activity. His second concern is to provide a consistent and fair set of laws and legal structure by which business is regulated. His third objective is to have an educated work force that is there when outside business comes to work in New York. And his fourth priority is to have an efficient transportation system. Overall, the concern of the City of New York is to make sure that the taxes and services are in balance. Additionally, New York City faces a two billion dollar budget deficit. What I'm saying is, that what challenges the fourth largest government in the United States, and that's what New York City is also, essentially among the foremost challenges to the fourth largest city in the Eurasian area, St. Petersburg. What I'm suggesting out of this is that the contextual differences need to be understood, and we need to account for those. Whether we're working for government, for university, or from business, we need to recognize that in matters of capability, our partnership ought and should be a partnership with equals.
Is St. Petersburg that special? Is this something that I'm talking about that could only apply to St. Petersburg because of the characteristics I mentioned at the outset of our discussion? I think not. The first deputy Mayor of Kalingrad came to Washington and talked about the kind of Russian/Western cooperation and growth plans that benefited from the commission induced cooperation. A Kalingrad delegation has visited St. Petersburg with hopes of entering into a similar cooperative framework. The Mayor of Ekaterinburg, the third largest city in Russia, came to Washington, spent some time with us, talked about the kinds of subjects that I've raised with you, went back, sent a delegation to St. Petersburg, and now wants to start this type of a cooperative effort to get his story as well as his opportunities more rapidly into the flow of world commerce.
Conculusion
You've been patient and thoughtful in respecting the fact that I've come with a long and detailed story, but I hope you've found it to be a serious story that has captured a little bit of your imagination. I hope that I've made the point clearly, that change and reform in Russia is driven from the grassroots as well as from the events and apparatus in Moscow. I hope that you decide that this has got to be an important factor in your assessment of what Russia's future could be. In looking at reform and change in Russia, I hope the point is clear that the nature of change in and of itself seems pretty simple, not at all complex; until you recognize that all those changes are occurring at the same time, and there's no real cornerstone to anchor any one piece to. I hope you recognize, too, that the change process in Russia can be benefited by Russian and Western partnership, if it's a partnership of equals. And I think that type of partnership is merited. I hope as well that cooperative actions that we've identified are ones that strike a chord with you, in the area of institutional change, infrastructure improvement, and also growth for business enterprises. I hope you've noticed as well, that our commission is not called "the US/Russia Commission"–it's called "The International Action Commission for St. Petersburg." And really the richness and the strength of what's being done is drawn from the texture of world community, albeit a six nation subset, and not simply from the interaction of the United States and Russia. On balance, I hope that the encouraging aspects of what I have said make it clear to you, that I think that democracy and the free market system are taking root in St. Petersburg and Leningrad Oblast. Although our cooperative efforts in this commission put the best face forward on democracy and the free market systems, I still trust the Russians to make the right decisions for themselves. And I'm sure that their systems will be somewhat different than the democratic and free market system that is a part of our traditions and experience. I trust too, though, that our system and theirs will continue to work together. Simply because they have to.
I hope, in conclusion, that you recognize that there's a strong need for innovative programs in cities like St. Petersburg, for governments, business, and universities. I hope you'll join us. Thank you.
Endnotes
Note *: George Handy is a retired U.S. Army Colonel who was a former executive for United Technologies Corporation. He is currently a coordinator of the St. Petersburg Commission Project at The Center for Strategic and International Studies. Mr. Handy spent two years in St. Petersburg where he coordinated U.S. business reform efforts. Back.
