Ever have this experience as a Westerner entering a Russian factory? You walk into the director's office. You take a seat at the long table where management sits at those interminable planning sessions. Meanwhile, the director, Arkady Prokopyevich, or whatever his name is, continues to sit at the dominant position behind his desk. His inscrutable secretary brings strong tea and dry crackers.


Arkady Prokopyevich tells you how badly things are going at the business. Workers have not been paid for three months. No one pays their debts. It is impossible to plan ahead. Yes, you agree, the company does look to be in a pretty run-down condition.


But on the other hand, you know the company really must be generating some cash. It does sell metals or widgets or oil to the West, it does earn hard currency from a big transport business, it does have a local monopoly.


You then notice that Arkady Prokopyevich, under his Soviet-cut suit, is wearing a Rolex watch and an Italian tie. Inquire politely and he will tell you about his next business-related trip to some sunny destination. Yes, he has just bought a lovely dacha.


Maybe the director is just lucky, or maybe he takes the occasional gift from a customer. Often, however, the director is simply robbing the company.


This, of course, is easy to do. First, he could simply sell off the company's property and pocket the money.


But this can be risky, so the more sophisticated director will set up a related trading company that will buy the factory's goods at below cost price and then make an outrageous profit.


Even more subtle forms of robbery by factory directors involve delivering goods to customers who do not pay in exchange for kickbacks.


So, while the factory is doing badly, Arkady Prokopyevich is doing fine. Even though he will publicly complain about the non-payments crisis, slow bank transfers and non-payment of wages, he is secretly delighted.


This sort of director will be hard for Western businesses to deal with until they realize that he evaluates every proposal not in terms of the benefit for the company but in terms of the benefit for himself.


These directors fear most the appearance of real shareholders who will take control of their companies. Luckily for the directors, even though privatization in Russia has notionally been under way for three years, very few factories have actually acquired real shareholders.


The main reason is that in most factories, despite voucher privatization, shares are still mainly held by workers, who have not got a clue about business and are still in awe of their old bosses, and by the government, which has given up exercising any active role in managing its shareholdings.


Of course, directors themselves have usually managed to acquire a big stake of the shares in their own companies, often using the money they robbed from them.


In a few cases, outside shareholders capable of looking after their interests are now starting to appear on the registers of Russian companies. This is an unpleasant phenomenon for the Arkady Prokopyeviches out there.


They complain loudly. They say the outside shareholders are foreigners with Western methods who do not understand Russia's specificity. When the outsiders are Russians, the directors accuse them of being mafia structures.


In many cases, however, this is just a smoke screen. The directors often object to outsiders simply because they will expose the large-scale theft of shareholders' property that is an essential part of the way business has been done here for the last 70 years.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.