Archive for the ‘Slate’s The Big Money’ Category

Nano-Potemkin Village

Wednesday, December 9th, 2009

Earlier this fall, inside the sprawling Moscow Expo Center, hundreds of scientists gathered at the second annual International Nanotechnology Forum to mumble through dense presentations with antediluvian graphics and pace the halls, which were plastered with posters exploring nanopowders and silicomolybdic acid-diamine self-assembling ensembles.

But this was no ordinary scientific conference. For starters, there were the attendees, of which there were about 10,000, including hundreds of journalists, raging into their BlackBerrys and sprinting between press briefings. Then there were the TV crews and the professional cameramen archiving those scientific presentations for posterity. There were awards for international scientists. Siemens was there; Samsung and IBM were there. Even Russian President Dmitry Medvedev was there.

This, you see, was a Kremlin production.

Medvedev came to reassure all involved that he and the Russian state were still invested in making Russia the world leader in, of all things, nanotechnology. “I hope we will be able to make nanotechnology, the nano industry, one of the most powerful sectors of the Russian economy,” he said. The financial crisis, which has hit Russia especially hard, was but an opportunity, the president said, “to renew the Russian economy,” which has for too long coasted on the extraction of the earth’s riches.

Sure, modernization has long been Medvedev’s calling card, and getting away from fossil fuels is certainly a laudable idea, but nanotech? Really? Why, of all things, would the Russians focus on that as their ticket to a 21st century economy?

Historians Yuri Lotman and Boris Uspensky once noted that Russia does not do gradual change well. Rather, its leaders have long approached reform as a one-two break with the past, an approach that often has the reverse effect: In cleaning the slate, Russia too often simply locks in what’s already there.

And that’s what happened here. Like all such reforms, the nanotech initiative – diversifying the economy through some sort of futuristic magic bullet—was cooked up somewhere at the top. Why nanotech? Because, back when the idea was being entertained, sometime in late 2006, says an analyst familiar with the project, “nanotechnology was just the flavor of the month.”

But this being modern, corporatist Russia, the Kremlin did not stop at a directive praising the virtues of everything nano, nor did it take the route of incremental reform that encourages innovation through nudging incentives. Instead, it created a behemoth: a goskorporatsia—an opaque and controversial state-owned entity invented during the Putin era to squirrel away government money—called Rosnanotech.

Upon its formation in April 2007, Rosnanotech was given a budget of $5 billion and charged with developing a domestic nanotech industry capable of export and competition with the West. Around that time, the world nanotech market was $147 billion and predicted to grow to more than $3 trillion in the next eight years. To do this, Rosnanotech hired a professional, suited cadre trained in the liturgy of business plans and debt financing and set about growing a nanoindustry from absolute scratch.

Rosnanotech has become, essentially, a state-owned, state-funded venture capital fund. Scientists with a nanotech proposal apply to the company, which uses an international expert panel to weed out those projects worth investing in, in which Rosnanotech then acquires a minority stake. (According to Rosnanotech’s charter, its participation cannot exceed a 50-percent-minus-one share.) The company then ushers the project along the road to mass production—the goal is revenue of $8.5 million by the fifth year—by helping the project find private investors and properly structure their debt; dealing with Russian bureaucracy; finding and retooling production facilities, all with the plan of an early exit. “Our goal is not to maximize our investments,” says project office director Mikhail Chuchkevich. “And we are prepared to exit earlier, a lot earlier than other venture capital funds. We’d rather reinvest the money faster and create another project.”

To date, more than 1,200 proposals have been submitted, and of those 36—ranging from ventures in nanosprings to nanoink—are at various stages of implementation.

And there are bigger plans yet in store. Later this fall, Rosnanotech plans to open a stock exchange to connect fledgling companies with investors. By 2015, the new chair of Rosnanotech, the controversial and perennially embattled Anatoly Chubais, hopes to see the annual production in the Russian nanotech sector boom to about $30 billion, having repaid about $5 billion into the Kremlin’s treasury.

It sounds, at first, like an excellent idea: using government money to get new businesses off the ground, using primarily private funds, while simultaneously weaning the country off of petroleum.

But there are, of course, huge—and quite likely fatal—hurdles in the way of achieving such astronomical projections.

First, there are the money problems. Some of Rosnanotech’s budget, observers note, came from the forced sale of the assets of Yukos, Mikhail Khodorkovsky’s oil company seized in 2003. (The money, apparently, needed pockets.) And because it is a government corporation, notes Troika Dialog tech analyst Anna Lepetukhina, the money doesn’t always get where it’s supposed to go. “There’s a question of the allocation of resources and it’s not totally clear how it happens or who gets the money,” she says. “All of a sudden, oops, it’s gone.”

And then there’s the crisis, which has pushed Russia’s official unemployment rate to nearly 8 percent and opened up a yawning budget deficit. And so, in February, around the time of the peak of the crisis, Rosnanotech had to give $3 billion—more than half of its budget—back to the Kremlin.

What’s left is not nearly enough money to fund the necessary (and very expensive) research and development, because there is not much of a foundation left to build on. Nor are there people left to build this industry. The effect of brain drain is not to be underestimated. In the first decade after the collapse of the Soviet Union, more than half a million scientists and engineers left Russia for greener pastures. Yet there aren’t many saplings waiting to replace them. A recent study showed that 60 percent of engineering students in Russian universities had failed their college entrance exams. Medvedev has announced another government initiative to fund scientific research at cash-strapped institutions, but, again, much of the allocated money is simply disappearing en route to the lab.

As a result, many of the proposals flooding into Rosnanotech at the rate of 45 a month are utter nonsense, according to a private investor working with the company. “Russia is a country of dreamers,” he said.

Chuchkevich, the projects manager, acknowledged that this was a problem. “Our work is really interesting, just like it is at any venture fund,” he told me at the Rosnanotech headquarters. “We get proposals that promise to overturn all current notions of transportation. Others say they will get energy from the air or the magnetic field of the earth. One proposed using the nanostructure of water to cure illnesses. But,” he added, “we’ll talk to anyone that comes to us.”

Then there is the fact that Russia’s infrastructure continues to rust, along with Russia’s historic inability to compete on par with Western high-tech companies—mostly because it doesn’t have a modern high-tech industry. While the Russian government parades around the nano-initiative, it still starts from scratch: Chubais himself acknowledges that the sector is now no bigger than $150 million. Meanwhile, the West, which has established centers of technological innovation, continues to surge past Russia.

And yet Chubais hopes that the Russian nanotech industry will increase 200-fold in the next six years, a break-neck prognosis that looks delusional at best, considering all the very, very real challenges he faces.

Indeed, most industry watchers and observers of Russian politics agree that, given the obstacles and given the Kremlin’s lackluster track record, Rosnanotech and the Nanotechology Forum are little more than an elaborate a PR stunt designed to make the Kremlin appear to be forward-thinking and reform-oriented while shunting wads of cash to its friends. (Or, put more bluntly by another analyst, “It’s just bullshit.”) Meanwhile, all the problems of the past—corruption, dependence on oil, crumbling infrastructure, terminal brain drain—that this nano-initiative was supposed to fix have grown noticeably worse during Medvedev’s short tenure. The only difference now is that Russia has a self-assembling, decorative nano-Potemkin Village.

Nano-Potemkin Village [The Big Money]

Geeks in Space

Thursday, June 25th, 2009

Richard Garriott is a geek. He loves fantasy; he has two thin braids running down his back that, for pictures, he swings over onto his chest for maximum effect. Back in the 1980s, he developed a series of fantasy role-playing video games under the Ultima umbrella, making him, perhaps, the Henry Ford of gaming. He made a fortune, and he used it to build two houses in Austin, Texas, named after the home of the hero of his video games, Britannia Manor. (The one he lives in now, Britannia Manor Mark 2, is equipped with a set of secret passageways, artificial rain, underwater caves, an authentic 16th-century vampire-hunting kit, crossbows, armor, two skeletons, an observatory, and a lock of hair from a wooly mammoth.)

And, because Garriott is a geek, he has also used his millions to pursue his love of space. In 2000, he shelled out hundreds of thousands of dollars to be the very first self-funded tourist in space. But then the dot-com bubble burst, and he lost most of his money and had to sell his seat on the rocket. But Garriott loves space so much that, once he regained his financial footing, he decided to buy back that trip rather than resume construction on the still half-finished Britannia Manor Mark 3, the other casualty of the bust. This time, it would cost him $30 million—up from $20 million—and the training would take about a year out of his life, but it was space and, goddamn, it was worth it.

“It’s so important to see Earth from orbit,” he told me recently. “It’s a truly life-changing event.”

He says he has also noticed a pattern: All those other tech geeks thirsting for the same view. For instance, when Garriott finally went up, in October of last year, he was already Space Tourist No. 6. But Nos. 1 through 5 were all tech geeks, too. Space Tourist No. 1 was Dennis Tito, who bought Garriott’s first seat in 2001. Tito made his money by bringing mathematical analytics to money management. (He also had a bachelor’s in astronautics and aeronautics.) Tito was followed by Mark Shuttleworth, the Web-security millionaire; then came Greg Olsen, the optoelectronic millionaire; Anousheh Ansari, the telecom millionaire; and Charles Simonyi, the millionaire responsible for Microsoft (MSFT) Office. Google (GOOG) co-founder Sergey Brin has reserved a flight but hasn’t yet found the time to go, and tech venture capitalist Esther Dyson just plunked down $3 million to train for five grueling months—including a tundra survival mission, a machete and all—just to be Simonyi’s understudy for his second flight, in March 2009. (Guy Laliberté, the tech-savvy founder of Cirque du Soleil, is the next space tourist, scheduled to go up on Sept. 30.)

And these are just the travelers. There is also a shadow NASA out there, made up of tech geeks who are investing their second entrepreneurial wind into beating NASA, Boeing (BA), and Lockheed Martin (LMT) by building lighter, faster, cheaper, and, amazingly, reusable rockets that will supplant the space shuttle when it is retired in 2010. First, there is Jeff Bezos, founder of Amazon (AMZN), who in 2000 founded Blue Origin, a secretive company focused on making suborbital space tourism affordable and accessible. (First qualification for working there? “You must have a passion for space.”) There is also Armadillo Aerospace, founded by John Carmack, of DOOM and Quake fame. And there’s the Big Space Cheese himself, PayPal co-founder and Tesla CEO Elon Musk, whose space company, Space Exploration Technologies (or SpaceX), has become adept at scoring massive government contracts to build rockets that will make space deliveries of things like supplies and satellites for NASA and the Department of Defense. (Musk recently made his ultimate destination clear: Mars.)

So why do tech geeks love space? Though they may have the resources—a trip to space will now set you back some $45 million—this can’t be the full answer: You don’t see Donald Trump or P. Diddy signing up for an astro-mission. What makes it worth it for the tech geeks? Garriott, for one, has thought about this extensively. In part, he loves space because his father, Owen, was a NASA astronaut. But then there’s the social conditioning.

“There’s a documentary called Orphans of Apollo that’s stated this well,” he explained. “There’s a generation of us, who are the tech leaders of today, who were universally inspired to go into science and technology because of the NASA Lunar Space Program. And the reason the movie is called Orphans of Apollo is because, in many ways, we feel orphaned by the fact that the space industry has not done a good job of capitalizing on that momentum of what many of us believed were the first steps into space, carrying the mission of human space flight farther and farther into deep space.”

“The same kids who grew up wanting to be computer engineers are the same kids who grew up watching Star Trek, OK?” says Eric Anderson, CEO of Space Adventures, the Vienna, Va.-based company that facilitates space travel for civilians. (Garriott is on the board of Space Adventures, and Dyson and Brin were early investors.)

“Technology entrepreneurs are the ones with the technical curiosity, the desire to do new things and explore new territory,” says Dyson. “And this is the ultimate new territory. There was a belief once, too, that America was something new and unnecessary.” Dyson believes we will eventually be colonizing other planets. Like Garriott, she also has space in her blood. In the late ’50s, her father, physicist Freeman Dyson, worked on using nuclear pulse propulsion to vault rockets into space. Esther was 7 at the time, and she recalls thinking that, naturally, one day, she would get to travel in one.

Now, these techies-made-good finally have a way to get to space. If they have the means, they come to Anderson. “Entrepreneurs take calculated risks,” Anderson says. “They’re willing to spend their life and time and money doing things that they know might fail.” And he’s willing to help them try for a slice off the tophis is a private company, and he would not reveal the terms of the contracts—though most of money goes to the Russians, who do all the heavy lifting. (Currently, there are no space-tourism flights leaving from American soil, and, according to a NASA spokesman, there won’t be for some time.)

The Russians, on the other hand, have been all too happy to oblige. Once the vanguard of space exploration, they suffered their own version of Garriott’s bubble bust. In 1991, the Soviet state fell and with it went the massive state subsidies for their space program. In 2000, Garriott and Anderson approached the Russians to see if they wanted to profit from this decaying part of their infrastructure, too. After the obligatory pooh-poohing, the Russians agreed to sell one seat on the three-seat Soyuz rockets they send up to the International Space Station. (NASA also buys seats on the Russian rockets, for $51 million per seat, which is still cheaper than building their own or sending up the space shuttle, which also happens to have a worse safety record than the Russian-made Soyuz.)

Space Adventures forks over most of the hefty fee to the Russians, who take the Space Tourist up to the International Space Station for about a fortnight. (The tourists themselves insist on being called “Space Explorers.”) Before they go, however, each space tourist must train for five months (900 hours) in the isolation of Star City, a secret hamlet just outside of Moscow that only recently started appearing on maps. There, working alongside Russian cosmonauts and some American astronauts, they work to attain “user level” proficiency in all things rocket: communication, emergency, life-support, electronics, and rocket-propulsion systems. It is all in Russian. (Dyson speaks the language; Garriott had a translator.) They undergo turns in the centrifuge and are subjected to endoscopies and colonoscopies. They are sent on zero-gravity “parabola” flights, which are fun with a caveat. (“The Americans try not to make you sick,” says Dyson. “The Russians try to make you sick.”) There’s survival training in the wilderness, including a bout in a tiny space capsule stranded at sea in which you have less than 90 minutes and very limited space to change out of your spacesuit. Garriott says he emerged black and blue, having failed on his first attempt: The capsule heated up so much that his core body temperature became dangerously high.

For the people who weren’t sufficiently athletic or eagle-eyed to become astronauts in the first place, completing this training is no easy feat. Nor is space a cakewalk. Once in orbit, blood becomes more concentrated and pools in your head; muscles atrophy and bones lose calcium. Back on earth, cosmonauts have to be lifted out of the landing capsule, essentially paralyzed for days.

“It’s no joy ride,” says Dyson, who is still waiting for the price to come down before she uses her successfully completed training in space. “It smells. It’s noisy. It’s the same people every day. The food gets repetitive. It’s lonely.”

But for the tech geeks, it is part of the fun.

“Now that I have been to space, and I have survived the second market crash, I hope to restart Britannia Manor Mark 3!” Garriott wrote in a recent e-mail. “Plus, of course, I plan to get back to space ASAP!”

Geeks in Space [The Big Money]

The Gun Club

Tuesday, January 13th, 2009

Last month at the Golden Idea Awards [1], an annual ceremony for the Russian defense industry, Deputy Premier and ex-KGB hard-liner Sergey Ivanov told the prize winners that he was supremely proud of them. “Even in the midst of the world financial crisis,” he said, “there has been no drop-off in the demand for our products.”

It is probably the only Russian industry that can claim such an honor. November’s dismal economic data showed [2] that the Russian economy had gone off a cliff; the double-digit declines in industrial output, commodities prices, and consumer spending were the biggest since the country’s outright collapse in 1998. Yet Russia’s weapons exporters are still doing brisk business. Their expected earnings for 2008 [3], a disastrous year for everyone else in Russia, were $8 billion, with a crop of future contracts worth some $33 billion.

The industry starts with a considerable advantage—proximity to the Kremlin. The weapons export monopoly, Russian Technologies [4], is run by Sergey Chemezov, Putin’s buddy from their Dresden days in the KGB. “There’s been a significant increase in Russian arms exports under Putin,” says Paul Holtom of the Stockholm International Peace Research Institute [5]. Russia is now second only to the United States in weapons exports.

And now, the industry is set to get another gift from the nation’s rulers. World demand for most Russian products—oil, nickel, gas—has collapsed, and Russia’s currency reserves are leaking like a sieve. So the Kremlin has started notching the ruble downward to ease those pressures. Its phased devaluation [6]—about 1 percent to 2 percent a week for the last two months—has left the ruble some 18 percent lower than its August peak. What’s more, economists predict that the Kremlin will deflate the ruble another 20 percent this year in order to protect the country’s reserves and revive its exports. (Even after years of promising diversification, commodity exports are still Russia’s lifeblood.)

As the ruble drops by more than one-third of its value, Russian guns, planes, and tanks, already the bargain alternative to pricey American models, will become still cheaper. This is important for two reasons: As the revenue streams of Kremlin-connected oligarchs dwindle, this one could hold steady since a cheaper product can catch dropping world demand. This could also help because some of Russia’s weapons customers are oil producers hurt by tumbling oil prices. Venezuela, for example, has signed a series of lucrative arms contracts with Russia but is already negotiating a loan [4] to pay for all those goodies. Cheaper arms, however, should alleviate these pressures—and keep pinched customers from reneging on those defense contracts.

That’s good news for Russian weapons exporters but bad news for some of the world’s peacekeepers. Once the world’s arms warehouse, the Russian defense industry since the collapse of the Soviet Union has been hobbled by inefficiency, an aging work force, and inferior products. (In an unprecedented incident last year [7], Algeria, an old Soviet customer, sent back 15 MiG fighter jets, claiming they were lemons. “It was the first time a foreign customer returned a military hardware purchase—ever,” says Stephanie Neuman, a weapons trade expert at SIPA. “It was unheard of.”) But what Russia lost in market share, it made up for in zeal, aggressively peddling its weaponry all over the world. Desperate to attract new customers and win back old Cold War allies, Moscow attached few strings to its weapons deals. Such terms of trade were very attractive to the countries that America refused to do business with, and soon Syria, Iran, North Korea, Libya, Venezuela, Somalia, Eritrea, Burma, Yemen, and Sudan all became Russian customers.

Of course, the United States has armed its fair share of unsavory actors, but on the whole, say weapons experts, its export controls are much tighter than Russia’s. “The U.S. sells widely, but places where it draws the line, Russia jumps in,” says William Hartung of the New America Foundation [8]. And Russia, recognizing that the West looks askance at sales to these rogue actors, has made some gestures of appeasement, like promising to do surprise inspections after a sale is completed to someone in what it calls the “awkward” market. It is unclear whether any such inspections have taken place.

The other discrepancy between the two superpowers is what they sell. America makes the bulk of its money selling very expensive, high-end technology—big-ticket items like fifth-generation fighter planes. Russia also sells mostly tanks and planes, but it also churns out a huge number of small arms and light weapons, the industry term for things like AK-47s, shoulder-fired anti-aircraft missiles, and RPGs. The figures are murky, but last year Russia sold as much as $400 million worth of these. And once these cheap and highly portable weapons are sold to “awkward” states, they very quickly turn up somewhere else entirely.

While the big stuff like planes and helicopters has been found in some nefarious corners of the world (Darfur, for example), it is the light, cheap stuff that presents the biggest problem. “Soviet-bloc weaponry constitutes the bulk of illicit circulation,” says Matt Schroeder of the Federation of American Scientists. And circulate it does. Russian guns sold to Eritrea recently surfaced in the hands of Somali insurgents [9]; the computer of a captured FARC leader revealed that Hugo Chávez was planning on arming them with Russian shoulder-fired surface-to-air missiles; Russian rifles sold to Algeria were found being used by death squads; and, in the summer of 2006, Russian anti-tank missiles, or RPGs, sold to Syria were found under the auspices of Hezbollah in southern Lebanon. (RPGs are cheap, but they cost the Israeli army nearly three dozen tanks.) And those Hamas missiles we’ve been hearing about of late? According to military sources, those are Russian Grad missiles, funneled to Gaza through Syrian and Iranian intermediaries.

It remains to be seen, of course, if a devalued ruble exacerbates the situation by making small arms and light weapons even cheaper. For one thing, the Kremlin seems unwilling to take the ruble down 20 percent in one fell swoop, which would really give the weapons exporters a boost. The Russian weapons industry is not in good shape: In recent years, there has been very little spent on R&D and even less on the Russian army (the industry is almost completely dependent on exports), and it is fast losing market share in its two largest markets: India and China. And, given that the entire world is hurting, there may be a bunch of canceled arms contracts around the corner.

On the other hand, countries might cut back on the big, less portable weaponry but keep the light and cheap guns flowing. The collapse of other Russian industries may make selling arms that much more urgent for the cash-strapped Kremlin, which has already stepped up its salesmanship, sending President Dmitry Medvedev on a sales trip to Venezuela in November [10]. And, with a cheaper ruble at its back, Russia might find some eager customers in the increasingly awkward and dangerous corners of the globe.

Links:
[1] http://www.kommersant.ru/photo/archive/search.asp?L=2&dt=1&ex=y&lang=2&lib=1&ps=50&searchbtn=search&text=aircraft&pg=6
[2] http://www.ft.com/cms/s/0/7f67201a-cba7-11dd-ba02-000077b07658.html?nclick_check=1
[3] http://english.pravda.ru/russia/economics/17-07-2008/105807-arms-sales-0
[4] http://www.iht.com/articles/ap/2008/07/14/business/EU-Russia-Russian-Technologies.php
[5] http://www.prio.no/
[6] http://www.cnbc.com/id/28600838
[7] http://en.rian.ru/russia/20080218/99490063.html
[8] http://www.newamerica.net/people/william_d_hartung
[9] http://www.fas.org/blog/ssp/2006/08/manpads_for_hezbollah.php
[10] http://www.reuters.com/article/worldNews/idUSTRE4AJ52B20081120

Wal-Mart’s Ruble Trouble

Friday, November 21st, 2008

Wal-Mart unexpectedly replaced its CEO on Friday, but things are looking up for the number 1 retailer as chastened American consumers rethink about those aspirational brands they’ve loved so long. Last week, the company posted a whopping 10 percent jump in profits [1], just as Starbucks [2] saw its same-store sales plummet 8 percent [3].

Besides cashing in on American consumer woes, in recent years much of Wal-Mart’s growth has come from overseas; indeed, incoming CEO Mike Duke has been in charge of Wal-Mart’s international operations. A decade ago, just 5 percent of its earnings came from abroad. Now, more than 40 percent of its stores are overseas. To be exact, they’re in 14 other countries where more than 50 million weekly visitors provide the Arkansas retailer with nearly a quarter of its sales [4]. Wal-Mart has had particular luck in Mexico, China (the source of much of Wal-Mart’s goods), and Latin America. The company is expanding in the larger markets, with more than 300 stores doing brisk business in Brazil and its first store in India early next year [5].

The glaring omission here is, of course, that backward R in BRIC [6]: Russia. For four years now, Wal-Mart has been actively—and secretly—scouting the Russian terrain, trying to find the best bucket to catch a sprinkling of petrodollars. But, after four years of jerking around Russian realtors, there are still no stores in sight. This summer, Wal-Mart announced that it had hired a German retail executive to head up Wal-Mart’s emerging markets division, with a scouting office in Moscow. Aside from that, however, Wal-Mart is keeping mum. “We continue to study the market” was the mysterious comment from Richard Coyle, the company’s senior director of international affairs.

Why the hesitation? Well, as you may have heard, Russia is a strange place, prone to unpredictable government intervention and hefty bribe-taking [7]. And if you want to build in Moscow, where nearly all of Russia’s new wealth is concentrated and spent, you’d better be prepared to pay. A lot. Unlike in California, skyrocketing prices there are no bubble.

So, let’s say you’re Wal-Mart [8], and you’ve managed to get a scrap of land. You’d quickly discover that there are all kinds of permits and papers needed to start building, but they’re hard to get, so, well, you’d have to come to a special-and pricey-understanding with the permit granters. When IKEA set up shop in Moscow in 2004, for instance, it fought with city authorities for months [9] over the building of an expressway ramp to its shopping center. The other way around it is to buy an existing chain-the strategy Wal-Mart pursued, to its resounding profit, in England (ASDA) and Japan (Seiyu). But retail is lucrative in Russia—the food market alone was estimated to be more than $140 billion last year—and it’s less than a decade old, so there aren’t many sellers just yet. An existing chain of 50 stores will now cost about $2 billion. It may seem like a bargain—Wal-Mart lobbied Tony Blair to allow its $14 billion deal [10] to go through, but ASDA was a ready-made, highly developed product. When Wal-Mart purchased it in 1999, the 50-year-old company was already Britain’s No. 2 retailer and had started mimicking Wal-Mart’s methods [11]. By contrast, Russian chains are still less than a decade old based on local, logistically fraught distribution chains.

Russian analysts estimate it will cost about $15 million to $20 million to build and stock each store. Unfortunately, Russian borders aren’t the most permeable. Often, authorities stop goods at the gate—say, goods coming from China—skim a little off the top, or just impound the whole lot without explanation or recourse. In 2006, for example, Russian customs agents seized 167,000 Motorola cell phones [12] and, after changing their reasons for doing so a few times, ground about 50,000 of them to a fine metallic powder. Also, the country is huge; even if those Chinese goods get into the country, the roads and railways spanning its 11 time zones are uneven at best and nonexistent at worst. (Don’t try to fly the goods, though, since Russian domestic flights tend to fall out of the sky with alarming frequency.) This matters a lot for Wal-Mart, since it has built its entire empire on big volumes of cheap goods from China coursing through a speedy, ultraefficient distribution network. Natalya Zagvozdina, a retail analyst with Renaissance Capital, puts Russia’s infrastructural readiness at somewhere near 25 percent. “And that’s probably a generous estimate,” she adds.

Then there’s the question of corporate culture. Wal-Mart has learned the hard way that it doesn’t always translate well. In 2006, it shuttered its operations in South Korea after a decade of incorrectly emphasizing dry goods when Koreans wanted food and beverages. In Germany, where Wal-Mart was already fighting an uphill battle in a very competitive market, it also faced problems of etiquette. Locals balked at other people bagging their groceries or smiling at them when they entered the store. (German men, apparently, thought they were being hit on [13].) It’s also not hard to foresee how a line in Wal-Mart’s employee manual stipulating that employees report rule-breaking would go over in Russia, a place where authority is a terrifying joke, interactions are highly personalized, and where ratting on someone is one of the gravest sins one can commit.

So that’s the bad news for Wal-Mart. The “good” news is the same as at home: The financial crisis has hit Russia, too. The Russian stock market has lost more than 70 percent of its valu [14]e this year and the construction industry is in crisis, as is the local credit market. Indeed, Wal-Mart may have some buying opportunities, because retail chains that have accumulated tremendous debt in the last few years are now finding it impossible to refinance. All of a sudden, properties that weren’t up for sale because they were still young and profitable—or that were going for $2 billion—now cost half what they did three months ago. (A hint from Russian investment bank Troika Dialog’s Anna Matveyeva: Buy a smaller chain that isn’t politically connected enough to fall back on the government for a bailout. There is, for example, Kopeika—or “kopek”—which already has almost 500 stores and about that many millions in debt.)

And remember: The Russian consumer is still itching to spend and is still woefully underserved, crisis and all. Assuming that one hypermarket—a grocery-department store hybrid—serves about 100,000 people, Russia needs 1,400 of them to serve the entire country; it has 150. (A decade ago, there were none at all.) And neither is the market empty: French retailer Auchan has smoothed the way [15] by hacking through some of Russia’s notoriously thick red tape and figuring out how to navigate such a coded place, so Wal-Mart doesn’t have to start from scratch.

For all the talk of nouveau Russians bathing in gold, there were only 33 billionaires before the crash. There are 140 million other Russians, whose per capita income was about $8,000. That’s why the Ford Focus—not the custom-trimmed Maybach—is the country’s most popular car. The average Russian is price-sensitive but also doesn’t save much, spending about 80 percent of their income-and they’re going to be even more cost-conscious now that their economy is on the rocks. “So far, the crisis hasn’t touched the Russian consumer,” says Zagvozdina. “It’s still a huge market with very fast growth, and, in the next five years, I don’t think Wal-Mart will be able to make do without Russia.”

And, she adds, Wal-Mart’s greeters might have a positive effect on Russia’s particular brand of customer service: “Maybe the clerks will have more normal reactions to shoppers instead of looking at them like they’re just random, annoying people milling about and demanding things.”

Source URL: http://www.thebigmoney.com/articles/number-1/2008/11/20/walmarts-ruble-trouble
Links:
[1] http://www.nytimes.com/2008/11/14/business/14shop.html
[2] http://www.thebigmoney.com/search/quotemedia/sbux
[3] http://www.marketwatch.com/news/story/starbucks-shares-fall-disappointing-results/story.aspx?guid={35253B39-43B9-4FBC-8260-E15E287D25B7}&dist=msr_25
[4] http://walmartstores.com/sites/AnnualReport/2008/docs/wal_mart_annual_report_2008.pdf
[5] http://www.hindustantimes.com/StoryPage/StoryPage.aspx?sectionName=&id=1066c5ce-7e08-4430-884e-62a641a59001&MatchID1=4857&TeamID1=1&TeamID2=5&MatchType1=1&SeriesID1=1224&PrimaryID=4857&Headline=Bharti Wal-Mart sticks to India plan
[6] http://en.wikipedia.org/wiki/BRIC
[7] http://www.forbes.com/feeds/afx/2008/07/27/afx5257689.html
[8] http://www.thebigmoney.com/search/quotemedia/wmt
[9] http://www.highbeam.com/doc/1P1-103470088.html
[10] http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/2783372/Wal-Mart-did-lobby-Blair-over-Asda.html
[11] http://www.managementtoday.co.uk/search/article/492390/mt-interview-allan-leighton/
[12] http://www.nytimes.com/2006/06/14/world/europe/14russia.html
[13] http://www.businessweek.com/magazine/content/05_15/b3928086_mz054.htm
[14] http://www.bloomberg.com/apps/quote?ticker=INDEXCF:IND
[15] http://www.iht.com/articles/2008/05/06/business/auchan.php