In post-Soviet Russia's special type of cowboy capitalism, it wasn't always easy to tell the good guys from the bad guys. The first generation of business leaders -- known as the oligarchs -- combined talent and guts with a flair for taking advantage of government connections. By being in the right place at the right time when Soviet industry was privatized in the mid-1990s, they emerged in control of the biggest companies, becoming billionaires within a few years. Managing for the long term -- let alone for minority shareholders -- was not a luxury many felt they could afford early on.
But since Vladimir Putin was elected president in 2000, the business environment has gradually become more normal. The oligarchs whose companies are still afloat have shown that they can run businesses, not just assemble assets -- or they have hired professional managers. Virtually all publicly listed companies have adopted international accounting standards, enabling investors to track once-amorphous cash flows. Violence has all but disappeared from big business; competing oil or metals barons now take their disputes to court. Imported Western executives and a new generation of Western-trained Russians have dramatically improved senior managements, even as top-flight talent remains scarce lower down. Directing these increasingly dynamic businesses takes a combination of savvy and stamina: Managing the needs of increasingly vocal investors, not to mention the growing demands of customers, makes the top job harder -- not easier -- to do. To find out who in this brave new commercial world stands out for business leadership, Institutional Investor asked the companies' most-exacting constituency -- their investors -- to identify the chief executive officers they thought best in their areas of expertise. We found that many voters preferred to select someone based on job function and accomplishments rather than be restricted to a specific corporate title. In Russia's rapidly evolving economy, titles don't mean as much as they do in Western or Asian countries with longer capitalist histories. We accepted these votes as long as the recipient was a top officer of the company.
Their choices, presented in the following pages, represent a variety of leadership styles, from Unified Energy System's Anatoly Chubais, a top political reformer turned utilities magnate, to Wimm-Bill-Dann Foods' David Iakobachvili, a consummate entrepreneur who gave his beverage and dairy company an English-sounding name to impress Russian consumers hungry to be associated with Western prestige. Some of the survey respondents' top choices still qualify as oligarchs, in the sense that they run formerly state-owned Goliaths; others built their companies more or less from scratch. And not all are, technically, chief executives. In several cases II's voters named a company's chairman or president as the person most closely identified with its success.
What these executives have in common is a desire to see Russian business develop into a force that can compete globally. That can mean drilling for oil in Colombia and Iran, as Lukoil Oil Co. is doing under chief executive Vagit Alekperov; buying an iconic American steel plant outside Detroit, à la Severstal boss Alexey Mordashov; or working with Deutsche Telekom as a strategic investor in Russian business, as did Mobile TeleSystems' 33-year-old CEO, Vassily Sidorov.
"Russia is more Byzantine than other environments," reflects Sidorov, acclaimed by investors in the Telecommunications category. "What's important is knowing how the market works and being able to inspire people. The criteria for what makes a good CEO are getting more aligned with the West. "
To be sure, the Russian business landscape still resembles an untamed frontier. The country's richest man and former CEO of oil giant Yukos Oil Co., Mikhail Khodorkovsky, has languished in jail for the past year on charges of tax evasion, fraud and embezzlement. Oil, automotive and media tycoon Boris Berezovsky went into exile in Britain shortly after Putin's election, also under investigation for embezzlement. Putin moved further toward authoritarianism last month, announcing plans to rescind the direct election of regional governors in the name of fighting terrorism. The public remains deeply mistrustful of business in general, believing -- not without cause -- that company bosses' outsize wealth was stolen from the nation at large. Three quarters of all Russians believe that oligarchs play a negative role in society and that the privatizations of the 1990s should be "completely or partially" revised, according to a survey last year by Moscow-based market research agency Romir Monitoring.
Graft and corruption are commonplace. Russia tied with Mozambique for 86th place out of 133 countries ranked in Transparency International's corruption perceptions index for 2003. The line between organized crime, which runs its own shadow economy, and the legion of small businesses that deal only in cash to avoid taxes remains blurry. Confidence in the financial system is so shaky that the Central Bank's shutdown of a tiny bank accused of money laundering in May set off a depositors' panic that threatened the biggest privately owned commercial institution, Alfa Bank, whose president, Pyotr Aven, was picked by investors as best in Financial Services.
Nevertheless, Russian business has reason to celebrate. Under Putin, Russia has been one of the world's fastest-growing economies, expanding for the past two years at more than 7 percent annually. Despite a 30 percent correction this summer, stock values, as tracked by the Russian Trading System index, have risen by 8 percent in 2004 through mid-September and by 80 percent over the past two years. In fact, the six public companies overseen by our winners, which either didn't exist ten years ago or were worthless by capitalist measures, now have a combined market value of close to $60 billion, or about one third of the entire market.
Gradually, prospering businesses are also improving ordinary citizens' quality of life. Alekperov at Lukoil and Mordashov at Severstal have turned decaying natural-resource enterprises in Russia's vast frozen north into corporations that not only turn billions in profits but also pay their workers on time. And thanks to CEOs like Wimm-Bill-Dann's Iakobachvili and MTS's Sidorov, consumers are enjoying services not dreamed of under Communism.
None of this is thanks to the state. Yet the average Russian dislikes business even more than he dislikes government. Trying to overcome the public's profound mistrust is an ongoing struggle for Russia's corporate leaders, however many millions of rubles they have begun to spend on sponsoring concerts or medical research. "We have to move, not with the government but with society as a whole, beyond the image of oligarchs who robbed the whole country," says UES's Chubais. "That's a problem that is going to take decades, not years."
Another challenge is making the transition from founder-owner to visionary executive. CEOs like Alekperov and Mordashov -- who has become Putin's poster boy for enlightened business practices -- certainly proved their mettle by wresting their enterprises from the Kremlin, fighting off the criminal gangs that muscled in on any cash-generation venture and whipping lethargic Soviet workforces into shape. The next step is learning how to delegate authority so they can concentrate on strategy and deal making.
That is not easy in a country where the profession of modern management is, at best, fledgling. The problem of attracting management talent is especially difficult for the natural-resource behemoths, whose operations are located in remote and inhospitable outposts that ambitious young people from Moscow or St. Petersburg are eager to avoid. "Everybody I know complains about the difficulty of finding quality managers," says Bernard Sucher, chairman of Alfa Capital, an arm of Alfa Bank that has about $130 million invested in Russia. "Russians are very educated, but the great mass of them are educated uselessly for the tasks that are before their economy."
Then there's the corruption. Russian officials still expect to be paid handsomely for cooperating with business, whether by expediting a mobile phone license or speeding up the process of securing an oil production permit. "One problem coming out of the Khodorkovsky affair is that a lot of rent-seeking bureaucrats may feel more emboldened to seek their rent," says William Browder, chairman of Moscow-based Hermitage Capital, which has $1.5 billion under management in Russia. (Most Russians see Khodorkovsky's arrest, whether welcome or not, as a reassertion of the government's supremacy over business.) "Managing [the bureaucrats] is going to remain a key part of the Russian manager's job."
Despite this often-hostile environment, Russian business leaders are digging in for the long haul. Having survived the birth throes of Russian capitalism, they now want to build something with deep roots. "The first green shoots of genuine management started to appear in 2000, after a famous meeting where Putin told the oligarchs they could keep what they had gained from privatization so long as they kept out of politics and started paying taxes," remarks Browder.
Four years later legitimate Russian business has taken on a recognizable profile, although that is still changing. And the job of CEO comes with a fairly consistent set of circumstances.
First, Russian companies, large and small, continue to be dominated by founding owners who retain close ties to top-echelon officials and spend a great deal of energy staying on the government's good side. MTS's Sidorov -- a Wharton School and Arthur Andersentrained professional manager who has streamlined operations, boosted profitability and improved investor relations -- may be the wave of the future. But for now he still needs oligarch Vladimir Yevtushenkov, whose AFK Sistema group owns most of MTS, to deal with regulators from the Communications Ministry and regional governments.
Big Russian businesses don't have much incentive to sell more equity. The raw-materials giants are flush with cash, thanks to high global prices for oil and metals plus favorable domestic tax rates, while those in services can raise capital on the bond markets. Owners are using these riches to widen their footprints, buying up new companies or the last of the state spin-offs, particularly utilities.
Second, raw materials continue to dominate Russia's economy. Putin's desire to diversify by raising taxes on oil and gas producers and lowering them for other corporate sectors was one reason he clashed with Yukos's Khodorkovsky, who fought the higher levies in Parliament. But no one expects Russia to become a world-class competitor in manufacturing any time soon -- notwithstanding a few exceptions, such as the nuclear-power technology exported by Kakha Bendukidze's United Heavy Machinery, or OMZ, to countries ranging from Finland to China.
Oligarchs like Mordashov and aluminum king Oleg Deripaska have bought up much of the Russian car industry, and domestic automakers get generous help from a protectionist tariff policy. Yet they are unlikely to woo newly prosperous consumers from foreign brands, much less to export their own beyond the ex-Soviet world. "I don't see Russian companies starting from scratch to become major producers of finished goods," says Alexander Branis, a director at Prosperity Capital Management in Moscow, which manages about $650 million in Russian assets. "Those sectors need to be developed through green fields by multinationals."
Third, Russian CEOs, including our winners, tend to do business from Moscow. For most industries, that's unnatural -- though not unlike the early 1900s in the U.S., when oil and mining interests were all headquartered in New York to have access to their Wall Street financiers. Managing from Moscow places a similarly undue emphasis on financial engineering at the expense of the shop floors thousands of miles away. But it's a Russian reality.
For one thing, company heads must participate in the intricate dance of government, cultural and, increasingly, philanthropic events in the cosmopolitan capital or risk ceding critical political advantage to rivals who do. For another, CEOs have enough trouble finding high-quality support staff in the metropolis; the pool dries up entirely in the remoter provinces.
In the short term, life may actually get tougher for Russia's top CEOs. They prospered during Putin's first term thanks to soaring commodity prices, a ruble deeply deflated by the 1998 financial crash and growth-oriented, low-tax economic policy from the Kremlin. But since his reelection the president seems bent on proving he's not out to coddle business. Utility privatization, expected to begin next year, and a steady rise in internal gas prices will raise the dirt-cheap energy costs that have given the Russian metals industry a huge boost. Having crushed Khodorkovsky, the government is hiking taxes on oil companies, which had been about half the world average. Fat current-account surpluses are strengthening the ruble, diminishing all Russian products' competitiveness against imports. And Russia plans over the next several years to prepare for entry into the World Trade Organization, which will mean lowering at least some tariffs.
These changes will lessen economic distortions in the long run, but they will make new billions harder to come by for the most-visible Russian companies. "CEOs have to find a way to keep profits rising even while their market edges, like electricity for aluminum, diminish," says Petru Vaduva, chief of research at UralSib Financial Corp. (formerly Nikoil), a Moscow investment bank. "That's going to require a level of management we haven't seen in the past, when business leaders created value by deal making and putting assets together."
Lately, Russian business has begun to think internationally. Mordashov, who recently acquired Detroit-based Rouge Steel Co., speaks of making Severstal "a big global company." Norilsk Nickel oligarch Vladimir Potanin has ploughed his Siberian profits into acquiring Stillwater Mining Co., a Montana platinum outfit, and taking a 20 percent stake in South African gold miner Gold Fields. Lukoil declares that Russia will be just one of three future focus areas, along with the Middle East (Iraq and Iran) and Latin America (Colombia).
Investors are divided on how promising this trend is. Browder sees potential benefits. "It may be logical to invest some of a Russian company's cash-flow generation in being seen as an international company, lessening the Russian-company discount on valuation," he reasons. Branis sees potential disaster. "It's a popular misconception that any successful business has to go global," he says. "Russian groups have competitive advantage in Russia. They understand very little about all these other countries they're going into."
But perhaps the biggest challenge for Russian CEOs will be to gain acceptance at home. Schooled on Communism and insulted by the mushrooming number of post-Communist nouveaux riches, the average Russian is still inclined to equate business with chicanery, if not theft. It is this popular resentment, as much as Russia's flimsy legal structures, that compels emerging corporate leaders to wonder how stable their fortunes really are.
"What worries me about my own business and about Russia is the absence of a social contract that fixes rules of the game," says Mordashov, who at age 39 has already amassed a fortune of more than $4 billion. "Those conditions make a business like ours very influential and very vulnerable at the same time."
Yet Russian commerce has never been for the fainthearted. Most of our top executives spent the 1990s knowing that their lives, not to mention their livelihoods, were constantly at risk. Their careers represent against-the-odds triumph in a prolonged multifront war against organized crime, an obtuse and greedy bureaucracy and generations of bad Communist economic habits. For all the billions socked away, they are still young and hungry to achieve more.
"There is a visceral energy in these guys that never stops," observes Alfa Capital's Sucher. "They want to go out in the world beyond Russia now and prove what they can do, be admired and challenged. They are going to be a very powerful force."