Will Fast Russian Companies Ever Emerge?

In 1999, we saw the economy strongly shifting away from oil and gas toward industrial and service sectors. Import substitution boomed, local production flourished, Internet businesses started and business life became a lot faster and a lot more competitive. We saw the emergence of VimpelCom, MTS, WBD and Sonic Duo, Yandex, Rambler, Begun and Mail.ru, CafeMax and Afisha, Kaspersky Labs, RBC, IBS and Integra.

But as oil prices increased, the economy split into oil, gas and mining and everything else. The businesses related to oil and gas flourished and became more important, and their cash flows were used as the source of capital to finance everything form restaurants and supermarket chains to internet media holdings and real estate empires. These companies continued to flourish, fueled by the oil money, but they were not required to be profitable any more.

They became uses of capital, entertainment for oligarchs, and a source of cash flow in ways not envisioned by their investors. Most of the talent shifted to work for large enterprises, such as Gazprom, LUKoil, RusAl and Sberbank, X5, PIK, Mirax, Transneft and UES.

The surprise of 1999 came in part because of expectations that the domestic economy could function without significant reliance on resource sectors. It gave way to the surprise of 2007 and expectations of what could have happened if oil price reached $200 per barrel. Expectations are now associated with the fear that either the oil price will drop to $10 per barrel either because of a drop in demand due to the global slowdown or the emergence of alternative energy sources, which could crush the oil industry as we know it.

The possibility that resource prices vital to the Russian economy could be worthless may encourage the creation of businesses in which the main resource used is talent and creativity. We hope to see creation of Russian "fast companies" whose the success will be based on talent and creativity of its founders and where the back bone of the business will based on creativity.

As examples of global fast companies we note Apple, Microsoft, Sun, Toyota, Sony, Honda, Yamaha, Shlumberger, Virgin, Bloomberg, Vodafone, Ferrari, Lamborghini, Tiffanys, GAP, Yahoo, Wikipedia, Google, Berkshire Health always, Porsche, Disney, Paramount Picture, New York Times. Domestic examples include Renaissance Capital, Troika Dialog, Altimo, WBD, VimpelCom, X5, OGK4, RTS, MICEX, Sedmoi Continent, MDM, Finam, Trust, Transaero, Russky Standard, Sukhoi, Energia, Mirax, Tinkoff, RBC, Rosinter … and Yevroset, which may be even too fast.

By isolating the necessary conditions for creativity, we can trace several ways to help stimulate creativity as a backbone of businesses.

One of the most necessary tools is talent that can be focused on solving particular problem.

The free market is a welcome condition, but there also were many creative enterprises working during the Soviet times, such as aeronautics and rocket construction bureaus, research institutions, and Bolshoi Ballet. The free market is not necessary, but, of course, it is welcome. Just note how much stuff was created in the United States during the 19th and 20th centuries.

A strong academic tradition is welcome but not a necessary condition, given that half of creators started in their parents' garages. Funds readily available are necessary, regardless of you are building a nuclear bomb or an iPod. They were available in the Soviet Union, they are available as debt or equity capital in free markets, and they were available from patrons during the renaissance.

Protection of intellectual property rights is welcome and probably crucial for mass market creativity. However, creativity could be fueled in an open source system, where building blocks are readily available and do not rely on the protection of intellectual property.

Given the extent of Russian resources, Russia could see fast companies emerging in agriculture and mining along with those in the conventional sectors of services and industry. There are currently very few examples of fast companies in these sectors.

Yukos was the largest fast Russian company (long gone now), Novatek could be called one or AIM listed oil and gas alternative companies — Imperial Energy, Volga Gaz, Urals (or what's left of it) could be qualified as such, but certainly not Gazprom nor Rosneft in its present form, though even they will be on track one day.

Relying on creativity, Russia could continue to prosper and defend itself even with significant problems such as the oil price and a collapse in the oil and gas sector and resource sectors. These sectors, including gasoline retail, account for 40 percent of current GDP in Russia.

Federal money must be heavily invested to promote innovation in schools, to maintain a culture that would deliver innovators at a constant pace. Infrastructure investment is simple solution, which likely help in the short term, and provide the necessary employment for laid off workforce in company towns. But more should be done rather than simply investing into infrastructure.

In the last 15 years fast companies have been developing slowly in Russia but eventually they came to equity market and were listed. Currently we estimate that fast companies account roughly for 15 percent of market capitalization and 85 percent accounted for old guard Soviet inheritance, corresponding to 15 years of free market economy and 70 years of Soviet-style economics. Most of the fast companies have been created after the 1998 crisis, the 2008 crisis will cause many more fast companies created.

The views of the author do not necessarily reflect those of Renaissance Capital.