#16
Financial Times (UK)
26 November 2001
Cosy havens in Moscow:
ENTERPRISE IN RUSSIA:
A network of welcoming cafe clubs is appealing to the city's emerging middle class
By ANDREW JACK

Dmitri Itskovich does not look like the typical tough executive destined for success in the harsh world of modern Russian business. With his big black beard and casual clothes, he most resembles the academic he used to be.

Yet with two fellow former students from the philology faculty at the Moscow Humanities University, he has created a fast-growing enterprise that, in three years, has become a phenomenon in the Russian capital: a network of cosy cafe clubs for budding intellectuals among the country's emerging middle class.

The service can be pedestrian, the cultural offerings curious and the locations all but impossible to find for the uninitiated. But thousands of people have been drawn by word of mouth to a growing number of venues. They fill a niche that remained empty for a surprisingly long time.

Itskovich founded OGI - the Russian abbreviation for United Humanities Press - in 1992 to put a range of academic texts, poetry and other limited edition works into print. He dabbled in a series of internet projects, including polit.ru, an online news and analysis service that remains functional but non-profit-making.

The phenomenon - and the serious money - began with Project OGI, created in the aftermath of the August 1998 financial crisis as a haven for those wanting to drink, socialise and nurse their wounds in the downturn that followed Russia's brief period of prosperity in the mid-1990s.

"There were lots of people who had had money and were suddenly thrown out on to the street or into unrelated jobs after the crisis," says Alexei Kabanov, the nearest to a finance director among the three founders. Among the other two partners, Itskovich co-ordinates and Mitya Borisov arranges cultural events. "It was not very profitable but a place where people could recover their energy."

With just Dollars 300 (Pounds 210) and the use of a friend's empty apartment, the experimental club opened in December 1998, complete with a bookstore for OGI's wares and a small performance space for music. It survived unlicensed for seven months, periodically shaken down by local police and interrupted by grumbling neighbours.

Moscow's literary elite congregated, some finding jobs and partners as well as solace among like-minded souls gathered in the slightly bohemian and heavily smoky atmosphere. It was, as one macho Russian cultural critic described it, the sort of place to meet interesting women who hoped you would take them somewhere else.

Then, in December 1999, with Dollars 70,000 in backing, the three men created a second venue - Club Project OGI - that is just as hard to find, tucked in a cellar behind an unmarked door in a courtyard off a back street. It replicated the first but on a larger and more professional scale, with a wider range of food, still at modest prices.

Combining till receipts with a succession of new investors, many drawn from their own clientele, the three partners paid back the money within a few months and came up with another Dollars 160,000 to open Pirogi (a pun on the Russian word for "pie", which dominates the menu) in September last year, near the Tretyakov art gallery.

Ulitsa OGI - which is slightly more upmarket but still offers set meals for the modest price of Rbs250 (Pounds 6) as well as an art gallery upstairs - opened in February 2001. Two more Pirogis in the centre of the city recently began operations. Kabanov says between them the outlets now turn over Dollars 500,000 a month and have a margin of 25 per cent.

One reason for the apparent appetite for OGI is that, until 1998, Moscow offered few alternatives. "There were a lot of things that did not exist in Moscow. Cafes were subsidised in Soviet times - and then the whole infrastructure collapsed," says Kabanov.

He recalls the revolution when McDonald's opened in Moscow in 1990 and was used by many Russians not so much as a fast food restaurant but as a place to linger and meet friends. It beat buying a bottle of beer and hovering on a chilly street corner. OGI has tried to capture a middle ground, resisting the steep prices of more upmarket coffee bars where, Kabanov argues, there is greater pressure to consume and leave.

He says one of the main challenges has been coping with an unspoken tradition among Soviet cafe employees of "you may be paid little - but you can steal and share the proceeds with the police". Security expenses account for about 10 per cent of turnover, although Kabanov says Moscow today does not suffer excessively from banditry.

Others argue that OGI has had some influential backers and clients in the past and is now talking about co-operation with the city of Moscow, which may help provide added protection in the future.

One challenge will be the voracious ambitions of the owners. They are planning to open a further 15 to 20 Pirogi spin-offs in the Moscow region in the coming months, with more in several other large cities. They are converting an old factory into the largest version yet, complete with concert hall. There are ideas to offer office catering and take-home food and even a chain of updated, Soviet-style corner bars.

One risk is that the three founders will overstretch themselves. Another is that there may be only a limited number of the current type of client, particularly outside the city centre. The original Pirogi already shows signs of going upmarket, offering cigars and coffee for sale alongside its books.

Itskovich and his partners see themselves in the vanguard of Russian business, creators of a new form of popular capitalism. Partly to avoid the bureaucracy, corruption and heavy costs of the country's inadequate banking system, they are seeking to tap large volumes of domestic savings. As part of efforts to raise Dollars 45m, they have just launched six-, 12-, and 24-month loans, with guaranteed loans above inflation for individual investors and shares in a new holding company.

"We want to show that business can be profitable, transparent and not linked to criminality or cons," says Kabanov. "We want to tap savings that will be invested not in pyramid schemes but in real industry. We are not afraid of losing our public, only our management control."