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#2 - JRL 7014
New York Times
January 12, 2003
In Going Legit, Some Russian Tycoons Resort to Honesty

MOSCOW In the prospectus that the curiously named Russian food company Wimm-Bill-Dann prepared for its initial public offering in New York, it revealed that one of the principal owners had spent nine years in prison, and warned that this could hurt investors.

That one owner had a criminal record might not be very surprising, given the heavy reliance of Russia's first "beeznissmeny" on stealing, lying and sometimes killing. But confessing it before the whole world, and vowing thereafter to be squeaky clean according to the highest Western standards, was startling.

It paid off handsomely. Wimm-Bill-Dann, the Russian market leader in dairy products and juices, successfully raised $161 million in the offering last year (the name, pronounced VIM-beel-dun and familiar to all Russians, apparently stands for nothing more than the founders' fondness for tennis and Wimbledon).

The lesson of Wimm-Bill-Dan and a handful of other major Russian companies that have chosen to abandon the more familiar Russian approach to business has made "transparency" and "corporate governance" business-speak for honesty something of a fad, at least among the bigger and more profitable businesses.

The leading light of corporate virtue these days is Mikhail Khodorkovsky, who used to personify the predatory Russian oligarch as the head of Yukos, Russia's second-largest oil company. After a two-year campaign to remake the company's image, Yukos now embraces the latest Western precepts for corporate candor. That, and generous gifts from Mr. Khodorkovsky's new "Open Russia" foundation, have opened wide for him the gates to respectability and honor (and capital) in Washington and London.

The 39-year-old tycoon does not pretend that he was struck by a revelatory flash on the road to Damascus. Being nice to investors and honest in the market, he says, "in the short term is to your advantage." He really doesn't need to elaborate. Investors have snapped up the cleaner, whiter Yukos, in the process raising Mr. Khodorkovsky's stake to more than $7 billion and quite possibly making him the richest man in Russia.

Many Russians are understandably skeptical of the newfound honesty, as is Charles Ryan, an American who runs United Financial Group, a Moscow investment bank. "Certainly there's a fad to appear honest it's self-interest," he said. "If you do it, you can keep what you stole. The world is very forgiving of wealth.

"Those who had principled positions in the past are now asking, if these guys are getting accepted in the West, what am I doing?" Mr Ryan said. "So now they're going to work for the businesses run by oligarchs."

Still, to some degree the apparent transformation of some predators into model citizens confirms the faith of those economists who preached that all successful robber barons sooner or later seek to go legit.

In the early 1990's, when the government of Boris Yeltsin first embarked on a chaotic sell-off of state properties, those who managed to grab something tried to turn it into cash, and to squirrel the cash abroad as quickly as possible, since nobody knew what might come next.

A few of these "new Russians" hit the jackpot in 1995 when they agreed to support Mr. Yeltsin's re-election campaign in a "loans-for-shares" compact that netted them some of Russia's most valuable properties, including the oil companies, at bargain-basement prices.

A new chapter opened in August 1998, when Russia's bubble economy burst, crushing many banks but also chasing off get-rich-quick speculators and bringing the ruble down to a more realistic level. Then in 2000, Vladimir Putin was elected, and before long, oil prices began to climb, finally giving the country a measure of stability and sobriety. Those at the top of the economic pyramid began to realize that there was more to gain from protecting what they had than from continuing to strip it.

For one thing, it is now possible to plan ahead, at least for the eight years that Mr. Putin can be president under current rules. More important, a well-managed company attracted Western capital, and going public created far more value for major shareholders than whatever they could siphon from their business.

In addition, big-name foreign shareholders provided protection against corrupt bureaucrats or predatory oligarchs. A listing on the New York or London exchanges came to be seen as the Good Housekeeping seal of legitimacy, since it required meeting stringent standards.

At the same time, a new generation of executives came on stream. These were young Russians without Soviet hang-ups. Many had studied or worked abroad and were at home in Western-style management.

To be sure, the conversion to honesty has hardly been universal. Last fall, a survey by Standard & Poor's of corporate openness, measured by how much a company discloses, gave Russia an average score of only 34 out of a possible 98, well below that of Asia and just a notch above Latin America. The survey did note, however, that some Russian companies, including Wimm-Bill-Dann, were at West European levels of transparency and disclosure.

In other words, while there has been progress, the "Wild East" is hardly tamed as yet. The star of Russian "beezniss" these days is a tycoon named Oleg Deripaska, who at only 34 has accumulated a business empire through ruthless and elaborate, though technically legal, takeover raids.

To Yulia Latynina, a sharp-tongued television host on the TVS station who has reported extensively on business, the difference between Mr. Deripaska and Mr. Khodorkovsky is not in morality or mind-set, but simply in strategy.

"It's not a question of intentions, but of pure business," Ms. Latynina said. "There are two possible strategies, one to increase the price of assets, the other to increase assets. The one strategy requires being utterly transparent. The other requires grabbing judges, giving bribes and being utterly untransparent. This is not cynicism. It's just the stage we're at."

Anatoly Karachinsky, a computer geek who built a highly successful company, Information Business Systems, argued that it was simply stupid for successful companies like his to stay in the shadow or black economies.

"You invest in transparency the same as you invest in R & D," he said. "It's value, and to lose it is senseless. I could save five or six million dollars in the shadow economy, but I'd have no value."

Grabbing a handful of felt pens, Mr. Karachinsky jumped to a board to show that the rule applied only to the relative handful of businessmen who already controlled a large part of the economy. (According to Standard & Poor's, fewer than 50 Russian businesses control about 98 percent of Russia's capital market.)

For small and middle businesses, the obstacles to emerging from the shadows were simply too high. A recent study by the Center for Economic and Financial Research in Moscow and the World Bank found that any small business trying to grow ran up against a glass ceiling of bureaucratic corruption, feeble laws and rapacious rivals. The problem is especially acute in the provinces, where Soviet-style bosses still have a choke-hold on politics and business.

"Russia changes, but Russians don't change," many a skeptical Russian mutters. But even if corporate honesty is a phenomenon limited, for now, to the pinnacle of the food chain, the very fact that the experiment has been succeeding so publicly and so profitably seems bound to win more converts. Already small shareholders are becoming emboldened to demand greater openness from their companies, and successful banks are beginning to demand more information from smaller businesses seeking loans.

"They still need a culture shift to perceive that it is in their interest to follow laws," said William D. Morris, a lawyer with Akin Gump Strauss Hauer & Feld, an American law firm with extensive business in Russia. "But the biggest positive event for this is the favorable response to the reforms of major companies."

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