IMI: NEITHER RED DIRECTORS NOR CEO'S; RUSSIAN MANAGING DIRECTORS IN TRANSITION

SUMMARY AND INTRODUCTION

1. MANAGING DIRECTORS OF RUSSIA'S PRIVATIZED ENTERPRISES ARE MORE EASILY DEFINED BY WHAT THEY ARE NOT -- SOVIET FACTORY MANAGERS OR WESTERN-STYLE CEOS -- THAN BY WHAT THEY ARE. BOTH NEW MANAGERS AND THOSE WHO ROSE TO POWER IN THE SOVIET ERA ARE GENERALLY RESPONDING TO MARKET SIGNALS -- AN ESSENTIAL CHANGE FROM PAST BEHAVIOR. HOWEVER, EVEN THE MORE SOPHISTICATED AMONG THEM OFTEN FAIL TO UNDERSTAND OR ACCEPT SUCH BASIC CONCEPTS AS DEMAND OR THE COST OF MONEY. ECONOMIC CONDITIONS, CORPORATE STRUCTURES AND ATTITUDES FORMED IN THE SOVIET ERA RESTRAIN THEM FROM FUNCTIONING LIKE SENIOR WESTERN MANAGERS. BECAUSE MANY RUSSIAN ENTERPRISES ARE COMPOSED OF A SINGLE FACTORY, THE DIRECTOR'S JOB IS OFTEN CLOSER TO THAT OF A U.S. FACTORY BOSS THAN TO CEO OF A DIVERSIFIED CORPORATION.

2. RUSSIAN DIRECTORS FILL A MUCH LARGER ROLE IN COMMUNITY LIFE THAN WESTERN COUNTERPARTS, MAKING THEM ESPECIALLY RELUCTANT TO SHED REDUNDANT LABOR OR COSTLY SOCIAL SERVICES. AS THE POWER OF INVESTORS FROM OUTSIDE THE FACTORY'S COMMUNITY WAXES AND THE INFLUENCE OF WORKER-SHAREHOLDERS WANES, MANAGERS WILL FOCUS LESS ON IMMEDIATE SOCIAL COSTS AND MORE ON THE BOTTOM LINE AND ENTERPRISE VIABILITY. OVER TIME THEIR BEHAVIOR WILL CONTINUE EVOLVING AWAY FROM THE SOVIET FACTORY MANAGER MODEL AND TOWARDS INTERNATIONAL NORMS, BUT WITH ENDURING RUSSIAN FLAVORS. DIRECTORS OF RUSSIA'S PRIVATIZED INDUSTRIAL ENTERPRISES HAVE MANY COMMON ECONOMIC AND POLITICAL INTERESTS. MOST HAVE ADAPTED THEIR SOVIET-ERA LOBBYING METHODS TO THE NEEDS OF THEIR NOW-PRIVATIZED ENTERPRISES AND ARE SKILLED AT LOBBYING THE GOVERNMENT AND THE DUMA FOR SUBSIDIES OR TAX BREAKS FOR THEIR FIRM OR SECTOR. ALTHOUGH FEW ARE PUBLIC CHEERLEADERS FOR ECONOMIC REFORM, THEY DO NOT WANT TO TURN BACK THE CLOCK AND ARE NOT ENAMORED OF EXTREMISTS, EITHER OF THE RIGHT OR LEFT.

3. DIRECTORS OF RUSSIA'S PRIVATIZED ENTERPRISES CAN BE GROUPED INTO THE FOLLOWING ROUGH, OVERLAPPING CATEGORIES: (1) DEAD SOULS (WAITING FOR THE END OR A SAVIOR); (2) MUDDLERS (MAKING CHANGES AT THE MARGINS); (3) DOERS (A MAN -- OR WOMAN -- WITH A PLAN); (4) OUTSIDERS (MANAGERS OR OWNER/MANAGERS FROM OUTSIDE THE ENTERPRISE); (5) SMALL TOWN MAYORS (MANAGERS IN ONE OR TWO ENTERPRISE TOWNS); AND (6) BARONS (MANAGERS OF LARGE ENTERPRISES WITH SUBSTANTIAL REGIONAL AND EVEN NATIONAL INFLUENCE). THESE CATEGORIES ARE DEFINED BY THE FUNCTIONS THEY PERFORM AND THE TYPE OF ENTERPRISES THEY RUN, NOT THE LIKELIHOOD OF SUCCESS. THIS CABLE IS THE IMI VERSION OF REFTEL. END SUMMARY AND INTRODUCTION.

NEITHER EAST NOR WEST

4. THE MANAGING DIRECTORS OF RUSSIA'S MORE THAN 100,000 PRIVATIZED ENTERPRISES ARE THE MOST IMPORTANT PLAYERS IN CORPORATE RESTRUCTURING HERE. AT A BASIC LEVEL, HOWEVER, WESTERN OFFICIALS AND BUSINESS PEOPLE OFTEN FAIL TO UNDERSTAND THE ROLE OF THESE CRITICAL MANAGERS AND HOW IT IS CHANGING. OBSERVERS FREQUENTLY ASSUME THEY EITHER STILL BEHAVE AS SOVIET FACTORY MANAGERS OR HAVE BEEN TRANSFORMED INTO WESTERN-STYLE CHIEF EXECUTIVE OFFICERS. BOTH VIEWS ARE ERRONEOUS. THE MANAGING DIRECTORS OF RUSSIA'S PRIVATIZED ENTERPRISES BEHAVE IN FUNDAMENTALLY DIFFERENT WAYS THAN DID SOVIET MANAGERS, BUT THEY ALSO PLAY VERY DIFFERENT ROLES FROM THOSE OF CEOS OF DIVERSIFIED WESTERN CORPORATIONS, AND MOST WILL CONTINUE TO DO SO.

MORE LIKE US

5. DIRECTORS OF RUSSIA'S PRIVATIZED FIRMS ARE CHANGING THE WAY THEY DO BUSINESS. THE DAYS WHEN THEY SERVED AS CONSUMERS (RATHER THAN BUYERS) OF RAW MATERIALS AND PRODUCERS AND SUPPLIERS (RATHER THAN MANUFACTURERS AND SELLERS) OF END PRODUCTS ARE OVER. ALMOST ALL OF THE 100 OR MORE INDUSTRIAL ENTERPRISE DIRECTORS WE HAVE MET WITH IN THE PAST YEAR HAVE CUT THEIR LABOR FORCES (MOSTLY BY ATTRITION) AND MANY ARE EXPERIMENTING WITH NEW MANAGEMENT STRUCTURES, DEVELOPING NEW PRODUCTS AND TRYING TO IMPROVE THEIR MARKETING, FINANCE AND ACCOUNTING OPERATIONS. THIS NEW COST-CONSCIOUSNESS IS SEEN IN RUSSIA'S RISING UNEMPLOYMENT RATE, WHICH, ACCORDING TO THE STATE STATISTICAL COMMITTEE (GOSKOMSTAT), WAS 7.7 PERCENT IN APRIL, USING INTERNATIONALLY ACCEPTED ILO STANDARDS. THIS TREND IS CONFIRMED AT THE ENTERPRISE-LEVEL IN A SURVEY CONDUCTED BY WESTERN RESEARCHERS, SHOWING THAT BETWEEN JANUARY 1991 AND LATE 1994, THE AVERAGE PRIVATIZED FIRM REDUCED TOTAL EMPLOYMENT BY 24 PERCENT. ACCORDING TO THE GOR'S 1994 "RUSSIAN ECONOMIC TRENDS," FROM THE SECOND TO THE FOURTH QUARTER OF 1994, THE PERCENTAGE OF DIRECTORS WHO CONSIDERED MAXIMIZING EMPLOYMENT ONE OF THEIR TOP TWO PRIORITIES DECLINED FROM 31 TO 20 PERCENT. OVER THE SAME PERIOD, THE PERCENTAGE WHO GAVE SUCH HIGH BILLING TO IMPROVING THEIR FIRMS' "FINANCIAL CONDITION" ROSE FROM 44 TO 56 PERCENT. ALSO, ACCORDING TO "RUSSIAN ECONOMIC TRENDS," FROM THE FIRST TO THE THIRD QUARTER OF 1994 THE PERCENTAGE OF MANAGING DIRECTORS WHO ASSESSED THEIR FIRMS' FINANCIAL CONDITION AS GOOD INCHED UP FROM FOUR PERCENT TO SEVEN PERCENT, WHILE THE NUMBER ASSESSING IT AS POOR DECLINED MODESTLY FROM 52 TO 48 PERCENT.

BUT THE MARKET IS STILL A STRANGE PLACE

6. DESPITE THE IMPRESSIVE PROGRESS RUSSIA'S DIRECTORS -- OLD AND NEW -- HAVE MADE IN RESPONDING TO THE MARKET, MANY OF THE BASICS ARE STILL NOT UNDERSTOOD. SEEMINGLY SOPHISTICATED, DYNAMIC DIRECTORS REGULARLY TELL US THAT DEMAND FOR THEIR PRODUCT IS AS STRONG AS EVER, THE PROBLEM IS THAT THEY SHIP THE PRODUCT BUT DO NOT GET PAID. SIMILARLY, WHEN WE ASK HOW PRICES FOR GOODS -- EVEN SCARCE GOODS -- ARE SET, DIRECTORS TELL US VARIOUSLY THAT X-AMOUNT HAS ALWAYS BEEN THE PRICE OR THAT IT WOULD BE UNFAIR TO CHARGE MORE. REGARDING RUSSIA'S PAUCITY OF FOREIGN DIRECT INVESTMENT, DIRECTORS DESCRIBE FOREIGN CAPITAL AS SOMETHING THEY ARE ENTITLED TO BECAUSE OF THE POSITIVE CHANGES UNDERWAY IN THEIR FIRMS AND COUNTRY, WITH LITTLE UNDERSTANDING THAT CAPITAL SEEKS THE HIGHEST RISK-ADJUSTED RATE OF RETURN. LIKEWISE, THEY FREQUENTLY EXPRESS OUTRAGE THAT MONEY IN RUSSIA NOW HAS A COST AND THAT POSITIVE, MARKET DETERMINED INTEREST RATES MUST BE PAID ON DOMESTIC LOANS.

7. CONFUSION ALSO ABOUNDS ON HOW TO DEAL WITH POTENTIAL FOREIGN INVESTORS. MOST COMMONLY, DIRECTORS BELIEVE THAT THEY CAN PRESENT THEIR "INVESTMENT PROPOSALS" TO THE FOREIGN INVESTOR WHO SHOULD SIMPLY RESPOND "DA." THAT POTENTIAL INVESTORS NEED TO KNOW THEIR ENTERPRISE'S CAPABILITIES, SO THAT THE POTENTIAL FOREIGN PARTNER CAN DETERMINE HOW BEST TO USE SUCH CAPABILITIES, IS NOT ONLY NOT UNDERSTOOD, IT IS CONSIDERED INSULTING. FURTHER, WOUNDED PRIDE FROM THE COLLAPSE OF THE SOVIET UNION AND THE RELATIVE DECLINE IN RUSSIA'S PLACE IN THE WORLD, HAS LEFT MANY DIRECTORS LABORING UNDER A LARGE CHIP ON THEIR SHOULDERS WHEN MEETING FOREIGNERS.

THE WAY THEY WERE (AND ARE)

8. MANY ASPECTS OF THE STRUCTURE AND ROLE OF FORMER SOVIET ENTERPRISES STILL DISTINGUISH THE JOB OF RUSSIAN DIRECTORS FROM WESTERN CEOS AND WILL CONTINUE TO DO SO. DURING THE SOVIET ERA THE JOB OF MANAGING DIRECTOR WAS CLOSER TO THAT OF A WESTERN FACTORY MANAGER, FOCUSED PREDOMINATELY ON PRODUCTION, RATHER THAN A CEO, WHO MUST ALSO MASTER FINANCE, MARKETING, STRATEGIC PLANNING AND OTHER SKILLS. WITH FEW EXCEPTIONS, RUSSIA'S PRIVATIZED INDUSTRIAL CONCERNS ARE STILL SINGLE FACTORIES SERVING AS PUBLICLY HELD OR CLOSED CORPORATIONS. THESE MANAGERS NOT ONLY HAVE DIFFERENT ROLES THAN U.S. EXECUTIVES, THEY RECEIVED VERY DIFFERENT EDUCATIONS; AND ALMOST ALL WERE AT LEAST NOMINAL MEMBERS OF THE CPSU. WHEREAS ENGINEERS NOW SERVE LESS FREQUENTLY AS CEOS IN THE U.S., HAVING BEEN SUPPLANTED BY FINANCE AND MARKETING SPECIALISTS, MOST OF RUSSIA'S DIRECTORS ARE ENGINEERS. THIS HAS LEFT RUSSIAN BUSINESS SHORT OF FINANCE AND MARKETING SKILLS.

9. THE HISTORICAL ROLE OF MANAGING DIRECTORS IN THEIR COMMUNITIES ALSO HAS AN ENDURING IMPACT. MOST SOVIET ENTERPRISES PROMISED LIFETIME EMPLOYMENT -- "WE PRETEND TO WORK AND THEY PRETEND TO PAY US" OR SO THE JOKE WENT -- AND PROVIDED COMPREHENSIVE SOCIAL SERVICES. FOR MOST DIRECTORS, BUT ESPECIALLY FOR THE "MAYORS," CUTTING THE WORKFORCE IS EXTRAORDINARILY DIFFICULT. AND THIS IS NOT JUST BECAUSE OF THE CONTROVERSY SURROUNDING SUCH A STEP -- MOST MANAGERS WE HAVE MET FEEL A GENUINE OBLIGATION TO RETAIN EMPLOYEES. ALL BUT A HANDFUL WE HAVE MET REDUCED PAYROLLS SOLELY BY ATTRITION. FURTHER, DESPITE HAVING WORKFORCES THAT MOST WESTERN EXPERTS BELIEVE ARE STILL 25 TO 50 PERCENT OVERSTAFFED, SURVEYS SHOW THAT THE AVERAGE RUSSIAN DIRECTOR WOULD ONLY CUT HIS WORKFORCE BY ANOTHER 10 PERCENT, EVEN IF SUCH A MOVE WERE NOT CONTROVERSIAL.

10. THE SOCIAL SERVICES PROVIDED BY RUSSIAN ENTERPRISES OFTEN INCLUDE SUBSIDIZED OR FREE FOOD, HOSPITAL AND MEDICAL CARE, HOUSING, VACATION AND RETIREMENT HOMES, DAY CARE AND SUMMER-CAMPS, A RANGE OF COSTLY SERVICES VIRTUALLY UNHEARD OF IN THE U.S. EVEN AMONG THE MORE WESTERN-ORIENTED DIRECTORS, THERE IS A DEEPLY HELD VIEW THAT PROVIDING SOME OF THESE SERVICES IS ONE OF THEIR RESPONSIBILITIES -- AND A SOURCE OF INFLUENCE. EVEN IF CITIES AND OBLASTS COULD AFFORD TO TAKE ON SUCH TASKS -- AND MOST CANNOT -- MANY MANAGERS WOULD STILL PREFER TO RETAIN SOME OF THESE OBLIGATIONS, WHICH COULD HAMPER RESTRUCTURING AND IMPEDE RUSSIA'S INDUSTRIAL COMPETITIVENESS.

EVOLVING RUSSIAN STYLE

11. SUCCESSFUL MANAGING DIRECTORS WILL CONTINUE TO EVOLVE AWAY FROM THE FACTORY MANAGER ROLE AND TOWARDS A MORE CEO-LIKE FUNCTION. THIS WILL HAPPEN AS THEY MASTER THE SKILLS NEEDED TO RESPOND TO THE FINANCE, MARKETING AND OTHER DEMANDS OF THE MARKET AND AS THE BETTER ENTERPRISES DEVELOP THE SCOPE MANDATING SUCH FUNCTIONS. EVOLUTION MAY ALSO BE DRIVEN BY OUTSIDE INVESTORS WHO ARE ALREADY TIPPING THE ENTERPRISE OWNERSHIP SCALES AWAY FROM WORKER-OWNERS AND TOWARDS LARGE, OUTSIDE STAKEHOLDERS. WILY DIRECTORS WILL FLOW WITH THIS POWER SHIFT; THE LESS DYNAMIC WILL BE SWEPT AWAY BY IT. AN EVENTUAL RECOVERY IN THE RUSSIAN INDUSTRIAL SECTOR AND A NATURAL ROUND OF MERGERS AND TAKEOVERS ARE LIKELY TO ACCELERATE THIS PROCESS. WE SUSPECT, HOWEVER, THAT FOR MANY YEARS TO COME THE DOMINANT STYLE OF MANAGING DIRECTOR, WHILE IN MANY REGARDS SIMILAR TO PREVAILING INTERNATIONAL PATTERNS, WILL BE DISTINCTLY RUSSIAN. IN PARTICULAR, ONE OR TWO FACTORY ENTERPRISES, PROVIDING A WIDER RANGE OF SOCIAL SERVICES TO THEIR EMPLOYEES THAN IS THE NORM IN THE U.S., ARE LIKELY TO ENDURE.

DEAD SOULS AND OTHER MANAGERS

12. UNDER OUR DEAD SOULS, MUDDLERS, DOERS, OUTSIDERS, MAYORS AND BARONS BREAKDOWN OF RUSSIAN MANAGING DIRECTORS, DEAD SOULS ARE THOSE WHO HAVE TAKEN LITTLE OR NO ACTION IN THE POST-PRIVATIZATION ERA TO SEE THAT THEIR FIRMS SURVIVE. TYPICALLY IN SUCH FIRMS THE WORKFORCE HAS DECLINED BY ATTRITION, DEMAND FOR THE FIRM'S OUTPUT HAS FALLEN SHARPLY, A LOW PERCENTAGE OF CAPACITY IS BEING UTILIZED AND WORKERS ARE PAID VERY LITTLE AND LATE, IF AT ALL. ALTHOUGH WE CANNOT AVOID SEEING A SKEWED SAMPLE OF ENTERPRISES, WE DO NOT BELIEVE THIS LEAST ACTIVIST OF MANAGER TYPES IS AMONG THE MORE HEAVILY REPRESENTED. WE HAVE, HOWEVER, MET SOME OF THESE SOMNAMBULANT MANAGERS, PARTICULARLY IN THE MORIBUND TEXTILE INDUSTRY AND THE NON-PRIVATIZED STATE DEFENSE SECTOR. IN THE FEW CASES WE HAVE ENCOUNTERED, DEAD SOUL MANAGERS DECRY THE BREAK-UP OF THE SOVIET UNION, LACK OF DEMAND, HIGH INTEREST RATES, HIGH ENERGY COSTS, INFLATION AND THE LACK OF STATE ORDERS OR OTHER FORMS OF STATE SUBSIDIES. WE SUSPECT BUT CANNOT CONFIRM THAT MANY DEAD SOULS ARE SO PASSIVE NOT ONLY OUT OF THEIR SENSE OF DESPAIR BUT BECAUSE THEY ARE HOSTILE TO REFORM.

MUDDLERS

13. MUDDLERS ARE MAKING CHANGES AT THE MARGINS, CONSIDERING NEW PRODUCTS, FIDDLING WITH THEIR FINANCE AND MARKETING OPERATIONS AND TRYING TO FIND INVESTORS, BUT HAVE NOT DRAFTED A REAL BUSINESS PLAN OR DEVELOPED A CORPORATE STRATEGY. MUDDLERS PLACE HIGH HOPES ON FOREIGN INVESTORS, INCLUDING THOSE WITH WHOM THEY HAVE HAD LIMITED CONTACT, AND HAVE A VARIETY OF EMBRYONIC, UNCOORDINATED INVESTMENT PROJECTS. THESE PROJECTS ARE INITIALLY DESCRIBED AS "CONCRETE" BUT BECOME VAGUE WHEN DETAILS ARE SOUGHT. BECAUSE THEY ARE NOT COMMITTED TO AGGRESSIVE RESTRUCTURING OR A CORPORATE PLAN IN GENERAL, MUDDLERS TRUST IN LUCK AND RELY ON THE KINDNESS OF STRANGERS. BECAUSE SOME MUDDLERS RUN PROMISING ENTERPRISES IT IS HARD TO GENERALIZE ABOUT THE FINANCIAL HEALTH OF THEIR FIRMS. HOWEVER, THE MANY MUDDLERS WE HAVE MET GENERALLY HAVE REDUCED THEIR WORKFORCES AT LEAST A LITTLE, ARE OPERATING FAR BELOW FULL CAPACITY AND HAVE SOME DIFFICULTY MAKING PAYROLL.

DOERS

14. THE DOERS AMONG RUSSIA'S INDUSTRIAL MANAGERS ARE TAKING AN AGGRESSIVE, PROACTIVE APPROACH TO THEIR ENTERPRISE'S SURVIVAL. SOME COULD BE DESCRIBED AS "TYPE A" WORKAHOLICS AND OTHERS AS HUSTLERS. THEY BELIEVE THE FATES OF THEIR ENTERPRISES ARE FIRMLY IN THE RIGHT HANDS - THEIR SELF-CONFIDENT HANDS. MANY ARE MOTIVATED PRIMARILY BY PERSONAL RESPONSIBILITY TO THEIR WORKERS AND COMMUNITY AND OTHERS BY PERSONAL FINANCIAL INTEREST, KNOWING FULL-WELL THAT PRIVATIZATION HAS GIVEN THEM A ONE-TIME OPPORTUNITY TO OWN A LARGE PIECE OF AN ENTERPRISE WITHOUT REALLY PAYING FOR IT. MANY DOERS ARE FORMER CPSU OFFICIALS OR OTHER INSIDERS WHO PRIVATIZED EARLY-ON, OUTSIDE OF STATE PROPERTY COMMITTEE (GKI) RULES, OR WHO MANAGED IN SOME OTHER MANNER TO PRIVATIZE WITH AN UNUSUALLY LARGE OWNERSHIP SHARE CONCENTRATED IN MANAGEMENT'S HANDS. DOERS HAVE A STRATEGIC PLAN FOR THEIR COMPANY AND OFTEN ALSO HAVE A FORMAL BUSINESS PLAN. MANY USE WESTERN BUSINESS CONSULTING SERVICES AND MOST ARE DEVELOPING BANKING, INSURANCE AND OTHER RELATED AND UNRELATED UNITS INTEGRATED TO ONE DEGREE OR ANOTHER INTO THE CORE BUSINESS. MOST HAVE DEVELOPED NEW PRODUCTS AND QUITE A FEW HAVE ONGOING RELATIONS WITH FOREIGN CUSTOMERS, SUPPLIERS AND PARTNERS. ALTHOUGH NOT SO COMMON AS MUDDLERS, WE HAVE MET DOERS IN ALL TYPES OF ENTERPRISES ALL OVER RUSSIA. DOERS ARE IMPRESSIVE, INTERESTING PEOPLE IN A HURRY. THEY PROJECT CONFIDENCE THAT ALTHOUGH RUSSIA'S INDUSTRIAL TRANSFORMATION IS A HARD BUSINESS BEST SUITED TO TOUGH MANAGERS, IT IS NOT HOPELESS. WE EXPECT THAT MANY DOERS WILL FAIL IN THEIR CURRENT INCARNATIONS ONLY TO SUCCEED IN LATER ENDEAVORS.

THE OUTSIDERS

15. OUTSIDERS ARE MANAGING DIRECTORS WHO EITHER HAVE BEEN SELECTED BY THE BOARD OR SHAREHOLDERS FROM THE OUTSIDE OR WHO HAVE PURCHASED ENOUGH OF THE COMPANY TO PLACE THEMSELVES OR THEIR DESIGNEES IN THE DIRECTOR'S CHAIR. THEY ARE A SMALL BUT GROWING GROUP OF HIGHLY SOPHISTICATED DIRECTORS. MANY USE WESTERN CONSULTANTS FOR ACCOUNTING, LEGAL, INVESTMENT BANKING AND BUSINESS PLANNING SERVICES. TO THE EXTENT THAT MERGERS AND ACQUISITIONS ARE UNDERWAY HERE, OUTSIDERS ARE OFTEN BEHIND THEM. HIGH PROFILE OUTSIDERS INCLUDE THE VOLGINS (FATHER AND SON) OF THE YAROSLAVL RUBBER COMPANY AND YOSIF BAKALEYNIK OF THE VLADIMIR TRACTOR FACTORY. LAST YEAR, THE VOLGIN'S ADAMANT INVESTMENT FUND PURCHASED THE YAROSLAVL RUBBER COMPANY. IN AN SENSIBLE DIVISION OF LABOR, THE YOUNGER VOLGIN RUNS ADAMANT WHILE THE FATHER (A FORMER INDUSTRIAL MANAGER) IS PRESIDENT OF THE RUBBER COMPANY, WHICH HE IS RESTRUCTURING. THE YOUNGER VOLGIN IS TYPICAL OF THE YOUNG RUSSIANS FROM THE FINANCIAL SECTOR WHO ARE PLACING THEIR OWN PEOPLE IN CHARGE OF THE PRIVATIZED INDUSTRIAL FIRMS THEY ACQUIRE. BAKALEYNIK HOLDS AN MBA FROM HARVARD AND GREW UP IN VLADIMIR, BUT WAS NOT ASSOCIATED WITH THE FACTORY UNTIL HE WAS ELECTED MANAGING DIRECTOR BY THE SHAREHOLDERS TWO YEARS AGO. SINCE THEN HE HAS ATTRACTED OUTSIDE INVESTORS AND EXTENSIVE WESTERN TECHNICAL ASSISTANCE, REWORKED THE FINANCE AND MARKETING OPERATIONS AND DEVELOPED BUSINESS AND STRATEGIC PLANS. MOST OUTSIDERS ARE SIMILAR IN STYLE AND TEMPERAMENT TO OUR DOERS AND ARE ALSO LIKELY TO BE HEARD FROM AGAIN EVEN IF THEIR CURRENT VENTURES FOUNDER.

THE SMALL TOWN MAYORS

16. THE MAYORS ARE A DIVERSE GROUP DEFINED SOLELY BY THEIR UNENVIABLE ROLE AS DIRECTORS IN ONE OR TWO FACTORY TOWNS. PRACTICALLY, THEY ARE A MIX OF DEAD SOULS, MUDDLERS AND DOERS. WE HAVE MET BOTH OF THE MANAGING DIRECTORS OF A TWO FACTORY TOWN NOT FAR FROM MOSCOW -- ONE IS A DOER AND THE OTHER IS A DEAD SOUL WHO APPEARS TO BE WAITING FOR THE FEDERAL BANKRUPTCY AGENCY (FBA) TO CLOSE DOWN HIS TEXTILE MILL. THE IMPORTANT DISTINCTION WITH THE MAYORS IS THAT AN ENTIRE TOWN DEPENDS UPON THE FACTORY THEY RUN, MAKING CUT- BACKS IN EMPLOYMENT OR SOCIAL SERVICES EXTRAORDINARILY DIFFICULT. CUTTING COSTS, HOWEVER, IS EXACTLY WHAT THEY MUST DO TO SAVE THEIR ENTERPRISES AND TOWNS. THE CATCH-22 IS STRONG HERE -- THE FACTORY CANNOT AFFORD TO PAY FOR SOCIAL SERVICES, BUT THE TOWN CANNOT AFFORD TO EITHER AS THE FACTORY IS UNABLE TO PAY TAXES. WHILE THERE ARE MAYORS RUNNING PROMISING FIRMS, A GREAT MANY ARE CONCENTRATED IN TEXTILES, DEFENSE INDUSTRY AND OTHER DEEPLY TROUBLED SECTORS. WE CANNOT EFFECTIVELY GENERALIZE ABOUT THE MAYORS' RESTRUCTURING EFFORTS -- SOME WILL SUCCEED AND MANY WILL FAIL -- BUT ALL WE HAVE MET WITH ACKNOWLEDGE SHOULDERING A HEAVY PSYCHOLOGICAL BURDEN OF RESPONSIBILITY TO THEIR COMMUNITIES.

THE BARONS

17. THE BARONS ARE DISTINGUISHED FROM OTHER MANAGERS BY THE SIZE OF THEIR ENTERPRISES, THE REACH OF THEIR POLITICAL AND ECONOMIC INFLUENCE AND THE SOPHISTICATION OF THEIR OPERATIONS. ALTHOUGH THE DIRECTORS OF RUSSIA'S BIG OIL AND GAS FIRMS LEAD ANY LIST OF RUSSIA'S INDUSTRIAL BARONS, OTHER RESOURCE COMPANIES AND THE MANUFACTURING SECTOR ARE ALSO REPRESENTED. THESE FIRMS ARE NOT ALL DESTINED FOR SUCCESS, BUT MOST HAVE THE RESOURCES (BOTH FINANCIAL AND POLITICAL) TO GIVE THEMSELVES A FIGHTING CHANCE IF THEY ARE INTELLIGENTLY LED. MOST HAVE ESTABLISHED RELATIONSHIPS WITH WESTERN CUSTOMERS, SUPPLIERS AND INVESTMENT PARTNERS AND ARE WORKING AGGRESSIVELY TO DEVELOP NEW FOREIGN PARTNERSHIPS. THE BULK ON THEM USE WESTERN ACCOUNTING, LEGAL, MARKETING AND BUSINESS PLANNING CONSULTANTS. SOME DIRECTORS, SUCH AS THOSE IN THE LARGEST ENERGY AND NATURAL RESOURCE PRODUCERS, HEAD ENTERPRISES HOLDING SUCH IMMENSE NATURAL WEALTH THAT THEIR FIRMS WILL DO WELL FOR A TIME WHETHER THEY ARE DYNAMICALLY LED OR NOT. OTHER BARONS, SUCH AS THOSE IN THE AUTO, TRUCK, STEEL, HEAVY MACHINERY AND OTHER INDUSTRIAL SECTORS, WILL PLAY THE CRITICAL ROLE IN THEIR FIRMS' VERY SURVIVAL.

MANAGING DIRECTORS, ECONOMIC REFORM AND POLITICS

18. THE DIRECTORS OF RUSSIA'S PRIVATIZED FIRMS RARELY INITIATE POLITICAL DISCUSSIONS -- THEY MUST BE DRAWN OUT. VIRTUALLY ALL THEN RITUALLY COMMENT THAT THEY HAVE EXCELLENT RELATIONS WITH THEIR MUNICIPAL AND REGIONAL ADMINISTRATIONS. ONCE DRAWN OUT, NEARLY ALL EXPRESS STRONG OPPOSITION TO EXTREMIST POLITICS, OFTEN SPECIFICA LLY DENIGRATING THE FAR RIGHT AND THE COMMUNISTS AS DANGEROUS AND OUTDATED. ON REFORM AND REFORMERS THEIR VIEWS ARE MORE COMPLEX. PUBLIC OPINION RESEARCH CONFIRMS OUR IMPRESSION THAT, AT LEAST IN PART BECAUSE THEY BENEFITTED GREATLY FROM THE PRIVATIZATION PROCESS, MANAGERS OF PRIVATIZED FIRMS ARE ONE OF THE MOST PRO-REFORM GROUPS IN RUSSIAN SOCIETY. THAT SAID, FEW ARE OUT-AND-OUT FANS OF SO-CALLED RADICAL REFORMERS AND PRIVATIZERS. FURTHER, ALTHOUGH BROADLY SUPPORTING REFORM IN GENERAL AND PRIVATIZATION IN PARTICULAR, DIRECTORS OPPOSE MANY ASPECTS OF MARKET REFORM WHICH THEY VIEW AS HARMFUL TO THEIR ENTERPRISE OR SECTOR. THUS, MANY CRITICIZE THE DECLINE IN INDUSTRIAL SUBSIDIES, RISING ENERGY AND RAW MATERIALS PRICES AND THE ADVENT OF REAL POSITIVE, MARKET-DETERMINED INTEREST RATES.

19. MANAGING DIRECTORS, ESPECIALLY THE BARONS, HAVE UPDATED THEIR SOVIET-ERA LOBBYING SKILLS AND ARE BECOMING MORE AND MORE ADEPT AT LOBBYING THE GOR AND THE DUMA ON BEHALF OF THEIR ENTERPRISES AND SECTORS. AS A GROUP (WHERE THEY HAVE COMMON INTERESTS) AND INDEPENDENTLY (WHEN THEY DO NOT) THEY PURSUE THEIR INTERESTS AGGRESSIVELY. THUS, ALTHOUGH BROADLY SUPPORTING REFORM AND IN THEORY KEEN TO SEE INFLATION BROUGHT DOWN, MANY MANAGERS WILL SUPPORT BUDGET-BUSTING SUBSIDIES AND TAX BREAKS AS WAYS TO SOFTEN THE MARKET'S IMPACT ON THEIR OPERATIONS.

INDIVIDUALS, LIKE ENTERPRISES, RESTRUCTURE

20. LIKE THE RESTRUCTURING OF RUSSIA'S PRIVATIZED ENTERPRISES, THE TRANSFORMATION OF THE OUTLOOKS, OBJECTIVES, STRATEGIES AND SKILLS OF RUSSIA'S MANAGERS IS A HIGHLY DYNAMIC PROCESS IN WHICH DIFFERENT PARTICIPANTS ARE MOVING AT DIFFERENT SPEEDS AT DIFFERENT TIMES. MOST, HOWEVER, ARE MOVING. ALL BUT THE DEAD SOULS HAVE AT LEAST CRACKED THE MOLD OF THEIR SOVIET MANAGER PASTS AND IN MANY WAYS HAVE MADE REMARKABLE PROGRESS IN THE LAST FOUR OR FIVE YEARS. SOME, ESPECIALLY THE DOERS AND THE BARONS, ARE GENERALLY PROGRESSING FASTER AND ARE FARTHER ALONG THE LEARNING CURVE. THIS DOES NOT MEAN THAT THEY WILL NECESSARILY SUCCEED WHILE THEIR "SLOWER" BRETHREN FAIL. LUCK WILL PLAY A BIG PART IN THE OUTCOME -- BOTH IN TERMS OF THE VIABILITY OF THE ENTERPRISE THEY HAPPEN TO BE RUNNING NOW AND WHETHER OR NOT THEY WILL RECEIVE A SECOND CHANCE IF IT DOES NOT WORK OUT THIS TIME. WE SUSPECT THAT THE RIGHT SERENDIPITOUS FOREIGN CONTRACT OR THE RIGHT ASSISTANCE IN DRAFTING A BUSINESS PLAN MAY CONVERT MANY OF OUR MUDDLERS INTO DOERS, IMPROVING THEIR PROSPECTS SIGNIFICANTLY. LIKEWISE, ONE BIG STRATEGIC ERROR MAY END THE ONLY CHANCE A GIVEN BARON OR DOER WILL EVER RECEIVE. THIS UNEVEN AND DIFFICULT PROCESS OF TRANSFORMING THE MANAGERS OF RUSSIA'S PRIVATIZED ENTERPRISES WILL TAKE YEARS TO PLAY OUT, BUT IT IS CLEARLY NOW WELL UNDERWAY. BURNS

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