Ben Aris in Moscow -
Sergei Petrov cuts a diminutive and modest figure compared to the crowd in the lobby of the Ritz Carlton hotel in central Moscow. That's somewhat surprising because the founder of Russia's biggest car dealership Rolf is probably the richest man in the room by far, and Russians are hardly known for understatement when it comes to displaying their wealth.
A taxi driver who built a car dealership empire, its not only Petrov's clothes that buck the trend. He grew rich from selling cars, one of Russia's most corrupt businesses, but it appears that he's remained scrupulously honest whilst doing it, concentrating on quality of service rather than nefarious schemes.
"We had to be strong and competitive and we civilised this business," claims Petrov. "In 1992 importing cars was little more than a smuggling operation, and people didn't know how to make real money. But we always tried to do it legally; later other companies followed us."
Today Rolf has 28 showrooms in Moscow and St Petersburg, Europe's biggest and second biggest cities respectively, which have a combined population larger than any of the Central European countries, bar Poland.
Business is flourishing. The 2008 crisis hurt Rolf along with everyone else, but the company's turnover was already back to well over $4bn in 2010, even if profits were halved. Petrov is a poster boy for the potential for real business founded on Russia's rapidly growing middle class.
"Is Russia better today?" he asks rhetorically. "Yes, things are better than when we set out on this path 20 years ago, but we hoped for much more."
Petrov had a fairly normal Soviet upbringing. He was born in city of Orenburg in the Urals in 1954 and became a military pilot until he was forced to quit after the KGB accused his unit of "anticommunist activities" in 1982. He moved to Moscow and retrained at the Soviet trade university, graduating in trade relations in 1987.
Peristroika and the subsequent collapse of the Soviet Union threw everyone in Russia into reliance on their own resources, but also wiped the slate clean. Petrov had been running the driver pool at a Moscow construction company Mosinzhstroy, but left in 1991 to set up his own company that provided drivers to many of the international companies that moved into Russia after the Iron Curtain fell.
"We had a fleet of cars and the international companies needed reliable drivers. I drove one and helped the clients carry their cases," says Petrov.
Petrov obviously got on very well with his clients, so when he approached the head of Mitsubishi Russia for a soft loan to expand his fleet, he was instead given 40 new cars imported from Finland with no down payment and no collateral - a loan he was able to pay off almost immediately as the business flourished. A year later, the newly established Rolf won a tender to become the first official Mitsubishi car dealer in Russia.
Despite the economic chaos and hyperinflation that wracked the country at the time, Rolf grew extremely fast. Not everyone had been ruined by the collapse of the old system; Rolf's first customers were high government officials and the newly minted "Russian mafia," mostly traders capitalising on the mismatch between Soviet-era valuation on goods and assets and those in the international markets.
"We earned enormous money [in the early 1990s]," Petrov remembers. "After Yeltsin introduced trade exemptions for charities as way of funding their work, we were approached by one and imported the cars under this scheme without duties. We had to pay a third of the duties and were making about $20,000 per sale. It was a lot for a small company like ours."
The first half of the 1990s operated on this huge arbitrage and made multimillionaires out of fast-moving businessmen literally overnight. Petrov tells a story of going to Japan to present to carmakers and explaining that the Russian market consisted of the top 5% of society who had money in spades, but below that was a retail desert.
"Luxury goods was the only stable market then. The fish were there - mainly high government officials, oligarchs and mafia," says Petrov. "The rest of society, about 80% of the population, had nothing." However, as the economy began to pick up the car market slowly expanded, and by the late 90s Rolf had made Mitsubishi the best selling car in Russia outside the luxury segment.
The 1998 crisis was another blow but hurt Rolf less than its competitors as Petrov had already built up several business lines. In addition to retailing cars, the company sold them wholesale to companies, serviced them and had established a second hand sales unit. Competitors concentrating solely on importing were forced to slash costs, but Rolf could sustain itself on its other businesses to absorb the loses from devaluation.
Fear vs greed
Over the first six months of 2008 Russia briefly became the biggest car market in Europe, selling 1.65m units to overtake former champion Germany. Then the latest crisis hit. However, despite the collapse that induced, sales of passenger cars and light commercial vehicles were up 30% in 2010, according to David Thomas, chairman of the Association of European Businesses (AEB). The uplift continues this year, and Russia is set to take back the crown in 2015 according to industry experts.
Already representing many of the world's leading brands - including the increasing number of domestically-produced foreign brands such as Ford, Toyota, and Volkswagen - Rolf will ride this wave. But building up the business has not been easy.
Firstly the company has always been forced to grow using retained earnings. "We've never gone to the banks for finances. The cost of money is so high that if you take loans there is no profit," says Petrov. "The only financing we have ever taken was from Mitsubishi when we started importing more than 100,000 cars a year in 2007."
Secondly there is the bureaucracy, especially in the import business. Petrov's solution to this snafu was to build his own car import terminal in St Petersburg, which takes all logistics out of the hands of the customs service, leaving them only to carry out inspections. This smoothes the supply of product to his dealership network.
However, Russia's lawlessness has been the biggest obstacle. Organised crime was reported to control Russia's car distribution networks throughout the 1990s, and imports arrived via schemes designed to avoid what were crippling import duties. However, Petrov declares that he stuck to his principles and insisted all his cars were brought in legally.
"It was a battle of greed vs fear - and fear won. When we started selling Audis my sales staff were de-motivated," says Petrov. "Other dealers could offer a $2,000 discount on any car compared to our prices." However, when Vladimir Putin took over as president and threw oil magnate Mikhail Khodorkovsky into jail for tax evasion, Russian companies started to "go white". The message was to business was clear: pay your taxes or else.
From oligarchs to taxpayers
In late 2007 Petrov moved beyond the business world; he joined the political party Just Russia and was elected Member of Parliament for his home town of Orenburg. He's also a member of the parliament's Budget and Taxes Committee, but he seems frustrated by the lack of action in parliament. The Duma needs to take liberal actions but we do just the opposite: there is pension fund spending as there are elections coming up and reforms are on hold," he complains.
The point is pertinent for the future of Rolf. The company is entirely dependent on the ongoing emergence of a Russian middle class, but the car salesman worries that the structure of the economy is so geared towards the state that rapid progress is unlikely. "Only 20-30% of the economy is really competitive," Petrov estimates. "The rest is state business and business connected to the state or the regional authorities."
A state dominated economy has a fundamental effect on the attitude and plans of entrepreneurs, producing a way of thinking in which the main goal is to win privileges from the authorities. Many of Russia's most powerful firms could not compete with the best of the international firms in an open market, he argues. "It corrupts you. My peers look at investments over a maximum of five years. They're prepared to invest into chickens, which produces money quickly, but not beef as it takes five years just to build up a herd."
Many Russians, particularly the younger ones, are getting frustrated and Petrov repeats an increasingly recurrent complaint that the country's brightest and most successful businessmen are choosing to leave the country, frustrated with the slow pace of reform.
"The whole establishment is dedicated to Putin - they've all benefited from the last 12 years and naturally want to protect what they've built up because they can't compete in an open environment. They need protection," Petrov says. "People are asking 'what's the point of staying when our skills are deteriorating?'"
Still, the Rolf founder is staying put. In many ways Russia is still at the start of the reform process, or at least at the start of the next phase: the basic problems have been solved and Russian Inc is in profit, but now the more difficult task building a system that can deliver long-term growth starts. The alternative is stagnation, and then social unrest.
"Russia is becoming normal, but mainly because people are spending money, which is ultimately all coming from oil," says Petrov. "In the long run I'm optimistic [about Russia's future], but in the short-term we need to increase the number of people that think private business should be the main driver of the economy. We need to change people's mentality and change them from state dependents to regular taxpayers."
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more