The Failure of Russian Projects

The Streetwise Professor writes about another ambitious Russian state project which has gone badly off the rails, this time the Vostochny Cosmodrome project.  As usual, the project is way behind schedule, way over budget, and workers haven’t been paid for months.

All of this would seem drearily familiar to anyone who has worked on Russian projects, but outsiders might not know the mechanism behind the failures.  Russian certainly would, but only those who have gotten their hands dirty on a project, i.e. the mal’chiki-mazhory who are the most enthusiastic of grand Russian projects won’t have a clue.

The problem is not in the experience, competence, or attitude of the technical workforce.  Russia has a ready supply of clever, motivated, experienced, and competent engineers and technicians.  These men and women are more than capable of designing and constructing pretty much anything in Russia.  Granted, it might not look too pretty and the design might be a bit dated, but it will work as intended.  The problem is in the management of these skilled resources.

The root cause is that owning a successful company in Russia is a result of your being allowed to do so by virtue of your personal connections or the muscle you can deploy (preferably both).  Without one of these, you are never going to be able to run a company large enough to execute a sizeable project, as you will be shut down or forced out by the local powerbrokers – either government authorities or gangsters – before your business is anywhere near mature enough to bid for large contracts.  Competence, a sound business plan, or good management practices count for nothing if you don’t have connections or the muscle to defend yourself.

As such, all players bidding for a large engineering and construction contract will have achieved and maintained their position by something other than technical competence and delivery.  The problem is further compounded by the fact that those very same connections which allow them to operate are used to determine which company gets the juicy contracts.  The award of contracts in Russia is therefore an exercise in nepotism; the selection of contractors is done not on the expectation of competent execution, but by which company offers the most beneficial kickbacks, favours, counterfavours, and financial rewards to those who have the final say.

This would not be a problem in itself if the winning contractor has within its organisation the skills required to execute a project competently.  Surprisingly, quite a few of these contractors do: they have on their staff the experienced technical resources that I mentioned earlier in the post.  Or even if they don’t, at the beginning a contractor will hire in the competent people and the project will start well.

The problem comes when the cashflow situation goes belly-up.  This always happens for the simple reason that cashflow is very difficult to manage on any project and especially so in Russia.  Whereas normally any contractor will have demonstrated their skill in managing cashflow by virtue of a proven track record and still being in business, in Russia this isn’t a requirement at all: personal connections are what matter.  So on Russian projects there is a strong likelihood that the management of the entity in charge doesn’t know much about cashflow, or indeed any other aspect of running a normal business.

Whereas some aspects of business can be ignored in favour of lies, threats, and pig-headedness, e.g. HR, HSE, quality, accounting, etc. cashflow isn’t so easily ignored.  If your bank account is empty, then you can’t pay suppliers; if suppliers aren’t paid, you don’t get the materials and equipment; if you can’t get the materials and equipment, you can’t make progress; and if you can’t make progress, you can’t invoice for the next stage payment.  Managing cashflow on a project is a very specific skill, and even major oil companies get it wrong and have to rely on the parent company and partners having large cash reserves to keep the project solvent.  Most Russian companies simply don’t possess this skill and probably few CEOs appreciate what it is, not having attained their positions through business acumen.

If a project experiences a problem with cashflow, one of the early signs is the workforce not being paid on time.  This is particularly true in Russia.  In countries like Russia and Nigeria, shafting the workforce by not paying them on time (or at all) appears to be perfectly acceptable behaviour in the eyes of many Managing Directors.  Indeed, some almost seem to think it a very clever way of saving money and engage in this practice even when they are flush with cash.  I knew several engineers and technicians in both Russia and Nigeria who had quit previous jobs having been owed months and months of wages, and given up hope of ever seeing it.  So if the company in question had experienced and competent technical staff on their books at the beginning, the best of these will leave once the pay problems start, with the rest following in a steady trickle depending on how bad the situation gets.  They will be replaced by inferior people, who will also get fed up and leave, to be replaced by even less-qualified people, and so on in a vicious circle until – like I saw in Russia – the site is filled with undocumented, uneducated rural folk from Tajikistan and North Korea working for meagre cash-in-hand wages.  When this manpower drain is coupled with the other side of the cashflow problem – the suppliers not being paid, hence materials not being delivered to site – the situation is almost impossible to reverse without massive cash injections from somewhere.  And this being Russia, the project owners are not the sort to be handing out extra cash even assuming it is available.

So in short it is a management problem, particularly their inability to manage cashflow.  This is compounded by the fact that the sort of people who manage large contracting companies in Russia are the sort of people who would treat the project account as their own personal fund for the purchase of dachas and Porsche Cayennes in the days after the initial advance payment, and also the sort of people who would think nothing of shafting the workforce and suppliers by not paying them for months or years.  Few, even in 2015, seem to understand the concept of a market for skilled labour which enables a skilled Russian welder to walk off the job if he hasn’t been paid and pick up another one elsewhere.  For those managers skilled only in Soviet-style thuggishness and corruption, they have yet to understand the Soviet labour system of being shackled to your workbench doesn’t, for the large part, exist any more.

This is why, despite Russia having easily enough technical resources to complete such a project, the Vostochny Cosmodrome project has been unable to even pay its bill for lighting.  The failure was never about Russian engineers being useless, or lazy, or too few in number, or Russian contractors not knowing how to do complex works.  It was always about that one thing Russia never had in the Soviet times or now, the one thing which they increasingly insist the West cannot help them with: managerial competence.

If somebody in Russia could harness Western management practices with local technical resources, we’d see a vast improvement.  One chap did this once, went by the name of Mikhail Khodorkovsky and had a company called Yukos.  Whatever happened to him?

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11 thoughts on “The Failure of Russian Projects

  1. “Granted, it might not look too pretty and the design might be a bit dated”the Russian military designs always seem to have a certain mean purposeful looking beauty about them the Sukhoi SU 35 comes to mind.

  2. The Eastern Spaceport is trapped in the worst of all worlds: state-owned, state-financed, state-managed and supervised by a man spectacularly incompetent even by Russian standards. The subcontractors are private but it’s not hard to guess who picked them and how. You nailed it in the fifth paragraph. But how do any projects get completed in Russia?

    Diego Gambetta, the author of research on criminal behavior, notes that Italian mafiosi typically don’t interfere with management of businesses under their “protection.” Nor do the smart “political oligarchs” in Russia, such as Timchenko, which is why Novatek and Sibur appear well-run.

    Even state-owned companies occasionally refrain from fixing what’s not broken. When Rosneft took over Yukos via the artificial bankruptcy, it kept most Yukos managers below the topmost level and did not meddle too much with subsidiaries for about five years. I’m sure it helped a lot when Rosneft developed Vankor, logistically a rather challenging project.

    More recently, Rosneft bought TNK-BP and the government nationalized Bashneft, both well-run, cash-generating private oil firms. In an unexpected bout of sanity, the government has chosen to keep Bashneft’s management team. But TNK-BP’s management practices and business processes are unlikely to survive being integrated into Rosneft. Which is a shame.

  3. marc,

    Yes, I always thought the Mig-29* and SU-27 (and by extension, the SU-35) looked fantastic. Even the rather aeronautically ugly Mi-24 helicopter has a certain beauty about it. I was more remarking on their civil construction: their industrial buildings are still eyesores.

    *That said, have you ever seen one up close? I have, in a park in Moscow. Far from having the seamlessly smooth wing surfaces of the Nato fighters, this one looked as though it had been hammered from a piece of tin in somebody’s garden shed. It was as rough as guts.

  4. Alex K,

    When Rosneft took over Yukos via the artificial bankruptcy, it kept most Yukos managers below the topmost level and did not meddle too much with subsidiaries for about five years.

    I think the engineers took a different view: I worked with a few when I was in Sakhalin, who fled Yukos very soon after the takeover. Those who remained didn’t fare too well.

    In an unexpected bout of sanity, the government has chosen to keep Bashneft’s management team.

    Until some lacky needs a high-profile position as a reward for slavish loyalty…

  5. On Rosneft and Yukos, I probably put it too strongly at first: rather, Rosneft under Bogdanchikov (who, unlike his successors, was a career oil man – ironically, from Sakhalin) restrained its urge for total control to avoid major disruptions at Yukos’ subsidiaries. But it’s only natural that professionals would want to leave a nationalized company.

  6. Good article. Also, do not forget the beautiful Russian blame culture. A person will be blamed no matter what. Even if it is a chance event that caused it. This aspect makes people very risk averse and has unwanted consequences when managing projects.
    Blame culture has been described in a book called “The Death of the Russian Engineer.” It shows how Russian engineers have fled into (extreme) specialism i.e. the change that your area is to blame is small and if it is then you know the most about it. If you know the most about it, then you have a good chance to deflect.

  7. marc, Soviet defense engineering was well funded and attracted some of the best talent in the country. As Tim points out, civil engineering was far from stellar and poor workmanship was unavoidable.

  8. Roger,

    Blame culture has been described in a book called “The Death of the Russian Engineer.” It shows how Russian engineers have fled into (extreme) specialism i.e. the change that your area is to blame is small and if it is then you know the most about it. If you know the most about it, then you have a good chance to deflect.

    I’d never actually thought about it like that. You are exactly right when you mention the Russian blame culture, and the behaviour of the Russian engineers makes perfect sense in that context. You were probably closer to the technical engineering than I was in Y-S and had a good chance to see this up-close. Very interesting!

  9. Trainee financial analysts – ones who are getting good training, anyway – have “Look at cashflow above everything else” hammered in to them over and over again. The test of a good analyst over a bad one is always the extent to which they get this, and how good they are at figuring out the cash situation from various other numbers that are not lying, exactly, but which are sometimes designed to make it hard to figure out. A company that makes it hard to figure out is a bad sign in itself – everyone loves companies that have good cashflow and are totally open about what it is.

    Sort of related, a couple of months back I found myself sitting next to a twentysomething Romanian bloke on a flight from Romania to London. He was coming to England to look for work. (He was some sort of professional driver, I think, but I didn’t get the details). He had spent the last five years in Italy. According to him, the situation in Italy is that employers have stopped reliably paying casual employees such as him. He was tired of not getting paid as promised and was therefore moving to the UK, where employers are still generally considered reliable in terms of paying wages owed. Is this a sign that the southern European countries like Italy and Spain that have looked bankrupt for about seven years are about to finally go under? I don’t know.

  10. Michael,

    Thanks for the input on the importance of cashflow, particularly as it supports my two contentions: it is important, and also requires skill to manage.

    Your comment re. the Romanian is equally interesting. My guess is these economies will start to collapse for real when the informal economies stop functioning. Not paying the casual labour forces might well be a sign of that happening already.

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