Fridman: How I became an oligarch

What do you need to succeed in business?A mixture of luck and good judgement, according to Mikhail Fridman, one of Russia’s richest men and currently head of the Alfa Group.Gorbachev’s 1980s reforms made private enterprise possible – Fridman and others like him did the rest, as can be seen from this transcript of his lecture at the Publishers’ Forum in Lvov.

Mikhail Fridman
14 November 2010

Good afternoon, good people of Lvov, dear colleagues!

I am starting this lecture in Ukrainian because I can still remember it, although I haven’t spoken Ukrainian for almost 30 years. I’m very grateful that you have taken the time on this day off to come and listen to me. I would like to apologize and switch to Russian, as my vocabulary is not sufficient to say everything that I would like to.

I’m grateful to the organizers for the chance to visit my native city and meet them. Actually, I never give lectures, as I work in a somewhat different genre, but I do enjoy it. I hope I will be able to answer the questions that interest you. The topic of the lecture is “How to become an entrepreneur”. In discussing this topic with my friends, I said that to start with you need to be born in Lvov, then come to Moscow at the right time, when the empire starts to collapse. In principle, this is the simplest way to become an entrepreneur.

But more seriously, I think that to become a major, very successful entrepreneur, you really need to be in the right place at the right time – a lot of things have to coincide. It would probably be difficult to become an entrepreneur in a small or a very poor country. The world is changing and becoming globalized, and the list of the richest people naturally includes Chinese, Indians, Americans and Russians – Russia is after all an enormous country with enormous resources. But the richest person in the world is the Mexican Carlos Slim, who is certainly not from the largest and richest country in the world. Nevertheless, from his beginnings in a small town he created an enormous business empire, which works practically all over the Latin American continent and successfully competes with representatives of other economies of the world, which are much larger and stronger. So I think that everyone present here who decides to devote his life to entrepreneurship has a chance of achieving virtually unlimited success.

But the most important thing is not how to become a major entrepreneur or head of enormous business projects, but how to become an entrepreneur in general. For this I believe it’s not so much the circumstances that are important, as a completely different quality – entrepreneurial talent.

Entrepreneurial talent is a talent just like any other. It’s like scientific, creative or literary talent – we are here as part of a literary forum, after all. Historically, the attitude towards entrepreneurial talent has generally been rather controversial, I would even say discriminatory, especially on the territory of contemporary Ukraine and Russia and the states that existed here. Public perceptions of entrepreneurial talents were generally quite negative. There are undoubtedly many reasons for this. One of the most important is probably religious. As you know, greed – and essentially entrepreneurship is about earning material wealth – is one of the deadly sins, and traditionally all religions, especially the Orthodox church, had a very negative attitude towards it. As Christ said in the Sermon on the Mount, “rather a camel will pass through the eye of a needle than a rich man will enter the Kingdom of Heaven”. This idea has been uppermost in the public mind for centuries. To this day, the image of the entrepreneur in Russia, and I think Ukraine, is generally contradictory.

The destruction of this stereotype began with Protestantism. The dissemination of the Protestant ethic led to a change in the attitude towards entrepreneurship: people began to think for the first time that an entrepreneurial talent was a gift from God, just like any other. A person who was born with this talent should use it and should accumulate material wealth, to be used not for his own needs, but to the benefit of society.

From that moment, business gained full legitimacy and became a respected and honourable occupation. This is why we have the phenomenon of Anglo-Saxon societies today – America, Canada, England and others – where the businessman is a leading figure in public life. The general approach of these countries to politics, social life and culture, has a clear business orientation and their societies focus on achieving results.  There is strict public monitoring of business expenditure and norms of behaviour. But the obvious success of these societies and their achievements have led to the figure of the businessman and business activity becoming increasingly important and significant in all countries, religions, and on all continents. For some, results are better, for others they are not so good.

Undoubtedly, for Russia and for Ukraine this is a long path, and a great deal of time must pass before attitudes towards business change.

Now for a few words about the talents I believe a businessman needs, and what entrepreneurial talent consists of. It is widely thought, and has in fact been proved by science, that the two hemispheres of the human brain are responsible for different talents. In people with analytical tendencies, an inclination towards the natural sciences, logic and calculation, the right hemisphere is more developed. The left hemisphere controls creative tendencies, intuition and creative thinking. Each person is considered to have one or other side better developed. My analysis of the activities of people who are seriously successful in business leads me to conclude that entrepreneurs come into the category of people with equally well developed hemispheres. Perhaps they might not make such great scientists or outstanding artists, but evidently they have a little of both talents, to an equal degree, so to say.

Why do I think this? Because, on the one hand, I think that entrepreneurship is an inherently scientific analytical function: it develops calculation, economy, a sober and very precise approach, forward planning ability and the calculation of results, efficiency and so on.

On the other hand, the main target for the work of the businessman is clearly the person, as it is for creative people. People, as we know, are very complicated and contradictory, and it is quite difficult to use the analytical method alone in your dealings with them, especially when we are talking about such subtle things as building a business team or relations with partners or the authorities. Therefore, in principle, I believe that a successful entrepreneur makes a precise, cold-blooded and balanced calculation of what will happen, but he also enjoys socializing with people and is good at it. He has a good sense of human nature, and sometimes even an intuitive understanding of the motives and behaviour of others. In other words, business is a science about the behaviour of people, both the general public and individual outstanding individuals. And I believe that the combination of these qualities to a sufficiently equal degree usually gives a good basis for success in business.

Entrepreneurial talent is expressed in a standard set of very important talents which are useful in any type of human activity: qualities of leadership, persistence, perseverance and so on and so on. But there are also some characteristics and qualities that are quite specific to entrepreneurial activity.

I would say that the first specific quality is that the entrepreneur has to have a healthily opportunistic approach. Opportunism doesn’t always have a positive meaning, and very often in personal relationships or family life and friendship it may not be so good, but in business it is sometimes very useful.

Fridman Lvov

Mikhail Fridman: I think that of all the types of human activity, entrepreneurship is in some sense the closest to war (photo:polit.ru)

I recently told my friends a story: when we started working as entrepreneurs at the dawn of the cooperative movement, we had an office in the building of the Institute of Chemical Physics, one of the largest academic institutes in Moscow. We rented a small part of the building, and people of the same age worked in the building next to us (I was about 24-25 at the time), graduates of the best Soviet universities, the Soviet scientific and technical elite. They were already either young candidates of science or professors, although we were all about the same age; in other words, these people were brilliant, well-educated, smart, erudite etc. Incidentally, I also tried to enrol in the Moscow Physics and Technical Institute at one time, but unfortunately I didn’t get in, so for various reasons I was mildly envious of these people.

We were friends, we met and talked, and as we were all only just starting out, I said to them: “Come on then, join us”. They seemed to be interested, but then we talked, and they explained to me very logically and in detail why they couldn’t do it. They said, for instance, that we would need start-up capital and that we didn’t have any. This was quite right. Then they started talking about the danger, the rackets and gangsters, which was also absolutely correct. Thirdly, they said that the Soviet regime would not allow it, and we would all end up in jail. They gave ten reasons why you could not go into business.  After that we continued on our way and they on theirs and the final result was clear for all to see: the Institute collapsed and they lost their jobs.

I’m not saying this because I want to criticize their logic. We had no answers to their questions, but we did have an internal conviction that we would win through. Businessmen frequently work in very contradictory conditions and it is very hard for them to make precise calculations of every aspect of what they are doing. I would actually say that if it could all be calculated, it would no longer be business, just the technique of execution. But a healthy opportunism and confidence that you will find the right decision in this rapidly changing world are some of the most important qualities for businessmen.

Another quality which I think is interesting for entrepreneurs is a combination which in ordinary life might be regarded as not very positive: great flexibility on the one hand and an ability to stand up for your interests very firmly. Flexibility in tactical issues and firmness in standing up for your strategic goals is a combination that one rarely encounters. Flexibility is sometimes perceived as lack of principle. Very often in the public mind, businessmen are amoral, because they are prepared to make friends with yesterday’s enemies and unite against the people they were friends with yesterday etc.   Such behaviour does indeed seem unprincipled. Nevertheless, I think that an ability to determine the thin line between tactics and strategy, tactical and current aims and strategic objectives is a very important quality.

There is another aspect which I believe is interesting. In principle, entrepreneurship involves a great deal of conflict. Most people don’t like conflict, which is quite normal. People like to be friends, reach agreements, and talk in a polite tone with their friends and relatives. But business involves focusing on conflict, if necessary, and a readiness for it. In business you should be prepared to defend your interests very fiercely from time to time.

I think that of all the types of human activity, entrepreneurship is in some sense the closest to war. Corporate wars reflect the level of tension in battle, the rigour and lack of compromise. If someone is in principle prepared for this kind of war and can live with the idea of conflict, then he will probably be successful in business.

And now for the last amusing thing which I think is related to entrepreneurship – an adequate assessment of yourself and the people around you. Sometimes people confuse this with cynicism and accuse entrepreneurs of a very cynical attitude to reality. Again, you could say that in the everyday sense of the world this is true, because the entrepreneur is probably obliged to perceive the whole world objectively, perhaps envisaging the most negative scenario, the most unpleasant acts by other people, including people who are close. We are talking about business here, where there can also be conflicts with friends.

Nevertheless, I think that if this justly reflects the surrounding world, then this quality is good for business, and not so bad for relationships either. Of course, it is delightful to delude yourself and have illusions about your acquaintances and friends, and other people you do not know well… But it is better to take a more sober attitude. Perhaps I am exaggerating a little when I talk about such things, which are not so attractive in an ideal world, but I’m talking about the generally accepted qualities of activeness, energy, drive, charisma etc, which are striking human qualities that are useful for almost any activity.

To conclude my lecture, I would like to say that in business there are different situations, pleasant and unpleasant, as there are in everyday life. But to my mind it is one of the most wonderful and intriguing forms of human activity, which is engrossing and gives rise to very vivid emotions. When I look back at my modest business activities over the last 20 years, I sometimes think that it reminds me of a good thriller, which so far has a happy end. (Although I hope it’s not the end yet).

And I recommend it to everyone who feels that they have the skills, tendencies and talents in themselves to work in business. It really is interesting and entertaining, and I think that your life will be very full and rich. Success to you all!

Publishers Forum Lvov

Publishers Forum in Lviv is the largest book fair in Ukraine and one of the largest in Central and Eastern Europe (photo:polit.ru)

Boris Dolgin:  Thank you very much, Mikhail Maratovich.

You have listed many wonderful qualities which indeed seem to be necessary for a businessman, though perhaps in other situations they may not be the best. But there is another profession, members of which I think you will have met in various countries and worked with in some way – politicians. Don’t you think that the characteristics that you talked about – the combination of analysis and intuition, and the readiness to take risks, and to enter into conflicts – are in some way close to the qualities of a politician? What are the differences?

Fridman: Yes, indeed, politicians and entrepreneurs are very similar, but we should not forget the difference between politicians and businessmen. And if we’re talking about how they differ, I think that politics is undoubtedly a more humane form of activity, there is less calculation and less logic in it. Or rather, there is also a certain logic to it, but it’s not like business logic. In business, especially in major organisations, analytical calculation involves marketing, studying the market and so on, quite scientific things in other words. That is all very important. Of course, politics is also gradually starting to move in this direction…

Dolgin: You mean they require studies and reports?

Fridman: Yes, sociological surveys and so on. But in my opinion politics at present still exists more in the sphere of emotions and feelings about the needs of society and social groups. It’s much less analytical than business, to my mind. Of course, a transition is taking place, because as we know politics is the concentrated expression of the economy, and in the end politics reflects the interests of large economic groups.

Also I believe that in some sense entrepreneurs are much freer than politicians. For me personally, for example, this is the most important factor, for politics is often harmful to your health. The reason that I would never go into politics is that it would undoubtedly force me to live publicly in many ways. But entrepreneurs have much more freedom to manoeuvre, they lead their own private lives. For me this is absolutely crucial.

I agree that politics and the economy are mixed spheres of activity, and as society develops, the dynamic of the transition from one category to the other becomes increasingly obvious. There are a huge number of examples: just take Silvio Berlusconi.  If we consider the structure of American politics, we can see that the “horizontal” transition from politics to business and vice versa is extremely common. The USA had a finance minister called Robert Rubin. That was about 10 years ago.

Dolgin: Under Clinton.

Fridman:  Yes, I think it was under Clinton. And he was in post for a long time, over seven years, I think, which is uncharacteristic, because usually a finance minister stays in his position for two, three or four years. In one presidential term there are often two Secretaries of the Treasury. He showed me portraits of all the finance ministers at the ministry, starting with the first, who were wearing wigs, and he said: “I’ve been the minister for longer than all the rest. Do you know why? Because I was rich when I came to the position. I don’t need to step down. Everyone steps down, because they are poor. They work and then go into business – they need to earn money. But I don’t have to.” He really was a very rich person when he became minister. I mean to say that the American establishment is quite relaxed about the political and economic environment being one whole. And the style of American politics is very business-like, everything is very much directed towards a specific end result, there are no abstract goals, everything is very focused. So I think that politics and the economy are often very close.

Question from the hall:  Do you think we can expect a second wave of the crisis? And a second question, how did you understand how to start a business and what to start with? Thank you.

Fridman: As for the second wave of the crisis, in order to talk about this more or less seriously, we must agree what we understand by the word “crisis”, and how the previous crisis manifested itself. It led to a drop in GDP in the economic system of the developed countries and in developing countries such as Russia, Ukraine and the Baltic States. In America the drop was around 5%, in Russia it was 8.5%, and in Ukraine it was 15%. On the whole this was, of course, a serious problem, but I wouldn’t describe it as very dramatic. The crisis was compared with the “Great Depression”, but that is not really appropriate. A crisis is a normal phenomenon, it happens all the time, and during the course of our work we have lived through at least three to four full-blown crises: in 1998, 1995 and 2000.

I think that if we are talking about a repetition of the crisis in the form that it took in 2008, i.e. a drop in GDP and several major banks in crisis, then there will not be a second wave. The central banks, governments and all the other institutions that keep track of them have drawn their own conclusions, and I am practically certain that a repetition of this scenario, when major financial structures collapse, will not happen. Today, we must admit that it was a serious mistake, dictated by the personal problems and mistakes of a group of people: the American treasury, and the management of companies.

But in some other form there will undoubtedly be a crisis. Maybe not next year, but in several years. An obvious form that it may take is the default of sovereign debts of European nations. This will lead to other problems, for example problems with the flow of investments to these countries, problems of budget deficit and accordingly the devaluation of national currencies and major inflation in the countries that it may affect.

What do I mean by this? If you understand the words “second wave” to mean a repetition of the scenario, then the answer is “no, there will not be a second wave”. If you understand the “second wave” to mean some kind of crisis in the economy, then that will certainly happen. I can’t say “sooner or later”, but I don’t think they will happen in the near future, because everyone is paying a great deal of attention to these issues  and making sensible decisions. They’re all very scared. A crisis usually happens when people are afraid of nothing, things in the garden are rosy and can only get better. That’s when the crisis strikes. As everyone is very scared at the moment, talks about this all the time, and tries to address the problems, I think that some fluctuations will inevitably occur, but in principle we should not expect such a dramatic development of events.

And the second question. You know, it’s a hard one to answer. I’ll tell you why. In principle, you can work in any area you wish to, I assure you. If you have talent, everything will be fine. I simply think that in order to do business, you need to have a feeling that is not on the level of calculations and economic models, but an intuitive, inner perception of some demand that is in the air, which exists in society and which is not satisfied at present, and you can try to satisfy it.

For example, if I took the metro, and I haven’t taken the metro for many years, unfortunately or fortunately, so I don’t know what people need who take the metro. But when I spent a lot of time in the metro 20 years ago, when I walked the streets and lived the life that students live – I graduated from the institute and then worked at a factory – I understood very clearly what might be of interest and what might be needed. That’s what we did: we didn’t sit and think up very clever things, we started from what interested us, what our friends and acquaintances needed. That was my initial premise. I assure you that if you listen attentively to your inner voice and the opinion of those around you, then you will soon understand what may be required.

This is a banal answer – of course, it’s always easy to do something new. The times we live in are greedy and fast-moving: the number of things going on in different places at the same time is constantly growing. This is mainly down to new technology, so that’s obviously a field to work in. It’s in demand, there’s less competition, it’s only just started and it’s a new field. And it probably won’t need a gigantic outlay: IT, internet and so on. As I say, a banal answer, but I think that anyone who is able to be intuitive about what people around him want, will be able to come up with something.

Dolgin: Mikhail Maratovich, but you are in business and you are an entrepreneur. When you decide to do something else, you are also reacting to something and you pay attention to the analytical reports that you read.

Fridman: Well, firstly, of course we don’t stand in one place and develop. A business structure has its finished logic, its own life. When we started out, there were a lot of new words in business here. For example, for a long time I didn’t understand the term “legal entity”, but with age and experience I began to understand that this is in fact a very correct name. It is indeed a notional legal person, the product of the activity of your company and your partners, which starts to live a completely independent life, has its own fate, its own interests and its own aims. Our job is to support it in these interests. It’s a separate object, inanimate, but well delineated. When you are already working on it, the existing business dictates to you what needs to be done, but when you’re just starting up, you are in a rather different situation.

Alfa Group

The geographical distribution of Alfa Group’s markets (2008 data).  Mikhail Fridman: “The percentage of our business in Russia is falling. Currently, I think, it stands at 70-80%, but over the next 10 years it will certainly drop below 50%”. 

Yury Maximovich: Good afternoon. How global is Alfa Bank now? How much of the business is in Russia, and how much in other countries?

Fridman: Thank you.

I already mentioned Carlos Slim, who started out with a Mexican company, and then spread his business throughout South America. I mean to say that undoubtedly globalization is at the same time a goal and an objective fact which doesn’t depend on what we want. We want to globalize, because diversification reduces dependence on a specific country. This dependence always exists, on politics, economics or social factors. Although we are in principle patriots in both Russia and Ukraine, we understand that diversification of business would be extremely useful for us, for our business to be stable, reliable and steady. This is on the one hand, but on the other it is absolutely essential, especially in the telecommunications sector, because, if you think about it, telecommunications is globalization in itself. The speed of information exchange is globalization. This is the business that represents the core of globalization, and so, whether we want it or not, staying within national borders in this business would be an absolutely no-win strategy. So, on the one hand, it’s what we want and on the other it makes good sense.  

As for the percentage of our business in Russia, in the CIS, and the rest of the world, I would put it like this: Russia so far remains the main economic space where we carry out our activity. Nevertheless, the percentage of our business in Russia is falling. Currently, I think, it stands at 70-80%, but over the next 10 years it will certainly drop below 50%.  Accordingly outside the CIS, it’s 5-10-15%. I think that in future there will be 50% in Russia, 20% in the CIS and 30% in the rest of the world, which in my opinion will be a much more balanced approach than what we have today. Although 5-7 years ago, practically 100% of our activity was in Russia, so we are taking the right path. 

Question from the hall:  How did you start, and is the income you earn at present sufficient for you?

Fridman: Since we started at the dawn of entrepreneurship, our goal was quite primitive – to earn money. We lived in a hostel, so we all dreamed about the beautiful life and cars, like all ordinary people. We earned the first money quite quickly, and over a few months our demands increased. We bought our first Panasonic television, a video player, and later we bought cars. Of course, this money, from the standpoint of personal consumption, was more than enough to live on comfortably. I know quite a large number of people who earn a lot of money, travel to various beautiful places and don’t deny themselves anything. This philosophy is somewhat alien for us (for me and our partners) as retiring on a professional pension (even a very comfortable one) would be at the very least totally uninteresting for us. We like what we do.

I can’t say that it’s an easy profession, but it’s very difficult to convey in words the excitement of the story that unfolds in business. For me it’s a thriller, a western, something like that. So, when you get used to living in this genre, life without it becomes very boring. For example, after several days on holiday, I feel the need to get back to my customary activity. In some sense this lifestyle is a little crazy, but at the same time it is very interesting. On top of that you start needing to develop and learn. If you want to be in the picture, you must keep track of political and world events, and rumours. So I don’t want to leave business, I don’t want to lose this drive, I want to be eternally young, energetic, strong and successful. It’s for this feeling that we do business. Money is just a way of measuring our success.

Dolgin: To continue briefly. One of your colleagues from Alfa, Pyotr Olegovich Aven, once made a kind of apology for big business at one of our seminars. He said that it is in really big companies with a serious corporate culture, where transparency is very important that a kind of new culture of relationships develops, and those elements that made business so unpopular in the 1990s, dirty dealing etc., disappear. What do you think about the role of big business as a bearer of culture?

Fridman: People say that in big business people are unprincipled and vile cynics and I’m sure that this is true in some cases. I don’t idealize myself or my colleagues, and I don’t doubt that my colleagues are not always whiter than white, but I do think that you can’t create a major business without having a very precise system of values and principles. This is because a major business involves a large number of people, and every company, as we know, has its absolutely individual approach to internal ethics, philosophy, aims, objectives and values. The fact that this set of values exists is not in doubt. Values can differ, they may be criticized for being incorrect, but they exist. They are sets of ethical and social norms inside a company, which create the backbone that is called corporate culture. This virtual thing is colossally important for the achievement of results. As important as community spirit and public morals are for achieving results in society. Every company, if it is living and strong, has ethics and principles. So in this sense, I think that businessmen have an important role to play as bearers of culture. The question is to what extent this spirit and this set of values correspond to public morality.

I think that the problem of big business in Russia, as in Ukraine, is that the needs of big business are very different from public perceptions, so there is a gap between the two.   This is why the morals of major corporations often seem hostile and alien, because they are in principle very different. Again, historical roots and explanations are to be found in religious beliefs. So to say that business is good for society, that the values it brings to society are correct is to my mind far from true. This is a philosophical question: it is not clear whether society needs these values, there are many societies living a different life.  The values instill a pragmatic attitude to life and improve the material results – that is true, but it’s not clear how much help that is to society. True, there are some ethical rules in big companies that are often of use to society.

Dolgin:  You are a member of the Russian Union of Industrialists and Entrepreneurs.  What do you do there?

Fridman: The RUIE is a public organization, one of the few in our country that was created from the bottom, not top down. It was an initiative of the general public, the“simple oligarchs”. It’s even called the oligarchs’ trade union, as a joke.

Dolgin: But that didn’t happen straight away, it was the ‘red directors’ at first.  

Fridman: Yes, the red directors came first, but they were already past their pension age and the organisation was dying on its feet, so it was given to us. You could say that we asked for it, and we saw them smoothly into retirement. It became an “oligarch” structure with the involvement of all the major and most famous entrepreneurs in Russia. If you’ve heard anything about Russian business, then you know virtually all of them. Incidentally, it’s a great honour to be admitted to the ruling body, which is called the “bureau” and consists of 20 or so people. We really do try, as far as it is possible in our socio-political conditions, to influence the economic policy of government and the legislative policy of the State Duma, deputies and ministers. You can’t say that we have great success, but in general it is considered to be the most influential public organization in the business sphere today.

Indeed, Presidents Vladimir Putin and Boris Yeltsin had regular meetings with representatives of the RUIE bureau, and President Medvedev still does. They discuss official matters, although some meaningful discussions also take place there. And we are undoubtedly protecting general interests, rather than the interests of our personal business. Not because we are such great altruists – we would gladly protect our business – but because colleagues do not permit the discussion of their interests only. Everyone has their own interests. You know, in the company of these people you become a decent person, whether you want to or not, and you fight for the good of all. This dictates certain conditions, and I won’t go into detail and give specific examples now, but we have indeed had a positive influence on many laws, legal documents, with a view to making business life easier. This organisation is very liberal in both its spirit and its views. At the very least, it advocates the priority of private property over state property and supports the liberalization of business in Russia.

Question from the hall: Pane Mikhail: how do you think mankind will develop over the next 60 years? Thank you.

Fridman: What lies ahead is a difficult question.  What can I say? In principle, we will have the same things we had in the past, there will be a lot of good things and a lot of bad things. I don’t think that this topic or this format allow me to say anything interesting on the subject. I’m not a scientist or a prophet, I just do what I do. Thank you for your questions.

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