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"Quo Vadis Russia: A Business Perspective"
Remarks by Neville Isdell
Chairman & CEO, The Coca-Cola Company
March 4, 2008
Southern Center for International Studies
(SCIS)
Atlanta, Georgia |
INTRODUCTION OF NEVILLE ISDELL BY CHARLES BATTLE, CHAIRMAN,
SCIS
Mr. BATTLE: Thank you very much, Cedric Suzman, and thanks
and welcome to each and every one of you for being here today
for what I know is going to be a very interesting and stimulating
presentation and discussion.
We're honored to have with us the Chairman and Chief Executive
Officer of The Coca-Cola Company, Mr. Neville Isdell.
Neville is a long time friend and supporter of the Southern
Center. He's a former member of our Board of Trustees. He's
been supportive through the years of many of our educational
programs, and most important, he's a real man of the world.
He was born in Ireland, educated in South Africa, served
in increasingly responsible jobs for The Coca-Cola Company in
Asia, in Africa, in Australia, in Europe, in the Middle East,
and of particular significance, led the introduction of Coca-Cola
into the then Soviet Union.
He serves on many international organizations, as Chairman
of the Board of Trustees of the International Business Leaders
Forum, the United States Council for International Business,
and the Center for Strategic and International Studies.
But of particular relevance is he's now the Chairman of
the U.S.-Russia Business Council, which is a very distinguished
organization, which provides significant services to its American
and Russian member companies in the area of business development,
dispute resolution, government relations, and market intelligence.
I think we all know that things continue to move at a very
rapid, and often hard to follow pace in the Russian Federation,
especially with the recent election of the new president, Dmitri
Medvedev. It's very timely that we ask the question, "Quo
Vadis Russia?" Where is Russia going?
And I can't think of anybody who has a better set of knowledge,
skill, and experience to lead us down this journey, but our
speaker today, and I'm proud to have him and to introduce the
Chairman and CEO of The Coca-Cola Company, Neville Isdell.
REMARKS BY MR. ISDELL
Thank you, Charlie Battle and Cedric Suzman for your introduction.
And Peter -- I'll thank you afterwards if I like the questions.
[Laughter]
Ladies and gentlemen, distinguished guests who are here with
us today, it's about 20 years ago, almost exactly, that I took
my first trip to, what was then the Soviet Union to work on
a countertrade deal to try and get concentrate, which is the
core ingredient for Coca-Cola, into the Soviet Union.
Only if you start around that period of time, can you have
a true understanding of how far we've come. And only then, I
believe, can you have a truly balanced view of Russia as it
is today, warts and all.
Russia in 1988 - How Can I Do Business Here?
As I walked the streets of Moscow, the city was gray. It was
barren. Buildings were run down. But funny enough, it wasn't
dangerous. You were well looked after. In fact, if you looked
over your shoulder there was someone there looking after you.
[Laughter]
But during the day, outside the stores, there were lines everywhere
of people trying to get in to shops, which frankly, didn't even
have the very basics of life. And the shelves, when you went
inside, were almost bare.
So, as I sat in my hotel room, which was the best hotel, and
they had beds which were very comfortable because, you know,
they fitted your body very well. And you got a good view of
everything outside, because the curtains hung down very nicely
-- and couldn't be drawn. You said to yourself, "What on
earth am I doing here? Why am I in this place, and how on earth
am I going to do business here?"
Russia in 2008 - A Transformation
Now, we all know the answer. As you walk those same streets
today, there is a vibrancy, world-class shops and restaurants.
Yes, higher crime. But this [transformation] is not only representative
of Moscow today. It's representative of cities across the whole
of Russia. People, as you mix with them, are generally happy
and hopeful. I think all of us who have been to Russia over
the past couple of decades can think about it similarly.
But again, I remember we had one kind of trade deal, which
actually involved bringing Lada cars to Britain to get countertrade
credits. And by the way, when they arrived there, it took three
days to have them repaired so they could actually go on a road
as new cars.
We were producing Fanta, and I sat there with the managers
and the owners, and we celebrated with Georgian brandy and tins
of sausages. That's all that there was available for a wonderful
welcoming celebration.
Today, that middle-class in Russia is growing, and they enjoy
a variety and a quality of consumer goods, which they had no
perception of 20 years ago. In fact, better than even those
privileged members of the Communist Party, who could go to the
"Berjozkas," the foreign trade shops, which frankly
didn't have very much in them either.
Now, in the 1990s, we decided that we wanted to build a bottling
plant in Moscow. It was a multi-year process. It was very frustrating
from bureaucratic standpoint and obviously lots of red tape.
But I want to share that story with you for just a moment because
here we are with Russia now actually a magnet for foreign investment.
It's a place which is still difficult to do business in -- but
I can tell you -- is considerably easier than it was in the
early 1990s.
Challenges Today
And of course, I am not ignoring the challenges, and those
are written about copiously in every newspaper every day. Those
challenges today are real. The political opposition, clearly,
is isolated. There are clear accusations of manipulations of
elections and of control of the media. The reports will focus
on corruption, about the ever-increasing centralization of power,
about the oligarchs, and about the fact that government employees
are not only running pieces of the economy, but running their
own businesses.
We all know that this is a particularly fraught time in terms
of relationships with the West, and in many respects, we are
now at the lowest point since the Communist era in terms of
relationships between the West and Russia.
A Difficult Road to a New Future or Just Back to the Past?
But, one has to think about -- Is this part of a difficult
process? Or is it part of a fundamental deterioration which
will lead back to the past?
I'm asked that by business people all of the time. "Why
are you there when you see all of these issues and problems?"
And they ask it with really genuine concern: "How can you
do business in Russia today?"
First of all, let me answer the earlier question. I think what
we're seeing is part of a long-term process, which I think will
be a long-term positive process. But it will be long-term. And,
like everything about Russia, all of the answers to all of the
questions are very complex and very difficult to dig behind.
I won't quote Churchill, but you know the Churchillian phrase
about the Soviet Union.
A Business Perspective
I think shedding some light on past experience is going to
lead us to the future. I just want to sound a few notes of caution,
though. I do not pretend to be a politician, a political scientist,
or government official. I only bring to you the experience of
a businessman who has worked as a businessman in that society.
I also don't claim to be a futurist, either. Like all of you,
I'm eager to prognosticate and to think about Sunday's elections
and what they mean. We're only going to see that playing out
in the months ahead.
But let me add this: I have met the new President, Medvedev,
when he was at the World
Economic Forum, and one other occasion -- both in public
and in private. And he does speak the language -- on those occasions
-- of a liberal economist.
They replaced an economy minister, German Gref, who was a liberal
economist and was part of the change in the economic situation
after 1998, and they brought in a woman called Elvira Nabiullina.
She is a student of Yevgeny Yasin, who was the father of Russian
reform. So here's this dichotomy. They remove one liberal reformer.
They bring in another.
The question, of course, about the new President is very clear
-- will it be his footprints, or someone else's? Can he, in
fact, leave a footprint?
As we ask the question "Quo Vadis Russia?," I also
want to say very clearly that the Russians won't allow us to
make the decisions for them. In fact, they're very prickly about
that. Very often, well-conceived words are an irritant to a
people who have lost an empire -- to people who feel, frankly,
they're being put-upon. Only the Russians are going to decide
their own future.
Two Trends in Russia's Development
But there are two trends, I believe, that really stand out
as we look at Russia as it has changed over the years.
The first is the tremendous speed of progress and change. I'll
come back to that, because that may surprise you.
And the second is the way that the business climate has improved,
but the perception has not.
Trend #1: Rapid Change and a Growing Middle Class
If you were to describe Moscow or St. Petersburg or even Chelyabinsk
to someone 20 years ago as it is today, they wouldn't believe
that that transformation could take place in 20 short years.
I certainly didn't at the time.
And you wouldn't have believed the middle class -- the emerging
middle class -- that you see walking the streets. You would
have believed that you still had massive poverty. Well, you
do. But in the last decade, that has dropped from 40 percent
to 16 percent. And the World Bank's estimate is that 2 million
more Russians enter the middle class every year. That's 5,500
Russians every day or an auditorium this size every 90 minutes.
The middle class are the underpinning of change in any society.
And as they come into the real economy, a genuine consumer economy
arises -- a consumer economy which allows businesses like us
to actually thrive and to flourish. It's no accident that they're
one of the BRICs, and every consumer goods company in Russia
today is enjoying - off a good base -- double-digit growth.
Coca-Cola's Entry into Russia
Our first entry into the then-Soviet Union was in 1970. Pepsi
-- which had struck a deal as part of the Nixon visits -- had
much superior countertrade deals than us. They had exclusive
rights with Pepsi-Cola, and therefore they outsold us in a major
way. So, we knew that catching up on the countertrade front,
given those interlocking relationships with Communist Party
officials, was going to be very difficult.
But perestroika was around, and change was taking place.
And we decided that we needed to find a way to establish a true
business system in the then-Soviet Union. We started planning
that before the Wall came down. By 1991, those plans allowed
us to see the full opportunity, and we decided we were going
to build a state-of-the-art, brand-new production facility in
Moscow.
Trying to Build Our First Plant in Moscow
It was an exciting time to make that decision. Why? Well, by
the way, a few "small" problems: Foreign companies
couldn't own land in Moscow. They had no idea, nor concept,
of what the leasing of land was. And the problem, of course,
was that no one had ever tried. There was no regulation permitting
it. In fact, in many instances there were arguments about who
actually owned the land.
The value of the land? Well, it belonged to the people. It
didn't have a value. How did you establish that? And then, in
practical terms, how were you going to be able to pay?
Well, eventually we got through with the then-Mayor, Gavriil
Popov, and he allowed them to show us some prime choices for
redevelopment -- one was a chemical dump, another had been a
biological weapons plant, and the other was right next to a
sewage treatment plant. [Laughter]
But we found land eventually, and we find an oblast with a
very willing mayor, as part of the overall, greater Moscow.
And only then did the fun begin: Eight approvals . .
. three weeks of talks dealing with two city governments (the
oblast and the Moscow City Council) . . . eleven meetings really
discussing the same thing until we got to one special decree,
which allowed us to do business . . . but then five more local
approvals.
Then they said, "No, we need to look at it all again."
We'd need another seven different local approvals. Good for
the lawyers. There were eleven of ours involved. We had 15 lease
revisions because we actually developed the first lease of land
in Russia to a Western company.
Many hours of talks with the City Council and then suspended
negotiations. Funnily enough -- the breakthrough took place
when the then-Mayor was on his way to the U.S. Craig Cohon,
who was the son of the person who brought McDonald's to Russia,
booked himself on the same Aeroflot flight and for 10 hours
sat next to the Mayor and talked to him all the way -- the breakthrough.
So there were only ten more lease revisions, another meeting
with the Mayor, charitable payments, you know, I can go on.
Each document needed 24 signatures.
After that, we met their demands for payment to the local oblast
of $800,000, which we made through Johnson & Johnson. It
was regulated by them in the form of medicines and medical equipment
to the local hospital, I will add, because you say "$800
million," and everyone says, "Whoo, Foreign Corrupt
Practices Act." We did it as a donation to a hospital which
just didn't have the facilities.
So, nine months later, we had a plot of land, and everything
agreed. As we got moving, we wanted to tap into the utilities
that the city had promised. Well, that cost another half a million
to have it all connected up, and it was our money.
But in April of 1994, after over two years and $35 million
later, we opened up that plant. And from Day One, we were on
two shifts. Russians wanted "The Real Thing." And
that was the beginning of us turning what, in effect, was a
four-to-one lead that our main competitor had against us, into
a two-to-one lead for us, in the whole of Russia.
We were in a hurry. You may have remembered an Atlanta Journal-Constitution
article, where we actually brought in an Antonov cargo plane
into Atlanta. We flew a whole bottling line out to Vladivostok
-- just to get going, to be there first. And by 1997, we had
11 plants, right across all of Russia.
We source most of our ingredients locally, as we do everywhere,
so we did a tremendous amount of training of local businesses
-- getting them to be able to produce glass of the right quality
to have a contour bottle.
And we had kiosks out in the streets. The kiosks were really
interesting, because they were now starting to understand that
there was another business out there. Guess what? The kiosks
were actually made in a factory that had previously built SS-20
missiles. They were pretty solid, too. [Laughter]
Coca-Cola in Russia Today
Today, Russia is one of our fastest-growing businesses, and
even though we went through the crash of 1998, and we had to
take a write-off in the year 2000, we today employ some 10,000
Russians -- that's our system (our bottler and ourselves). We've
done a study that each of the jobs that we provide in a bottling
plant has a multiplier affect of between 7 and 10 jobs. So,
you can say we actually hire, or are responsible for hiring,
some 70,000 to 100,000 Russians.
The total investment to date -- excluding an acquisition of
some brands, which I'll come to in a moment -- is $1.5 billion,
and we gone public recently in saying in the next 3 to 5 years,
we're going to invest another $1.5 billion.
Trend #2: Improved Business Climate, But Western Perceptions
Lag
So, I've seen Russia from two sides -
- the old, corrupt bureaucracy that did not want to value
foreign investment, in fact, had a fundamental, ideological
rejection of it -
- to a place where, in effect only a company the size
of Coca-Cola, with our patience and our heft, was able to
move forward and start helping to create what is a more capital-friendly
Russia -- one that is better for private investments.
But I mentioned perceptions -- because the climate has changed,
the perception has not. One of the organizations I'm involved
with is the Foreign Investment Advisory Council (FIAC). Last
year, they undertook a study of how Western businesses operating
in Russia felt about the legal framework, felt about the regulatory
framework, felt about the ability to do business in Russia.
And then they surveyed a comparable number of companies that
had not invested in Russia. And guess what? A massive difference
in the perception.
You talk to the Western managers working there, and they say,
"We can work here." Most of them speak Russian. Most
of them understand the culture. They know how it works, and
they still live by the rules that we hold to around the world.
How Will Our Actions Sound to Russians?
And that's one of the lessons that I really have learned, in
living in 11 different countries -- most of them working for
The Coca-Cola Company. You can not separate success and commerce
without understanding the history, the culture, and the motivations
of the society in which you are operating.
And I don't believe that governments actually think -- certainly
legislators don't think -- in those terms. They don't take that
mirror and turn it around, and say "How does it look from
the other way?" Not just, "How's it look from us?"
But "How do our actions look from [their perspective]?
How can we be misunderstood?"
The Path To Democracy
And that means that you need a degree of patience. And I would
also add -- don't forget that our own paths to democracy are
not as pristine, and they weren't as easy as we like to think.
I'll not use the U.S. as an example, but if you take the U.K.
-- parliament was full of people elected from rotten boroughs
of 12 people, who voted according to whoever employed them,
whoever directed them. Most of them were sugar barons, and that
was all part of the peculiar agricultural policies of the 19th
Century. So, that was called "democracy," because
it was a parliament, but it wasn't [a democracy by today's definition].
Understanding Russia's Motivations
I also think that we're under-appreciating the fact that Putin's
well-over 70 percent approval rating is largely real. It comes
from the economy. It comes from the fact that people now have
an interest in their own well-being. You talk to them, and what
are their number one interests? Education for their children,
an apartment, a flat, a home, a motor car -- all of the other
basics that go round what we call a normal, middle-class society.
The political piece, by and large, they don't want to be involved
in. And we've seen that model in a number of other countries
as they emerged, as well.
And the other thing that he's done -- and we don't necessarily
like the way that he's done it -- but he has restored
pride in a badly-wounded psyche of the Russian people. Now,
we may not like how he has achieved it -- that's one
thing. But it is the sort of leadership that the Russians have
craved.
And I just want to repeat that that's were we need to think
about how it looks to the Russians -- how we can create hostility,
rather than helping them move along, helping them move in a
way that we helped Germany move as a defeated country after
the second World War.
But it does not mean -- and I want to emphasize this
-- that we should abandon our principles. No. It does not
mean that we should not raise our voices when we see things
that we disagree with. Of course not.
But it does mean that we need to understand the drivers within
the society, and we need to engage in the right forums, in order
to have the right, productive dialogue. And I see that in my
chairmanship of the U.S.-Russian Business Council, I see it
through FIAC, that when you engage constructively, you actually
can bring about change.
Business's Role in Influencing Russia's Future
And I do also believe, from my own biased viewpoint, that business
is a powerful agent for change in this world, and that we already
have played a very positive role.
The legal framework that exists in Russia today is far from
perfect, and we're lobbying for all of the changes that we believe
need to be made. But, what is there, is part of those type of
discussions -- with the likes of FIAC, and the Chambers of Commerce
and the U.S.-Russia Business Council. I've been involved in
helping draw up laws that the Duma have passed.
And, thankfully, there's another very good example of progress.
On January 31st, the U.S. and Russia announced that they going
to, once again, create a formal economic dialogue. And it's
something that we've been pushing for, for some time at the
U.S.-Russia Business Council.
And of course, they are headwinds. There's much more to do,
but I see our impact can be actually beneficial in five areas.
1. Help Develop a Growing Middle Class
Firstly is a very simple one, and we certainly will do this.
We can help Russia to continue to expand and strengthen its
middle class by investing in facilities, by training our employees,
developing our local suppliers, our partners, and our retailers.
In 1995, we opened up our first Coca-Cola University to train
our Russian employees. And you know, from those that you've
met, coming over here to be educated, what a strong educational
system they have, and how bright and engaged the young Russians
really are. And one of the other things we can do is continue
to emphasize quality. We emphasize that on all of our suppliers,
and we have Western certification standards for all of them
to meet.
We continue investing. In 2005, together with our bottling
partners, we invested $501 million in a Russian juice company,
which we took over, which was very well-run. It was the second-largest.
It had 25 percent share of the Russian market. It's a very high-growth
market, as well. And, if you look back to 2005, that wasn't
an easy time, either. The Board [of Coca-Cola] did ask questions
about the political relationship.
Today, the number three juice company in the market (in other
words, smaller than the one we bought) is on the market for
over $1 billion. In fact, they're asking nearly $1.5 million.
That's what's happening to values in Russia. So, that's part
of the deal.
2. Keep Communication Open
The second is keeping those lines of communications open. Dialogue
-- even if it's tough dialogue -- is a source of stability and
understanding.
3. Educate the World About the Realities of Russia
Third, we really need to -- and this is not just a U.S. comment
-- educate people about the real Russia, the experiences in
Russia. And, in fact, now the organizations that I've talked
about earlier have actually got outreach programs trying to
do just that. Part of that is also going there -- attending
forums, like the St. Petersburg Economic Forum, where you see
a different face, and also you see different Russian businessmen
-- not just oligarchs, but local entrepreneurs.
On that note, Cedric Suzman mentioned a DVD earlier that the
Southern Center for International Studies had done about 10
years ago. I'm trying to buy up the copies, because I had hair
then. It looks pretty good. [Laughter] But 10 years back, they
started that whole process. Peter White had the belief that
it was a program that would help the U.S., and it's been sold
through to the Armed Forced, as well, in training people to
understand the real Russia.
4. Be a Positive Example to the Russian People
Then the other step is to refuse to be involved in corruption,
to enforce in our businesses our workplace rights policy, and
to ensure in our businesses in Russia that we are environmentally
responsible and to spread that through our supply chain.
It's that sort of example that changes Russian businesses.
If you look at Severstal, it's led by a guy called Alexei Mordashov.
He absolutely lives by these principles, and he's one of the
largest steel producers in the world. And he sees that corporate
governance is fundamentally important for Russia, and he has
a very loud voice in that arena, when he addresses Russian audiences.
And of course then it's being part of the society. We have
a 15-year partnership that we've had with the State Hermitage
Museum. And just another example, we're involved with the World
Wildlife Fund, in preserving the Russian Arctic polar bears.
5. Help Russia Enter a Rules-Based Trading System
And finally, the one that's been so difficult for so long,
and it's not just because of the West, it's also because of
Russia -- but continuing to try and bring Russia into a rules-based
system.
Access to the WTO is seen by some as a reward to Russia. Well,
it is to a degree. But, by the way, it brings them into a rule-based
system. And it means the sort of appeals and the sort of overrules
that, actually, China is undergoing right now, because they
are a member of WTO, will bring Russia into that actual ambit.
Before that, in fact, there's even a smaller piece of legislation
called Jackson-Vanik that needs to be removed, where there's
really not a lot of support for it, apart from those people
who don't want to reward Russia.
And then there's awarding PNTR -- Permanent Normal Trade Relations.
Again, that sounds like a favor to Russia. It's actually a program
to facilitate U.S. exports to Russia, and it doesn't even work
the other way around. But the stigma is there to such a degree,
that it cannot find enough support up on the Hill. And then,
finally, looking to work on -- absent Doha -- a bilateral investment
treaty.
So, this is the linkage between what we do as businesses, what
governments need to do to help businesses be successful, and
what we all need to do to move Russia forward into being a more
normal global citizen.
I'm actually going to stop there because I want to take some
of Peter's questions. I probably have prompted a number in your
minds, and I want to take those as well.
A Strong Future
But, we believe that our business in Russia does have a strong
future. We believe that we will be able to work with the Russian
system.
And by the way, if you ask about legal challenges that we've
had, we've had some pretty crazy ones. As we've taken them through
the courts, eventually, right has prevailed. The court system
eventually works. Now, some of it has to do with being the size
of Coca-Cola. I understand that.
But I honestly believe that with sensible dialogue on both
sides, that the relationship between the West and Russia can
be improved. I'll talk a little bit more about that in Q&A.
That is good for the world because with what is happening today
-- in terms of some of the misunderstandings, some of the talking
past each other -- we have the potential to enter a non-productive
phase, which is to the benefit of none of us. Thank you very
much, indeed.
# # #
Transcript edited for clarity, full names, and Mayor Povopov's
name.
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