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The Russian negotiation style: experience from the oil service industry February 2010 Grigorij Serscikov (PhD Candidate at the Centre for Energy, Petroleum and Mineral Law and Policy, The University of Dundee), gserscikov@dundee.ac.uk
Abstract: Although a mountain of scholarship has been written about Soviet negotiation styles and tactics, few of them have tackled oil and gas industry. After the collapse of the Soviet Union, many Western oil field service and equipment companies have entered the Russian market choosing various entry mode strategies. The major part of this article is based on interviews (about 30) conducted by author with the managers of the international oil field service and equipment companies currently operating in Russia. Although the major focus of the interviews was on entry mode strategies, the area of the Russian negotiation style and tactics has been also dwelled on. Based on this primary research, the Russian negotiating behavior is analyzed and some practical recommendations are provided in the last chapter.
Key Words: Soviet Union, Russia, negotiation-style, oil field service industry, oil and gas, interviewing Introduction While much has been written about Soviet and Russian negotiation styles and tactics (s. for overview Roemer et al. 1999), few of these studies have tackled oil and gas industry. The literature which exists on this topic focuses primarily on the Soviet (pre-1990s) negotiation experience during the East-West gas pipeline deal 1980- 1984 (OTA 1979; OTA 1981; Lebahn 1983; Gustafson 1985; Bonin 2003). After the collapse of the Soviet Union, many Western oil and oil field service companies have entered the Russian market choosing various entry mode strategies ranging from joint ventures (TNK-BP) and consortia (Sakhalin I and II projects), to partial (Weatherford owns 33% of Borets Company) and complete acquisition of companies (Schlumbergers acquisition of PetroAlliance Services Company). Understandably, the information on the companies negotiation practice and experience is not available freely in the public domain. With exception of periodically appearing articles and papers lamenting an awful situation in the Russian oil and gas industry (s. for example Huang et al. 2003), the information on negotiation process in the industry is based mostly on anecdotal evidence and personal experiences. In the framework of the ongoing PhD research, the author has conducted about 30 semi-structured interviews with the managers of the international oil field service and equipment companies. The major topics of the interviews have been an entry mode strategy where the area of negotiation style and tactics has been dwelled on, operational experience in Russia, ethical issues, and some other industry-related questions. The remainder of the article is presented in three parts. First, literature regarding Russian negotiation styles is reviewed. Next, the negotiation style and tactics experienced by the respondents of the interviews are presented and analyzed. The final section provides recommendations and directions for those contemplating about negotiations in Russia.
Distributive bargaining strategies: pre-1990s and post-1990s literature overview The ease of international travel, communication and transportation has widened the circle of international actors businesspeople, engineers, scientists dealing with Russia and the countries of the former Soviet Union. This unprecedented level of cooperation increases possibilities for misunderstanding caused by variations in negotiating behaviors that are grounded in cultural differences which can complicate, prolong, and frustrate negotiations (Cohen 1997). Compare to the western partners, Russians have often followed a distributive rather than a cooperative, approach to negotiations. This reflects the Russian belief that a compromise is equal to unscrupulousness, lack of will, and that one persons profits are always at the expense of anothers. Therefore all attempts to strive for a compromise are considered as negative (Prokhorov & Sternin 2007). Win-win solutions do not fit the Russian psyche well, it is rather a zero-sum game. This was reflected in the existing literature which, due to the nature of world politics in the last decades, was mostly based on the experience from the international political negotiations rather than on the commercial trade negotiations between nations. These sources have described Russian negotiators as hesitant, contradictory, and improvising (Gustafson 1985); inflexible (Gorlin 1979); hard (Carvounis & Carvounis 1989; Vlachoutsikos 1986); rigid (Gorlin 1979; Von Czege 1983) tough (Carvounis & Carvounis 1989; Gorlin 1979); uncompromising (Von Czege 1983), and secretive, risk-averse, and manipulative (Rajan & Graham 1991). Graham et al. (1992), while looking for explanations offered in the literature, come up with mainly two reasons which can be seen as complementary: 1. Bureaucratic/organizational constraints lead to a more distributive approach and contribute to the Russian economic system run as an integrated, single complex on the basis of a system of commands. The secretiveness and mistrusts inherited in the system were even exacerbated by the tensions between East-West relations. Furthermore, as Lebedeva (2004:125) points out, the Marxist-Leninist doctrine of class struggle in the international arena degraded negotiations to the status of temporary tactical maneuvers insignificant in the larger historical perspective. 2. Differences in ethical systems which are reflected in the Lefebvres (1982) theory of two types of ethical systems. According to this hypothesis, Western cultures are dominated by the first ethical system under which individuals seek compromises to resolve conflicts with both their partners and adversaries, and this is considered positive behavior. Positive behavior for Russians, who are governed by the second ethical system, is in sharp contrast: Individuals try either to create new conflicts or to exacerbate existing ones with adversaries (Lefebvre 1982 cited Graham et al. 1992). Weigand (1977) observations also corroborate the Lefebvres theory that the rigidity of the Soviet negotiators may be a product of the Soviet and Russian culture and national trait. After the collapse of the Soviet Union and Russias opening for foreign investments, the attitudes to negotiations among Russians have hardly changed. Today, one can observe a peculiar mixture in peoples mentality and behavior of both old and new cultural patterns, which perhaps conflicting with each other, coexist. Institutional and cultural backgrounds translated into specific features of current Russian negotiating behavior produce three crucial features: zero-sum and rigid approach, manipulative behavior, and low contract loyalty. Zero-sum, tough, obstinate, and forceful approach to negotiations is portrayed vividly by Wilson and Donaldson (1995). According to Brett et al. (1998), Russian negotiators identified hierarchy as a guiding cultural value, distributive tactics as normative in negotiation, and negotiator role as a source of power. Manipulative behavior is characterized by information greed, secretiveness and mistrust. As Michailova (2003:62) points out, everybody in Russia is trained to keep things confidential. As a result, there is no knowledge transfer but rather a husbanding and hoarding of information at all hierarchical levels. During the negotiations, Russian counterparts often withhold the useful information, which is seen as a source of power (Fey & Bjorkman 2001), in the same time, asking for much detailed information that foreign counterparts can provide (Gorlin 1979). Mistrust towards outsiders makes Russians consider every negotiation process as a manipulative and uncompromising play. For homo sovieticus, everyone outside a very narrow circle of intimate friends was seen as basically evil, selfish, greedy, and cruel, tend to take advantage of other exploit them for achieving personal gain, safety, and leisure (Mikheyev, 1987:519). This attitude towards the outside world was not specific to the times of Communist era only because in Russia, cultural attitudes have proven more durable and resilient than in other countries (as it has been only less than twenty years since centuries-closed Russian borders opened for free travel and exchange). Hingley (1978) was stunned by the ability of Russians to a sudden switch, a volte- face in their moods. Twenty years later, Holden et al. (1998:161) wrote of Russian businessmen we need to take account of the mercurial side of the Russian character: that element in their makeup which inclines them literally and figuratively to change agendas. This resulted in frequent changes in already-signed contracts and overall low contract loyalty. Thus, Szymanskis (1998) in his analysis of the JVs in Russia reports that agreements are frequently rewritten. Similarly, Kohlert (2006) mentions decreasing contract loyalty as one of the major negative factors in modern Russia. The abbreviated account of literature given here can be summed up by the findings of Ayois (2003:193) citing a Russian general director: Everything goes on not the way it goes in the west. There is no doubt that Russians and Westerners differ not only in terms of national culture, but also in the economic, political, ideological, religious, and social systems from which they come, the approaches to negotiations is thus completely different. In the next chapter the most striking differences, western managers should be aware of, are described.
Negotiating with Russian counterparts: empirical evidence from international oil field service and equipment companies In 2008, the volume of oil and gas service market in Russia was quite considerable in size - about USD 13 billion dollars. Starting with 2003 the market doubled in size, whereas during 2005-2006 the highest growth rates were achieved, forming +33% and +22% respectively. The growth spike throughout the industry was provoked by the fact that the companies operating in the field finally exhausted their low cost expansion possibilities at already existing and developed deposits, facing a need to compensate for fall of extraction by increasing the effectiveness of operations. It is expected that in the next years the market would be growing at +10% per annum and reach a whole USD 20 billion by the year 2010. Given the sheer size and perspectives of the market, all major international oil field service companies (Schlumberger, Baker Hughes, Halliburton, Weatherford, BJ Services) have been active in Russia since early 1990s, providing services in high-end segment and holding about 15% (whereby Schlumberger - 11%) of the total market (Veles Capital Research 2008; Pak 2007). Since 1990s, all mentioned companies have acquired smaller Russian oil field service providers and accumulated valuable experience in dealing with Russians inside (as acquired firms and employees) and outside (as customers) the company. In order to tap into this invaluable reservoir of knowledge, the author conducted about 30 semi- structured interviews with the managers of international oil field service and equipment companies in Moscow in the period of August-December 2008. The main purpose of interviews was to determine how alliances (e.g., JV, partnerships, and acquisitions) between foreign and Russian partners develop over time and what the causes behind the short-terminism of major joint ventures in the industry. The interviews corroborated with the literature review described in the previous chapter and revealed some additional interesting insights into negotiating tactics of Russian managers. The majority of respondents have mentioned substantial differences between western and Russian/Soviet cultures. As a Managing Director of the US leading oil equipment manufacturing company put it: The whole culture is different. It is not to say one is wrong and the other is right. Historically, the western culture was based on the mercantile philosophy, it was based on trade, there was always this movement towards compromise trade me something and I give you something, and it was in the nature to negotiate to the point, when you have this, when you have mutually agreeable, mutually acceptable fundamental decision and everybody was happy. You win I win that means a win- win situation. And then you have a Russian culture which was highly land-locked the nearest largest metropolis 300 years ago was Paris or Berlin. It was very tribal, very clan-oriented, harsh climate it was win-lose situation. We have to conquer to survive. So compromise historically in the culture was not there. It is victory or death. Another respondent mentioning lack of success of the venture in one of the countries of former Soviet Union, there is a big culture clash. Sometimes, I thing they look at us as if we were invaders. Culture has a direct influence on the Russian negotiating style, which, in words of one respondent is rigid. Another, describing his negotiation experience, says: When I go to the negotiations I have to have a mentality that everything that comes out of their mouth is going to be a NO, because they have to take the high ground. And morally speaking, they actually feel like they fell and must take the high ground. Even if they wrong or right it does not matter they have to stand their position to show a compromise will be considered a weakness. So is that wrong? Not it is not wrong, it just a different way of approaching business. There is no wrong way or right way. On the matter of unethical behavior of Russian counterparts, the majority of respondents have stated that they experience it very often. Russians are driven by egoistic motifs, playing tricky games. A Key Account Manager of the leading supplier of drilling fluid systems says that here is always an attempt from Russian site to buy something cheap and probably with lower quality and to sell it with profit. Here is the root of the conflict. Another respondent, reporting on numerous failed attempts to set up an alliance with Russian partners, consider an unethical behavior as specificity of Russia. More important, the manipulative behavior of Russians observed throughout negotiations goes beyond this process and influences the entire cooperation lifespan. So, having their roots in rather fluid ethical standards in Russia, attitude to power control and intellectual property rights are two major reasons why the partnerships and alliances in the oil field sector are almost inexistent today. Thus, a country manager of the US drilling rig producer, reporting on his experience in alliance with the Russian rig manufacturer, says about visit to the production site in Russia: These guys walking around with machine guns you cannot go there, you go over there. We did a pilot project when we had subcontracted some of the work to Russians and our quality control guys could not even get access to see the parts to control quality on certain stages of production. So, how can I have a partner like that? Strive for control is also mentioned by others: There are attempts to take as much control as possible and to control manufacturing processes and distribution of profits, even when the Russian counterparts lack experience and knowledge. As one respondent put it: You cannot be in a driving seat if you do not know how to drive. Fear to lose know-how is another reason preventing companies from establishing alliances with Russians. The major reason why we do not go for JV is because we do not trust our Russian partners. Our competitive advantages are subtle because everybody can buy a set of equipment, disassemble it and try to repeat. So, subtle advantages of our equipment are in packing materials, some proprietary fields that allow the equipment to function much longer and be more corrosively resistant. By doing everything in Russia we would expose the proprietary knowledge which we do not like to do obviously, - says a business development manager of the US manufacturing company. He later portrays his visit to the possible partners site in Russia: They invited us, they have a lot of vacant areas that we can use bringing in our machinery. But we noticed that they were looking more for our technology. Whatever we see here, there is something behind it. They try to get our technology and then probably just kick us out. Another respondent says: Often we would either not bring some type of technology in, if we think that it might be easily copied, or it is not a key property than we just do not worry about it that much. To avoid problems inherited in joint ventures and alliances, as JV in Russia we are not really happy to do it, almost all oil field service and equipment companies have preferred acquisitions and green field investments as the most appropriate choice for Russia. The findings above corroborate with the authors own experience in Russia as business development manager of the German drilling rig manufacturer and later strategic consultant in Russian oil industry that many Russians still consider negotiations as a zero-sum game, where at the end the only winner will stay glorious. Forced to make compromises, Russians will feel a subtle sense of defeat. The willingness to make compromises from the start without getting anything in return will be viewed as weakness and not as gestures of goodwill or flexibility, therefore, inviting them to squeeze harder. The achieved agreements are often completely reversed due to purely laughable pretexts, so that the negotiations can start from the scratch. During the negotiations, the Russian team will sometimes leaves the room for some urgent need, in this case, if the negotiations take place at the Russian site (e.g., factory, plant, office, etc.), the room is likely bugged, so they can listen to what opposite side is talking about usually it is negotiation tactics. Summarizing the findings, this chapter highlights the fact that the specifics, underlying societal and cultural values in Russia, need to be explored as predictors and determinants of established norms which might appear during the negotiation process. Often missing in traditional due diligence studies, these salient issues might be crucial for overall success of negotiations. The question then becomes how to prevent Western managers underestimating the importance of specific features of the Russian mentality by projecting its own way of doing business on this country. In what follows, some practical recommendations are given.
Some practical recommendations Negotiating team composition and structure can place a decisive role in every negotiation. In Russia, which is often seen as unpredictable, the team composition and management can be used to diminish unpredictability and make negotiation process more manageable. Depending on effort and expected outcome (e.g., M&A, JV, product sale, etc.), the negotiating team can vary in size and composition. Below is an example of the negotiating team, set-up by a western multinational during acquisition process of the Russian oil field company.
Figure 1: Negotiating team structure In a large acquisition, a structure of this size (or larger) would be appropriate. For a smaller alliance, it would be sufficient to have a steering committee and a core deal team consisting of people with skills in each area. In authors view, the most important element here is the role of people running the steering committee who must be key decision makers able to apply a veto and meet at least once per month. Moreover, the composition of the committee should remain constant throughout the time of negotiations (a high turnover of members can hamper the negotiating process). Therefore: Carefully select the delegation. Women and young managers may have a much harder time gaining the trust or respect of Russian managers. Try to clarify the authority of your counterpart. Because the decisions can be made only by chief executives or director, that could delay negotiations. The first barrier that has important implications for international communication could be seen in the subtleties of language and the crucial problem of grasping meaning, not only words (Kopper, 1996). As language reflects the diverging values of societies, appropriate translation and usage of a correct word seems to be a problem. Especially in Russia, much of business language is still new to Russian managers who often interpret the business terminology in their own way (Snavely et al. 1998). Consequently, the underlying psychological meaning and emotional impact is either changed, blurred, or lost. Therefore: Check that the Russian counterpart indeed understands the presented proposals correctly. Establishing personal relations and experience in the country are very important. Business Development Manager of British oil field service firm describes it as follows: Personal relationships are really critical in Russia. In UK, US corporation is corporation and thats it they have systems and processes. Here they have systems and processes but still a personal touch is worthwhile. This is also reflected in the statement of Country Head of the German rig manufacturer: The business culture in Russia requires long-term relationship. Therefore: Build personal ties and cultivate trust even prior to transacting any business because Russians tend to trust more in relationships than in contracts. Furthermore, Russians prefer exclusive relationships; emphasize the exclusive nature of your order and the significance of your company. Since the Soviet times, the price was a decisive factor in negotiations. It still is. The Soviets managed to squeeze a good price for sometimes wrong product (Gorlin 1979) or for the product of low quality Why should I buy a western-made product when I can by three Chinese products for similar price? is what western producers often hear. Russians expect that foreign negotiators will make concessions on price from the very beginning and feel sometimes offended when the other side is not ready to so. Therefore: Do not let yourself to be squeezed. Invest time and endurance into negotiations. On the same time, avoid the we know best syndrome that would push Russians to stick more strongly to their positions and create antagonism. Write down all the interim results of the negotiation, including verbal consensus. In order to get the Russia right, western managers have to understand that there are sometimes different layers behind decisions and actions of people. In words of the Business Development Manager of the leading international oil service company, I have seen many foreign managers who were very experienced in what there were doing, but sometimes they made decisions based on their previous experience and not on the existing realities on the ground. The Russian fur hat (shapka) or wood doll (matrshka) is for tourists. In business life here there are certain laws of the game which differ from the western mentality. To explain or teach it is impossible. Conclusions In the analysis presented in this paper, an abbreviated account of literature regarding Russian negotiation styles is reviewed, showing that there are still sticking similarities between the Soviet and post-1990s negotiation styles. By providing examples from praxis, the author does not try to dissuade investors to enter Russia, which still contain vast economic resources and large untapped oil service and equipment market. The aim here is to direct attention to issues which are presently in state of flux, given the major transformations occurring in Russian society. Many of issues, however, have the kind of robustness that will endure, retaining their significance for those attempting to understand and deal with the Russian people. Although the communist legacy continues to exert a powerful conditioning effect on management thinking, the possibility now exists that a new order of constructive collaboration is emerging between eastern and western business representatives in an international business context that necessitates mutuality and dependency. The results from the interviews show that overall, attitudes among foreign managers are wary but increasingly positive; there is a strong sense that you need to know and what you are doing and be prepared to operate successfully in Russia.
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