Clearly, Chapayevsky's snacks have been so
successful because they are
far cheaper than imported
nuts and potato chips. But Rudenko and his
partners wanted their product to stand out among the
behind a beer tap. Because they did
not have money for advertising, they
snappy red-and-yellow packaging.
And in making
a food every Russian eats, they chose a name
Russian knows. The Soviets had tried to fashion a
hero out of the
distinctly mediocre Bolshevik
commissar Vasily Chapayev, but people
ended up making
him the butt of endless jokes. On the front of the
the legendary Chapayev gallops on his steed,
gripping a mug of beer
instead of his trusty Mauser.
"Chapayev is like Mickey Mouse,"
Rudenko said. "We
thought of him because his name immediately brings
smile to people's lips."
5,000 bags a day and will soon go to 15,000, but
that may not be enough even for the St. Petersburg
market. The partners
have made franchising deals with
companies in Belarus and in the Russian
Nizhny Novgorod, Samara and Krasnodar.
Chapayevsky's biggest wholesale buyers, who declined to
his name, said he could not keep up with demand.
"What these guys are
doing is great," he said, "but
as soon as they get a bit bigger and hit their
stride, someone will crush them. It will either be
coming back into the market, or
bureaucrats or organized crime who
want a piece of the
Some people also say former stockbrokers
and food importers, used to
quick profits, do not
have the needed perseverance.
entering manufacturing realize the days of easy money are
"Everyone with any common sense knows that to
survive you have to be
producing something, or you
have to physically leave the country,"
Khutsiyev himself bought control of the
Yanta clothing factory in 1996
earnings. The plant looked promising: it had relatively
new equipment, and it was manufacturing for export.
When the devaluation came in August, Khutsiyev
thought Yanta's exports
would rocket; they did not.
When his brokerage firm work came to a
standstill, Khutsiyev had time
to dig into the company's
finances. He found Yanta's management was
funds and employees were stealing materials. He
top management and invested $40,000 in new
projects, including a
clothes for Russia that are 30 percent cheaper than
clothes, Khutsiyev said he can win 10 percent of
the local market in 18
months. He predicted that
sales would rise to about $750,000 this year,
$500,000 in 1998, growth that has already attracted an
offer to buy
company was offering a pretty sizable sum, but it's
interesting for me now to work here," Khutsiyev
says. "If things work the
way I want them to, I can
make even more money. I'll need to get a big
to leave this company. After all, it's part of my
"Political risks play much more of a role there."
The three bankers behind Chapayevsky toasted
bread snacks, in St.
Petersburg, began thinking of
manufacturing for the Russian market
during the Asian
crisis of late 1997.
"We were investing in
Russian blue chips, and we realized we didn't
anything about them," said Yuri Khomylov, a
partner. "We wanted something that belonged to
us, whose finances we
controlled and which no
crisis in the future could affect."
outset, the approach new manufacturers take to doing
reflects how much they differ from members of the
generation who still run most big
businesses and are mostly concerned
with how much is
produced instead of whether it sells. But younger
entrepreneurs want to manufacture goods that actually make
to win a place on the market and in
people's minds, they have to know
how to sell.
"We decided what we were going to make had to be
domestic, cheap and tasty," recalls
Sergei Rudenko, another
Chapayevsky partner. "We
wanted to make something others hadn't."
recipe for success was stunningly simple: make something
loves but no one can find. Russians snack on
sukharii, similar to Melba
toast, the way Americans eat
popcorn, but it is not sold in ready-to-eat
Russians must instead buy dark rye bread, slice it thinly
dry it on low heat in the oven.
made the snacks for years for his family, but the
partners had to
find a way to mass-produce them.
Rudenko and Khomylov, along with
Gennadi Becker, the
third partner, turned to the St. Petersburg
Bread-Baking Research Institute for advice. Through trial and
discovered what flavors might be good to
add (dill and garlic, yes;
lobster, no) to the
bread. They found a local machine-tool builder to
construct production lines, since no machines existed to
cut bread into
project was supposed to be secondary to their main
investing in Russian stocks and regional debt.
But Chapayevsky turned
out to be their salvation.
The three lost $500,000 in trading, but within
days, they pooled $75,000 to buy the last of the
equipment for their
snack venture and to rent a room on
an army base at the end of a
With no staff at first, they
worked 15-hour shifts and drove around town
the snacks to any wholesaler and bar that would have
"The opinion we ran into at first was,
'Harrumph, I can make that at
home,' " Rudenko recalled.
"But those who took the snacks and tried
now our regular clients."
To grow, the small
manufacturers will eventually have to create a brand,
just a product, said Benjamin Wilkening, an investment
the $300 million Millennium Fund.
"Most are competing solely on price now because
that's the short-term
strategy for survival," he
said. "If they want to be viable in the long term,
they have to have a brand name the consumer
"Russia has always had this megalomania," says
Aleksei Reznikovich, a
partner in the Moscow office
of McKinsey & Company, which is doing
on barriers to economic growth in Russia.
"The people who run things are from the old system,
and they think if
they develop five or six big
companies, that will drive growth. What
with more entrepreneurs entering manufacturing is that
would create a middle class, which would have a
huge influence on the
social, political and
economic life of Russia."
The economic collapse
did not reduce the number of small businesses
sharply, but it did change their mix, indicating that as
closed, new ones in different,
more profitable fields opened. The official
of small businesses in the first half of 1999 fell
by only 1,000
from a year earlier, to about
870,000. But there are many more: to avoid
onerous taxes, a lot of enterprises simply do not
More businesses were involved in
services, manufacturing, retail and
January than a year ago, according to the Russian
for developing small and midsize businesses.
Although the agency lacks
information about the nature
of new manufacturing, discussions with
and entrepreneurs indicate that it is mainly in food
"Some money survived the
crisis, and money should make more money,"
Vladimir Buyev, head of a commission on entrepreneurship
liberal Yabloko Party. "Those people
decided to get into manufacturing
in Russia. After
all, even during a crisis, people have to eat and
clothes, and that niche is still largely open."
Much of the money that survived was in the hands
of people working in
finance, who earned
handsomely in the bull markets of the mid-1990's,
those in importing, who had a few thousand dollars on
working capital. Entrepreneurs seldom turn
to Russian banks because
they charge exorbitant
The average initial investment
for manufacturing projects appears to be
to $70,000, still a large sum in Russia. Some
companies set up
their own production lines, while
others turned to existing factories. New
manufacturers understand that working in securities or with
them vulnerable to broad, uncontrollable
factors like political and
economic stability. But
real production for the domestic market shields
them more from the vicissitudes of President Boris N.
Yeltsin's health or
the fluctuations of world markets.
"If I still worked on the securities market, I'd
care much more about who
would be Russia's next
president," said Grigory Khutsiyev, a 32-year-old
equities trader who now runs a women's clothing factory.
July 20, 1999
From Russia's Chaos, a New
Issue in Depth: Russia's Turmoil
Join a Discussion on Russia's Turmoil
By NEELA BANERJEE
OSCOW -- Ernest
Shakarov, a former investment banker, is
among the few
Russians who could easily have kept living
after a crisis shattered the securities industry here.
At 28, having worked for some of Moscow's better
brokerage firms, he
could have left turbulent Russia or
moved to another prestigious job.
Shakarov chose the great, arduous unknown of manufacturing
Russia, investing $70,000 of his savings in a
small venture to make
mayonnaise for the highly
competitive Moscow market. "There were
said, 'Why are you doing this when you could be getting
six-figure salary?' " Shakarov said. "I had
several offers, but there comes
a time when you want
to work for yourself."
Now, with a company
whose sales have been doubling every month,
Shakarov is part of a rising generation of manufacturers
opportunity amid the tumult. The
ruble's devaluation made imports too
most people, and as imports shrank, Russian
filled the void with cheaper products. Large,
Soviet-built factories have
done best, but people like
Shakarov are also fashioning a role for
Typically in their 20's and 30's, these
entrepreneurs left the securities
industry or the importing
business to open factories that make everything
bar snacks to women's blouses. No one knows their
and their operations are still small.
But they bring to Russian industry a knowledge of
finance, marketing and
management that most old
directors of Soviet-built plants have still not
Most important perhaps, the new blood
proves the resilience of
entrepreneurs here. Despite
the huge blows Russia's chronic instability
dealt them, they consistently find ways to adapt. "This
is the future,"
Shakarov said. "Russia will be a
normal country, a normal market, when
with experience in a market economy go into
Right now, Russia is far from what
anyone would consider normal. The
little to support entrepreneurs, burdening them with
corrupt bureaucrats, endless red tape and suffocating
taxes. Even the
lack of reliable statistics about
small business illustrates its lowly status.
Small business makes up only 10 percent of Russia's
economy, while in
most Western countries it is about