By Ted O’Callahan
Nikolai Zinoviev never expected to be an entrepreneur. He explained how he became one, and how his business survived and eventually thrived amid the chaos of post-Soviet Russia, in a series of interviews with Yale Insights.
Russia in the early 1990s
Prior to the collapse of the Soviet Union in 1991 there had been some small moves to allow market-based enterprises, but there was neither a culture of entrepreneurship nor the conditions needed to grow a business. As state-owned assets were privatized in a chaotic and often corrupt way, tremendous wealth was concentrated in the hands of a few oligarchs. The financial and legal infrastructure for a market economy followed behind, fitfully. Big companies, primarily focused on energy and natural resources, dominated the economy.
Zinoviev was in college, studying languages, when the Soviet Union collapsed. His family suddenly needed him to earn money, and his then girlfriend (now his wife) helped him he get a job at the bank where she worked.
Zinoviev’s colleagues at the bank were biologists, mathematicians, and linguists. There were two reasons for the eclectic team of non-bankers. First, as Zinoviev explains, “There was no banking education back then.” Second, like Zinoviev, people were scrambling for new jobs as many state-supported careers disappeared.
Rather than just accepting dull duties for a steady salary, Zinoviev got his hands on a textbook from a USAID program and got to work learning the tools of banking. Within months, he was running the bank’s foreign exchange desk. Things moved so fast that sometimes he was using the textbook as a how-to manual.
Russia in 1998
In the 1990s, Russia spent billions on the war in Chechnya, stressing the economy. In March 1998, President Boris Yeltsin dismissed the prime minister and his own cabinet, adding political strife to the equation. By August, the ripples of the 1997 Asian financial crisis and subsequent reduced international demand for oil shook the Russian economy. Efforts to protect the ruble sapped the central bank reserves, investors fled the country, and an international bailout failed to prevent the ruble’s eventual collapse and a default on government debt.
From character to data
When Zinoviev realized he would neither grow professionally at the bank nor share in its growth, he moved to a USAID-supported investment fund that provided loans to small- and medium-sized enterprises. After two years assessing business plans there, he wrote his own. The Russian economy was in crisis. The ruble had crashed. The price of imports had quadrupled. Domestic production suddenly had a tremendous advantage; however, Russian businesses didn’t have cash to spend on capital investments. For Zinoviev, that marked an opportunity.
He created Delta Leasing, a company that leased business equipment (eventually renamed Europlan on the way to becoming the largest independent vehicle leasing firm in Russia). At the time, leasing anything was a new concept in Russia, but Zinoviev says that he viewed it as an extension of the work he had been doing. This time, instead of giving cash without knowing exactly how it would actually be spent, the “loan” was more concrete—a printing press, a commercial refrigerator, a delivery vehicle.
With $200,000 in funding from the investment fund he had just left, Zinoviev launched his three-person company in 1999. Initially, the company operated out of a hotel room in Rostov-on-Don, a trading city in southwest Russia. Within a year it expanded to Moscow and cities across western Russia.
The key challenge was deciding which firms to lease to. There were no credit reports. Tax filings were widely understood to be fictions. Zinoviev relied on a mix of character-based and cash-flow-based assessments. “We put a huge stress on understanding the key owner or manager making decisions, analyzing his competence, track record, and ability to adapt, change, and develop,” Zinoviev says. “And, we looked at his commitment to keeping a good name.”
Zinoviev’s team also went through each company’s books, examined financial statements, and assembled cash flows, revenue streams, production schedules, pricing, and administrative expenses to establish the company’s realistic debt-service capacity. “It was very labor intensive,” Zinoviev says. “For every project we had to write a loan analysis that would be 10-12 pages, looking at competition, markets, and management.” In addition, because they were lending across so many industries, Zinoviev and his team had to establish industry-specific information baselines, again and again.
Despite the inefficiencies, the business was profitable. “There wasn’t any competition,” Zinoviev says. “I mean zero. No one wanted to work with small- and medium-size businesses.”
As the economy recovered, the company grew. The firm secured $20 million in loans from the European Bank for Reconstruction and Development and the International Finance Corporation (part of the World Bank). Despite capital and plenty of demand, the company had a structural issue—the need to do a deep dive into every company before offering a lease. “The model wasn’t scalable,” Zinoviev says. “You can’t teach 3,000 employees to do this without losing on the quality.”
The firm built a statistical model to assess creditworthiness using numbers from nascent credit agencies and bank-based credit databases, which were becoming part of Russia’s economic infrastructure. It took years, but it eventually automated decisions on all standard commercial leases.
Russia in the early 2000s
Vladimir Putin became president of Russia at the end of 1999. Energy and commodity prices were strong, driving an extended period of economic growth. There were some efforts to diversify the economy beyond energy and natural resources, but they didn’t lead to substantial changes. There was significant tax reform, which included a simplified flat tax for small and medium-sized enterprises, implemented in 2001.
A legal framework
“To create a leasing market, we needed security. That required clear determination of the obligations of the parties to the contract. We needed clear repossession rules,” Zinoviev says. In 1998, the IFC had helped Russia develop an initial framework around leasing laws where nothing had existed, but it wasn’t nearly detailed enough. Businesses pushed for clarification. “We were the agent of change on leasing legislation,” Zinoviev says. “I’m one of the authors on the federal law on leasing.” In 2002 the amendments were finished.
The task didn’t end with writing civil code. “Leasing is a tax-driven product, dealing with depreciation and amortization, deductibility of lease payments,” Zinoviev says. That meant reworking the tax code, too. Even then, the market was exclusively commercial. Individuals weren’t allowed to use leases until 2011.
Even after there were regulatory frameworks, leasing was such an alien concept that for years Delta Leasing was unable to tap Russian capital sources. “Initially, they didn’t believe us or could not understand leasing as a standalone business,” Zinoviev says. The reliance on international money meant that the company adopted international standards for transparency, including GAAP accounting with audits by PwC starting in 2001.
In 2003, Baring Vostok Capital Partners, a Russia-focused private equity firm, bought Delta Leasing. Zinoviev and the other early managers became minority partners.
The deal brought access to growth capital—and growth meant focusing. The company culled a sprawling list of leasable business equipment down to vehicles and changed its name to Europlan. There was still little direct competition. A number of Western firms did offer vehicle leasing, but they focused on large companies.
In 2005, Europlan bought its biggest competitor, Rolf Leasing, which had been owned by one of Russia’s largest automotive dealers and importers. Part of the purchase agreement was a five-year exclusive arrangement to do leasing for the former owner.
The reliance on international capital hurt the company in 2007. Zinoviev knew Europlan finally had the track record to successfully offer securitized lease receivables. Since securitization was unfamiliar to Russian investors, Europlan prepared an offshore special purpose vehicle. It was ready to launch when the U.S. subprime crisis turned all securitized products toxic.
Despite the hurdles, by 2008 Europlan was the largest independent auto leasing company in Russia. The company’s return on equity was over 30%. It generated thousands of leases a month using a standardized risk-scoring model that included default probabilities. When there were defaults, repossession and resale actually netted a profit.
In 2008, Europlan sought ratings from Fitch and Morningstar in preparation for a bond offering. Two days after the company opened the book on its first bond offering, Russia invaded Georgia. With a laugh, Zinoviev says, “There’s a general understanding—Russian managers are very good at crisis management. There have been so many.”
Russia in 2008
The global financial crisis didn’t impact Russia until mid-2008. In August, war with Georgia created uncertainty, which was worsened by oil prices plunging as demand fell around the world. Russian stocks lost $1 trillion in value. Vladimir Putin cracked down on the oligarchs, ushering in a period of state capitalism in Russia.
Surviving the crisis
Car sales slowed dramatically. “We’re very much dependent on the general car market environment,” Zinoviev says. Growth fell but the company managed to hold onto the core management team and even remained profitable.
The Russian recession was brief compared to much of the rest of the world. The economy had largely bounced back by late 2009. Europlan finally had competitors—leasing companies owned by large state banks. “They have an advantage of cheaper money,” he says. “We have an advantage of a more entrepreneurial approach, a more scalable model, more statistics, more automation, quicker decision making, and better service.”
An upside to competition was not having to explain the business when going to banks for capital. Sberbank, Gazprombank, and VTB were glad to work with Europlan. But other doors slammed shut.
In March 2014 Russia annexed Crimea, triggering international economic sanctions. Because of the sanctions, combined with falling oil prices and significant corruption, the economy has been struggling since. Nevertheless, the country has climbed up to 51st on the World Bank’s Ease of Doing Business Index.
A new venture
In 2015, Zinoviev exited Europlan when the B&N Group, a bank and manager of nongovernment pension funds, bought the company. Zinoviev and a partner from Europlan have a new startup: an online auction site for used cars. “There's potential for making the market more transparent, less risky, and more civilized,” Zinoviev says.
Zinoviev first became an entrepreneur in the turbulent post-Soviet era. More than two decades later, he is one again, and launching a new venture in Russia remains complicated. He will continue to navigate the uncertainty of doing business there and the global shocks that hit even domestically focused businesses. In the process, he is helping, inevitably and necessarily, to build the infrastructure of a market economy.