Conflict Management in German-Russian Joint Ventures

Research Paper (undergraduate), 2008

54 Pages, Grade: 1,4


Table of Contents

Executive Summary

Table of Contents

List of illustrations

List of tables

List of Abbreviations

1 Problems and Objectives of the topic

2 Clarification of important terms being used
2.1 Conflict Management
2.2 Joint Ventures
2.3 The Russian Federation
2.4 Federal Republic of Germany

3 Analysis
3.1 Cultural comparison of both countries based on Hofstede
3.1.1 Individualism versus collectivism
3.1.2 High versus low power distance
3.1.3 High versus low uncertainty avoidance
3.1.4 Masculine versus feminine
3.2 Historical development of Russian job involvement
3.3 Transformation of Russian law principles
3.4 Internal stability conditions of JVs
3.5 Empirical study of JVs in Russia

4 Selected examples of German-Russian JVs
4.1 Nord Stream AG
4.1.1 Importance of Russian Gas for Europe
4.1.2 Organisation of Nord Stream AG
4.1.3 Motivation of both sides to enter the Nord Stream JV
4.1.4 Possible conflicts between the participants of the JV Increased Russian leverage on non-connected countries Increased Russian leverage on connected countries Domestic Energy Concerns Risk of Appeasement Regional and Intra-EU Frictions Dependence on scarce resources
4.2 Mobile TeleSystems OJSC
4.2.1 General information
4.2.2 Shareholder structure and historical development
4.2.3 Breaking up of the international JV and consequences
4.3. AFK Sistema as a special partner for Russian-German JVs

5 Lessons Learnt

List of Literature

Electronic sources for Literature


Illustration 1: Basic forms of foreign direct investments (cf. Schanz 1995, p.16)

Illustration 2: Business Risks in Russia 1992 compared to 1999 (Weibel 2000, p. 152)

Illustration 3: Distribution of shares in Nord Stream AG

List of tables

Table 1: European Gas Dependence on Russian Gas Supplies 2003, (Stern/ Jonathan 2005)

Table 2: Development of partners in percentage (Liemich 2000, p. 22)

List of Abbreviations

illustration not visible in this excerpt

Executive Summary

The German-Russian foreign trade has been doubled since the year 2000 to 50 billion Euros. According to the Ost-Ausschuss of the German Economy (Deutsche Wirtschaft) this positive trend will continue during the next years. German companies are planning investments accounting to 1.4 billion Euros in the Russian market and as well Russian firms are going to invest in Germany.

Russia is not only the biggest country in the world but also richest in commodities. Furthermore, it is also one of the fastest growing economies in the world with a geographical closeness to Germany. This should be reason enough for the German companies to invest in the Russian market and reversely. Next to exporting and licensing the entity form of joint ventures represents a good strategy for entering the foreign market. The hosting partner will deliver the knowledge and technology and the home partner will offer experience in the market, meaning awareness of cultural differences, political regulations and potential conflicts. Nevertheless, joint ventures are also starting points for conflicts that may endanger the success of the business. This paper deals with the conflict management of joint ventures that have been coordinated by German and Russian firms.

At first the terms conflict management and joint venture will be defined followed by an introduction to the two countries Germany and Russia. At the second stage different starting points for conflicts will be determined. Examples of these are the differences in culture, the restrictions and regulations for entering the Russian market and opinions of experts on joint ventures with Russia. Due to the lacking of direct information on conflict management of actual joint ventures, two successful joint ventures will be presented. Occurred and potential conflicts will be determined. With help of these conclusions will be drawn upon the management of conflicts which most often leads to success in business. To complete the paper lessons learnt for more Russian joint ventures will be pointed out.

1 Problem sand Objectives of the topic

The direct economic contacts between east and west increased during the years of Russia’s transformation. First steps for this future were taken by Mikhail Gorbachev, who introduced the idea “Perestroika”. This reform consisted of three main parts: first the openings of the borders, second the democratisation of political processes, and last the acceleration of economic development. In ten years Boris Yeltsin had managed to destroy the old Russian system and built new democratic and free market economy oriented structures. At the end of 2006 Russia had succeeded its eighth straight year of growth, averaging 6.7% annually since the financial crisis of 1998. Although high oil prices and a relatively cheap Rouble, this growth was initially driven by the strong consumer demand since 2003 and recently additional investments on the Russian market. (cf. CIA World Factbook 2007)

One German politician stated that “Russia increasingly plays an important role for the European Economy. Therefore Germany persecutes the idea of strategic alliances, which has also been supported by the European Union. This cooperation includes the political, economical and social dimensions.” (Stolpe in Weihe 2005, p. 25) Hereby comes clear that also the government is willing to support such investments.

Still the overall image of managers when doing business in Russia is not positive. The media published so many articles about Mafia and other typical stereotypes, that it is very hard to overcome these prejudices. Additionally corruption and crime increase the perceived risks that foreigner have to face when investing into the Russian market. On the other hand a survey in 2003 of the Swiss Business Hubs showed that 89% of businesses in Russia have rapidly growing turnover: most of them increased the turnover by ten to 20% whereas only two percent announced declining turnover. (cf. Denz 2005, p. 15) These figures also represent the foreign investments: updated figures of January-June 2007 show that foreign investment in the Russian economy doubled year-on-year, reaching $60.3 billion. (cf. RIA Novosti 2007a) The total investments in Russia's economy are forecasted to reach $360 billion in 2010 meaning a growth rate of 800% since 2000. (cf. RIA Novosti 2007b) Due to these statistics the Russian market offers new chances to expand business for the rest of the world. But the question is in which way to expand. Here the form of a JV provides opportunities: the foreign partner will be able to enter the market and the home company increases its business in the home country. But there are also disadvantages that may result in general conflicts and especially problems between the partners. These have to be managed in order to succeed with the new corporation.

2 Clarification of important terms being used

The following chapter will introduce the different terms and present the status quo of the countries. First, the term conflict management will be taken apart and then defined. Consequences will be drawn from the utilization of conflict management. Further on, the term joint venture will be exemplified. Since joint ventures can be formed with different criteria, these will also be explained followed by the advantages and disadvantages. Afterwards the two countries will be introduced in terms of historical, political and economic development.

2.1 Conflict Management

In order to fully understand the concept of conflict management it is essential to define the two words separately: The word “conflict” derives from the Latin term “confligere” which means “to collide”. This leads to the general definition of conflicts being “differences of interests between at least two parties of a certain length and certain intensity with respect to specific values. Conflict occurs in different stages of intensity: thus there can be latent, open and violent conflict and

- as the most intense form - war.” (Schelnberger 2005, p. 6) They are generally categorised according to their causes and usually four broad causes are identified:

political, economic, unequal access to resources and politicised ethnicity. (cf. Smith 2004)

The word “management” has its origin in the Italian language “maneggiare” meaning “to handle”. Later it was transformed in France to be “ménagement”. (cf. Meyers Lexikon 2007) It comprises directing and controlling a group of one or more peo]ple or entities for the purpose of coordinating and harmonizing that group towards accomplishing a goal. Management often encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources.

With regards to the separate definitions of the two words it is now possible to conclude the definition of the term conflict management: “Conflict management is the positive and constructive handling of difference and divergence. Rather than advocating methods for removing conflict, it addresses the more realistic question of managing conflict: how to deal with it in a constructive way, how to bring opposing sides together in a cooperative process, how to design a practical, achievable, cooperative system for the constructive management of differences.” (Bloomfield/ Reilly 1998, Chapter 1.4)

Conflict Management exists since industry and companies have evolved, but it is only since a few years that men and especially executives actively perceive conflicts and study this subject. Though it is especially important for organisations to prevent or abolish conflicts. Conflicts can cause several negative effects on the employees which continuatively result in disadvantages of the company. Stress for example increases conflict point and leads to susceptibility to diseases, therefore raises deficits in labour. The staff turnover may also increase due to the unsatisfying working atmosphere. Employees are unmotivated which further leads to unproductiveness. (cf. Israr 2007, p.13)

Conflict management theorists see conflicts as an inevitable fact of life born out of different values and interests between and within communities. Conflict has both a positive and a negative side: it can be a catalyst for social change and development. The potential for violence stems from historical relationships, existing institutions and the established, unequal distribution power. As conflicts are considered to be inescapable and to a certain degree a normal fact of life, their solution is considered unrealistic: they can only be managed constructively. This means that the various manifestations of conflict are dealt with in a stable and consensual manner. (cf. Schelnberger 2005) Once conflict management is understood, conflicts appear to be desired: they help to raise and address problems; they energize work to be on the most appropriate issues. It helps the employees to "be real", for example, it motivates them to participate. Furthermore it increases the employee’s recognition of difference in human being and encourages benefiting from the different advantages of culture. (cf. McNamara 2007)

Conflict management is especially important for companies that would like to cooperate with others. Most prominent conflict point is the culture. Whenever merging or forming a new company the different corporate cultures need to be considered. Best example for this is the attitude towards their employees: is an employee seen as a work force, therefore only works monotone, or is he seen as human capital, therefore is given the chance to develop. Next to the corporate culture there is the regional, geographic culture. Differences in history, attitudes and beliefs may result in misunderstandings between the cultures. This topic will be further evaluated for the case of Russia and Germany in the third chapter of this paper.

2.2 Joint Ventures

A foreign market can be entered in three different forms: through export or franchising to a local producer, or direct investments. Last represent the highest form of internationalisation for a company. Foreign direct investments (FDI) such as foreign subsidiaries and joint ventures require a high commitment of assets and management resources. They are defined by the International Monetary Funds as following: “direct investment refers to the investment that is made to acquire a lasting interest in an enterprise operating in an economy (…) This definition implies a long term relationship between the direct investor and the enterprise together with a significant degree of influence by the investor on the management of the enterprise.” (1993, p. 209) The following illustration represents the different FDI approaches positioned according to their assignment of management resources and the asset commitment in the host country.

illustration not visible in this excerpt

Illustration 1: Basic forms of foreign direct investments (cf. Schanz 1995, p.16)

The most common definition of the term joint venture (JV) is the one which follows: “a joint venture is a legal organization that takes the form of a short term partnership in which the persons jointly undertake a transaction for mutual profit. Generally, each person contributes assets and share risks. Like a partnership, joint ventures can involve any type of business transaction and the “persons” involved can be individuals, groups of individuals, companies, or corporations.”(Cochran 2007) The objective may differ in JVs: some join to enter a new market, others create a new product. The created organisation is an independent entity whereby the partnering companies remain in their original legal form. They share the responsibility for the JV according to their capital involvement. JVs can be a horizontal, which refers to cooperation between companies from the same field of activities, as well as vertical, which here refers to cooperation with companies coming from activities before and after your field of activity. The conglomerate refers to cooperation in which the partners have no link in there original activities. (cf. Ruff 2001, p.20-22)

According to Kutschker and Schmid (cf. 2006, p. 864) there are several distinctive characters of JVs. The differences are based on criterion such as the number of partner joined together, the line of business, the setting, the geographical localisation of headquarters, and the length of cooperation between the partners. In the international context, the JV that is found most frequently is the one with two partners. Due to the minimum of partners it is easier to communicate in terms of language and cooperate in terms of responsibility with each other. Another criterion, the setting, is crucial for all JVs: on the first side the JV can take place in the home country of one partner and the other one will be introduced. In the second hand it can take place in a foreign country, where neither partner is experienced. This criterion comes along with the decision of locating the headquarters. This is very important because it has a strategic background: all governmental regulations of that country will apply to the JV. Last criterion refers to the length of the cooperation. Some JVs, for example, exist only as long as a certain project runs; whereas others will be closed after a given time frame which is defined in the contract.

International JVs can be extremely advantageous for all partners since they provide participation to income and growth. Developing countries give JVs preferential treatment because they present the desired mix of foreign technological and capital involvement, they guarantee local management, and accomplish an efficient transfer of technology. They are often used as an alternative to exports thereby eluding import restrictions. Furthermore in international JVs the foreign companies generally bring new technologies and business practices, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry. Both sides benefit from this combination.

Setting up a JV is also a way to save money: the joining of companies in the research or development area helps to carry out large projects for which one company alone might not have enough assets. This also includes the share of risks. This is an important commercial reason for participating in JVs. While minimizing the risk of exposing long-term investment capital, the partners try to maximize leverage on the capital that is invested. That fact that a JV can be established by more than two partners further reduces the risk of breakdown: the more partners the smaller the risk for each participant. The surely main advantage of an international JV is the participation of a local partner. If the partner is an experienced professional, the access to clients, providers, distribution ways, transport companies, will be easy. Especially in countries like Russia, it is essential to work with someone who knows the governmental system and will avoid corruption. (cf. Kutschker / Schmid 2006, p. 867)

Even if the number of JV increases continuously, there are disadvantages and difficulties for companies. First of all it is not evident for companies to set up the JV in the way they really want it. This happened because of law restrictions on capitals and on competition. Another drawback is the divergence that exists between the partners. In an international context the intercultural background plays a main role: it reinforces the divergence and it makes it more difficult to find a solution and a collective agreement.

The international competitive advantage can also become a disadvantage for JVs. When setting up a JV in several countries it may become impossible for a company to adopt the same strategy in each country. This often becomes critical when the international partners follow different objectives and have different processes and systems. For example, American companies prefer the system Oracle whereas European chose to work with SAP. South American companies follow short term objectives whereas Asian companies focus on the long term orientation. (cf. Hofstede 2007) At first the objective may be the same for the partners but over long term it may change. (cf. Geringer 1993) The problem of not having the same goal and ambition is also a consequence of the instability in a JV. This leads to the differences in organisational behaviour within companies including corporate culture. It might be that the introduced managers of one partner may not be accepted by the others employees, because he is a formal leader but very unsocial. This would lead to an unmotivated and uncontrolled workforce resulting in disappointment of both partners. Usually the employees in the JV are expatriates coming from the different companies engaged in the partnership. As a result the employees are used to the corporate culture of their origin company and may not want to adapt new working styles. As well only experts in needed fields will be offered the position in the JV, thus the partners depend on their agreement to change companies. This will increase the costs: for once the left position needs to be filled and the employee will want a compensation and salary raise for the transition. (cf. Anon 2007a)

Conflicts can also appear at the management level in terms of cooperation. High commitment of time and energy from all the partners is fundamental for successful JVs. The geographical distance may not be beneficial in the first communications towards the JV foundation. Another point depends on the invested capital: the more shares a partner holds and the more responsibility they take, the higher the risk evaluation must be. (cf. Kutschker / Schmid 2006, p. 869)

A disadvantage that may appear at the end of a JV project results with the acquisition: foreign JV partners generally would like absorb the organisation in case of success. This might cause a problem for the home company due to the fact that it has contributed essentials to the success. Also it has shared the knowledge that now may conclude in lose of competitive advantages.

2.3 The Russian Federation

Concerning the twentieth century Russian history can be divided into three eras: the end of the Tsarist state, comrade communist from the Russian revolution of 1917 to the collapse of the Soviet Union in 1991 and the entrepreneur in the market-oriented economy at present. The Tsarist state collapsed before creating the social basis that would have enabled the state to evolve into a democratic order as the government and moderate socialists desired. Soviet history was a struggle to control both the people and administration to build up a better society. The former Soviet system of foreign trade was founded by a decree signed by Lenin on April 22 in 1918 and established the state having a monopoly on foreign trade. Furthermore, all the trade operations were to be concentrated in the hands of organizations authorized by the state. As a result, this trade structure isolated the firms and consumers in socialist economies from the West. The communist party became the manager of the economy and supervisor of all state bodies from the army and secret police, to local councils, educational establishments, and of all other public associations and institutions, like trade unions. Job placements have also been controlled by the nomenklatura system, a list of important jobs filled by party appointees. The fact that the communist party and its leadership had both executive and legislative decision-making power gave the USSR an absolutist system. There was hope that Yeltsin and the Russian government could cope with economic collapse after the collapse of the Soviet Union by developing social support, privatization, building effective administration and forming the Russian state into one that could support the market and cope with the diversity of a society stratified by the market and expressed through democracy. The economic crisis in 1998 showed the contrary and Putin became Yeltsin’s successor. (cf. Robinson, 2002)

Taking into consideration the Russian history, the formation of the Soviet system had a high influence on Russian business behaviour. As a result of differing politics and ideology the trade history of Russia and the other socialist countries is completely different from that of the Western countries. The top-down management is a result of the socialist economic system of the post-war era where companies in Russia were owned and controlled by the state and reflects a high power distance. The division of power at every level of work was designed to ensure absolute Communist Party control. Referring to the continuing bad economic performance in Russia which lasted during the whole Soviet system until today people had to work under pressure to reach the quantity stipulated and hard work under pressure. This pressure did not allow a kind of teamwork and that fact would explain Hofestede’s idea of the Russians being individualistic. Under the communist control progress was not possible and that might be one reason why the Russian economy even became worse after the decades of Communist control. The fact that people still stick to these old habits and consider new approaches with scepticism and anxiety, shows that the past is still present in their heads, despite the failure of the communist system in 1991 and the transition to a market-oriented economy.

The Russia Federation is the biggest country in the world with an area of 17.075.200 square meters and about 141 Mio. inhabitants in July 2007. The capital of Russia is Moscow, which also is the biggest city in the country with more than 10.000.000 inhabitants. In Russia like in other countries, the trend shows that there are more people living in cities. In fact, 73% of the total population of Russia lives today in a city. This means, that about 27% of the population are rural population. The density is around 8.3 habitants per square meters in the same year. But what is more important to know about Russia is that the majority of the population lives in the west side of the Russian Federation, that is to say, on the European side. Life expectancy is on average around 65.9 years but women live longer than men, that is to say, that women live in average until 73 years old whereas men only live until they are 65 years old. As far as the population of Russia is concerned, 160 different ethnic groups live in the country. The majority of them (approximately 79.8%) are ethnically Russians but also some ethnic minorities like the Tatars with 3.8%, the Ukrainian with 2%, the Bashkirs with 1.2% and the Chuvash with 1.1%, the Chechen with 0.9% and the Armenians with 0.8% are represented in Russia. The remaining 10.3 % is unspecified. 15-20% of the Russian population is member of the Russian Orthodox Church whereas 10-15% is member of the Muslim Church and 2% is part of the Christianity. Russia obtains a large base of natural resources and contains deposits of oil, coal and natural gas. Considering the GDP of Russia, which has an estimation of approximately 8.183 US dollar per inhabitant in 2008, it should be pointed out that the difference between the wealth Russia and poor is not considered within this figure. The industry sector stands for 40% of the GDP whereas the agricultural represents only 6% of it. The service sector points out 54% of the GDP. (cf. CIA World Factbook, 2007)

2.4 Federal Republic of Germany

In the twentieth century the rising pressure for nationalistic expansion led to the First World War, in which Germany and its allies were defeated. (cf. Hickson and Pugh, 1995) During the central dictatorship under Adolf Hitler from 1933 to 1945 all state bodies and all public associations and institutions were centralized under Hitler and the Hitlerite national socialists (or NSDAP, Nationalsozialistische Deutsche Arbeiterpartei). With the defeat in the Second World War in 1945 and the end of the Nazi regime the Western Allies such as France, Great Britain and the USA occupied vast parts of West Germany and banned the antifascist committees, depriving them of facilities and refused requests for the open revival of the old political parties. A centralised, command economy was installed in the Russian zone in East Germany, whereas decentralisation was introduced in West Germany. A bad economic situation let to the Allies’ decision to work to restore German capitalism in the zones they controlled. Therefore, the labour movement in West Germany had to be disabused of notions of the socialisation of industry, which implied the strengthening of the market economy in the West, the abuse of controls and black market deals, as well as the re-establishment of a central bank and a new monetary reform. The philosophy of a social market economy in West Germany became reality under Ludwig Erhard, initially in his capacity as Allies- appointed Director of Economic Affaires and later as Minister of Economics after the Second World War. Under the first post-war Federal Chancellor, Konrad Adenauer, who implemented an economic policy, which also embraced social measures, Germany faced an economic miracle in the 1950s and 1960s. The economy in the 1970s and 1980s was everything but miraculous and an upturn in business came only in 1983 after three years of recession. With the reunification on 3 October 1990 and the intensified support of the former German Democratic Republic, Germany experienced a poor economic performance, which is still deteriorating.

The German system of industrial democracy, which has been abolished by the Nazi regime in 1933, but was re-introduced after the Second World War, reflects the bottom-up approach. The fact that co-determination allows employees to influence the business strategies and plans of the company can be linked to the delegation of responsibility and authority as well as the involvement-oriented control the German expatriates were used to. These co-determination schemes might lead to a reduced feeling of “them and us”, which is reflected in the low power distance and the strong business culture in Germany. It can be said that West Germany developed its management perspectives and attitudes under the influence of the Allies during the post-war period. (cf. Smith, 1994) Germany has an area of 356.970 square meters and about 82 Mio.


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Conflict Management in German-Russian Joint Ventures
University of Cooperative Education Mannheim
International Seminar
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Conflict, Management, German-Russian, Joint, Ventures
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A. Rademacher (Author)K. Zimmer (Author)J. Laubner (Author)A. Payarolla (Author), 2008, Conflict Management in German-Russian Joint Ventures, Munich, GRIN Verlag,


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