Beginning Long-Term Project

I have begun work on what promises to be a long-term project in Ukraine.  I will post notes on research and observations on this blog, along with other writing.

Below, find a summary of the project.

Nizhyn, Ukraine

In 1932, the Ukrainian Soviet Socialist Republic established a machine factory in Nizhyn, Ukraine, about 100km from Kiev.  The factory is called Nizhyn Mechanical Factory (NMZ in Russian).  The factory began making industrial bread ovens to produce the brick-shaped loaves of flavorless, mauve “black” bread that are still ubiquitous in the former Soviet Union.  The factory sprawled over 10 acres, with 35 buildings, and provided employment for a large percentage of Nizhyn’s growing population.

NMZ was immensely successful during the Soviet period, escaping destruction by the Nazis and expanding into manufacture of commercial fishing equipment, fermentation/distillation equipment, and a few other fields of industrial agricultural and food technology.  As is typical in a command economy, the factory received designs for products and annual orders from the central government, fulfilled those orders, and repeated this process the next year.

On 24 August 1991, Ukraine declared independence from the Soviet Union and lurched overnight–in principle, at least–from a centrally planned command economy to a laissez-faire capitalist free-for-all.  NMZ, like every enterprise, was privatized through a voucher system (employees buying shares), and was expected to teach itself sales, marketing, tech support (they had no idea how many of their products actually worked), and corporate finance.  Instead, the factory survived on government subsidies donated to newly independent Ukraine by Western governments or provided by the IMF.  They received these subsidies through accounting fraud:  they recorded wages in arrears, performed sales in cash, then gave workers their earnings under-the-table from that cash.  In this way, they avoided laying off workers, to whom they felt they owed housing and employment.  This continued until 1998.

In 1998, the Russian ruble crashed in response to the Asian economic crisis, setting off a chain reaction among the former Soviet countries that survive largely on exports to the Russian Federation, including Ukraine. Ukraine experienced near-Weimar-level inflation for a year or so.

At this moment, a group of four retired American businessmen, all graduates of MIT’s Sloan School of Business, saw an opportunity.  They bought a controlling interest in NMZ for 1998, intending to educate the Ukrainians in the principles of American capitalism, turn the enterprise around, and sell it for a profit.  Win-win.  They paid $250,000.

For ten years, they tried and failed to implement their plan.  In 2007, I went for three weeks to Nizhyn to investigate their failure for my college thesis (I was a Russian major at Middlebury College, and had a connection to a mid-level manger at the factory).  Essentially, the culprit was the Americans’ inability to understand and adapt to Ukrainian business and social practices.  No surprise.

In 2008, six months after I wrote my thesis, the Ukrainians cobbled together enough money to buy the Americans out.  According to town records, NMZ turned a profit for the first time in 2012.

In three weeks, I will be returning to the factory to further explore its path and the path of its workers.

 

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