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Contracts, Negotiations & Culture

September 23, 2009

Last winter, many people in Europe were left shivering when Gazprom, the major Russian exporter of natural gas, turned off supplies.

European governments became nervous about their growing dependence on Gazprom and made noises about finding alternatives. Whether or not they do in fact develop new sources, the incident left many shaking thier heads and presuming some Kremlin-inspired show of strength.

In fact, the story is probably much simpler and provides an excellent lesson for anyone involved in cross-cultural negotiation and contracting.

Gazprom pipelines run through a variety of former Soviet states, such as Ukraine. Gazprom are also major suppliers to those states. The incidents in Europe appear to have been inspired by two disputes with Ukraine – one relating to their contract with Gazprom and the other because it was alleged that they were stealing gas en route to Europe.  So the simple answer – in the mind of Gazprom executives – was to turn off supplies. The obligations under their European contracts were deemed irrelevant if a third poarty was somehow cheating them.

For anyone brought up in most Western cultures, and accustomed to a world of contracts governed by the rule of law, such behavior seems remarkable. The idea that an obligation could be breached in this way is itself shocking; but the fact that any company could simply turn off critical supplies to innocent consumers and businesses in the dead of winter also gave a strong ethical slant to the story. Surely such an inept display by a company seeking to expand its operations across Europe must have been politically inspired? What right-minded business executive would authorize such action, with all the resulting damage to trust and to reputation?

I spent last weekend in Kiev, capital of Ukraine, and gained insight to the answer. I stayed with friends and when I first arrived, they told me that they hoped I wouldn’t mind, but there was no hot water in their apartment. The service management company had turned it off.

My friends live in a block of private apartments – a large block, with perhaps 100 units. All services – waste disposal, heating, water etc. – are overseen by a private management company. Each resident pays a monthly fee – except that one or two have failed to pay for several months. So the service company announced that it was stopping the supply of hot water to the entire block until they paid.

The residents do not appear to find this action unreasonable or surprising. They heat pans of water; they shower at friends’ houses;  they wait patiently in the hope that one day service will be restored. There is a collective resignation and responsibility.

The people in these apartments are highly educated, mostly professionals. But even the young students, brought up in the post-Communist era, are resigned to a world where individuals have no real power or rights, where high-level corruption is endemic and where your future depends primarily on who you know, rather than what you know. This feeling of powerlessness means you cannot view concepts like ethics or fairness in the same way – there is no timely or meaningful recourse and ‘the court of public opinion’ is simply resigned to an unequal world where the masses have little influence.

The optimist in me says that this will change and that international trade will be a major factor in shifting attitudes among the business and political leadership. In the end, most people want to be liked and respected, so growing integration and cross-border trading relationships are key to progress and more common standards.

However, in the interim, any negotiator or contract manager must understand that cultural values and expectations differ dramatically. If we work with partners in new markets, we must not assume that they share our view of norms or procedures. Whatever we write in the contract, however diligent our management, it is culture that will drive behavior – so be sure that it is part of your risk analysis.

  1. this reminds me of a personal situation I am currently experiencing in Hurghada Egypt. I knew that Egypt had a corrupt culture so put extra safeguards into my contract for apartments in a new resort built a couple of years ago. We also got close to the key players at the time. Sadly due to some disputes between the developer (british) and landowner (egyptian)the property and resort has not been completed as expected. To compound matters the egyptian has brought in his ‘heavies,’ taken control of the resort and is attenpting to stop owners from getting in to their own apartments (so he can resell them). He has cut off the water and electric (against islamic law) but despite our efforts at using the legal channels it is both costly and time consuming. The apparent corruption and apathy at both a local legal and governmental level is not helping. As an experienced collaborator and architect of solutions to difficult problems it even has me foxed for now. I’d be interested in hearing from others about solutions to challenges like the Gazprom and my own situation where contracts and legal levers dont work, collaboration is brushed aside because of their culture and position of power, and attempts at constructive negotiation are not going to result in fair outcomes.

  2. Arvind permalink

    Tim has struck a very basic fact of life, “Nothing is right or wrong in this world.” It’s all about how we are conditioned to see the things.

    Look at the following facts:
    Just till a few decades back and since the very beginning of humanity, it was considered all right for a state to annex other if it had the power. We still say Alexander the Great, when all that he did was defeated and captured people and places even though he had no enmity with them.
    British and other European Colonies all over the world were fine earlier, today the world would protest.
    America had to give a whole lot of excuses for its action in Iraq.

    Polygamy and Monarchy are absolutely normal in Middle East, in other parts of world we will find them weird.

    Single/ unmarried mothers are normal in West while in most other parts it’s contemptible. In fact, the mother may be stoned to death quite “naturally” in some parts.

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