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The crisis will be back. What is to be done?
Yuriy Yavorsky
A crisis can ruin a business of any size. There is a threat of losing everything. This book offers 121 practical tips from a business owner who has overcome three crises. How to survive on your own and save your business. What to do when everyone around you is going crazy. How to find a way to earn in a crisis and go for it. How to act during a crisis and what steps to take after it is over. The recommendations given in the book are useful for businesses of any size and market niche.
The crisis will be back. What is to be done?
Yuriy Yavorsky
Project manager Alexey Perevedentsev
Translator Andrei Piven
Translator Irina Piven
Illustrator Vitaly Blokhin
© Yuriy Yavorsky, 2023
ISBN 978-5-0060-6347-1
Created with Ridero smart publishing system
First published in 2018.
All rights reserved. No part of the electronic version of this book may be reproduced in any form or by any means, including posting on the Internet and in corporate networks, for private and public use without a written permission of the copyright owner.
Frequency and Causes of Crises
Economy is a big roulette game
Some experts believe that crises are cyclical. Yet harnessing cycles of crises for your own benefit is very much like playing roulette. Imagine a classic roulette table with a green felt betting mat.
Let me explain one detail for those of you who do not know the rules – just look at the three vertical columns of numbers and then locate the three rectangles under the numbers 34, 35, and 36. Placing a chip into one of these three pockets wins you 2 to 1 if the ball settles on any of the numbers in the respective column, meaning your chip will get you two more.
Now imagine that you placed two chips into two pockets. If your bet wins, you get two more chips, losing one, leaving you one chip up. It is perfectly clear that with the ball settling on zero or any number in the other column you lose both of the chips you laid down.
Time to remind you of the probability theory. Simply put, the longer you study or measure something under the same conditions, the more accurate the result. One example is the more times a coin is flipped, the more likely it is that we get half tails and half heads, i.e. a 50:50 probability of one of the two outcomes.
So, start laying down two chips on the same two pockets over again, keep collecting your prize chips if you win or place two more chips yet again on the same two pockets if you lose. The probability theory suggests that the longer you play, the more likely the ball is to settle on a number in each of the three columns in about 32—33% of the cases, with about 1—4% hitting zeros. Consequently, if the same two columns are permanently bet upon, you should win in about 64—66% of the cases, which is more than 50%, meaning you should always be one chip up.
I’ve had this experiment dozens of times at different roulette tables in dozens of casinos in different countries. The stack of the chips I have won would always grow slowly. Always.
Why haven’t I become a millionaire on the back of this perfectly legitimate way of making money at roulette that I discovered? Because after a while, a new croupier would come to the roulette table to play against me.
The probability theory that had made the ball spun by the previous croupier land in the roulette slots with a distribution of 32% +32% +32% +4% (zero) suddenly stopped working. Well proven and globally accepted, it would no longer produce the due outcome, and all my winnings would then melt away.
It does not really matter what skill or magic the “killer dealer” practised in each such case. What is important to the aspiring and seasoned entrepreneurs alike is that all laws in the business world, however free they may appear, are in fact influenced by the forces unknown to us. The probability theory can play a trick on you in case of putting blind trust in the “hand of the market” being free of anyone’s control and, consequently, in having algorithms that can be identified and exploited.
Believing in the self-regulated market or in techniques helping to identify impending crises through certain established behaviour patterns in a given economy is not unlike reading tea leaves or telling fortunes by the stars. “The only way to win money out of a casino is to own one” runs the famous adage favoured by gambling enthusiasts.
Economy is a big roulette game. A budding entrepreneur can be allowed to place bets with no one interfering with the game for a while. But as soon as one gets auspicious or strikes incredibly lucky, enter the “killer dealers”. They are not competitors or criminals; rather, they are the ones holding aloof, sipping on their whiskey, and keeping a close eye on the game and the players. They know how to analyse all the odds and scenarios, both at the moment and looking forward. These people never gamble. They are professionals making sure that no one gets too lucky.
Would you like to rub your elbows with or, at least, be recognised by them? If you do, don’t be like the rest of the crowd, don’t be a gambler. You should make a sober, level-headed assessment of your own chances and the chances of your business in a crisis, enabling you to reach a safe place or be as ready to fight as it gets in the face of this looming ruthless steamroller.
Run uphill from a tsunami
In times of crisis, it is no easy task resisting the temptation to sell off what everyone else is selling or buy what everyone else is buying. Yet, from the very first seconds, you must protect yourself from public psychosis. You don’t know what to do? You’d better step aside. Don’t make decisions under the weight of what everyone else is doing or based on the predictions of hundreds of analysts. It is better to run uphill from a tsunami rather than stand there pondering whether to dive under the first wave or to get on your surfboard.
Economies can be affected by global corporations, domestic and foreign governments, severe weather, meteorites, or another dictator who, in his desperate quest for staying in power, orders forests to be cut down, rivers to be reversed, sparrows to be decimated, diamonds to be mined in the most heart-rending manner… World market prices can soar or plummet because of a government’s ham-fisted action or the slightest of accidents at a nuclear power plant.
The list of all objective and subjective leverages affecting crises is endless. Nature provides some of them, but most of them are of our own making, waiting in the wings. The seemingly aloof gentlemen with whiskey glasses are always ready to send a “killer dealer” to the roulette table to undermine the currency of any economically weak country in just a few days. They can just as easily drive oil prices down two- or threefold or increase the dollar’s value against all world currencies in a matter of hours.
I think that the Russian crises of 1998 and 2014 when the rouble shrank (fourfold in the former and more than twice in the latter case) were fomented by the Russian government itself, unable to cope with the challenges of the global market. Could anyone have foreseen this? Hearsay and rumours aside, no one around me back then could understand in time what was happening and why the government had allowed this to happen.
From what I saw, businesses crumbled proportionately to the currency collapse. In 1998, the Russian rouble depreciated against the US dollar from an average of six to 24 in a week. In the course of the following year, 75% of all market businesses crashed. In 2014, the exchange rate went from 30 to 60 roubles per dollar. Within two years, half of the businesses, i.e. more than 50% of the entire real market, vanished into oblivion.
Thus, the frequency of crises cannot be foreseen or projected. The invisible hand holding a glass of whiskey is always ready to shake not just the economy of one or several countries but the whole of our not-so-secure tiny planet.
Crises are said to be cyclical – I couldn’t agree more but only in the sense that they are bound to come back. The debate about how often they can be back and in what format is always interrupted by yet another crisis.
In my 25 years in business, I have lived through several painful banknote exchanges and rouble devaluations as well as a global property price collapse that reduced entrepreneurial activity by a factor of 1.5—2. I am certain that even one national leader can single-handedly orchestrate a crisis out of a clear blue sky in the interests of national monopolies or narrow government goals.
When looking for new markets or creating new products, we, entrepreneurs, can never account for all risks. An analysis of all the crises I have personally gone through suggests the following:
– a crisis always strikes suddenly however hard you may have been on the watch for it or tried predicting its onset;
– business activity is brought to a standstill for an average of 1—3 years;
– crises are inevitably followed by business growth, which you must be prepared for if you survived;
– do whatever it takes to survive because it is next to impossible to bounce back from scratch. Even losing 90% of all your business is still a lucky escape;
– there is no room for complacency, thinking that your business will be spared by the crisis;
– reinventing must be your first order of business.
Substitution or destitution?
“Now I am equipped for any economic eventuality,” I was saying to myself. “My business has been growing as much as 10% annually for ten years running, it has developed and become strong. Almost 300 employees make a $20 million worth of products that are sold, among others, in export markets generating revenues in foreign currency, the warehouses are well stocked and there are still reserves of production capacities.”
I survived several crises, learnt a lot and thought I knew everything. And yet I could not foresee that my business would be on the brink of ruin, that there would be a question of either bankruptcy or survival…
The Russian government decided to make a “dead loop” in foreign policy by annexing Crimea. It had a disastrous impact on the Russian economy. Not even in my wildest dreams could I imagine that an embargo on the supply of goods from dozens of countries across the world would be suddenly introduced in response to the sanctions against Russia. My business was suddenly banned from using film made in the Netherlands in production of bulletproof glass for customers from the national security bodies or government monopolies.
I had 66 people working at the bulletproof glass factory. It operated around the clock, making products of various sizes and protection levels for various uses: armoured cars, ships, bank buildings, and other assets that needed protecting. Demand was ever-growing, the factory was working almost to its full capacity, the monthly turnover was totalling 300—400 thousand dollars. Lo and behold, the military inspection and acceptance representative is telling me to change the supplier of the film, as they will no longer accept any materials from a NATO member country. How on earth can this be planned for or projected?
Moreover, the government did not suggest that businesses should either find a replacement within 6—12 months or start doing things differently. It was a curt military-like command: do it here and now!
“But this just cannot be done!” we ranted. “All our equipment is tooled for this particular Dutch film! No one else in the world produces a film of similar quality suitable for our production.” The authorities were relentless. The year was 2015 when “import substitution” started to be aggressively implemented in Russia.
“The government resolution can only be rescinded by the government itself,” I would hear in all offices. I had to close down a highly profitable modern enterprise — private demand was low while the pull from my primary consumers (80—90%) in the national security bodies or state monopolies was suddenly lost.
Kinds of crises
– Global, rocking the whole planet and entire civilised world. Such crises drop business activity through the floor in many countries. One such example is the global financial crisis of 2008 driven by bankruptcy of Lehman Brothers, one of the largest banks in the world.
– Nationwide, with the government suddenly and without caring about consequences deciding to exchange banknotes of certain denominations within a predefined volume, as was the case with the monetary reform of 1991 in the Soviet Union (also known as Pavlov reform), or to confiscate people’s life savings, freezing the money for years, or to prohibit import or export of certain goods all of a sudden.
– Industry-specific, with something suddenly going wrong in one or several industries.
– Business-specific, with certain businesses becoming hostage to political or administrative decisions.
The American financial giant Lehman Brothers, founded in 1850, had not raised the slightest doubt in anyone over its competence or resources before the crisis of 2008. Yet the storm cracked and the entire global financial system faltered.
Did Russia draw the proper lessons from it? No. Barely five or six years later, the Russian economy flew at full speed into a crisis of its own making. Needless to say, it was provoked by falling oil prices, yet the Russian economy was ultimately pushed off the cliff by its own Central Bank. It did all it could for the Russian rouble to lose more than 50% of its value within just a few days.
As a consequence, the capital of Russian companies depreciated, all foreign currency debts of Russian businesses doubled in rouble equivalent, the demand for every single type of goods and services dropped three- or fourfold. In an attempt to salvage their savings, people made an equivalent of their annual spend over just one month, and entrepreneurs faced a tricky challenge whether to procure or produce something to make stock for the next year at all.
Attempts at predicting crises remain worthwhile, but it is a lot more important to understand what needs to be done when dark clouds have gathered and there is a storm coming or, even worse, when you missed storm warnings and it has caught you unawares in the open ocean.
“Business Resection” or Ways to Cut Spending
Take urgent action!
No matter how well you have planned for it, the crisis will strike suddenly – just as with too much alcohol, intoxication sets on suddenly and the brain is shutting down. You may think you are drinking in a measured way, and you do not drink much generally, and you have had enough bite after, and yet – bam! – you miscalculated…
You wake up in the morning to the national currency losing 20—30% of its value or oil prices more than halving, and everything has fallen apart at the stock exchange… Your debts are now doubled; the suppliers, who were so favourably disposed just yesterday, have become your enemies demanding to return their goods. Not the money that has lost some of its value already and keeps depreciating daily, but the product that you have already processed or put up for sale.
You forget about food, about the holiday package you have bought, and you immediately cut short your honeymoon trip. You can feel the shackles on your wrists chaining you to the oars, making you a galley-slave of the crisis. Incidentally, most entrepreneurs do not realise that it is impossible to handle the economic storm – it is as good as deliberately getting in the way of a herd of bison rushing for no apparent reason from distant pastures in your direction.
The economic agony in troubled times resembles chaotic movement of information from one pseudo-analyst to another who is no less “informed”. They are vying with each other in predicting the timescale and depth of the slump, recalling all the crises since the Great Depression. People, with and without money alike, begin thrashing about. Some, to keep their money; others, to dodge unemployment.
Most entrepreneurs act in the same way. These are the laws of the crowd and the psychology of how people behave in the same misery. On a sudden, they need a leader – someone who knows which way to turn. Even those who have forgotten what a TV is about keep turning it on to watch the news. Old business pals are at once able to find an opportunity to get together, even if, for various reasons, they have not seen each other for many years. The world is losing its mind, and an entrepreneur who is unprepared for these changes is going insane too.
