The crisis will be back. What is to be done?

The 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 earn you two more.

Now imagine that you placed two chips in 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 cases, which is more than 50%, meaning you should always be one chip up.

I’ve done this experiment dozens of times at different roulette tables in dozens of casinos in different countries. The stack of chips I won would always grow slowly. Always.

Why haven’t I become a millionaire on the back of my discovery, this perfectly legitimate way of making money at roulette? 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% (i.e. zero) suddenly stopped working. Well proven and globally accepted, it would no longer produce the expected outcome, and all my winnings would then melt away.

It does not really matter what skill or magic the “killer dealer” practised in each case. What is important to both aspiring and seasoned entrepreneurs is that all laws in the business world, however free they may appear, are in fact influenced by forces unknown to us. The probability theory can play a trick on you if you put blind trust in the “hand of the market” being free of anyone’s control and, consequently, in algorithms that can be identified and exploited.

Believing in a self-regulated market or in techniques that help 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 from a casino is to own one” runs the famous adage favoured by gambling enthusiasts.

The economy is a huge 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 incredibly lucky, enter the “killer dealers”. They are not competitors or criminals; rather, they are the ones holding aloof, sipping their whiskey, and keeping a close eye on the game and the players. They know how to analyse all the odds and scenarios, both now and looking forward. These people never gamble. They are professionals who ensure no one gets too lucky.

Would you like to rub shoulders with them, 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. This will enable you to reach a safe place or be ready to fight in the face of this looming, ruthless steamroller.

Run uphill from a tsunami

In times of crisis, it is no easy task to resist the temptation to sell off what everyone else is selling or buy what everyone else is buying. Yet, right from the outset, you must protect yourself from public psychosis. You don’t know what to do? Then 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 many things, including severe weather or meteorites… World market prices can soar or plummet because of the slightest accident 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.

From what I saw, businesses crumbled in direct proportion to the currency collapse. In 1998, the Russian rouble depreciated against the US dollar from an average of six to 24 in a week. Over 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.

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 may come 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 times.

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 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 $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…

Following the 2014 crisis, I had to close down a very profitable, modern company producing highly technical (specialty) glass.

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 the bankruptcy of Lehman Brothers, one of the largest banks in the world.

– Nationwide, one good example being the Pavlov Reform of 1991 when the Soviet government decided to exchange the 50 ruble and 100 ruble banknotes.

– Industry-specific, with something suddenly going wrong in one or several industries.

– Business-specific, with certain businesses becoming hostage to various administrative decisions.

The American financial giant Lehman Brothers, founded in 1850, had not raised the slightest doubt over its competence or resources before the crisis of 2008. Yet the storm broke and the entire global financial system faltered.

And so did Russia: Russian companies’ capital depreciated; all foreign currency debts of Russian businesses doubled in rouble equivalent, and the demand for all goods and services dropped three- or fourfold. In an attempt to salvage their savings, people spent in one month what they normally spent in a year! and entrepreneurs faced a tricky challenge: whether to procure and produce something to make stock for the next year at all.

Attempts at predicting crises remain worthwhile, but it’s far 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 the storm warnings and it has caught you unawares in the open ocean.

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 in suddenly and the brain shuts down. You may think you are drinking in a measured way, and you do not drink much generally, 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 the return of their goods. Not the money that has already lost some of its value 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 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 – you might as well get in the way of a herd of bison careering for no apparent reason from distant pastures in your direction!

The economic agony in troubled times is characterised by the chaotic movement of information from one pseudo-analyst to another who is no less well “informed”. They vy with each other to predict the timescale and depth of the slump, recalling all the crises since the Great Depression. People, both with and without money, 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. There is an urgent need for a leader – someone who knows which way to turn. Even those who have forgotten what a TV is, 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 goes insane too.

A different scenario is also possible: when the crunch comes, adrenaline levels in society begin going through the roof, and a young businessman tough it out, rolling with the blows of the crisis’ waves slamming against the side of his ship amidst an ever-intensifying storm. He will neither furl the sails nor down the masts. He is banking on luck or his own dedication, determined to fight till the bitter end.

The raging ocean reaches up to the sky. Wave after wave. No rescue in sight.

The staff, who are being washed overboard with each new wave one by one or by the dozen, keep calling out to their employer, begging him not to abandon them, not to stop paying salaries, and not to shut down operations. The captain is stubborn as a bull and wants to preserve traditions, to remain a recognized leader. He believes that he’d better perish himself than betray his people. So noble-minded. But so stupid!

At the very first signs of a crisis, any entrepreneur must immediately whittle down the scope of his or her business, namely:

– reduce floor space;

– downsize production staff;

– stop redundant machines and production operations;

– scale back the supporting infrastructure;

– delay all (!) outgoing payments from several weeks to three months;

– accept all advances or full payments for both current and future shipments. Take all the money that someone is giving you at this time;

– take any orders, even ones making little economic sense, at the cost price, or even complete loss makers, as long as there is work;

– sell all slow movers at any price – by the time the crisis reaches its peak, you need cash, real money instead of useless junk;

– sell off cars and all unnecessary equipment. Offload unnecessary property; like it or not, it will surely be cheaper for many years following the crisis;

– cut back on the driver and the secretary, stop going to fancy clubs and spending money on clothes, cars and other luxuries;

– make a list of all funds available to you, and build your untouchable nest egg enough to sustain you for two or three years should you lose everything else to the crisis, and keep it hidden, say, in a safe deposit box;

– shut down your factory, or store, the whole business for two or three weeks to recuperate, get your puff back, and gather your thoughts;

– furlough most of your staff for as long as is permitted by law.

After these emergency measures (which should take three to five days at most), you should start downsizing your business for real and “for good”, not just provisionally. This is the hardest part, because it can be very painful – inevitably saying good-bye to highly valued employees who may even be your relatives.