Global Economics

Shedding Stereotypes in Eastern Ukraine


Upscale shops and hip cafes amid statues of Lenin—a literary city of contrasts, Kharkiv also is home to a Bertelsmann local success story

My head was swimming with stereotypes as the cramped Austrian Air short-haul jet touched down in Kharkiv, a city of 1.5 million in the plains of eastern Ukraine. I had imagined this Russian-speaking part of the Ukraine to be a gritty post-Soviet city still struggling to come to terms with Ukrainian independence and the collapse of the U.S.S.R.

Initial impressions tended to confirm my prejudices. The airport was tidier than I expected, but a freshly painted gold hammer and sickle still crowns the Stalin-era terminal. A couple of dilapidated, decommissioned Aeroflot jets were parked at the edge of the tarmac. Thanks to my hosts at German media company Bertelsmann, whose phenomenally successful local book publishing operations I had come to observe, I was whisked straight from the plane to a VIP customs area where a guard in a Soviet-style military cap promptly stamped my passport (see BusinessWeek.com, 5/14/07, "Where the Book Business Is Humming").

But in the days that followed I was forced to develop a more nuanced picture of this metropolis a short drive from Vladimir Putin's Russia. The city—also known by its Russian name of Kharkov—still boasts enormous bronze statues of Lenin and other stern-looking socialist heroes. In the center of town there is a big, empty central square of the kind once used for ostentatious displays of military might. A rusting Red Army tank, one of thousands manufactured here, decorates a park.

A Literary Lifestyle

But the city is more than just a Bolshevik theme park. Thanks to the presence of several major universities and thousands of students, Kharkiv has a chic, bohemian side. There are cafes where you can get an excellent cappuccino, and broad clean avenues lined with upscale shops and filled with fashionably dressed young people. There are hip restaurants where you can eat grilled sturgeon with caviar, and bars like Fidel's, a basement joint with a red décor where I met 23-year-old Ukrainian author Ljubko Deresch, a former accounting student who has already published five novels.

Deresch, whose latest book, A Bed of Darkness, is published by Bertelsmann's Family Leisure book club, described how the Ukrainian people's traditional reverence for books is helping to drive a revival in local-language literature. "There are people who are deeply interested in literature, who read new texts, who make literature a part of their lifestyle," Deresch said over a cup of tea. "The most persuasive reason to keep on writing is that you know there is a dialogue between your text and their inner lives."

Bertelsmann is profiting nicely from this tradition, which meshes with a budding entrepreneurial scene. The Ukrainian unit is Bertelsmann's most profitable book club, and also an example of how an old business model can find new life in the fast-growing economies of Eastern Europe. Bertelsmann's success wouldn't have been possible, though, without an energetic local team led by Oleg Shpilman, an affable, slightly harried Russian Army veteran who is proof that growing up under socialism doesn't prevent somebody from becoming a savvy business person.

Learning by Doing

You have to admire Shpilman's chutzpah. He and some Dutch investors created the Family Leisure Club in 2000. The plan was to shamelessly copy Bertelsmann's book-club business model, then sell the company to Bertelsmann. The plan worked, with Bertelsmann buying the club for less than $10 million in 2004. (Bertelsmann has already recouped the investment and then some.) Shpilman stayed on to run the business. On the side, he also owns an Irish-style pub which caters to expatriates and visiting foreign business people.

Shpilman has never actually been to Ireland, but never mind. He and his employees at Bertelsmann have an anything-is-possible mindset that you don't often find amid the cubicle farms of Western Europe and the U.S. Unable to find off-the-shelf software suitable for their ordering and distribution system, for example, Bertelsmann's Ukrainian team wrote their own. "Many things we simply learned by doing," says Shpilman.

There are, of course, reminders that the Ukraine is still an economy in transition. In one neighborhood, prostitutes stroll in front of concrete apartment blocks. At a site outside of Kharkiv where Bertelsmann is converting a former insulation factory into a new book distribution center, rough-looking security guards patrol the grounds in camouflage jumpsuits, an effective deterrent to anyone thinking about stealing construction materials.

Feeling the Success

The Ukraine still suffers from rough politics as well. In recent weeks the Ukrainian government has been in crisis after President Viktor Yushchenko, leader of the Orange Revolution, dissolved parliament amid a power struggle with pro-Russian legislators. But in Kharkiv people seem to pay little attention. (The crisis eased May 4 after the two sides agreed to hold new elections.)

To the contrary, the mood in Kharkiv seems upbeat. For many people, life is a lot better. Natalia Obraztsova used to hawk children's toys from a kiosk in Kharkiv to make ends meet, even though her romantic adventure novels, set in medieval times, sold tens of thousands of copies through a Russian publisher. "I didn't feel the success," says Obraztsova, who writes under the pseudonym Simona Vilar—a name chosen by her former publisher because it sounded French. Now she writes full-time, often working through the night when inspiration strikes.

Bertelsmann's Shpilman draws a parallel with Western Europe after World War II, when the old structures were wiped away and the continent was a clean slate. "If you have some common sense and some money in your pocket, you can do well," he says.

Ewing is BusinessWeek's European regional editor.

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