48840 MAY 2009 ABOUT THE AUTHOR Reaching Out to Indigenous People in the NATALIA BUHONINA Russian Far East joined the IFC Russia Far East Business Development Project in April 2002 as a Team The Russian Far East faces severe development challenges. Its Assistant. In July 2004, she became a Program Assistant remoteness and harsh winter conditions, particularly in the case of with major responsibility to develop or enhance the Magadan Oblast, limit economic development opportunities to mining performance of existing or and fishing. The weak investment climate, combined with geographic potential SMEs in aboriginal communities. She also isolation, contribute to a poor standard of living. And the most provides advisory services to SMEs in agricultural and vulnerable group is the indigenous community, where unemployment aviation sectors. is four to five times that of the general population. The SmartLesson APPROVING MANAGER below summarizes the experience of the Russian Far East Business Approving Manager: Ivan Ivanov, Senior Operations Development Project in working to develop new economic Manager, Central and Eastern Europe Department, IFC opportunities for entrepreneurs among the native population. Advisory Services in Europe and Central Asia. Special thanks to my In 2001, IFC invested in Magadan's Julietta colleagues who helped gold mine project, together with the Canadian develop the paper: Steven mining company Bema Gold Corporation. In Harapiak, Elena Bushuyeva, March 2002, in order to stimulate economic Natalya Kalchevskaya, Viktoria Menkova, and Ivan activity in the region, IFC launched the Russian Ivanov. Far East Business Development Project, with funding from the Canadian International Development Agency (CIDA). The goal of the Project was to extend the impact of a joint IFC- Canadian investment to the local community of Magadan by developing a supply base to the mining sector among local small and medium enterprises (SMEs). The Project worked with SMEs to help them overcome Evdokiya Chivitkina displays her crafts at an ex- basic but critical barriers to their development, hibition in the City of Magadan. (Photo by the including weak business management skills, author) limited access to market information, poor access to financing, and lack of customer focus. traditionally male-dominated businesses but To ensure that the lessons learned and also catered to activities that provide materials developed would remain available opportunities for women, such as handicrafts. to the wider business community, the Project also worked with SMEs outside the mining The target group in the crafts sector was sector, including the indigenous community. represented mainly by elder women, and 70 percent of crafters resided in remote native Lessons Learned: Traditional Arts villages 500 kilometers from Magadan, in an and Crafts area with no infrastructure. The objective was twofold: 1) the preservation of these rapidly In general, the aboriginal leadership believed vanishing skills; and 2) their revival and that any initiatives for them should proceed expansion to provide a viable, sustainable along the lines of traditional pursuits such as economic activity for the local aboriginal fishing, hunting, and herding. To integrate the community. To meet these objectives, we aboriginal community into the local market, needed local (and nearby) partners. the project not only addressed the needs of IFC SMARTLESSONS -- MAY 2009 1 The Project's key partner for this activity, the Magadan Area emphasize the critical role of these factors in market Native Association (MANA), had a critical role in the penetration and pricing policy. Training included a step-by- outreach efforts and the extension of sustainable services step slide presentation, introduction of computer-aided to the community. Working with MANA and others, we design (CAD) as a modern quality tool, and samples of took the following steps: native arts and crafts produced by Pamela Baker's company or tribe members. Since attendance of the target groups Local Market Survey. In partnership with MANA, the Project was less then the numbers hoped for, we decided to provide completed a survey of the local market for traditional native access to such unique and valuable training to as wide an arts and crafts, polling visitors to the region, citizens, audience as possible--not only to crafters but also to souvenir shops, and native crafters. The overall key findings students with an interest in the field as well as to the indicated that: 1) crafts do not reach the distribution broader community. The training was videotaped for channels; 2) a lack of raw materials, tools, and accessories crafters of remote communities who were not able to hampers production of handicrafts; 3) goods are too participate in the training. expensive; and 4) the variety is limited. To facilitate access to materials, the Project located Internet Raw Materials Evaluation. Given that CIDA has funded a shops selling beads and accessories, and trained a group of similar initiative in Kamchatka (the region neighboring progressive crafters on Internet basics and how to order Magadan) through the International Union for Nature materials online. We also engaged a successful local trade Conservation (IUCN), the Project recruited key Canadian entrepreneur to share her experience in dealing with and Russian IUCN staff to evaluate raw materials availability Internet stores that sell beads and accessories. The group for crafts and develop recommendations on the sustainable received individual training in developing product lines, production of native arts and crafts in Magadan. Their main cost building, and domestic and international market findings echoed the results of the Project's market survey, requirements. including: 1) limited access to raw materials; 2) native crafters' lack of knowledge and skills in pricing and marketing; and 3) stores' requirement for utilitarian goods that are useful in daily life and are regularly supplied. Action Plan. Based on the market survey results and IUCN recommendations, the Project developed an action plan for the revival of the crafts sector in the Magadan Region. It included: 1) providing seminars for dissemination of market survey findings and basic training on market channels and pricing; 2) setting up a support center and engaging a coordinator for sales and distribution of handicrafts; 3) creating financial projections for a revolving fund, based on demand analysis and management costs; 4) selecting the best crafters for training in quality standards in the handicraft market; and 5) assisting with product marketing and distribution, starting with a product catalog for potential buyers. Crafters and trainers gather with the head of MANA and the head of Evensk Area administration at the Project's first seminar on Trainings. Jointly with MANA, the Project conducted business basics and price building (July 2004) in Evensk settle- practical seminars--in the City of Magadan and in remote ment, a remote aboriginal community. (Photo by an unknown villages--to train aboriginal crafters in marketing local photographer) fundamentals, including price building, product-mix analysis, distribution, and promotion. The seminars disseminated the findings of the local market survey, and Marketing. To assist the craft sector with product marketing involved a director of the local souvenir store to explain the and distribution, the Project developed several handbooks market requirements to the crafters. (such as Traditional Handicrafts Catalogue, and Tracking Sales Handbook) and helped crafters develop their logos, During implementation of the crafts project, it became business cards, flyers, souvenir tags, and portfolios. obvious that the quality of crafts, though traditional, often did not meet market requirements. To improve the quality To broaden the crafters' operations practice and increase of aboriginal arts and crafts, the Project engaged the their target audience, the Project (with permission from the services of a highly qualified Canadian consultant--Pamela Alaska State Council of the Arts) translated and distributed Baker, designer and owner of Touch of Culture (T.O.C), a the Native Arts Marketing Handbook developed by the Canadian First Nations Company (First Nations is a term of Council for Alaskan Native Artisans. ethnicity that refers to the Aboriginal peoples in Canada who are neither Inuit nor Métis people.) The primary focus Distribution Channels. The Project negotiated with the of the quality training seminars--in the city and remote local souvenir store to establish stable channels for selling villages--was to impress upon the crafters the importance native arts and crafts. The store agreed to provide of quality and consistency in native crafters' work, and to commission-sales services for crafters and to assist them 2 IFC SMARTLESSONS -- MAY 2009 with test shipments of crafts to Moscow and Vladivostok. would remain in the community after the Project New avenues also were established through the local tourist completion. companies; the items supplied to their stores were largely At the exit stage of activities, the Project concentrated its efforts to locate a coordinator for crafts sales. We identified a business-oriented crafter from the native community who had a lot of experience working with the Project team and had successfully developed her family arts-and-crafts business. Her experience working with remote reindeer herds and her leadership in village administration will help utilitarian--mostly clothing for hunters and fishermen. The attract the support of the local administration to the craft improved quality of crafts allowed the artisans to enter into sector. The Project properly trained the coordinator and commission-sales relations with two art galleries. The provided her with the necessary tools and materials to number of sales outlets cooperating with artisans increased support and develop crafts sales. from zero to six, and annual sales went from $0 to $15,000. In April 2009, the coordinator happened to visit Alaska, the Not all of the Project's efforts were successful, however. To areaoftheUnitedStatesneighboringtheRussianNortheast, facilitate access to external markets the Project explored and explored international sales opportunities with stores exportingthroughthePangeastoreatIFCHQinWashington, and museums through the contacts provided by the Project. D.C. Unfortunately, high export duties levied on crafts, The test sales totaled $1,000--a significant amount of transportation costs, an aggressive pricing structure, and money for local people. the high markup of intermediaries resulted in the crafts being too expensive for this highly competitive export 1) Native crafters require substantial hand-holding and market. explanation of basic concepts such as pricing, distribution, and supply--and how to develop and The Revolving Fund. The concept of the revolving fund was market their crafts as self-sustaining businesses. presented to crafters, who agreed with its basic principles. However, the financial analysis revealed that with a small 2) Without the active involvement of an experienced client base such as that of the crafts sector, a revolving fund local intermediary and trade coordinator, craft sales would not be viable; but such a facility would work if it may not be sustainable. were available to all SMEs. The Small Businesses and Crafts Sector Development Fund, "Business Key," was established 3) Individual training for the crafters appeared to be a in 2006 as a spin-off of the Project's activity.1 very productive and effective educational tool, supplementing the seminars conducted for the larger groups of participants. Lessons Learned: Magadan Union of Tribes and Indigenous-Owned Businesses--A New Client and Partner Early in 2006, a group of business-oriented native tribes established the Magadan Union of Tribes, a nongovernmental organization, to represent the interests of the native population. (Later in 2006, the Union of Tribes became a co-founder of the microfinance fund "Business-Key.") To create jobs in the native community, the Union of Tribes asked the Project for tailored assistance in properly setting up their operational activity. The Project played a pivotal role in the establishment of two Program Coordinator Liliya Sherbakova lives in the village of commercial cooperatives in the aboriginal community: a Evensk and also is director of the Children's Cultural Center there. fish-processingcooperative,andatransportation(trucking) This photo is from 2004, when she participated in a marketing cooperative. The support of the Project in targeting mining survey in Moscow. (Photo by the author) companies in both matters was highly important. Transportation Company. The Project assisted the Union of Local Partner and Coordinator Position. One of the options Tribes in negotiating a winter road-haulage contract with explored was to train MANA to extend sustainable services Bema Gold, the Project's anchor company. Under the terms to the aboriginal community, to service the needs of crafters of this contract, in 2007 members of the union, using a and other native entrepreneurs. As it turned out, MANA fleet of 12 all-terrain vehicle (ATV) trucks, hauled mining did not have the capacity to provide business support supplies from Magadan to the Kupol mine site some 3,500 services to local artisans, but it was actively involved in all kilometers away. The preliminary estimate of the contract Project activities with native arts and crafts. This knowledge value was 5 million RUR ($190,000). The Project also 1 Please see the SmartLesson "Helping Start-Ups Start Up! Setting up a small, sus- assisted in developing a business plan (a cash flow for tainable standalone microfinance facility," by Natalya Kalchevskaya. IFC SMARTLESSONS -- MAY 2009 3 current activities) to enable the members to Conclusion access financing for the purchase of two trucks. Today, it is an independent trucking Any projects implemented with the objective company with a fleet of 20 trucks. of increasing employment opportunities for the indigenous population in remote areas The Project leaves behind: 1) a set of well- canberegardedassocialdevelopmentprojects developed contacts between SMEs and big and thus require substantial involvement and mining companies; 2) SMEs with experience support of all possible parties. These parties and knowledge about how to approach include mining and fishing companies, companies and conduct negotiations; and 3) educational and trade facilities, charity funds, SMEs trained in developing business plans and, most important, the support of local and in ways of approaching financial governmental authorities, who have a better institutions and "angel investors" for understanding of day-to-day issues in the financing. remote areas. The best results are achieved by a combination of efforts of all possible parties Fish Processing Cooperative. The cooperative who are able to answer the question: How can was established to process and add value to we help develop employment opportunities the fish caught, and to represent the for indigenous people? The Project was subsistence and commercial fishing interests instrumental in helping these parties focus on of the natives, including their right to this question. ownership of fishing quotas and of fishing groundsinthehistoricalhabitatofindigenous To continue beyond the Project, we put in peoples. place: 1) a microfinance facility for SMEs, including aboriginal crafters and tribes, where The Project facilitated the donation of city and regional administrations are equipment by the Omolon Gold Mining represented; 2) distribution channels for the Company (Kinross Gold)--another Project craft sector; and 3) a program coordinator target company--to the Union of Tribes to trained by the Project and subsequently start construction of a fishermen's cooperative elected to sit in the municipal Assembly of site that will serve as a shared processing Evensk Area in the capacity of deputy. facility for native fishermen. The Project also assisted the cooperative with the purchase of three refrigerating containers and a freezer. The cooperative was able to provide freezing services to the native community. During the 2007 fishing season, 89 tons of fish were processed for the local fisherman, resulting in net revenues to the cooperative of $10,000 for services rendered to local fishermen, and 18 seasonal jobs for aboriginals were created. Unfortunately, the cooperative was not granted any fishing quotas in 2008, due to the small fish run. (Natives received only personal quotas.) In 2008, a local branch of the Federal Fishery DISCLAIMER Committee was established, and the native IFC SmartLessons is an awards tribes expect positive developments on the program to share lessons learned issue of quotas for aboriginal businesses. in development-oriented advisory services and investment operations. The findings, 4) Indigenous-owned SMEs, although interpretations, and conclusions experienced in their businesses, require help expressed in this paper are those to cover the gap in negotiation skills with of the author(s) and do not big mining companies. necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World 5) The viability of native fishing businesses is Bank or the governments they highly dependent on fishing quotas, which represent. IFC does not assume are dependent on local and federal any responsibility for the legislation and the transparency of the completeness or accuracy of the information contained in this quota-distribution procedure. document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SMARTLESSONS -- MAY 2009 4