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Reform Makes It Harder to Do a Soviet Deal : Perestroika: American businessmen complain that emerging layers of bureaucracy have produced a tangle of red tape that makes the bad old days look good.

December 02, 1990|ROBERT W. GIBSON | TIMES INTERNATIONAL ECONOMICS CORRESPONDENT

Moscow's two Pizza Hut shops were doing a brisk business when, suddenly, the smiles froze. The successful enterprises were forced to shut down for 18 hours while local officials argued over whether the U.S. franchise should report to the Moscow city council or some other government body.

Welcome, American business, to the land of perestroika.

It has never been easy to do business in the Soviet Union. But as the nation wrestles with the Gargantuan task of restructuring the world's second-largest economy, U.S. executives are finding it more confusing than ever.

"For those entrepreneurs who think chaos is an ideal environment, this is a perfect time," says Marshall Goldman, associate director of Harvard's Russian Research Center and an expert on the Soviet economy. "But for others it is a scary time. The society is collapsing. The economy--both the marketing portion and the planning and administrative sectors--is in a shambles."

The Soviet Parliament has given Soviet President Mikhail S. Gorbachev authority to overhaul the economy, but it remains unclear exactly what form that overhaul will take. Already, the law has been changed to permit foreign firms full ownership of Soviet subsidiaries; eventually special tax breaks and liberal profit repatriation measures are expected.

Meanwhile, the lines of authority are blurred. Before perestroika, foreign companies usually dealt with a Soviet ministry or some other central agency. But now, deals are struck with one of the nation's 15 republics, with city agencies such as the Moscow city council or even directly with Soviet factories and firms.

As a result, anarchy reigns for many U.S. firms trying to conduct commerce with the Soviets.

"Before (perestroika), the road map was not clear, but at least you had a road map," says David Mostny, a San Francisco businessman involved in barter trade with the Soviet Union. "You knew who the (right) people were and you knew their limitations.

"Now it is a war zone. Central authority is not recognized and there is no road map--not even for Russians--showing new lines of authority."

In the trenches of commerce, reaction is mixed. For example, Ford Motor Co., suddenly alarmed that the Soviets might not be able to fulfill financial guarantees, recently dropped out of a project to produce cars in the Soviet Union.

But General Motors Corp. has signed a $1-billion agreement to supply catalytic converters and other parts for a car model Moscow hopes to export. Unlike GM--whose contract requires payment for shipments in hard currency only--Ford faced the much riskier prospect of major direct investment.

In the cigarette business, RJR Nabisco has followed Philip Morris' plan to bring 20 billion Marlboro cigarettes to Soviet consumers. RJR's contract calls for supplying up to 14 billion cigarettes.

The tobacco makers now mingle with Eastman Kodak, Pepsi-Cola, Archer Daniels Midland, Chevron, Monsanto, Occidental Petroleum, Johnson & Johnson, IBM and a growing number of other U.S. corporate names on the Soviet scene.

Soon after he came to power in 1985, Gorbachev began working for acceptance in Moscow of the then-unwelcome concept of joint ventures between the Soviet government and Western companies; after two years of persuasion, he got through a law legalizing them.

Eleven months later, at the Soviet Embassy in Washington on the final day of his summit visit, he personally lobbied a group of 50 U.S. corporate and banking executives who had been invited by him to Washington for the occasion. "Let's have real action," he exhorted.

According to PlanEcon, a U.S. consulting group, the Soviet Union had signed a total of 1,256 joint venture agreements with Western companies by April 1, 1990--compared to 193 on Jan. 1, 1989.

But, of these 1,256 agreements, only 172 involved U.S. partners and only 244 have led to actual ventures--of which only about 30 have U.S. partners.

Of the U.S. joint ventures in the Soviet Union, two-thirds are in service areas, such as restaurants, hotels and travel. Major ventures, such as a chemical works being built by Combustion Engineering of Stamford, Conn., are relatively few.

One of these, in formation for the past 2 1/2 years, involves Chevron's joint venture to develop the huge Tengiz oil field northeast of the Caspian Sea in Kazakhstan--a field said by the Soviets to be the largest discovered in the world in the past 10 years with reserves estimated at more than 25 billion barrels.

The case illustrates how Soviet authority is still shifting and how an American company can cope with the new stresses.

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