A Handshake, But No Promise

Bush didn't bail out Yeltsin--and U.S. companies are balking, too

The get-together had that painstakingly choreographed feel of past superpower confabs. George Bush and Boris Yeltsin chatted each other up in the Oval Office, exchanged gushing toasts at state dinners, and toured Chesapeake Bay. During their June 16-17 gathering, the leaders signed off on some 20 trade and technical pacts. Most significant of all, they agreed to a historic arms deal that would take an enormous bite out of their nuclear arsenals.

Even so, the affair had none of the high-stakes summit drama that once transfixed the world. The sessions were no meetings of equals. With the Russian economy in free-fall, Yeltsin and histhirtysomething team of reformers are groping for a financial lifeline. Unfortunately, a cash-strapped Bush Administration had little to offer.

Instead, the Russians got an earful of Washington's new mantra: Private investment will be your salvation. This was pounded home at a hastily arranged "business summit" of U.S. and Russian executives hosted by the Commerce Dept. (box). Yeltsin got the message: "We're inviting the private sector of the U.S. to invest in the unique and untapped Russian market--don't be late."

LONG SLOG. Trouble is, with few exceptions, U.S. companies aren't coming forward. Yeltsin has taken some steps to promote investment, such as planning to make the ruble convertible. And on June 17, Russia promised to offer foreign equity stakes in some Siberian gold and oil fields. But Russia is beset by an Alice-in-Wonderland tax code, a wobbly banking system, and deepening insolvency. It won't get better soon. The International Monetary Fund is pressuring Yeltsin to get his economic house in order before the agency releases $24 billion in the Western aid approved this spring. To satisfy an IMF demand that he keep Russia's budget deficit at less than 5% of GNP, Yeltsin may have to slap even more taxes on foreign companies.

Yeltsin needs all the revenues he can get. Russia's foreign debt is a staggering $80 billion, while its hard currency reserves are all but gone. Given that grim math, Moscow has little sympathy for complaints from Western companies. "We have a lot of pressures from various interests--and foreigners aren't the most important," snaps Foreign Relations Minister Pyotr Aven.

Until the economy stabilizes, foreign executives will find Russia a treacherous place to do business. The recent freeing of prices has made life difficult for Cummins Engine Co., which invested half a million dollars last October in a deal to ship engines to Russian truckmaker Kamaz. Now, Kamaz' factories are cutting output by a third. "The environment today looks a lot scarier than it did," says John L. Becker, director of business development at Cummins.

Two U.S. oil outfits have far more at stake. Phibro Energy Inc. in Greenwich, Conn., a unit of Salomon Inc., and Anglo-Suisse Inc. of Houston sank $100 million-plus into its White Nights venture to develop oil fields in western Siberia over the past 18 months. But virtually all their profits have been wiped out by a $6-per-barrel severance tax. Now, the Russians are mulling a dollar hike in the levy. Warns Richard Lewis, director of tax for Ernst & Young Vneshconsult in Moscow: "Seven dollars will be the nail in the coffin" for future oil investment.

MIA SNAG. That sort of harsh treatment makes even the best-heeled companies shy away. American Telephone & Telegraph Co.'s investment of less than $10 million has yielded only a few millions in sales so far in the former Soviet Union. In Poland, by contrast, AT&T is generating $100 million a year in business.

The private sector isn't alone in casting a wary eye on Russia. Faced with a yawning deficit and domestic demands, Congress has little appetite for pumping billions into an economic basket case. So far, lawmakers have balked at approving the U.S. share of the $24 billion aid package. And Yeltsin also undercut his position by disclosing that Americans captured in Vietnam may still be alive in the former Soviet Union. Congress threatened to delay aid until more details are unearthed about the fate of GIs, though Yeltsin headed off the problem with pledges of prompt disclosure.

No question, Bush got a lift from the arms cuts, among the biggest ever proposed. Unfortunately for him and Yeltsin, future dealings may not be so smooth--particularly when it comes to the far stickier issue of spending U.S. taxpayers' money in Russia.

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