For Investors, `After One Step Backward, It's Two Steps Forward'Richard A. Melcher
As the tanks rolled into Moscow on Aug. 19, John Mitchell dispatched a message to his colleagues at Imperial Chemical Industries PLC: All visits to the Soviet Union were canceled. Families of employees there were ordered to leave the country. As chairman of ICI East Europe, he also called a halt to several joint ventures that he had been negotiating with the Soviets.
But 48 hours later, Mitchell did an about-face. As the tanks retreated and reform-minded politicians appeared to regain control, Mitchell overruled his earlier messages and prepared to resume joint-venture talks. "After one step backward, it's two steps forward to a free market," he says.
STILL SHAKY. Western executives are elated to see the reformers back in charge. With the hard-liners eclipsed, the prospects for accelerating the move to a market economy are looking more promising than ever. "The positive development is that the reforms will be much faster and much more radical," says Alex Ustraykh, vice-president of Bankers Trust Co. in London. At stake are some 3,400 joint ventures with Soviet enterprises, valued at tens of billions of dollars (table).
Since Mikhail Gorbachev came to power in 1985, scores of Western investors thought they had gotten used to weathering upheaval in the Soviet Union. But the coup gave them a case of the jitters they won't forget for a long time. The promise that Gorbachev had offered of sweeping economic reforms bolstered by infusions of foreign investment seemed dashed by the emergence of the hard-line conservatives. Now, in the wake of the coup's quick collapse, many investors remain shaky. "It's still a high-risk situation," says John J. Goossens, president of Belgium's Alcatel Bell, which has three joint ventures in the Soviet Union. "The whole thing could happen again in six months."
To win back confidence, Gorbachev and Yeltsin must send strong signals that the rules of the game will change for good. Foreign investors are looking for swift moves toward ruble convertibility and privatization. Perhaps most important is the proposed landmark union treaty that provoked the coup in the first place. Once signed, that agreement will go a long way toward eliminating the jurisdictional disputes between the central government and republics that have bedeviled business executives in the past. It will legalize private property and clear up ownership rights of natural resources. After years of confusion, Western executives will finally know the right person to deal with.
That will be welcomed by Alcatel Bell. The company lost six months over delays in locating a plant to produce sophisticated telephone switches in Leningrad. "There were constant disputes between the Soviet PTT, the army, and the city of Leningrad over who owned what," recalls Goossens.
SNOWBALL EFFECT. The biggest impact will be felt in Soviet oil fields. Dozens of Western companies have extended offers to help the Soviets tap their vast oil reserves by bringing in technology and knowhow. To pay off $64 billion in debt, the Soviets desperately need to get the new fields pumping--and generating hard currency. The biggest project by far is Chevron's multibillion-dollar proposal to develop the giant Tenghiz oil field in Kazakhstan. Four years in negotiation, the project has been stalled by endless wrangling over ownership of fields and machinery and by disputes between ministry officials in Moscow and those in the republics over control. Assuming the treaty is signed, James H. Giffen, president of the American Trade Consortium, a group of blue-chip multinationals including Chevron, predicts that the deal could go through "by the end of the year or sooner."
That should have a snowball effect on other deals in the oil patch. Only hours after the army pulled its tanks out of central Moscow, business was hopping at Professional Geophysics Inc., a consulting outfit in Houston that sells seismographic information. Six top officials from five Soviet republics were sending telexes confirming plans to attend the company's next seminar on the Soviet Union. "They didn't waste any time," says Thomas A. Russell, the company's chairman. "I look for things to really open up now."
The mood at Fiat's headquarters in Turin is also upbeat. Fiat's ground-breaking deal, worth $1.5 billion, would be the first major privatization of Soviet industry. Fiat gets a 30% stake in Soviet carmaker VAZ in return for cranking out 300,000 midsize cars. But Fiat's bullishness goes beyond sheer profit. "This is history at stake," says Renato Ruggiero, who oversees Fiat's international relations. "Everybody is going to be eager to help the Russians in a much, much more substantial way."
Smaller companies, which have rushed in to the Soviet Union to fill niches in everything from restaurants to retailing, are encouraged. If the new treaty goes through and the Soviet economy is decentralized, the impact will be felt first at the grass roots. Take Bostonian Henry Quinlan, who has been selling U. S. consumer goods, from Kellogg's Cornflakes to Lands' End sportswear, at his American Stores in Moscow and Kemerovo. Soviet enterprises buy his goods to use as payment for employees. "Now that the bad guys aren't in the way," Quinlan says, he is set to open 15 to 20 new stores across the country. Gorbachev will be under pressure to drop trade restrictions and speed up access to hard currency. "That'll be very good for business," he says.
The financial spigots that suddenly went dry after the coup have opened up again just as quickly. On Aug. 21, just hours after the coup toppled, President Bush held out the first signs that the Group of Seven industrial nations might step forward with further assistance. The new European Bank for Reconstruction & Development, created to back new enterprises in eastern Europe and the Soviet Union, had shut off all aid to the Soviets. Now, everything is back on track. "The West has a greater incentive to step in now," says Ronald Freeman, the bank's first vice-president. "It is time to rethink the constraints on Soviet lending."
Companies that have been in Moscow for years barely blinked during the coup. "It was business as usual at McDonald's," says Peter Beresford, vice-president of McDonalds Restaurants of Canada Ltd. The company is sticking to plans for an office building in downtown Moscow and 20 more restaurants. Others, such as Pepsico, U. S. food-machinery maker FMC Corp., and British engineering giant John Brown PLC, remained sanguine throughout the upheaval. "We have acquired a certain way of doing business in the Soviet Union in times of turmoil and calm," says FMC's Nha Hoang, director of international business. He says FMC lined up financing in August for $12 million in pea- and tomato-processing machinery to Moldavia.
If Western executives were baffled by the Soviet turmoil, consider the plight of Roger Corman, king of Hollywood's B-movies. He was producing a thriller called Red Target: The Plot to Kill Gorbachev. The day of the coup, he renamed it, Red Target: The Plot to Overthrow the Soviet Union. Will Corman revert to the old title? His staff says no. They'll stick with the new title, thank you, and hope for the best. With the good guys back in power, the real-life drama at least seems headed for a happy ending.
SOVIET BUSINESS DEALS IN THE WORKS Company Project ALCATEL France A $2.8 billion contract to supply advanced digital telephone switches CARROLL GROUP Britain Construction of a $250 million hotel/trade center CHEVRON U.S. Exploration and development of the Tenghiz oil field, with reserves 2.5 times those of Alaska's Prudhoe Bay FIAT Italy A $1.5 billion contract to assemble 300,000 autos a year, a third of them for export GENERAL MOTORS U.S. A five-year deal to supply auto parts worth $1 billion IBM U.S. Providing 40,000 PCs for schools DAIMLER BENZ Germany Contracting for a $140 million plant to build buses DATA: BW ROBERT TONSING/WHITE TIGER PHOTO