Non-Soviet businesses face major challenges in dealing with the Soviet bureaucracy and nonconvertibility of the ruble.
One high ranking Soviet economist believes the size of the bureaucracy is expanding to accommodate more officials involved in joint venture negotiations. U.S. officials believe both countries' bureaucracies need fine tuning.
The president of a West German company that formed a Soviet machine tool joint venture says it is hard to find anyone in the Soviet bureaucracy to make decisions and has lost bank credit in his own country because of the sluggishness.
Meanwhile, the Soviets are moving cautiously on several fronts toward ruble convertibility.
Under an agreement signed in Budapest in late March, Soviet-Hungarian trade is to be counted in U.S. dollars and other hard currency instead of rubles starting in 1991.
The agreement calls for Hungary's 800 million ruble trade surplus to be converted to U.S. dollars with the ruble rated at 92 cents.
The Soviets also plan to expand trade with East Germany in convertible currency at world market prices in 1991, East Germany's foreign trade minister said in Berlin. The Soviets and East and West Germans will meet in Moscow this month to discuss mutual trade interests.
SOVIET BUREAUCRACY
Stanislav Yakorlevich Maslov, U.S.S.R. trade representative in Great Britain, said the number of Soviet contacts for non-Soviet joint venture candidates is growing.
In an interview last month with the Soviet trade union daily newspaper Trud, Maslov said non-Soviet businessmen for many years dealt with official Soviet foreign trade associations with which they were well acquainted.
"Now," he said, "a multitude of Soviet trading organizations run by new people completely unknown in the West have appeared...
"Whereas in London one can for a small price easily obtain information regarding the main details of any British firm, its solvency, and general financial condition, in the U.S.S.R. there is simply nobody to provide such information. Thus, business isn't conducted."
Charles E. Hugel, chairman of the National Foreign Trade Council, Washington, D.C., said U.S. companies need relief from the size and inaccessibility of Soviet bureaucracy, from centralization of Soviet ministries with which American companies must deal, and from the need to obtain clearances from multiple U.S. agencies and to deal as well with Soviet republic authorities.
The Soviets should be strongly encouraged to set up a coordinating mechanism, ideally one stop shopping, to deal with outside companies, said Hugel, chairman of Asea Brown Boveri Inc., Stamford, Conn.
"Even the process of establishing an office in the Soviet Union, a very important issue for companies headquartered at much greater distance from Moscow than the West Europeans, has been time consuming and cumbersome," he said.
A WEST GERMAN'S STORY
Rainer Roland Lang, president of Heinemann of West Germany, underscored the difficulty in dealing with the Soviet bureaucracy in an interview published in the Soviet daily newspaper Pravda late last February.
Heinemann formed the Khomatech joint venture with the Moscow Production Association's Ordzhonikidze Machine Tool Factory. The venture turned a profit quickly, earning 3 million rubles in 1989 and expected to earn about 9 million rubles this year.
Even so, Lang expressed deep frustration.
"I can't find people to whom I can turn for help in solving our problems," Pravda quoted the Heinemann official as saying. "The difficulty isn't in your bureaucracy as such. Hiding behind the concept of bureaucracy, in my opinion, are people who in general don't want to make decisions."
Lang blamed a "lack of convergence of interests of administrators and producers."
He contacted the U.S.S.R. Council of Ministers' Machine Building Bureau for 3-4 months about investing a further 150 million marks in the Soviet Union and got no intelligible answers.
He said that Stankoimport (All-Union Machine Tool Association of the U.S.S.R.'s Ministry of Foreign Trade) failed to pay 10 million marks that it owed for the past 6 months.
Stankoimport owes Lang a total of 14 million marks, the first 6 million mark payment of which should have been turned over in September 1989 and the remainder last January, he said.
"As a result, (West Germany's) Deutsche Bank is refusing to grant me credit."
Lang expressed reluctance to take legal action against Stankoimport because that would make West German businessmen even less inclined to cooperate with the Soviet Union.
Lang said he could get no assistance from the Ministry of the Machine Tool Industry.
RUBLE CONVERTIBILITY
The merits of ruble convertibility are beyond doubt, and the Soviets are moving cautiously toward it, Nikolai Shefov, a Soviet candidate of science (economics) wrote in last month's issue of Soviet Life magazine.
"The first step toward convertibility was the decision of the U.S.S.R. Council of Ministers on a 10-fold reduction in the exchange rate of the ruble against the dollar and other freely convertible currencies," Shefov wrote.
That action, taken in November 1989, applies only to nontrade operations such as sales of currency to Soviet citizens going abroad on personal business or vacations and purchase of such currencies by Soviet banks.
The nontrade exchange rate is about 6.25 rubles/U.S. dollar.
The old exchange rate for the ruble remains valid for foreign trade operations.
Nontrade operations make up less than 1% of Soviet currency turnover.
The Politburo voted in late 1988 to accomplish convertibility by 2000, but U.S. economists expect comprehensive changes in the early 1990S.
Shefov said the present objective is to saturate the Soviet market so rubles could be easily converted into any goods. The ruble's purchasing power varies regionally because workers may not always have equal access to the limited supply of commodities.
Implications of backing the ruble with Soviet gold reserves are illustrated by last week's drop of more than $20/oz in gold prices.
Furthermore, various reports place the combined value of Soviet savings accounts at 300-450 billion rubles, easily enough to buy out estimated Soviet gold reserves of about 2,000 metric tons.
Shefov points out that ruble stability also depends on worker productivity, industrial performance, and supply of quality products.
OTHER RUBLE OPTIONS
Two other joint venture repatriation options might be considered during U.S.-Soviet trade talks, Hugel said.
One: The U.S. in a trade agreement could seek a Soviet commitment to allocate a certain percent of foreign exchange for direct purchase of U.S. products.
A formula could be developed whereby a percent of the amount of new foreign exchange the Soviets earn in the U.S. market, as a result of most favored nation status if granted, would be dedicated to buying U.S. goods and services.
Two: An import substitution scheme could be negotiated under which a U.S. partner in a joint venture could be given credit by the Soviet government for new goods produced in the U.S.S.R. for the internal market that displace products currently imported into the U.S.S.R.
There should be an official commitment to return to the joint venture the aftertax profits earned on domestic sales, therefore not requiring Soviet hard currency resources.
Because the ruble is nonconvertible, joint venture parties should "carefully study the necessary ratio between earnings in nonconvertible and foreign currency to ensure that the western partner can effect the expected transfer of profits," said Carol Xueref, International Chamber of Commerce, Paris.
BANKING ITEMS
A joint venture's monetary assets can be held in rubles or foreign currency accounts with Vneshneconombank (Bank for Foreign Economic Relations) or a national network of specialized banks.
The interest paid on foreign currency accounts will depend on world market rates, and for ruble accounts on Gosbank rates and conditions, said Xueref.
Hugel pointed out that foreign companies cannot establish ruble bank accounts in the Soviet Union.
The Soviets should allow ruble and foreign exchange bank accounts because companies need to make purchases within the U.S.S.R. as well as import, Hugel said.
Further, the Soviet government is becoming more open but still provides almost no information on its convertible currency, trade, foreign assets and liabilities, or reserves.
"These and other economic and financial statistics are essential in day to day business relations, including credit decisions, risk analysis, and so on," Hugel said.
INVESTMENT SPLIT
There is no requirement that a western investor in a Soviet joint venture make his investment in cash, said Eugene E. Madara, vice-president and chief counsel, engineering and process technology, Combustion Engineering Inc., Stamford.
The Soviet partner at first will try to require the western partner to invest in cash immediately while it invests "in kind" in the form of land use rights, a vacant building, manufacturing equipment, and the like.
"The problem with in-kind capitalization, regardless of who is contributing, is valuation," Madara said. "You have to be flexible in reaching a reasonable determination.
"This is one of the most serious problems with establishing a western-Soviet joint venture and must be resolved prior to signing any agreement.
"Contribution schedule is a matter for debate and agreement before the first contribution is made. The most practical method is to tie the schedule to achievement of milestones in the agreed business plan."
Both parties must be flexible and carefully consider what combination of equity and debt makes the most sense, Madara said.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
