Firms Study Business Prospects

WHEN a Vermont business group asked for a talk on Soviet reform recently, Michael Claudon planned an introductory lecture. To his surprise, his audience wanted far more. "I walked into a room of small and medium-sized businesses who were ready to take the first step" into the Soviet market, recalls Mr. Claudon, who heads a nonprofit organization called Geonomics Institute. "They were asking the tough kinds of questions [like]: 'Can I get an enforceable contract?

So last month, the group - which included a granite importer, the president of an electronics firm, and two real-estate agents - set off for the Soviet Union to scout out prospects.

Call it die-hard American entrepreneurship. Despite a high degree of Western skepticism, Soviet political and economic turmoil, and other obstacles, US companies are setting up shop in the maw of the Russian bear.

Just days after the Soviet Army pulled out of Lithuania, US businessman Donald Roach toured the republic's capital, Vilnius. He picked his way through tank barriers, saw wet sandbags in the parliament building, turning once-beautiful carpets white with mold. Some of the employees in his new joint venture had relatives who died in the fighting.

Yet he remains upbeat about Soviet market reform.

"It's absolutely inevitable," he says. Soviet President Mikhail "Gorbachev understands that he can't effect the change that must take place without help from the West.... He can't afford a Tiananmen Square."

Ever since the euphoric days of the late 1980s, when US businessmen tripped over each other to enter Eastern Europe and the Soviet Union, the West has grown increasingly skeptical. Prospects for reform still look bright for Hungary and, to a lesser extent, Czechoslovakia and Poland. Romania and Bulgaria appear stuck in neutral. The Soviet Union is as inscrutable as ever - and less dependable than in the past, when hard-line Communist governments paid on time.

By one estimate, the Soviets currently owe some $6 billion in unpaid bills.

The Soviets continue to attract the most attention because of their sheer size and potential: 290 million consumers, highly literate and eager for western goods, sitting atop vast reserves of mineral wealth. "The Soviet Union is the last major market left on earth," says Kent Moors, a director of the American-Soviet exchange center at Duquesne University here in Pittsburgh.

But bureaucratic delays, conflicts between Moscow and the republics and between hard-liners and reformers made US businesses hesitant. Most of the early joint ventures didn't work.

Last month, Mr. Moors' center issued a gloomy report, saying that 65 percent of US-Soviet joint ventures would fail within a year after start-up unless something changed. The report forecast new joint venture activity this year would equal only one-third the level of 1988.

Recent reforms suggested by Mr. Gorbachev have buoyed Moors' hopes. "If these reforms get introduced and passed by the Soviets, then it's a different ballgame," he says. The Soviets are aware of the problems and are almost certain to enact new laws to correct the problems, he believes.

But other US businesses are taking a wait-and-see attitude. Many academic experts, perhaps a majority of them, are also pessimistic.

"Business executives tend to be fairly innocent about politics," says Josef Brada, professor of economics and Soviet watcher at Arizona State University. "People have to understand that there's a political risk there."

Numerous risks

There are more basic risks too.

For example: If your Moscow joint venture sells a widget to Sverdlovsk, how will you get paid? Checks and credit cards are virtually nonexistent. Ordinary Soviet citizens pay cash at the appropriate ministry or shop. Businesses can transfer money from one bank to another, but it takes weeks instead of hours.

Sometimes, the bank won't even inform its clients when the transfer has arrived, says Paul Hoffman, a US-Soviet liaison at Arthur Andersen. At times the consulting firm's Moscow office has had to call its clients to find out whether a payment was sent.

Parts of the infrastructure are in poor shape. Robert Thompson, dean of Purdue University's agriculture school, recalls visiting an ultramodern Soviet dairy processor. The milk was putrid because it hadn't been refrigerated properly before reaching the plant. The Soviets admit they lost a third of their crop because they don't have the necessary transportation to get it off the farms.

So agriculture reformers are grappling with two US models, Mr. Thompson says. Keep the large farms and try to make them work more like California's huge corporate farms; or break up the farms into family-owned, Midwest-style operations. Problem: The Soviet machinery is generally too big for small farms.

Finally, there's the ruble problem. It can't be readily converted into other currency. Thus, US-Soviet joint ventures are making ruble profits that are essentially worthless in the rest of the world.

Some companies have gotten around the problem by bartering. PepsiCo Inc. trades its soft drinks for vodka, which it exports to the West for hard currency. At the other extreme, Polaroid Corporation sells its new Soviet-made 635 cameras in Moscow for rubles.

The Soviet market requires patience, says George Hamilton, the company's international business development director. "We presumed from the very beginning that that it wasn't going to be easy." But once these smaller ventures prove successful, "people come to you with opportunities because you have built up a level of trust in the current environment.... The doors are opening."

Mr. Roach has taken the middle road with his joint venture, which will start selling precision measuring equipment later this year. The mechanical, Soviet-made machine will sell for rubles; the western electronics inside will sell for hard currency. That should make his machines cheaper than European and Japanese models selling for hard currency only.

Although Western interest in the Soviet Union is down from what it was three years ago, it's hard to tell if interest is rising again. Claudon sees a sharp upturn. His Geonomics Institute is picking up five or more new members a week compared with only three to four a month last fall.

On the other hand, consultant Frank O'Neill has seen inquiries fall 50 percent. Mr. Hoffman of Arthur Andersen says interest is down in New York but climbing in the company's Moscow office. Arthur Andersen plans to double its Moscow staff in the next year. It just announced the opening of its second Soviet office, in Leningrad.

Nothing could rekindle the rush to the Soviet Union like an oil boom, Hoffman adds. For more than two years a consortium of US corporations led by Chevron has been negotiating for drilling rights in Siberia. Should the consortium succeed, a host of smaller drilling products and service firms would follow.

Long-term view

So far, though, the patient and focused approach of smaller ventures has brought the most success, businessmen and consultants agree. This long-term perspective stands in sharp contrast to the usual stereotype of the short-term American businessman.

"We are long-term players," says Leif Tomasson, a project manager for Scott-European Corporation. The company represents US firms in the Soviet Union and has Soviet joint ventures of its own that make, among other things, protective gloves.

"I think we are going to get caught flat-footed five or 10 years from now when things are going to be much better over there," says Raymond Agran, a Philadelphia attorney representing clients involved in Soviet joint ventures. "Then the Soviet people that you are negotiating with will say: 'Where were you when we needed you?