The Case for Doing Business in Russia

UNITED States multinational corporations that are not actively exploring investment opportunities in the former Soviet Union are making a mistake! The Commonwealth of Independent States - or whatever that vast area encompassing 11 time zones is called in the future - offers some of the best opportunities in the world for investment.

That statement is not inconsistent with all that has been said about the perils of exploring business opportunities in Russia and the other republics of the former Soviet Union. Potential joint- venture partners are not rated by a local equivalent of Dun & Bradstreet; if they were, many would be classified somewhere between Ivan Boesky and Charles Keating. In addition, many potential ventures are not feasible because too many raw materials or components of sufficient quality cannot be obtained domestical ly, and would need to be imported in exchange for hard currency. Other ventures do not make sense because there is no way to repatriate anything but rubles.

At best, investing in the former Soviet Union is a high-risk undertaking that often will not yield near-term profits. Success requires management that is patient and sufficiently familiar with the culture to negotiate successfully. Also, the business strategy must match what the US company can offer with the unique market in the republics.

A few companies have been very successful. Fracmaster and Royal Dutch Shell struck a deal to provide the technology and capital to increase oil production in a Siberian oil field in return for being able to export 49 percent of the increased production, which currently is about 10,000 barrels a day. Tambrands built a plant to make feminine hygiene products in Kiev that has sold all of its production without any advertising. The company takes out its profits in high-grade cotton - a deal Tambrands was abl e to negotiate since women there who now use tampons previously used cotton for the same purpose.

There are other demonstrated models of how to enter the former Soviet Union. But for many companies the best strategy may be to take a path that has not yet been tried. Russia, or any other republic that has no trade barriers with Russia, for many years will be a very large market with little competition. This combination, which does not exist anywhere else in the world, provides foreign investors with two types of unique opportunities.

The first is to build production facilities for a well-established product both to supply the domestic market and to serve as a source of low-cost exports to the West. The lower labor costs in Russia and the other republics will be helpful, but the key to this opportunity is that the product can be sold at a relatively high price in the domestic market, thus allowing 20 to 40 percent of the output to be sold for hard currency in export markets at a price below that of competitive products. This strategy is one that many Japanese companies, taking advantage of a large protected Japanese market, have used with great success.

Second, Russia offers a unique opportunity for commercializing new consumer products. New products, even when successful, usually incur heavy losses for several years because of low sales and high marketing costs. The absence of competition in Russia would allow a Western company to introduce a new product there without a period of low sales and high marketing costs while the product moved down the experience curve. One such product would be processed food in plastic, shelf-stable packaging.

There are a wide variety of risks to investment in the former Soviet Union. Enormous changes in the laws that are important to business investment will occur in the next few years. However, the trend in changes has been to make investment more attractive to foreigners, and the recent hiring of Goldman, Sachs & Co. as the investment banker for Russia indicates this trend will continue. And for multinationals there is a risk to waiting; a competitor may become well-established.