Russians Seek US Investors To Aid Arms Industry Switch

RUSSIAN business leaders, convinced that US investment is key to converting their defense industry to civilian production, are trying to overcome a variety of communist legacies inhibiting the flow of dollars.

Business and government leaders from both countries cite accusations, misperceptions, and a mutual lack of respect as reasons private investment has come so slowly to the former Soviet Union.

"One obstacle has been a lack of faith, because we have had very little success" in Russia so far, says Katherine Wittneben, president of the Enterprise Development Information Center in Alexandria, Va., and a speaker at a recent conference here on Russian defense conversion.

Although the Soviet Union announced plans to convert its military-industrial complex to civilian production in 1988, so far the process has been slow and haphazard. The need for speedier conversion is urgent, said Russian and American economists, business leaders, and defense experts at the meeting, sponsored by the nonprofit Geonomics Institute.

"In two to three years defense orders will fall to levels where defense production will not be profitable," says Alexander Kononenko, a member of the Russian Coordinating Council for the military.

"We need to find free money" for defense conversion, adds Valerian Sobolev of the Volgograd Regional Administration.

American business leaders complained at the conference of the acute "regionalization" of Russian defense plants, which reduces the efficiency of transporting raw materials from suppliers and goods to consumers, as well as a sense of general lawlessness pervasive in Russia.

And the Russians' newfound profit motive can put off US entrepreneurs. Potential investors have been asked to pay admission fees to visit factories, says Jeffrey Moore, director of European programs for Grumman International, who has encountered the phenomenon personally. "This kind of thing has to stop before [US investment] can go forward," he says.

For their part, Russians complained that visiting Americans often are not serious investors, but come on "tire-kicking" expeditions. Others were critical of investors who replace Russian managers with Americans and those who raze or abandon Russian factories to build new ones.

STICKING with either products or markets a company understands is essential to any successful conversion away from defense manufacturing, Ms. Wittneben says.

The most successful companies in a study she conducted on conversion were those that sold new products into their old markets or versions of their products to new markets.

Adds Grumman's Moore: "It's a mistake to ask high-tech defense companies to give up the driving force of technology; realize this and conversion won't be the dirty word [to defense manufacturers] that it used to be." Citing Grumman's experience building buses in the 1970s, Mr. Moore says employees and executives were worried because conversion "meant moving from products and markets we understood to products and markets we didn't understand."

Defense industries in general have difficulty understanding marketing to consumers, Moore adds. Russian defense enterprises have always had only the government to answer to in designing and building products and are not prepared for market competition.

The experience of some American businesspeople now active in Russia suggests that rewards can await some entrepeneurs. Mark Mariska, for example, has a growing business selling Avon cosmetics in Russia. With the profits from this business, he plans to start an insurance company in the Kuzbass coal mining region.