Russia to US: Don't Shun Our High Tech

IT'S a little-known fact that irks many Moscow officials: United States private investment in Russia is hardly greater than in tiny Estonia, 1/15th the size of its former ruler.

But just as worrying to a swelling chorus of critics here, the lion's share of US investments so far has been targeted at extracting Russia's raw materials, while sophisticated industries are faltering for lack of cash.

Experts in the US and Russia disagree over why this is so. But the pattern of US investment is fueling politically explosive resentment that Washington has not put its money where its mouth is in helping to build a sound free-market economy.

Such sentiments could prove as dangerous to US-Russian ties as missiles once were. In Moscow's new cauldron of open politics, beleaguered free-market democrats are finding it harder to fight off ultranationalists who warn that the West cannot be trusted.

The effect of US investments so far has been to ''fund Russia's conversion into a banana republic,'' charges Irina Khakamada, a successful young businesswoman who sits in the Duma (lower house of parliament) as a member of the ultra-free-market December 12 faction.

''This will have very negative consequences'' for pro-Western politicians here if the trend continues, Ms. Khakamada says.

Many US investors, concerned about a lack of legal protection for foreign investments, have balked at entering Russia, while still entering other former Communist-run economies that have far more experience with capitalism.

''The pace of US investment has been very slow,'' concedes Eugene Lawson, president of the US-Russia Business Council, which represents about 95 percent of US firms doing business in Russia. But there is ''huge investment'' waiting in the wings, he says, pending Russia's passage of investment laws and tax reforms.

Russians -- not just nationalists -- are unconvinced of the US commitment, however. With no sign that the US government is lighting the way for private investors into the riskier reaches of the Russian economy, official rhetoric in Washington about US partnership with the new Russia is ringing increasingly hollow here.

The invisible helping hand

Since the Soviet Union collapsed in December 1991, the bedrock of declared US policy toward the 15 former republics has been to foster prosperous economies that would underpin democratic and peaceful governments. Russians, reformist democrats in particular, took US statements of commitment to a free-market Russia as a guaranteed helping hand.

They have been deeply disappointed. The US is the world's top private investor in Russia, but the amount -- an estimated $2 billion in direct investment since 1991 -- is ''very modest ... very weak,'' says Eduard Gryaznov, a Russian investment official. And 77.8 percent of the $1.2 billion foreign direct investment in dollars last year went to tap Russia's prodigious oil and gas supplies.

It is against this background that the Clinton administration will be making a crucial decision in the next two months, which Russia will take as a signal of how far the US government is willing to help develop high-tech Russian industry and encourage private investors to do likewise.

The US Export-Import Bank (known as Ex-Im) will rule on whether to guarantee a $1 billion loan to Aeroflot Russian International Airlines. Aeroflot would use the guarantee to obtain financing to buy 20 Russian-built jetliners, the Ilyushin 96M, whose US-made engines and avionics make the plane Russia's first Western-caliber intercontinental passenger aircraft.

The 300-seat plane would have engines supplied by the Pratt & Whitney division of United Technologies Corporation and avionics from the Rockwell International Corporation's Collins unit.

The decision will be ''a significant test of relations between the two countries and between very senior people on both sides,'' says Alexander Roubtsov. He is managing director of Ernst & Young Vneshconsult, the US accounting firm's consulting arm in Russia, which carried out a feasibility study on the new plane.

If the Ex-Im Bank rules against financing the project, politically ''it will be seen as a signal that Russia is not an equal partner, that the honeymoon is over,'' warns Vladimir Kossov, deputy minister of the economy and Russia's top foreign investment official.

Amid prophecies of political fallout, Ex-Im insists its first priority is the bottom line. ''We are not an aid agency dictated by foreign policy,'' says a senior Ex-Im official. ''We operate on credit ratings and risk and our chances of repayment,'' a condition set by Congress.

''We are not going to sign on the dotted line because of politics,'' the senior official adds.

Yet this reasoning goes only so far in Moscow, where Ex-Im's decision is likely to be seen as an indicator of US policy. ''At the end of the day it's a political decision,'' says Mr. Roubtsov. ''Do you want to support Russia?''

Support for Russia runs into even more difficulties when it involves angering major US corporations. Boeing Corporation has come out against the deal, saying it would aid a potential foreign competitor.

In a letter in March to Commerce Secretary Ron Brown, US trade representative Mickey Kantor, a nonvoting member of Ex-Im's board, opposed Ex-Im involvement in the project.

Applying pressure from the other side, Russian Prime Minister Viktor Chernomyrdin has been lobbying US officials on behalf of the deal. He made it clear in a recent letter to Vice President Al Gore that Moscow views the Ilyushin 96M aircraft as a top priority -- Russia's first high-tech commercially valuable project since Washington began offering significant economic aid to Moscow.

Russia may have more leverage than other countries when it asks for economic breaks that can keep its government stable. No one in the US wants to see the current system collapse.

And a decision against financing the Ilyushin ''would certainly be another arrow in the quiver of nationalists who have been saying that whenever Russia tries to be good at something, America blocks it,'' says a senior Western diplomat.

Greenbacks on the starting block

US investors insist, meanwhile, that they have buckets of dollars waiting to flood Russia -- and that the ball is in Moscow's court. ''US investors are ready to put $40 billion to $50 billion in Russia's oil sector alone,'' says Mr. Lawson of the US-Russia Business Council, but they are waiting for Russian legislation that would make such investment safe.

Though the Russian government is anxious to promote foreign investment in the energy sector to generate badly needed foreign exchange, parliament -- where nationalist sentiments run high -- has not yet approved laws on production sharing.

The Russians are ''jealously guarding'' their oil and gas as a national treasure, not to be pillaged by foreigners, says Lawson.

But Moscow observers note that the US investment poised to go is not necessarily aimed at high-tech sectors, encouraging accusations that Washington is trying to hold back its technological development.

President Clinton further fueled such charges at last week's summit meeting with President Boris Yeltsin when he pressured Moscow to desist from another high-tech project, the $1 billion sale of nuclear reactors to Iran.

''The American concept is that Russia should gradually transform itself into a raw-materials appendix of the Group of Seven'' industrialized capitalist countries, charges Vladimir Polevanov, who was sacked after a brief tenure as Russia's privatization chief for his anti-Western stance.

Less suspicious analysts say it is natural that private investors should gravitate toward the energy and service sectors rather than long-term industrial projects, because that is where returns are highest.

Oil is guaranteed to earn dollars on the world market, while trading, services, and consumer goods ''were underdeveloped sectors during the Soviet period, so there are higher margins to be made now,'' explains Kakha Bendukidze, a prominent Russian businessman.

But not only private foreign investors have shied away from high-tech enterprises. So have official US funds designed to bolster the Russian economy.

*Of the $300 million that Congress mandated in 1993 to set up the Russian-American Enterprise Fund, only $1.3 million has been disbursed -- to a women's skirt manufacturer and a small wood-processing company.

*Of the $1.3 billion in financing and insurance that Ex-Im Bank provided to support US exports to Russia in 1994, more than 80 percent was directed by Ex-Im to the oil and gas sector.

*Of the $400 million slated for defense conversion projects in Russia last year under the Cooperative Threat Reduction Program (known as Nunn-Lugar), only $40 million has been spent.

*The Overseas Private Investment Corporation (OPIC), a government agency that insures US investors abroad and finances projects itself, directed the bulk of its resources last year to raw-materials exploitation and to two big projects that Mars and Coca-Cola are setting up in the candy and soft-drinks market.

An example of US aid used in Russia came last month when US Defense Secretary William Perry visited a formerly top-secret Soviet weapons plant to inaugurate a civilian project.

Amid much fanfare, Mr. Perry praised the way a US company, Hearing Aids International, had used Nunn-Lugar funds and its own money to convert part of the ISTOK arms factory in Fryazino, outside Moscow, to peaceful use.

Russian Deputy Defense Minister Andrei Kokoshin was on hand, stressing that ''one of the most important things for us is not to lose the high technological level that exists in the defense industry.''

As they spoke, white-coated women at a nearby production line bent over microscopes, assembling clunky, 1950s-style hearing aids that company officials said made no use at all of the advanced microwave technology that ISTOK had developed for its missile-guidance system.

Perry said nothing, however, about another ISTOK product also on display, a state-of-the-art machine that supplies power to satellite earth stations, being made and sold worldwide in collaboration with a private US investor, Farid Rafiee.

''The US government usually won't fund high-tech related projects so we are funding this ourselves,'' said Mr. Rafiee, adding that he had approached official US agencies in search of backing for his Russian investments, but so far without success.

''They are not looking for competition,'' he speculated.

To get US government support for an investment project, he argued, ''you have to develop a product that is going to be marketed in Russia, then in the CIS [Commonwealth of Independent States], then in Asia or Eastern Europe, but least of all in the US. And that puts the product into the low-tech category.''

Looking out for US jobs

Some Russian politicians point to this as evidence of a deliberate US policy to keep Russia down. But US officials point out that agencies from Ex-Im to OPIC are bound by their charters not to use US taxpayers' money to promote foreign competition that might endanger jobs at home.

If US agencies are hamstrung when it comes to high-tech investments, private investors are simply too frightened of the uncertain Russian market.

''People are reluctant to commit capital with long-term payback in an environment where rules can change so fast and things could go wrong,'' says Michael Calvey, an American who manages a $200 million investment fund in ex-Soviet republics. ''Russia is still in the danger zone as far as a lot of senior executives are concerned,'' he adds.

Key laws encouraging foreign investment still await Duma approval. Until investors can be sure that the rules of the game will not change with every new minister or election, Russia will not be attractive for people seeking opportunities for their money.

At the same time, officials here say they know that Russia cannot look to foreign investment as a panacea: ''We clearly understand that we will have to solve our problems ourselves'' says Deputy Economy Minister Kossov.

But the government has almost no funds to invest in domestic industry, and local banks are absolute beginners. Industries likely to create a modern industrial economy in the next century are gasping for investment.

That is because almost all high-tech developments were funded by the military, which can no longer support them.

''The risk is really dangerous'' that Russia could fall irretrievably behind international competition in areas such as electronics and biotechnology, says Oleg Kiselyov, who is on the board of the Congress-funded Russian-American Enterprise Fund.

That prospect, and a sense that the US is not helping as much as it might to avert it out of a fear of competition, is fuelling ''a dangerous anti-Western mood among our capitalists'' says Ms. Khakamada in her Duma office.

Where once there was a hope -- perhaps naive -- that the US would extend its hand to restore a fallen giant's strength, now ''more and more there is a feeling that we have a huge country with great potential and we are not going to bow to anyone. A childish insult complex is emerging,'' she warns.

Holding out hope

Still, confidence in Washington's good faith is not extinguished even in unlikely breasts.

''There are certain circles in the United States that would like to see Russia become a third-world country, I know,'' argues Communist Party chief Gennady Zyuganov. ''But for three centuries Russia has been a geopolitical fulcrum between East and West, and I think it is more advantageous to have Russia developed and quiet and strong.''

''Russia with a weak economy but strong nuclear muscles is a dangerous country'' where radical national sentiments could flourish and threaten the world, adds Mr. Kiselyov.

Western governments should perhaps reconsider whether Russian economic competition would be such a bad thing after all, says Iosif Bakaleynik, the first post-Soviet to graduate from Harvard Business School's MBA program. He is now chairman of the vast Vladimir Tractor Factory, 120 miles East of Moscow.

Though the US-funded Marshall Plan after World War II helped make competitive economic powerhouses out of Germany and Japan, ''look what happened after World War I, when Germany was ruined,'' Mr. Bakaleynik points out.

''In the end, would you rather have German cars on US roads causing problems for General Motors, or German tanks on the streets of Paris?'' he asks.

''Do you want [extremists] capitalizing on wounded national pride? Because if things go wrong in Russia, they will go wrong in all of Europe,'' he adds.

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