US-Soviet joint ventures: big promise, small start
New York — When the world's two superpowers form business ventures, ``small is beautiful'' seems to be the rule. In the two years since the Soviet Union legalized joint ventures, only about a dozen American companies have started operations with a Soviet partner. The modest deals range from engineering to fast foods. No manufacturing has begun.
But businessmen and lawyers involved in negotiations say the character of United States-Soviet joint ventures will change during 1989. Corporate giants like Combustion Engineering, Occidental Petroleum, RJR-Nabisco, and Kodak are close to concluding deals to establish manufacturing facilities. Dozens of other companies are in negotiations. ``Joint ventures with Americans could reach 50 by this time next year,'' says Sarah Carey, a Washington, D.C., lawyer who is negotiating 12 prospective deals.
Soviet leaders are promoting joint ventures to learn Western business and managerial skills that might be used for economic modernization. They also hope the partnerships will improve access to Western technology, boost Soviet exports, and even improve consumer goods production, which could shore up support for Mikhail Gorbachev's policy of perestroika, or restructuring.
The US projects begun so far only nibble around the edges of those grand plans, and critics like former Pentagon official Richard Perle say such problems as lack of currency convertibility (the Soviet ruble cannot be freely changed into dollars) and bureaucratic red tape will continue to block further progress.
Many lawyers and businessmen disagree, saying the Soviets are working to remove administrative barriers to joint ventures.
``I think the Soviets are moving much faster than our government and academic analysts perceive,'' says John Cavanaugh, an adviser on Soviet projects. Soviet officials recently announced that foreign partners will soon be granted the right to majority ownership of joint ventures.
Jack Brougher, a Soviet expert at the US Department of Commerce, says the approximately 100 joint ventures the Soviets have signed is within the range of their original plans. ``The program actually seems to be going faster than many Soviet leaders had planned.''
The vast majority of deals are with European companies. The small number of US projects seem to result not so much from problems in the Soviet program as from continuing sluggishness of US-Soviet economic ties.
The European companies have been helped by government policies that encourage trade and lending to the Soviet Union. West German Chancellor Helmut Kohl took 40 top executives with him on a recent visit to Moscow, and European banks recently lined up several billion dollars in lines of credit for the Soviet Union.
``When a German business leader makes a deal with the Soviet Union, he is called in to Kohl's office and given a dozen roses,'' says Dwayne Andreas, chairman of Archer-Daniels-Midland. ``When an American company makes a deal, we are called on the carpet by the Defense Department.''
Jim Verrant, a vice-president of Honeywell, says American companies and their Soviet counterparts have been deliberately cautious. ``We are trying to find our way and decide how best to work together.'' Honeywell is now considering expansion of its engineering joint venture with the Ministry of Mineral Fertilizers to include manufacturing of sophisticated instruments.
The biggest roadblock before the joint-venture program is the Soviet shortage of foreign exchange. The price of oil, the most important Soviet export, has fallen dramatically in recent months. Competition for foreign exchange among Soviet ministries is intense.
Soviet leaders would like to relieve the country's dependence on raw materials exports by making some of the joint ventures export-oriented. But most American companies want to sell to the Soviet market. Soviet policy says that even those joint ventures oriented toward the Soviet market must be self-financing. Any profits repatriated or products imported must be financed by the venture exporting a portion of its product.
Service ventures like McDonald's and the AlphaGraphics print shops can get around this problem by catering to tourists and businessmen who have foreign currencies. Combustion Engineering is receiving petrochemicals for export as compensation in its engineering venture. Honeywell has been guaranteed access to foreign exchange for at least two years, because its process control systems will boost output of fertilizers, a promising Soviet export.
And American food manufacturers, a delegation of which visited Moscow in October, hope they can get around these restrictions altogether now that the Soviet government has shifted investment priorities to emphasize food production.
But for many companies, the Soviet policy is too constrictive. Monsanto negotiated for 18 months about manufacturing herbicides, and could not accept Soviet conditions that the output be mostly for export.
An innovative end run around the foreign-exchange problem is being negotiated by the American Trade Consortium (ATC), which consists of six American companies: RJR-Nabisco, Chevron, Ford, Archer-Daniels-Midland, Johnson & Johnson, and Kodak. The ATC wants a comprehensive legal and financial framework to govern all of its members' ventures, in which Chevron would export enough Soviet oil to cover the import and repatriation costs of the other companies. The Soviets have agreed in principle to the arrangement. Negotiating for the ATC is the Mercator Corporation, a small New York-based merchant bank headed by James Giffen. Included in the negotiations are thorny logistical issues like housing for American citizens and multiple reentry visas.
``None of the issues are insurmountable,'' says Mr. Giffen, who expects the trade agreement to be concluded by the end of this year.
The ATC financial arrangements could eventually be applied to all joint ventures, allowing hard-currency earners like service companies or big exporters to trade currencies with ventures that are domestic-oriented. ``The Soviets are studying the best way to do this,'' Ms. Carey says. Many businessmen expect the ruble to be convertible in five to 10 years.
Several consortium members are expected to conclude deals quickly after the general agreement is signed. Kodak is negotiating the manufacture of floppy disks and blood analyzers. Archer-Daniels-Midland is negotiating production of seed oils, starch, and sweeteners.
Chevron, the key link in the consortium because of its role as primary exporter, has yet to identify a project. John Silcox, president of Chevron Overseas, says Chevron and Soviet authorities are seeking a project that can quickly enter production and export, and he hopes to have an agreement within eight to 12 months. ``The Soviets have given every indication they will help us over the economic hurdles,'' he said.
At least two other US companies are working on huge manufacturing deals. Occidental Petroleum is conducting feasibility studies on two polyvinyl chloride plants, which would cost $160 million to $200 million, and company officials say construction should begin in 1989. A second project would manufacture chemicals for plastics in western Siberia. The third project, involving partners from Italy and Japan, will develop and operate a petrochemical complex near the Caspian Sea.
Combustion, along with McDermott International, Mitsui Trading, and Mitsubishi Trading, have tentatively agreed to build two huge petrochemical complexes in western Siberia. The foreign partners will construct and operate the plants, and market the output. A feasibility study will be done by December, and Combustion executives fully expect the project to move ahead.
US-Soviet joint ventures
More than 100 joint ventures have been officially registered with the Soviet Finance Ministry, including at least 12 involving American companies:
American Express - Installing automatic teller machines in Moscow.
Pan Am - Jointly operating a New York-Moscow flight with Aeroflot, and marketing Soviet tour packages in the US.
Management Partnerships International - Marketing Soviet software in the West and importing personal computer technology into the Soviet Union.
International Data Group - Publishing a Soviet edition of its magazine PC Week.
McDonald's - Opening 20 restaurants, working through its Toronto-based subsidiary.
Zeiger Enterprises - Selling pizza in Moscow from mobile units.
Delphi International - Renovating and managing office space for foreign businesses.
AlphaGraphics - Opening, with its Toronto-based franchisee, Phargo Management, two AlphaGraphics print shops in Moscow.
Combustion Engineering - Designing, importing, and assembling process control systems for petrochemical plants.
Honeywell - Designing process control systems for fertilizer plants.
Dresser Industries - Providing engineering services.
Tambrands Inc. - Beginning to manufacture sanitary napkins in 1989.