COVER

TO RUSSIA WITH CASH

PATRICIA CHISHOLM,Peter C. Newman November 13 1989
COVER

TO RUSSIA WITH CASH

PATRICIA CHISHOLM,Peter C. Newman November 13 1989

TO RUSSIA WITH CASH

COVER

TOP CANADIAN BUSINESS PEOPLE WANT TO LEND A HAND-AND MAKE PROFITS IN RETURN

The eight high-level visitors from the Union of Soviet Socialist Republics did not waste a moment. During a recent 10-day tour of Toronto and Edmonton, the delegation of Communist officials from Leningrad met with architects, planners and engineers and toured Toronto’s waterfront in a large powerboat. Later, joined by their Canadian advisers, the visitors consumed large amounts of Russian caviar and vodka at a lavish party in the downtown penthouse of Toronto real estate developer Edwin Cogan. And Maclean ’s has learned that it has all paid off. Together with the Soviets, Cogan and a group of high-profile Canadian businessmen are working towards an agreement to mount a spectacular billion-dollar venture: the renovation and rebuilding of bustling Leningrad, founded as St. Petersburg by Peter the Great in 1703 and a strategic Baltic port city that also was home to Peter Tchaikovsky, Sergei Rachmaninoff and the Russian Revolution.

The orchestration of a possible Canada-Leningrad development project is one of several signs that the political thaw in the Soviet Union could lead to complex financial, social and cultural links between Canada and the U.S.S.R. There already are several large Canadian construction projects proposed in the U.S.S.R., including Toronto’s billionaire Reichmann family’s plan, announced last week, to build a $250-million, 60-storey office tower in downtown Moscow. Symbol3 ic of Canada’s burgeoning I economic links to the giant £ Communist state, it will be g the tallest building in the £ U.S.S.R., soaring 24 floors

above the Moscow State University, one of the seven distinctive wedding-cake landmarks around Moscow that were built by Josef Stalin’s architects. But no Canadian project now under way, or proposed, is in the same league as the possible $l-billion development, which would create a modem waterfront complex on 200 acres near the core of the city that survived a three-year siege during the Second World War when 650,000 died of starvation and Gerol man shelling killed more than 17,000. Beyond the boundaries of specific projects, the Canadians say that they want to bring the ways of capitalism to the avenues that spawned the revolution in 1917. At the forefront of the bid, which will only go ahead if Soviet loan guarantees are in place, is a colorful Canadian entrepreneur, Edwin (Eddy) Cogan, and his colleagues (page 48) and an American with historic ties to Canada and the Soviet Union, Cyrus Eaton Jr. (page 46).

Explore: Clearly, the Canada-Leningrad proposal shows that, despite the U.S.S.R.’s deep economic problems, economic links with Canada are accelerating as Soviet President Mikhail Gorbachev’s doctrine of perestroika leads to fundamental restructuring of the economy. That same trend is also evident in bilateral deal-making in progress between Canadian brokers and enterprises in Hungary (page 53) and other Eastern European countries. In fact, joint ventures between Canadian business interests and Soviet organizations, only possible since a 1987 change in Soviet law, now number 23. And late this month, Prime Minister Brian Mulroney, who visited Moscow in 1985 to attend the funeral of Konstantin Chernenko, will lead a high-powered trade and diplomatic delegation to Moscow to explore other major economic opportunities. Among the business leaders accompanying the Prime Minister will be Albert Reichmann, who will sign an accord that

will create the Canada-U.S.S.R. Business Council, formally linking Canadian and Soviet businesses in co-operative developments (page 45). McDonald’s Restaurants of Canada Ltd. president George Cohon, whose firm plans to open a giant burger outlet in Moscow this January, will also join the Prime Minister in Moscow. Said Cohon: “It’s a good sign that the Prime Minister is going. It’s a signal to Canadian businesses wanting to enter the market and it lets the Russians know we are serious.” And Dmitry Beskurnikov, a senior official with Moscow’s State Foreign Economic Commission, said that projects such as the ones proposed are critically important in the U.S.S.R.’s redevelopment.

The Soviet vision of a gleaming new city by the Gulf of Finland caught the imagination of Cogan’s Toronto group when Cleveland financier Eaton passed along the idea last spring. The preliminary joint venture outlining the $1billion urban-renewal project is between the Leningrad City Soviet and Cyrus Eaton World Trade Ltd., controlled by American financier Cyrus Eaton Jr., son of the Canadian-born steel magnate and philanthropist. If the project receives the official backing of higher authorities in the form of loan guarantees, it will be followed by a formal joint-venture agreement, which would enable the Western partners to earn profits and the Soviet partners to take

advantage of Western know-how and Westernstyle production.

The Canadian experts are drawn from the fields of finance, real estate, politics, movie and concert production, law and urban planning, and include such well-known names as former Toronto mayor David Crombie, Brascan Ltd. chief executive officer Trevor Eyton, former Canadian ambassador Ken Taylor and film director Norman Jewison. Eaton has said that the project could generate returns of between 20 and 30 per cent, but Cogan emphasized that the project is also an important technical and cultural exchange. Cogan, whose father left the Soviet Union in 1919, said: “A lot of us were immigrants, and we saw a window that might be there forever or might be there for a week. If we do not go in there and support them with our know-how, that window might close on us, and a great opportunity would have been missed to create freedom in a part of the world for people who are, as we see it, screaming for it.”

Beauty: The precedent-making redevelopment will turn a prime waterfront section of central Leningrad into a contemporary, showpiece Soviet city. The preliminary plans would transform 200 acres on the waterfront on the north side of Leningrad, bordering the Gulf of Finland, into a tourist playground. It would also

enhance the historic beauty of Leningrad, epitomized by its famous Hermitage Museum, by renovating a group of old buildings in the downtown core.

Profit: The project would be only the first phase of a much larger multibillion-dollar undertaking. The Canadian partners hope to ultimately develop a 25,000-acre site just west of Leningrad proper. In that larger deal, the Canadian entrepreneurs would participate in the creation of a satellite city to channel investment funds and technology into the Soviet Union. That would involve construction of a new international airport, a container-ship harbor, as well as manufacturing plants, shopping and housing. New apartment buildings designed to hold 70,000 people are already being built behind the 200-acre site. But fundamental to any Leningrad development would be the establishment of a free trade area within which Western businesses could operate at a profit and import as well as export goods and services without restriction.

But for now, the Canadian partners in this unique venture have agreed to build and operate:

• a huge, covered shopping mall (about the size of Toronto’s Eaton Centre) with a daily capacity of 30,000 shoppers and with recreational attractions such as an artificial beach

AMBITIOUS SOVIET PLANS TO RELY ON INTERNATIONAL CAPITALISM

with wave-making machines and an Olympicsize skating rink alongside aisles of Westernstyle shops;

• six hotels with a total of 4,000 rooms, health clubs and indoor swimming pools;

• a giant theme park with a daily capacity of 31,200 visitors;

• a major cultural centre, with art galleries, arena, TV studios and artisans’ workshops. It will include an annex of the Hermitage Museum where its best-known masterpieces, many now in storage, would be exhibited on a rotating basis;

• a monorail that would carry 4,000 visitors per hour through the various sites;

• a reconstructed shoreline, only a ferry ride away from Helsinki and other Scandinavian and North European ports, with a walk-through model of Old Petersburg, a recreation of a typical Russian village, a children’s fair and an ultramodern marina;

• an agricultural enterprise, located about 300 km from Leningrad, that would help teach Soviet farmers how to increase meat, dairy and vegetable yields.

Capitalist: The Soviet delegation, co-led by Alexei Bolchakov, first deputy chairman of Leningrad’s executive committee, and Alexea Alfimov, general manager of the city’s Central Capital Construction Board, visited Toronto and Edmonton from Oct. 16 to 25, attending private briefing sessions with the Canadian partners who showed them, firsthand, what they had achieved in their various fields of expertise and how their efforts might be adapted to Leningrad. Among the sites they studied in Canada were Toronto’s Sky Dome, its lakeside redevelopment area known as Harbourfront, the Eaton Centre, the Royal Ontario Museum, the new Mississauga downtown, the Ontario Science Centre and Edmonton’s West Edmonton Mall.

Precise details of how the Canadian group would finance the project have not been worked out, but the advisers maintain that financing is not expected to be a problem if the city of Leningrad obtains the anticipated approval from the central government of a “sovereign guarantee” for the project’s long-term debt—the equivalent of a federal government guarantee of funds in Canada.

As well, Cyrus Eaton suggests that the project has backing at the very highest levels in Moscow, including Gorbachev himself and Prime Minister Nikolai Ryzhkov. The Canadian

group already maintains a full-time representative in Leningrad, and David Taylor, chief commercial officer at the Canadian Embassy in Moscow, said that officials there have followed the project “with interest” and have provided assistance to the Canadian group. Added Taylor: “Although there are already a number of large Canadian projects here, this will certainly be the biggest and is certain to attract others here.”

The road to the present project was not an

easy one. Eaton initially subcontracted a group of Toronto-based entrepreneurs who put together a much larger Leningrad proposal— worth between $5 billion and $6 billion—but the project never got off the ground. If Phase 1 proceeds and the separate economic zone is created, both sides say that it would operate on broadly capitalist lines, with convertible currency, no customs duties and free access for tourists, investors and Leningraders alike. And Beskumikov, of the State Foreign Economic Commission, confirmed that the U.S.S.R. is drafting plans for precisely such special economic zones, which will enable Western companies to operate alongside Soviet and jointventure enterprises. For Western businesses, the major problems in dealing with the Soviets are the repatriation of profits, because the ruble continues to be, in effect, a nonconvertible currency, and rigid hierarchies make decision-making difficult. “We want to use these zones to educate our people to do business in hard currency, treating them as pilot projects for a market economy,” said Beskumikov.

The new economic zones, like similar zones in China, or free ports such as Hong Kong, would

be striking evidence that the Soviet Union is serious about rebuilding its economy, which has been shattered by strikes, uneven wage hikes, slumping productivity and ethnic conflict. And the Soviet desire to bring about change is clearly growing. Stephen McLaughlin, a former Toronto planning commissioner and an adviser to the Cogan group, said that he was surprised by the intensity of the Soviet visitors, who were intrigued by everything they saw. Said McLaughlin: “They have a sense of urgency, and they are eager to find solutions.”

Still, the hurdles are formidable. The Soviet state statistics committee, Goskomstat, reported on Oct. 30 that industrial production in the U.S.S.R. had slumped to half its pre-July level and that imports had outstripped exports tenfold since January. If the trend continues for the rest of the year, it will be the first time since 1976 that the Soviet Union has recorded a negative trade balance.

Freedoms: The Soviet legislature approved the country’s 1990 economic plan and budget last week and noted that the budget deficit will be made up by issuing state bonds “for enterprises and organizations,” but it did not specify how that would be done. Last year, the Soviet Union admitted for the first time that the government was spending more than it was earning when it passed a 1989 budget officially allowing for a $72-billion deficit. But officials have since acknowledged that the gap was 2 even wider, running closer to x $240 billion.

Part of the problem is that the Soviet economy has been split wide open by perestroika and glasnost. In allowing new freedoms, the U.S.S.R. now has to deal with new conflicts, such as the devastating strike by nearly 500,000 coal miners in Siberia and Ukraine last July, costing the nation an estimated $70 million in lost production.

The new openness has also begun to create more inequality. As some entrepreneurs, like the co-operative stores and restaurants, begin to show profits, other citizens are beginning to feel resentment. Carl McMillan, an economist at Carleton University in Ottawa, says that some market-oriented reforms have begun to slow as pressing shortages gain more immediate government attention. Said McMillan: “Politically, they have moved so fast over the past year that, in my view, they should slow down.” Still, the potential of a huge untapped market continues to draw more and more Canadian companies to the Soviet Union and Eastern Europe. Toronto’s powerful Reichmann family, which owns gigantic real estate developer Olympia & York Developments Ltd., is planning to build a $250-million commercial centre in Moscow. If built, the towering centre, due to open in 1992, will house offices for foreign

companies, a conference hall, cinema, hotel and satellite communications facilities.

As well, McDonald’s Restaurants of Canada Ltd. has received a Jan. 31, 1990, opening date for its huge 900-seat restaurant at the corner of Gorky and Pushkin streets near Moscow’s Red Square. McDonald’s president George Cohon has been pursuing the project for more than 12 years and will celebrate its culmination in Moscow with Mulroney.

Pizza: Canadian business activity is already burgeoning in other sectors of the U.S.S.R. Soviet law now permits joint ventures with Western companies with virtually no restriction on the level of foreign ownership.

Since the law was changed in 1987, 23 joint ventures between Canadian and Soviet companies have been formed and about 50 more are under discussion. They range from pizza outlets to oil-drilling equipment to the breeding of pedigree Holstein cattle. But the frustrations are acute.

Said Douglas Blair, president of cattle-breeding company Alberta Genetics Inc. of Calgary: “I get lectures on how patient we have to be. It is as if they have all the time in the world to do it.”

Despite the daunting obstacles, many Canadians see a huge new world of opportunity opening up in the U.S.S.R. Lou Naumovski, deputy director of U.S.S.R. and Eastern European trade development for External Affairs, predicts that investors will likely

have to wait at least three or four years before beginning to see a return. Many analysts say that the U.S.S.R. has gone too far to turn back the clock on its reforms. “There is an enormous pool of talent there,” says Naumovski, noting that the U.S.S.R. has more engineers

per capita than any other country.

Politics and geography have also played a part in promoting business links between Canada and the U.S.S.R. According to some political observers, Canada is attractive to the Soviets simply because it is not the United States. That reason for doing business with Canada is “con-

tinually reiterated by Soviet officials,” Naumovski said. “We have to give it credence.” And Peter Solomon, professor of political science at the University of Toronto, adds: “The Soviet authorities have been making the climate for foreign investors as attractive as possible. Firms are getting fantastic deals.”

Syrup: The urge to make contact appears to be strong on both sides of the CanadaSoviet equation. As a goodwill gesture, Canadian filmmaker Jewison will have the Canadian delegation to Moscow bring in a copy of his 1966 movie, The Russians Are Coming, The Russians Are Coming, as well as some maple syrup from his farm just north of Toronto. And David Crombie, former minister of Indian affairs and northern development, who has visited the Soviet Union, says that he hopes to return again in April. “We got along 2 very well with the Soviets, g They have a strong burst about life and they like humor

1 with their information. At the 2 same time, they are very seg rious, hard-working people.” ° Those are qualities both the

Canadians and Soviets will need to accomplish the task of rehabilitating the U.S.S.R.’s economic ties with the West.

PATRICIA CHISHOLM and PETER C. NEWMAN with ANTHONY WILSONSMITH in Moscow and SHONA MCKAY and DAVID TODD in Toronto

PETER C. NEWMAN

NEWMAN

ANTHONY WILSON-SMITH

SHONA MCKAY

DAVID TODD