Pitchmen in Russia

Anthony Wilson-Smith July 25 1988

Pitchmen in Russia

Anthony Wilson-Smith July 25 1988

Pitchmen in Russia

Long after they had devoured all the food on two long tables brimming with appetizers last week, more than 30 Soviet government officials and Canadian businessmen were still in a mood to celebrate. As two bartenders in Moscow’s Western-style Mezhdunarodnaya Hotel tried unsuccessfully to signal last call, a group of 10 Canadians and Soviets gathered nearby in a boisterous circle. Then Frank Stronach, chairman of Markham, Ont.based Magna International Inc., the auto-parts manufacturing giant, stepped into the middle, raised a glass of Georgian red wine and gestured toward several Soviet officials. Declared Stronach, who two hours earlier had signed a $25million joint manufacturing agreement with the Soviets: “I toast bureaucrats who do not behave like bureaucrats and who really help to get things done.” After almost 18 months of negotiations between officials from Magna and the Soviet automobile industry ministry, both sides had good reason to raise their glasses. The Soviets, who are desperate for so-called hard Western currency to use alongside the country’s nonconvertible rubles, welcome Magna’s $5-million investment in the new deal. That represents the largest publicly announced stake invested by a Canadian company since the Soviets began permitting joint ventures last year. Declared Soviet Automobile Industry Minister Nikolai

Pugin: “We are very excited at working with people the calibre of those at Magna.” But in spite of Soviet leader Mikhail Gorbachev’s policy of economic reform, known as perestroika—which has engendered new enthusiasm among Western businessmen—large stumbling blocks remain in the path toward such co-operation.

Magna, which is contributing 20 per cent of financing, will hold 25-per-cent ownership in the project and will take its profit in the form of Soviet-made machinery. The venture involves the construction and operation of a factory in the Ukraine that will build moulds for the manufacture of Soviet automobile parts. As part of the exchange, 23 Soviet factory employees will go to Toronto to be trained in Magna management methods. The company operates without unions at more than 85 locations and rewards all workers through profit-sharing. When the plant opens next year, Soviet workers, like their Magna counterparts in Canada, will share in 10 per cent of any profits the factory makes. Declared Stronach: “The Soviets like the way we do things, and we like the opportunity to do things with them.”

Although close to 100 Western firms have signed protocols of intention to engage in joint ventures with the Soviets, less than half of those ventures are now in operation. Many potential investors

are wary of Soviet manufacturers’ traditional problems with ensuring adequate supply and quality control. As well, business operations are often complicated by the Soviet Union’s chronic lack of basic office equipment. Most offices do not have switchboards, which means that untended telephones can ring unanswered for long periods, and some Western observers estimate that fewer than 1,000 Soviets own personal computers. Photocopying and telefax machines are not in wide use, and most long-distance calls to Western countries must be booked hours in advance.

Business executives also complain that the country’s joint-venture law, which gives the Soviets a minimum of 51-per-cent control and the right to appoint the managing director of jointly controlled companies, is one-sided and needlessly complex. Many investors balk because of the difficulty in taking profits made in rubles out of the country. “You can do tremendously well here if you know what you are doing,” declared Emanuel Vorona, the Moscow-based vice-president of The Seabeco Group Corp., a Toronto-based international group of companies offering consulting and business development services in the Soviet Union. But, added Vorona, “if you do not, you can also go crazy.”

To date, few Canadian companies have been able—or willing—to risk such frustrations. Although Canadian Embassy officials in Moscow estimate that the number of visiting Canadian business executives has more than doubled since Gorbachev took office in 1985, only two Canadian businessmen work full time in Moscow. Along with Magna, two

other Canadian companies have signed joint-venture agreements with the Soviets. Calgary-based Canadian Foremost Ltd. is marketing coproduced all-terrain vehicles used for oil and gas exploration. And McDonald’s Restaurants of Canada Ltd. signed an agreement in April to build up to 20 restaurants and a foodprocessing and distribution centre in Moscow, although McDonald’s officials did not specify either a date of construction or the size of their investment. Said McDonald’s Canadian president, George Cohon, who spent 12 years negotiating the agreement with the Soviets: “Breaking into this market is a long process, and you must be very patient.”

Although the Soviet Union is Canada’s fourth-largest trading partner, Canadian exports there have fallen dramatically over the past three years. From a 1985 total of $1.6 billion, sales fell by 50 per cent over two years to a 1987 total of $800 million. Canadian Embassy officials attribute the drop to a decrease in the value of Canadian grain sold to the Soviet Union as well as a decline in Soviet spending power abroad—caused by a drop in oil prices that are the principle source of Soviet hard currency— and Soviet efforts to reduce their large trade imbalance.

During the same period, the total of goods imported from the Soviet Union to Canada rose to $35 million from $27.6 million. Canadian Embassy officials say that the Soviets are adamant that Canada must begin importing more Soviet goods in order to reduce the trade gap.

But many Soviets acknowledge that before that happens, their industries will require dramatic changes and improvements in the quality and quantity of goods they supply. Gorbachev, in a speech to Communist party members in Moscow last month, said bluntly that Soviet industrial planning suffers from “hopelessly outdated notions and formulas, such as production for the sake of production.” Soviet factories routinely produce shoddy and defective items, and the Soviet media frequently report startling cases of industrial waste and abuse.

Earlier this year, a reporter for the newspaper Literaturnaya Gazeta said that sausages produced in a Moscow factory were produced under such unsanitary conditions that “one is lucky to find only string, sand or small snails inside.” Last year, the Soviet government spent $60 million building a new shoe factory

that was supposed to produce two million pairs annually, but after six months the newspaper Trud reported that, because of a shortage of skilled workers, the factory’s only output was “orange-colored winter boots for men and some small brightly colored shoes.” And it is estimated that in 1987, goods worth tens of billions of dollars were sitting unused in storage, and almost one-quarter of industrial firms

fell short of their production targets.

Many Western business executives say that Gorbachev’s reform policies represent both a blessing and a problem. Because Soviet decision-making processes have traditionally been highly centralized, potential investors were often able to conduct most of their business with a single official. But many industries are now decentralizing their operations to transfer more power to local managers, and the process has caused both confusion and irritation.

Declared Vorona: “Now, it is necessary to spend a whole lot of time in different regions talking with workers’ committees.”

Potential investors say that a more serious problem is the difficulty in taking profits out of the country. Because the ruble cannot be exchanged for Western currency, investors must devise other potential sources of revenue. Some companies, including Molson Breweries of Canada Ltd., which recently signed a contract to distribute its beer in the Soviet Union, sell their products only in the Beriozka (birch tree) stores that cater to foreigners living in Moscow.

Magna’s Stronach said that his company plans to recoup its investment by taking its profit in the form of Soviet-produced machinery that his company can use in the West. Meanwhile, the key to the McDonald’s agreement is the company’s plan to build a huge commissary, which will produce baked goods and meat, potato and dairy products. Some of those products will be exported to McDonald’s restaurants in other parts of Europe, where they can be sold for convertible currency.

Still, many Western business executives say that the huge potential of the Soviet market makes its hardships bearable. Said McDonald’s Cohon: “This is a population market the size of the United States, and we simply cannot afford to ignore something this size.” Gorbachev has said that he would eventually like to make the ruble convertible, which would tie the Soviet Union more tightly into Western markets. Declared Vorona: “This place is just waiting to explode in a positive way.” Some investors add that they find a particular emotional benefit in their dealings with the Soviets. When he concluded his agreement, Cohon said, he felt “as though we perhaps managed to move East and West a bit closer together.” Stronach, who has been nominated as a Liberal candidate in the next federal election, said that he shared the sentiment. “I do not have to wait for politics to do something for people,” he declared. “Business can be a positive force, if we use it to bring countries together.” For foreign businessmen, and the Soviets, the challenge is to prove that the desires that unite them can outweigh the obstacles they continue to face.