Dialing for rubles

Pursuing profits in a challenging new market

Anthony Wilson-Smith August 14 1989

Dialing for rubles

Pursuing profits in a challenging new market

Anthony Wilson-Smith August 14 1989

Dialing for rubles

Pursuing profits in a challenging new market

For Brock and Inessa Minaker, doing business with the Soviet Union seemed logical and potentially lucrative six years ago. The Vancouver couple operate Minaker Enterprises Ltd., an import-export business, and when they examined Soviet trade opportunities, they liked what they saw. They decided that the country’s 287 million people constituted a huge market and, as well, that Soviet workers—who often earn less than $400 a month—could produce many inexpensive, exportable goods, including clothing and furniture. Inessa Minaker, who speaks Russian, declared, “Everything seemed right for us to do well.” But it took three years and, she said, “a million dollars and as many headaches” before the company signed its first contract. This year, despite a trade volume of more than $6 million in the first six months, the Minakers’ operations are only beginning to earn a profit. Said 30-year-old Inessa:

“A dozen times a month, I think of giving up.” But, she added, “We do not, because this place could be a gold mine.”

Among Western business executives with interests in the Soviet Union, that kind of ambivalence is widespread. Soviet leader Mikhail Gorbachev’s four-year-old policy of perestroika, or economic reform, has created unprecedented international interest in the Soviet market. Between 1985 and last year, the value of goods imported from the Soviet Union to Canada increased to $156 million from only $27.6 million. Many business executives are buoyant about the country’s growth prospects. Said George Cohon, president of McDonald’s Restaurants of Canada Ltd.: “We are going to learn to crawl and then walk and then run.” He added that his company expects to open its first restaurant in Moscow by early 1990, after 12 years of negotiations.

But other Western firms, after examining Soviet business conditions, have declined to make an investment there. Among the problems: a nonconvertible currency, a low standard of living, the poor quality of many Sovietmade products—and perhaps the most complex and baffling business regulations of any major country. Despite the Soviet Union’s position as a military and political superpower,

the country’s living standards are far lower than those in Western Europe or North America. Said Alexander Rotzang, the Soviet-bom president of Noralco International Inc., a Calgarybased technology-transfer company that is active in Moscow: “It is easier for them to put a man in space than put a bagel on the table.”

The obstacles are proving to be stubborn ones for Western-based businesses attempting to expand into the Soviet Union. Despite the increase in Canadian imports, a huge trade imbalance exists between the two countries: last year, the Soviet Union bought almost $1 billion more of goods from Canada than it sold.

Last month, Igor Faminsky, the director of the U.S.S.R. Council of Ministers’ Foreign Ties Institute, said that 685 foreign firms have signed joint-venture agreements with Soviet partners. But he acknowledged that only about one-quarter of those firms are actually operating. Moscow-based Western diplomats say that many companies are unlikely to fulfil their contracts. One reason, some Soviet experts concede, is the continuing frustration many Westerners feel toward operating conditions in the country. “We have had perestroika for four years,” Vitali Sayevsky, the commercial director of Moscow’s one-year-old government-operated High Commercial Management School, told Maclean’s. “That is enough time to change attitudes, but not age-old problems.”

But Western diplomats also cite lack of

preparation by some visiting business executives as a problem. Although travel agents advise that Moscow hotels are solidly booked year-round, some visitors still arrive without hotel reservations. The owner of one small American firm recently had to cancel a jointventure contract he had just signed because he had not believed warnings that the ruble cannot be used or sold outside the Soviet Union. Those mishaps occur despite the considerable information and services that Western embassies offer. Said Maria Aronson, a commercial attaché at the U.S. Embassy: “We tell prospective investors to approach business here in a most cautious and realistic manner.” For its part, Canada’s external affairs department offers

entrepreneurs information on the Soviet market. In Moscow, embassy officials sometimes meet business visitors at the airport and give them a briefing, a temporary guide and some use of embassy office facilities.

Despite that help, many business executives regularly encounter unusual problems. The Soviet government is reluctant to allow widespread access to photocopiers, because they can be used to print underground material. As a result, Western partners in some joint ventures often have to agree to post a 24-hour guard over the machines they plan to use. Soviet customs officials have become infamous among foreigners for their repeated unwillingness to give necessary notice when shipments have arrived. Because foreign residents are charged $1 a kilogram for all imported items held more than three days, owners who do not know that their goods have arrived have sometimes paid thousands of dollars when they finally did receive the shipments.

As well, it is difficult for foreign firms to extract profits from the country because of the ruble’s nonconvertibility. Soviet economists

concede that, within the country, the ruble exchange rate is an artificially high one. Westerners are obliged to pay the equivalent of $1.88 for one ruble, but the ruble’s real value is estimated at between 25 and 30 cents. Many companies prefer to take their profit in raw materials that they can sell outside the country. But the Soviet Law of Enterprise, passed last year, places new restrictions on barter.

However, said Lou Naumovski, the deputy director of External Affairs’ U.S.S.R. and Eastern European trade development division, “Barter is still, by force of circumstance, the principal route.”

As well, living in the Soviet Union poses

difficulties. The Soviet government assigns specific office and living quarters to nearly all of the estimated 25,000 foreigners living in the capital, including diplomats, business executives and journalists. Those facilities, which are closed to ordinary Soviet citizens, are located in specially designated compounds with militia officers on guard 24 hours a day.

It takes up to two years to obtain office and living space—and even then the process is costly. Last year,

22 members of an American engineering firm spent more

than two months sharing three hotel rooms while they awaited living quarters. At the Western-style Mezhdunarodnaya hotel and business complex, there is a long waiting list for two-bedroom apartments renting for $5,000 a month.

In older, more traditionally designed buildings, Western diplomats estimate that the cost of renovating to North American standards

averages more than $125,000. In addition, Moscow has a chronic problem with cockroach and mice infestation, and buildings have frequent plumbing and electrical problems. In order to clean the city’s aged plumbing system, the hot water supply is cut off in all buildings for

a month every summer. And because of severe shortages, Western companies subsidize the cost of importing such difficult-to-obtain items as fresh meat, toilet paper, sugar and soap. As well, many employees who are older, or who have children, are reluctant to accept a Moscow posting because of health concerns. In comparison with Western hospitals, many Soviet facilities are unsanitary and under equipped, and doctors at Western embassies have long waiting lists of patients who would rather see a Western doctor than go to

the Botkin clinic, where medical aid is available to all foreigners. For serious medical problems, most Westerners fly to Helsinki, more than 1,200 km away. Said Minaker, who divides her time between Moscow and Vancouver: “It is like moving between two different planets.” Maintaining a Moscow office is also a financial drain. The American embassy advises visiting business executives who want to establish a

business office in Moscow that they should be prepared to spend $12,500 for a weeklong stay for two. And an informal survey conducted by representatives of some American firms found that the average cost of maintaining an office with one Western employee ranges between $175,000 and $400,000 annually.

In addition, Moscow’s overloaded and outdated communications equipment results in companies often having to wait more than a year before obtaining Telex facilities or international telephone lines. One American businessman was given a choice between receiving a Telex or telephone line at his office, and recent arrivals in Moscow have been told that international telephone lines

will not be available until 1991. Many businessmen say that other, smaller problems can become equally frustrating. Soviet offices and hotels do not often have switch-

boards, and calls often ring

unanswered. Most Soviet organizations do not leave or return telephone messages,

and many say that all meetings should be prefaced by written requests. Said Rotzang, whose company arranges technological transfers and joint ventures between Canadian and Soviet companies: “There is nothing fast, nothing easy, nothing cheap. It is like molasses.” But many people say that they remain convinced that the Soviet Union’s potential as a developing commercial market overshadows its difficulties. Said David Taylor, the chief commercial officer at the Canadian Embassy: “This is the right time for Canadians to come here. Things are changing, and doors are opening.” Declared Soviet business school director Sayevsky: “Things may be difficult at present, but no one who invests here now will be sorry in five years.” Said Inessa Minaker: “What we do right now, we do not do for laughs. But this is the time when tomorrow's fortunes are decided here.” In the risky business of speculating on Moscow’s future, Minaker and others are gambling that short-term strain will be rewarded by long-term gain.