CANADIANS IN HOT PURSUIT

JOHN DALY July 29 1991

CANADIANS IN HOT PURSUIT

JOHN DALY July 29 1991

CANADIANS IN HOT PURSUIT

For Gulf Canada Resources Ltd., it is a rare opportunity to earn quick returns from an investment in the Soviet Union. Last week, the Calgary-based company, which is controlled by Toronto’s billionaire Reichmann family, announced plans to invest up to $250 million in a joint venture to develop two huge oilfields in the region of Komi, about 1,500 km northeast of Moscow. Gulf Canada will provide a quarter of the money for the project, the same amount as British Gas PLC. Komineft, a state-owned Soviet oil company, has the remaining 50-per-cent interest. In return for its investment, Gulf Canada will receive a quarter of the oil extracted from the fields, which it can then sell abroad on the open market. In that, says Gulf Canada president Charles Shultz, the

oil company is fortunate—many other Western businesses investing in the Soviet Union have resigned themselves to earning only ruble profits, which cannot be converted into hard currency. Declared Shultz: “As we put money in, we will share in the revenues right away.”

Gulf Canada’s decision to invest in the Soviet Union makes it something of an exception among Western investors. Although Soviet President Mikhail Gorbachev and the G-7 leaders agreed last week that foreign capital is needed to avert a Soviet economic collapse, many Western executives say that the risks and frustrations associated with doing business in that country are actually increasing.

Gorbachev's drive to decentralize economic decision-making has in practice made things worse, some businessmen claim. They point out that Western investors now have to negotiate with individual Soviet firms and local and regional officials, as well as with the central finance ministry in Moscow. Gulf Canada, for one, spent two years negotiating with Komin-

eft, Komi region authorities and the government of the Russian republic. Said Shultz: “There is no telephone book to tell you the names of the important players.” For the moment, trade analysts predict that Western investment will continue to be weighted towards export-oriented sectors such as oil and natural gas. Indeed, the Reichmanns themselves appear cautious about proceeding with another major Soviet venture: a $300-million office and hotel complex in Moscow that the family's Toronto-based real estate development firm, Olympia & York Developments Ltd., first proposed in 1989. That project has been delayed while Olympia & York conducts feasibility studies of the proposal. Unless the political and economic climate in the Soviet Union improves soon, that project and many others are likely to remain on the drawing board.

JOHN DALY