Russia and the NIS in the World Economy: East-West Investment, Financing and Trade

[Deb Palmieri on Russia Table of Contents]

The following summary describes the book, Russia and the NIS in the World Economy: East-West Investment, Financing and Trade, edited by Deborah Anne Palmieri and published by Praeger Publishers, Westport, CT in 1994.

Russia and the NIS in the World Economy: East-West Investment, Financing and Trade

Introduction and Book Summary

This volume brings together scholarly writings that illuminate our understanding of the rapidly changing contemporary role of Russia and the newly independent states (NIS) in the world economy, with special reference to the industrialized West. Many questions and issues need to be addressed to enhance a greater understanding of Russian global economic integration. These encompass conceptual, theoretical, practical, and empirical themes.

The first set pertains to investment-related questions. What opportunities and problems are associated with foreign investment as a vehicle of economic development for the former Soviet Union (FSU)? Russian and Western officials wax euphoric that such investment will stimulate critical economic growth, but this hypothesis should not be taken for granted, and in examining the question it is useful to look at Third World foreign investment experience and its impact on domestic economies. Is there a discernible pattern of foreign investment in the FSU? If so, what are its features and likely effects? Understanding the conceptual side of investment issues is complemented by an actual case study of an investment joint venture. A case study can help illustrate the defining features of a joint venture, the major aspects of its business structure, and its operations. An investigation into the microoperations of one firm's experience with the FSU can shed light on the pros and cons of the FSU/Western investment relationship.

The second set of questions centers on financing, money, and banking issues. Financial issues are a complicated, obscure, and difficult dimension of FSU global economic involvement, not only for Westerners, but also for Russians themselves. What are the perimeters of Russia's domestic banking crisis? How are its domestic finances organized, including the microeconomics of the traditional government-enterprise relationship and other issues pertaining to the Central Bank and ruble convertibility? Another major financial question centers on commodity exchanges, a phenomenon little understood in the West. What role did these exchanges play in market transformation and integration into the world economy? How are these exchanges now developing and what is their future role in the Russian economy?

The third set of questions centers on trade-related issues. What are domestic trade policies and how do NIS view the role of foreign trade? What types of regulatory systems for imports and exports are evolving? Can an export strategy be identified? Are there any particularly noteworthy regional or sectoral trade developments that require more indepth investigation to illustrate the importance of changing commercial trends to the global economy?

Finally, I wanted to enrich conceptual aspects of the volume with a case study example of a Western firm working in Russia. This should shed light on a number of interesting questions. What will the microlevel experience of the firm tell us about patterns of Soviet/Russian interaction with Western companies? What successes and problems or difficulties did these companies meet when doing business in Russia? What lessons can be learned from their experiences? I felt it would also be useful to include a policy-related paper on addressing defense conversion in the marketization process. That way, the reader could have writings on Russia and the NIS in the world economy that intersected the spectrum of conceptual, empirical, case-study, and policy issues in one volume.

The book thus shaped up in the following way. Chapter 1, "Russia's Foreign Economic Relations with the West," provides an introduction to a broad spectrum of dimensions that should be considered in understanding Russia's evolving relationship with the West. This includes a conceptualization of Russia's foreign economic policy toward the West and Yeltsin's developmental strategy, which is derived from a belief and philosophy that Russia will benefit by building a Western style economy based on market driven economic principles. It includes a discussion of the profound change in attitude that the West now has adopted toward Russia. This thinking, from the corporate boardroom to the halls of Congress and public opinion, has led to the embracing of Russia with an almost messianic obligation to ensure that democracy and economic transformation succeed to approximate that of Western civilization. According to the new ethic, foreigners see the tool of foreign investment and a quasi-open-door" policy in Russia as fundamental to the ability of Yeltsin to guarantee economic reform. International economic institutions like the International Monetary Fund (IMF), the World Bank, and the International Bank for Reconstruction and Development (IBRD), once hostile and discriminatory toward East-bloc economies, now embrace admission of Russia, other NIS, and Eastern European states to their organizations and support them through huge aid and recovery packages.

Chapter 2, "Foreign Investment, Economic Growth, and Market Transition" by Eileen M. Crumm, provides unique analysis and insight into issues of NIS global economic integration through joint venture vehicles and foreign direct investment (FDI). She scrutinizes the common assumption, espoused both by the West and Russia's reformers, that foreign investment and FDI guarantee domestic prosperity, increased productivity, and economic stabilization. After conducting an extensive factual review of the extent and distribution of foreign investment activity among NIS, including a sectoral analysis of investment dollars, Professor Crumm determines that the only states that are likely to benefit from FDI in stimulating growth are Russia, Kazakhstan, Turkmenistan, Azerbaijan, and, to some extent, Uzbekistan. These states also possess scarce natural resources, particularly oil and natural gas.

What is particularly intriguing about Crumm's analysis is a discussion of the effects of foreign investment on economic development in Third World states, a comparison curiously absent in current debates over Russian modernization questions. Based on Third World experience, she concludes that states that are in a most favorable position to take advantage of foreign investment have enhanced regulatory capacities, possess an infrastructure for technological research facilities, and are endowed with generous natural resources. For the NIS, Crumm concludes that the most beneficial foreign investment is in the concentrated, monopolistic industries and manufacturing sectors producing consumer goods for domestic consumption rather than investment producing manufactures geared for export sales.

Chapter 3, "Russian Banking and Finance: A Crisis of Credibility" by Eric A. Stubbs, analyzes the current crisis in Russian banking and other finance-related matters. Stubbs evaluates the difficulties and challenges faced by Russia while making the transition to a modern commercial banking and financial system. He highlights the nature and extent of the present Russian banking crisis, including a synopsis of the history of banking institutions under the old Soviet system. Stubbs also analyzes several key issues and problems, including the relationship between the Russian government and enterprises, the politicization of the role of the Central Bank of Russia, and the valuation of the ruble and its convertibility. He ends the chapter by discussing the difficult choices and strategies available to the Russian government as it struggles with the reform process in banking and finance, particularly as defined by the rapid reform favored by Gaidar and others versus a gradualist model.

Chapter 4, "The Yeltsin Revolution and Russian Export Protectionism" by William E. Schmickle, analyzes Yeltsin's trade policy, starting with its origins in Gorbachev's trade reform strategy that criticized conventional protectionist policies. He analyzes this important aspect of Russia's foreign economic policy, including a vivid portrayal of the leading personalities and institutions in the debate. Professor Schmickle argues that essentially three foreign trade scenarios emerged from the months following the August coup. Under the first, price reform, fiscal restraint, privatization, and demonopolization of state property would engender a modernized tariff and nontariff system committed to long-term openness. Under the second, reforms were less likely to succeed and instead inflation, unemployment, speculation, and chaotic privatization with increasing corruption would create conditions whereby 'predatory" traders would drain domestic resources for private gain through unofficial or black market transactions, thus avoiding taxes and regular procedures. Finally, the third scenario, under conditions of Russian state disintegration, meant that local authorities (from autonomous republics, oblasts, and krais) would erect barriers and set their own policies according to regional interests.

Chapter 5, "Breaking with Moscow: The Rise of Trade and Economic Activity in Former Soviet Border Regions" by James Clay Moltz, argues that an important trade development has emerged, the growth of "transborder economic ties." At the peripheral border regions of the FSU, countries are setting up strong ties with foreign partners on their borders. Moltz discerns two trends in the development pattern of the linkages between the old Soviet Union and its foreign neighbors, those that are culturally and historically based, and those that are economic in origin. He uses the example of growing ties between Central Asia and adjacent Muslim states to illustrate the first trend, specifically between Azerbaijan, Turkmenistan and Iran; Kazakhstan and China; and Kyrgyzstan and China. Similarly, the creation of the Black Sea Economic Cooperation Region (joining Turkey, Russia, Ukraine, Moldova, Romania, Bulgaria, Georgia, Armenia, and Azerbaijan) illustrates this trend. The economic ties that the Kaliningrad region is developing with Poland and Germany and the Karelian region with Finland are examples of the second trend. A development that seems to fit both patterns, argues Moltz, are the ties now being forged across the Bering Sea by the Kamchatka, Chukotka, and Magadan oblasts with the American and Canadian Pacific Northwest. For each of these case examples, Moltz draws on a wealth of carefully detailed and documented sources.

Moltz pays particular attention to the south border region, observing the opening of the Russian Far East to its Pacific Rim neighbors, especially China, South Korea, and Japan. He analyzes in detail policies that this region has implemented to make accessible its "Far Eastern frontiers." Moltz ends the chapter by assessing unique types of problems faced by foreign investors in border regions. One of these is the communication gap between Moscow and local officials, which often sends conflicting messages to potential investors. The constantly changing state role in governing joint ventures and other business transactions results in inconsistent laws and center-regional conflicts within state ministries. Moltz concludes that many areas that were marginal or peripheral to the old Soviet Union may now become thriving, independent economic centers and important sources of new export-led growth.

Chapter 6, "Commodity Exchanges and the Post-Soviet Market" by Ariel Cohen, offers a rare insight into the evolution of commodity exchange networks in Russia. Piecing together original Russian source material on this subject, about which little is known in the West, Cohen analyzes the role of exchanges as key institutions in the marketization process and evaluates their strengths and shortcomings. He places special emphasis on their crucial period of development from early 1991 to early 1992, but also looks at their roots in the Russian prerevolutionary exchanges.

Cohen examines the origins of the principal Russian commodities exchange, Rossiyskaya Tovarno-Syryevaya Birzha (RTSB) and the processes and procedures by which it functioned. He includes an insight into the world of Russian commodity exchange brokers and reviews competing exchanges in Moscow, including RTSB's major competitor, the Moscow Commodities Exchange, Moskovskaya Tovarnaya Birzha (MTB), whose origins evolved from the old Soviet bureaucracy. Regional exchanges outside of Moscow also played an important role. Siberian exchanges specializing in oil developed. Another, the Asian Exchange, played a key role in developing trade ties with the Pacific Rim region. Other regional exchanges include one in Vorkuta to trade in lumber, coals, and other raw materials; the Altai Commodities Exchange (ATB) in Barnaul; the Southern Universal Exchange (Yu.U.B.) in Nikolayev, Ukraine; the Tbilisi Universal Exchange in Georgia; and others in Kiev, Gomel, Odessa, Penn, Ryazan, Duzbass, Volgograd, and Dnepropetrovsk. Moscow also faced stiff competition upon the founding of the Leningrad Stock Exchange, or Leningradskaya Fondovaya Birzha (LFB), in early 1991.

Cohen reviews problems and obstacles the exchanges faced, including shortages of qualified brokers and staff to administer the exchanges, and a lack of cooperation early on from government ministries to secure necessary licenses. He helps the reader comprehend how these commodity exchanges are instrumental in the reform process as distribution channels and price-setting mechanisms. Cohen also provides insights into deficiencies of the emerging commodities system, including lack of computerized information systems to set prices among the different regional exchanges; lack of specialization and focus by commodities markets; and lack of a code of business conduct, or business ethics. He ends the chapter on a solemn note, by illustrating many examples of how undesirable business conduct threatens to undermine the whole system (for example, demands for up-front payments for goods that later are never delivered, and the belated return of funds or nonreporting of large numbers of transactions). Cohen concludes that while commodities exchanges are not a panacea, combined with other market institutions, including systems of civil and private property law, exchanges will serve as Russian "windows to the world" and facilitate its global economic integration.

Chapter 7, "Monsanto's Operations in the Former Soviet Union: A Case-Study" by Paula M. Ross, offers a fascinating inside view of a company whose operations have not been extensively publicly chronicled in the FSU. The multibillion dollar Monsanto Company, specializing not only in chemicals and pharmaceuticals but also agricultural products, synthetic fibers, plastics, and food products including NutraSweet, has been doing business with the Soviet Union since the 1950s. Ross offers readers a perspective on Monsanto's business structure and operations in the Soviet Union, and how Monsanto worked to develop its Soviet market niche. In an unusually detailed way, Ross covers a range of Monsanto's business dealings, including sales of chemicals, agricultural herbicides, and pharmaceuticals, and the spawning of technology agreements to help the Soviets develop advanced production methods in polymers and diamondlike coatings and the upgrading of phosphate facilities. Agricultural operations were a key component of Monsanto's Russian portfolio. Not only did Monsanto experience increased sales of their Roundup herbicide but they also became involved in demonstration farms and other agricultural operations, as in Sumy, Ukraine, to promote advanced farming technology.

Ross goes on to detail other aspects of Monsanto's business operations in the FSU, including research and development, communications, employees, how the company worked through the Soviet foreign (and now FSU) trade system, and how they developed other appropriate business channels such as methods of product delivery, contracts, and product and trade financing. She includes an assessment of how Monsanto viewed the issue of ruble inconvertibility (not a problem) and analyzes what they perceived as trade barriers to business, including disregard for intellectual property rights, patent stealing, and unfavorable U.S. export trade policy.

Chapter 8, "Marketization through Defense Conversion: A Policy Perspective on the Ukrainian Case" written by Margaret B. McLean and Deborah Anne Palmieri, is a policy position statement on Ukrainian prospects for defense conversion. While few disagree that defense conversion is a vital component of the reform process for the NIS, few agree on specifically how this can be done. The complexities are enormous. This chapter evaluates the Ukrainian case by looking at the issue both philosophically and operationally. It points out some of the difficult trade-offs faced by countries like Ukraine, whose economies under Soviet rule were heavily defense-based. While conversion can conceivably provide avenues for the technological upgrading of outdated manufacturing equipment, new supply and distribution networks, and increased productivity to modern sectors of Ukraine's economy, there is also a downside. Who will absorb the shortrun, start-up costs of such a massive retooling of basic industrial structure, one that is likely to be substantially less profitable than lucrative defense industries, not to mention other spinoff effects including unemployment, employee retraining, enterprise bankruptcies, and the political and economic instability caused by it all?

McLean and Palmieri address these issues and others central to the conversion process. They evaluate the pros and cons of several conversion strategies, including the domestic regrouping, joint efforts, compensation, public finance, Western credits, and foreign manufacturing strategies. The chapter ends with a discussion of four critical steps that Ukraine must take to ensure a successful conversion process, including appropriate business, tax, and legal incentives that protect intellectual property rights, avoiding double taxation and streamlining the investment process.

In summary, inevitably this book has not been able to cover every topic of interest on Russian and NIS integration into the global economy. Each essay may not have perfectly or comprehensively covered all that it should have. But it is hoped that the volume will provide some unique insights; display the vivid complexities of Russia and the NIS's past, present, and future involvement in the world economy; and stimulate further research in this area.

Edited by Deborah Anne Palmieri
Russia and the NIS in the World Economy: East-West Investment, Financing and Trade
Westport, CT: Praeger Publishers, 1994.