Russia and the New Republics Part I

[Deb Palmieri on Russia Table of Contents]

The following article was published inThe International Review for Chief Executive Officers in 1994. The International Review for Chief Executive Officers is published by Sterling Publications Limited a subsidiary of Sterling Publishing Group PLC.

U.S.-Russian Business and Economic Relations

U.S. antagonism vanished when the Soviet Union collapsed and American businessmen saw never-ending business opportunities opening up. This article sees trade ties between the two nations growing.

The past decade has witnessed a major shift in U.S. economic relations first with the U.S.S.R. as it was, and now with Russia and other nations of the Newly Independent States (NIS).

An economic relationship which, during the Cold War and up until the early 1980s could be predominantly characterized as autarchical, minimalist and hostile, can now be hailed as integrative, cooperative, hopeful and friendly. Both the West and the former Soviet Union (FSU) have executed a volte face which has replaced the high politics of defense with economics as the pressing agenda for the twenty-first century.

Past legacy

Until the Gorbachev period (1985-91), the U.S. had one of the lowest levels of economic activity with the U.S.S.R. of any major Western nation. For decades, the U.S. established and enforced a blockade against the Soviet Union and its Eastern European allies to prevent their access to Western technology, and especially those commodities which might aid and abet the expansion of Soviet military might. The U.S. led a policy of embargo and sanctions towards the Soviet Union beginning in 1948. Combined with the Soviet desire to form its own economic bloc, the Council for Mutual Economic Assistance (known as either CMEA or COMECON), the end result was Soviet isolation from the post-World War Two international economic order. This meant that the Soviet Union was not a party to the founding or membership of key global institutions including the General Agreement of Tariffs and Trade (GATT), the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF) and the World Bank.

As a result of these policies, U.S.-Soviet trade was minimal. Hostility, suspicion and distrust in foreign policy spilled over into economic affairs and fueled an isolationist strategy of one towards the other. Some thaw was evident, however, during the 1970s, when trade levels rose somewhat as a result of the Nixon-Brezhnev Summit of 1972. U.S.-Soviet economic relations assumed more of a cooperative character in part due to a foreign policy strategy that sought to "entangle" the Soviet Union in a "complex web of interdependence."

But by the late 1970s and early 1980s, the fledgling relationship disintegrated because of hostilities spawned in large part by a Soviet expansionist drive into the Third World and particularly the invasion of Afghanistan in late 1979. Economic sanctions were again used as a technique to punish undesirable Soviet foreign policy behavior. The Carter and then Reagan administrations imposed a series of economic and political sanctions to express U.S. outrage, including a grain embargo, diplomatic recalls from Moscow, the prohibition of U.S. participation in the 1980 Moscow Summer Olympics, and a freeze on licenses to export high technology to the Soviet Union. Following the Soviet imposition of martial law in Poland in December 1981, former president Reagan initiated trade sanctions to block the sale of equipment to build the Yamal pipeline, which would carry gas from Western Siberia to Western Europe. Such negative sanctions, which were eventually lifted, nonetheless resulted in a suppression of U.S.-Soviet trade until the early 1990s.

The U.S. responded positively to the reforms of Mikhail Gorbachev, when he came to power as General Secretary of the Communist Party of the Soviet Union (CPSU) in March 1985. Gorbachev demonstrated his determination to initiate major economic reforms in the stagnating inefficient and bureaucratic Soviet economy, especially in the sector of foreign economic relations with the West. Gorbachev viewed, as did his predecessors, foreign economic ties with the West as the critical factor to spur a scientific and technological revolution that would stimulate the growth and development of a modern Soviet economy. Towards that end, until he resigned in December 1991, he initiated a vast array of policies and undertook bold initiatives to cement a strong Soviet-Western, and Soviet-American economic relationship.

Contrary to its previous isolationist posture towards the U.S.S.R., the U.S. began to play an active role with its European allies to redefine a new and productive relationship with the Soviet Union, especially upon the collapse of the communist empire in 1989 and the disintegration of the U.S.S.R. in December 1991. Because of these factors, and while in the midst of its own economic recession and needing to expand domestic markets into former communist territories, Americans began viewing Russia's economic potential anew with the passing of the Cold War. No longer was Russian potential seen primarily from the vantage point of how its resources could fuel defense capabilities and outstrip America in the arms race. America now viewed Russia as a land of economic opportunity and searched for trade and investment outlets to complement its own growth needs in mineral resource development, oil and gas prospecting and telecommunications. It looked into a whole array of investment projects and other trading opportunities encompassing a variety of agricultural and industrial commodities.

As a result of this reassessment, U.S.-Soviet trade activity began to increase from 1989 to 1991. U.S. exports of manufactured articles, prepared foodstuffs and textiles rose substantially. Exports of live animals and animal products increased twelve-fold from 1989 to 1990. Still, aggregate exports declined from $4.3 billion in 1989 to $3.1 billion in 1990, before inching up slightly to $3.5 billion in 1991. U.S. imports of Soviet commodities experienced a jump from 1989 ($691 million) to 1990 ($1.1 billion) and then declined somewhat in 1991 ($794 million). Individual categories of import commodities to show marked increases included vegetable products, chemicals, base metals and works of art.

With Boris Yeltsin, elected President of Russia in summer 1991, U.S.-Russian economic relations have experienced significant expansion. Yeltsin - determined to set Russia on a path of Westernization, liberalization and democratization - embarked on a multifaceted cooperative strategy with the West which was particularly geared to cementing strong ties with the U.S.

With the Cold War as history, the U.S. accepted the challenge and cause célébre of playing a major role in transforming Russia's formerly socialist economy. This swords-to-plowshares philosophy was articulated by former president George Bush when he declared that the U.S.-Russian partnership was destined to "become one of the largest two-way trading relationships in the entire world."

Significant developments

Two of the most significant developments in the American-Russian commercial relationship were agreements emerging from the summit talks between Bush and Yeltsin in June 1992 and the April 1993 Vancouver Summit initiatives between President Clinton and President Yeltsin. The Bush-Yeltsin summit meeting can be considered among the most important economic developments between both nations since the Nixon-Brezhnev Summit of 1972. Both leaders signed the U.S.-Russia Trade Agreement which provided for reciprocal Most Favored Nation (MFN) tariff treatment, improved market access for both sides and other business incentives. Two important treaties were signed, the Bilateral Investment Treaty and the Treaty for the Avoidance of Double Taxation of Income. Both treaties created a more favorable business climate and eliminated previous barriers and disincentives to trade.

The Clinton-Yeltsin meetings that convened at the Vancouver Summit were equally impressive in their commitment to expand trade and economic ties. Besides a $1.6 billion aid package to Russia, the meetings showed optimism about the future of American-Russian trade. Clinton voiced his belief that a prosperous Russia "could add untold billions in new growth to the global economy, resulting in new jobs and new investment opportunities for Americans". He announced his support for an end to Russian exclusion from the Generalized System of Preferences (GSP). Consequently, Russia received GSP status effective on 18 October 1993. Under the GSP, the U.S. grants Russia duty-free access for over 4000 semi-finished and agricultural commodities. Economic support for Yeltsin's reform movement is indeed a major cornerstone of Clinton's policy towards Russia.

Other complementary developments cemented the new relationship, including programs initiated by the Export-Import Bank in February 1992 to finance U.S. exports to Russia. A major legislative action occurred on 1 April 1992, when House Joint Resolution 465 repealed the Stevenson-Byrd Amendments which removed a $300 million limit on trade financing with Russia and other restrictive legislation. Other government agencies set out in 1992 and 1993 to facilitate trade, financing and investment including the Department of Commerce (DOC), the U.S. Department of Agriculture (USDA) and the Commodity Credit Corporation. DOC programs include the establishment of the Business Information Services for the Newly Independent States (BISNIS), an up-to-date information service on trade regulations, legislation and market data; the Consortia of American Businesses in the NIS (CABNIS), a program combining the resources of small- and medium-sized American businesses to enter the NIS marketplace; and the Special American Business Intern Training (SABIT) program, that sponsors executives and scientists from the former Soviet Union to serve as interns in American companies.

As a result of these changes, business volume has increased. Studying the distribution of joint ventures in Russia by foreign partners as of April 1992 shows the U.S. leading developed countries in registered joint ventures with 14.3 per cent of the total market share. Germany follows with 13.4 per cent, Sweden with 7.6 per cent, Finland with 7.5 per cent and Italy with 7.1 per cent. While statistics of U.S. trade with 12 FSU republics show trade volume similar to 1992 levels ($3.6 billion U.S. exports and $801 million imports), this disguises the fact that U.S.-Russian imports and exports are experiencing significant gains. First quarter 1992 U.S. exports compared to 1993 first quarter jumped from $206 million to $427 million. U.S. imports soared from $34 million to $240 million during the same period.

Despite the aforementioned optimistic trends in U.S.-Russian economic relations, serious obstacles impede Russia's opening to the West and the U.S.. Russia is a high-risk prospect in the global marketplace and that fact naturally deters investors, bankers and traders from conducting business. One cluster centers around continuous political and economic instability and social chaos now endemic in Russia. Other clusters of risks center around Russia's inability to guarantee contract enforcement or define ownership and property rights. Undefined property rights over enterprises, natural resources, and real estate constitutes a major obstacle to commercial development, since it creates the simple dilemma of determining who owns what. Other risks in doing business include indiscriminate and unannounced taxation of joint ventures or commodities; unauthorized confiscation of foreign funds from bank accounts; disregard for intellectual property rights and copyright laws, including outright patent stealing; lack of business experience among Russian entrepreneurs; lack of creditworthiness resulting in loan default; and finally, a skyrocketing rate of business related crime, including theft of shipments, kidnappings or murders of executives, extortion attempts, outlandish demands for protection compensation, illegal investments or false financial transactions, embezzlement of loan funds and theft of state property.

Nonetheless, steps are being taken to mitigate these risks, and future prospects for the expansion of business and trade ties between both countries are good. I expect steady, upward trends in joint venture partnerships, volume of import-export activity; and project financing programs. The U.S. will gain a strong competitive standing vis-à-vis Europe and Japan in Russia. Trade and investment barriers, and risk factors will continue to moderate and decrease as Russia slowly but steadily assimilates into the global economy. Fruitful business activity is a given for the future.

This article was written in advance of many political and economic changes in the region and care should be taken in interpretation of facts, acres and other data.

Deborah Anne Palmieri
The International Review for Chief Executive Officers
Published by Sterling Publications Limited a subsidiary of Sterling Publishing Group PLC, 1994