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U.S.S.R. Trade: Should U.S. Firms Invest Now or Wait for Better Times?
The Soviet Union. Is it a market paradise for Western capitalists, with its 287 million consumers clamoring for investment and technology, eager to obtain commodities ranging from toothpaste to telecommunications systems?
Or is it merely a high risk gamble for small and giant investors alike - a fragile economy teetering on the brink of disaster; a country threatened with national disintegration?
It is probably a bit of both.
The Soviet economy is in bad shape. 1990 economic performance declined compared with 1989. Decreases registered in industrial, fuel and energy outputs (especially crude oil and coal) as well as agricultural products. While slight increases showed in consumer, light industry, and foodstuff production, the improvements were still not enough to meet domestic demand.
While the weakness of the Soviet economy guarantees that short-term commitments in general won't yield quick or high returns, a patient long-term investment strategy will find a gold mine in Moscow, the outlying republics and the untapped resources of the Soviet Far East and Siberia. Here's why.
The volatile political risk factor will eventually subside. There is no doubt that instability and chaos in the Soviet Union now presents an uninviting investment climate. President Gorbachev is now in a precarious situation, with his leadership severely challenged form military conservatives on the right and political radicals on the left.
But viewed in a historical context, such circumstances are neither unusual nor permanent. The Soviet Union has always regained stability following major catastrophic changes - after the 1917 Bolshevik Revolution, World War I and the civil war; and after the loss of 20 millions lives and destruction of its most productive regions in World War II.
Despite Cold War and global economic isolation, the mid-fifties and early sixties under Khrushchev, and the late sixties and seventies under Brezhnev were periods of overall economic growth and productivity.
Stagnation had set in by the eighties and with his leadership ascent in 1985, Gorbachev was determined to set the economy on a new course. He turned old communist dogmas upside down, causing an inevitable and necessary period of upheaval, and launched a search for the right balance between democratization and marketization.
Within the next decade, the turmoil will subside, the problems dogging the Soviet economy will iron out; new political and economic institutions and a steady course towards modernization will prevail regardless of whether the Union of the 15 Soviet Socialist Republics stays together or not.
Either scenario can be beneficial to the West and there are trade-offs for better or worse each way. On the one hand, national unity will mean more central control and greater security and reliability for foreign economic relations, although at the cost of reduced flexibility.
On the other hand, independent statehood for the republics will mean more autonomous economic decision making and less red tape. It will also bring about greater uncertainly over the Republics' ability to service debt and develop their diversified economies without subsidization from the center.
The shift to a market economy is not contingent on Gorbachev's persona for success. Soviet decision makers from the highest officials in the Council of Ministers to plant managers realize that the old system of central planning and state ownership simply doesn't work and has to change.
The long-term prospect for Soviet market potential is good. The reality of the Soviet economy is that 287 million people live in a society that cannot produce adequately to meet modern consumer demand. Their economy is now linked into the broader global marketplace, where buying and selling with the West is increasingly commonplace.
This means Americans need to understand more about Soviet demand by analyzing demographics, consumption patterns, spending habits, income levels and cultural preferences. The diversity of the Soviet people in 15 republics, crossing 11 time zones with over 170 nationalities and 200 languages or dialects renders this a complex task and not amenable to simple stereotyping.
What is suitable for cosmopolitan Russians in Moscow might not be appropriate for Estonians in the Baltics. Conducting the right kind of advance market feasibility analysis and marketing research for investment of product targeted to region or sector is essential.
Now is a prime time for American market entry. Of all the major Western countries, the U.S. has the smallest share of trade with the U.S.S.R. The former West Germany was Moscow's leading Western trade partner.
But following unification, Germany's ability to pour resources into Soviet ventures was seriously eroded by the demands imposed on it from an archaic and crumbling East German economy. Other traditionally strong West European trading partners have also found themselves pressed into helping the Eastern nations. This means less for Moscow.
That is why Gorbachev is courting alternatives in the Pacific Basin, including the PRC, South Korea and Japan to secure more aid, investments, financing and joint ventures. Those nations are receptive.
The Chinese have extended generous commodity loans for food aid and Soviet-Chinese trade turnover is rapidly increasing. South Korean President Roh Tae Woo visited the U.S.S.R. early this year accompanied by business executives and numerous agreements and protocols were signed to promote economic ties.
Despite negative press which touted the failure of Gorbachev's recent Japan visit with Prime Minister Toshiki Kaifu and the fact that the Kurile Islands dispute remains unresolved, Japanese executives are quietly involved in a wide range of economic cooperative ventures with the U.S.S.R., from defense conversion to oil extraction projects, and they regularly exchange manufactured goods like cars and electronics for Siberian natural resources.
The point is that the weaning of the Soviet Union from Eastern Europe caused West Europeans to divert resources from Moscow creating a vacuum which the Japanese well understand can be extremely profitable, especially given their geographical proximity and need for natural resources.
For Los Angeles, the State of California and the West coast in general, a similar trade need exists for the exchange of manufactured goods, natural resources and projects to develop the Soviet economic infrastructure and is now being cultivated by many traders and investors.
One problem is that the U.S.-Soviet trade presently suffers from a marginal and undiversified structure.
Under such circumstances, opportunities for balance, proportion and diversification in trade are unlimited, since the Soviets need virtually everything. But there is still the harsh reality that the U.S.-Soviet trade structure is still operating in the shadow of the Cold War.
Numerous export control acts, the Jackson-Vanik and Johnson Amendments severely inhibit trade and volume and diversity with a seemingly impossible set of restrictions subject to further contractions during the periods of superpower conflict, such as the invasion of Afghanistan.
The U.S.S.R. still hasn't been granted most-favored-nation trading status, meaning that wildly inflated Column II tariffs in the Harmonized Tariff Schedule for communist countries can kill almost any deal.
In order to foster the normalization of economic relations, each side must bear some responsibility for openness and dialogue. What needs to happen in the Soviet Union for East-West trade to flourish is a combination of factors including a convertible rouble, privatization, stabilization, institution of a private property rights system, and the resolution of union vs. republican rights.
What the United States needs to do is to overhaul its antiquated legislative system which was the product of an earlier era of non-cooperation and replace it with a free trade policy with formerly communist countries.
The United States should and can help the Soviets define a new role in the international economic system by restructuring GATT, the World Bank, the International Monetary Fund and the Organization for Economic Cooperation and Development (OECD) to become more supportive of the reform process.
In doing so the Unites States will help itself by forging an economic alliance with a country destined for future economic prosperity.
Deborah Anne Palmieri
Los Angeles Business Journal
International Trade Supplement
May 13, 1991
Copyright 1999 The Russian-American Chamber of Commerce®
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