Disintegration of Soviet Union spells trade trouble.

Experts say short-term profits remain unlikely in turmoil

Experts proffer a dismal appraisal of potential Soviet-American joint ventures -- due to the Commonwealth of Independent States' shaky infrastructure and struggle to establish leadership -- and say it may be impossible at this point to realize any short-term profits from them.

The introduction of privatization in the former Soviet Union inspired a new era of entrepreneurship and opened the floodgate to opportunities for international trade. It also caused some Southern California-based business owners to rethink the prospects of doing business with the ex-communists, although hard currency is in scarce supply in the 15 emerging republics and no fixed trade restrictions have yet been set in place.

Proposed business ventures generating from the Southland vary in range and complexity, from the construction of one of the world's largest power generators to a smaller international tourism business.

In July, MagneTek Inc., a Los Angeles-based electrical equipment manufacturer, announced a joint venture with Electrosila and Leningradsky Metallichesky Zavod, both based in St. Petersburg. As a result of this agreement, MagneTek Power Inc. was formed. Its first project will be to design, manufacture and install a 15.5 megawatt hydroelectric generator, with the equipment manufactured at Electrosila and LMZ facilities in St. Petersburg and shipped for installation and assembly at Tacoma Public Utilities' Wynoochee Power Plant. MagneTek holds 51 percent of the venture and the Soviet firms divide the remainder. The new company publicly announced its $3.6 million contract award from Tacoma Public Utilities in September.

Hoping for a larger percentage of the North American market, the U.S.-based Soviet-American joint venture was completed, in spite of the recent upheaval in the new Commonwealth.

From a "traditional" American perspective, the advantages of the open market in the Commonwealth presents a bounty of opportunity to American investors. In reality, the topsy-turvy nature of the economy creates such overwhelming demands, they can only be handled by corporations with major assets, said Jon Goodman, director of the Entrepreneurial Program at University of Southern California.

"It is not a game for people with shallow pockets," Goodman said. "What you have in burgeoning, emerging markets like this where there are no rules is total chaos."

Like MagneTek, Chevron Overseas Petroleum Inc., a subsidiary of international oil giant Chevron, is devising its own joint venture with the former Soviet Union. Negotiations, now underway, call for a long-term mining agreement to tap into Kazakhstan's huge supply of oil.

Company spokesman Dan Johnson said the negotiations were probably several years from introducing a fresh supply line of petroleum to the world. He said patience has been necessary to deal with regional jurisdictional disputes, as new production standards and practices are set in place.

Some companies find creative methods for offsetting trade difficulties with the Commonwealth. They accept barter for goods or assume the risk of involving a third-party nation as an intermediary in the transaction. This helps reduce the strangle-hold of a confusing legal system and rampant inflation resulting from radical reforms, said Abraham Becker, director of the Rand/UCLA Center for Soviet Studies, a graduate training institute for public research and education.

Today's investors in the former Soviet Union can best be described as big risk takers because they are willingly walking into a hostile environment. In the absence of government guarantees and backing, the companies are on their own in completing multinational transactions.

Local markets' conditions in the independent regions merely complicate the risks. But the former Soviets still hold the trump card in the form of cheap labor and an availability of resources.

Many of the exports are based on barter or countertrade exchanges. Yet, many of the transactions are up in the air, since on-time delivery of goods presents a chronic problem.

Dr. Richard Rahn, former vice president chief economist with the U.S. Chamber of Commerce and president of Novecon Corp., a Washington, D.C.-based firm that handles financial investments in Eastern and Central Europe, offered a three-point plan to end problems of inconsistent trading.

"The Soviets have some unique problems," Rahn said. "There is still too much of the old Soviet/communist mentality and a lack of understanding of how the market system operates."

This lack of understanding has led to confusion, which in turn has weakened the country's infrastructure. To restore order, step one is to guarantee private property rights and decontrol prices, then focus on the privatization process, removing barriers to trade, he said.

An overhaul of the tax system and restructuring of regulations is necessary to keep these reforms intact, he added. The final step in the process is to eliminate the need for barter transactions by establishing a strong monetary system or utilizing foreign currency to restabilize the economy.