Printer Friendly

Moscow learns the language of business; integrating a government-run economy into the global marketplace takes more than exchangeable currency, stock markets and commercial banks. Much more.

Five years ago, Soviet President Mikhail Gorbachev set in motion the gears of pestroika, the restructuring initiative aimed at increasing Soviet productivity. In September he backed a proposal by Republic of Russia President Boris Yeltsin to implement a free-enterprise economy within 500 days. One of its goals it to integrate the Soviet economy into the global marketplace by adjusting Soviet business practices to mesh with those of the free market. The USSR has made certain strides toward establishing the systems and institutions necessary to expedite its full participation in international commerce. The achievements and shortcomings are explored here.

The focus of the business world has shifted to Moscow. With the advent of pestroika, the Soviet Union's industrial infrastructure, the volume of its products, the extent of its debts and the inadequacies of its accounting system have fallen under the scrutiny of businesses from Tokyo to New York to Paris. One thing foreign investors and entrepreneurs are finding is confusion. In a country where an accounting profession has never existed, financial numbers tend not to mean much. The valuation of assets, for example, has been so theoretical that it is, for all practical purposes, useless. In fact, Soviet accounting is really no more than a bookkeeping system managed by low-level retired women and inexperienced new graduates of technical schools. In addition, financial and accounting information has, in the past, been distorted by the government in the pseudo-interest of national security. Further complicating the situation, prices have been distorted by the arbitrary introduction into the marketplace of billions of unbacked rubles--18 billion rubles last year alone--by the government, which has run the banks.

Incorrect or nonexistent financial information can mean trouble for both foreign and Soviet companies that want to invest in the Soviet Union. The problem must be solved on several fronts.


First, the Soviet economy needs a new, independent national bank that is subordinate only to the Supreme Soviet (the Soviet Parliament) and the law. The current state bank obeys the Council of Ministers formally but, in fact, responds to pressure from the Central Committee of the Communist Party. A phone call from this committee is enough to justify printing more rubles. The lack of backing by any standard or commodity leads inexorably to inflation.

In addition to circulating worthless rubles, two other factors doom attempts at economic reform. One is the fact that banks pay interest of only 2% to 3% a year--far less than my estimated inflation rate of 18%. Citizens therefore keep their money at home, ready to spend should an opportunity arise. The other factor is the scarcity of products. When consumers have cash in hand, nothing to buy and no reason to save, prices inevitably will rise.

Until 1986, there were three Soviet banks, all state owned. In 1988, three more state banks, also run by the government, were formed for specific financial purposes: construction of housing, schools and hospitals, agricultural investment and saving.

In that year, the first commercial banks also were opened. These cooperative, publicly held banks were not state banks, although industrial ministries were among the founders of some of them. For example, Tehknobank was created at the initiative of the city council of Moscow. Capital of 6.2 million rubles was raised in shares valued at 100,000 rubles. Shareholders received a 5% return at the end of the first year. Tehknobank already has lent money to transportation cooperatives, and to support the growth of consumers goods, it plans to lend to military factories that are converting to civilian production.

The second nonstate bank, the new Credobank, is licensed to open foreign currency accounts for enterprises doing business abroad. For the first time, hard currency on account in a Russian commercial bank can be given to bank customers in any country in the world or deposited in any foreign bank. This means Credobank also can pay dividends in foreign currency.

The existence of such banks surprises both Soviet and Western business people. The Westerners are surprised to find that commercial banks are only now beginning to operate and that there still are no private banks; Soviets are surprised to see such revolutionary new banking concepts in their country. These banks are totally commercial enterprises creating their own financial data. Three hundred such commercial banks will facilitate the creation of a modern accounting system.



In all probability, the specialized state banks will be turnedinto specialized commercial banks, and the central State Bank eventually will become independent of the prime minister and cease the arbitrary issuance of paper money. This will bring about the second major change needed to correct a fundamental problem with the Soviet economy: a new credit and budget policy. New policies will limit budgetary spending which, in turn, will limit inflation.

The state budget in 1989 allotted 20.24 billion rubles to the military but, in newspaper accounts two months later, the Soviet minister of defense said military spending had surpassed 70 billion rubles.

Both of these figurs are wrong. The problem is that the accounting and bookkeeping system of the individual ministries (and of enterprises) does not correlate with the methods of the central government budget calculation. This has led to a budget deficit which I estimate for 1990 at more than 100 billion rubles (the official estate is 50 billion rubles), which is about 11.5% of the gross national product.

It would seem that, under such conditions, the government would restrict credit, but the interest rate on credit remains only 2%. Even more absurd, credit is granted to enterprises facing bankruptcy. Also, a number of joint ventures involving foreign companies have taken advantage of this inexpensive money to increase their cash position.


In the near future, foreign enterprises in the Soviet Union can expect higher interest rates. They also can expect some revolutionary new avenues of investment on the Soviet scene: stocks, bonds and other commercial paper.

In early 1990, a few publicly held companies were created and a few stocks are circulating. In July, the USSR Council of Minister adopted two regulation dealing with stockholding and shares. In the same month, one of the largest state banks, Zhilsotsbank, was turned into a stockholding commercial bank by the Kremlin, with foreign entities and individuals allowed to buy shares in it.

The decentralization of the banking system was accelerated when the Parliament of Russia, the USSR's largest republic, declared on July 13th the creation of a state bank in its territory, independent of the USSR state bank. Such decisions create the necessary elements for a market economy in the Republic of Russia. Preliminary discussions are under way in the Supreme Council to pass laws tht will enable foreign business people t be among the founders and shareholders of Soviet enterprises.

The Soviet Union has no experience in this area. Cooperation with the West will be essential in the complex process of issuing, buying, selling and overseeing stocks, bonds and other instruments.

The emergence of a stock exchange depends on two conditions. One is an agreement between several state banks, cooperative banks and shareholdings banks concerning the operating rules for trading securities. Also, given the totalitarian history of the Soviet Union, it will be important that the exchange operations and share possession be anonymous.

To develop a free-market economy, it will be necessary to establish and operate a stock exchange and privatize at least 50% of state-owned companies. Brokers, who do not yet exist in the Soviet Union, also will be necessary; this means new training programs will have to be developed.


In May 1990, the first Board of Trade, a commodities exchange, was created. In September it became operationa. The founders of the board are a number of Soviet enterprises and cooperatives and a Soviet-Yugoslavian-Italian joint venture. Initially, the Board of Trade mostly will carry out barter operations.

In spite of the current scarcity of goods in the Soviet Union, the Board of Trade will become the heart pumping blood into the new arteries of the market. Available goods will come not only from the allowed inventory levels worth 500 billion rubles but also from another 200 billion rubles' worth of hoarded goods being stored by enterprises.

Such inventories during times of inflation and scarcity might surprise some Westerners. One reason for the storage tactic is that the ruble is all but worthless. Enterprises have little success trying to use rubles to buy production materials. Domestic bartering proves more effective, though, of course, more awkward. For example, a company would more readily procure bricks by proffering, say, telephones that it would by paying in rubles.


Perhaps one of the most important changes that must take place is in the field of accounting. The current system does not allow for the realistic valuation of products or assets. For example, the concepts of depreciation and current market value do not exist. These gaps lead to disparities between government and commercial financial numbers. The inaccuracies also make it difficult for managers and potential investors to make educated decisions.

Until this summer, there was only one auditing entity in the Soviet Union, INAUDIT, which was created by the Ministry of Finance to oversee joint ventures with foreign companies. It did not audit Soviet enterprises. This summer, two foreign accounting firms, Ernst & Young and Arthur Andersen & Co., were licensed to practice in the Soviet Union. More will certainly follow, but, for the time being, the concept of auditing is quite new to Soviet enterprises.

The presence of accounting firms will lead to the creation of a genuine accounting profession in the Soviet Union. Currently, the accountant/bookkeeper has little prestige and earns less than half the salary of an engineer of economist; but accountants are going to prove essential in the shift to a free-market economy with international connections. If accounting is the language of business, Soviet accountants are going to have to learn that language and create a Soviet dialect.

In June, President Gorbachev signed the Law of Enterprises of the USSR. It will take effect on January 1, 1991. The law states that all companies, whether state owned or private, have equal rights. (A law governing foreign investment and joint ventures is being drafted now.) The law of enterprises also protects commericial secrets. No one--government, union or industrial ministry--can usurp the right to financial information not specifically required by financial reporting law.

Three articles of the new law deal specifically with accounting: article 32 is devoted to the operational accounting and bookkeeping at enterprises; article 34 defines the responsibility of enterprises to follow accounting and tax regulations; article 35 legalizes government audits for tax purposes but specifies that the government may request only relevant information.

The law also allows, for the first time in Soviet history, an enterprise to declare bankruptcy. Previously there was no such term in Soviet law; enterprises suffering losses got subsidies from the state. When a Soviet or joint venture enterprise is being closed, a special abolition committee has to be created to assess debts and investigate the creditors' claims. After all claims are satisfied, the employees and foreign investors of the enterprise receive their investment in either currency or securities.

In May 1990, the Soveit Union also adopted its first tax law. It embraces joint ventures and other organizations created with the participation of foreign entities and Soviet and foreign citizens. The law gives official tax inspectors the right to check such an enterprise's monetary documents, bookkeeping records and other documents relating to the payment of taxes; to fine enterprises; and even to shut down their operations.

By September, 2,060 joint ventures had been registered in the Soviet Union--1,200 of them in Moscow, where a state tax inspection office is being created with help from the New York City accounting firm of Weiner Associates. Overall, Soviet enterprises involved in foreign economic relations and joint ventures totaled 17,000 as of September 1. Obviously, there exists tremendous interest in foreign trade and, necessarily, international accounting practices.


The establishment of tax audits, the development of a banking system and the introduction of auditing firms are beginning to create opportunities for Western business people who want to objective information about the financial status of a potential partner in a trade deal or a joint venture. They also make it possible, in some cases, for Soviet organizations to guarantee payment for foreign goods purchased, which has not been possible since the government stopped backing all foreign trading.

As long as Soviet and international accounting practices differ and there is no common language for expressing financial information, Soviet and Western companies will have to be careful when they deal with one another. Western companies need to understand the Soviet tax structure and the lack of a coherent system of accounting for financial transactions. Soviet enterprises having little or no international business experience, will need the help of auditing firms to interpret financial information.

One thing is clear. The Soviet Union's dramatic progress toward a free-market economy can go only so far before the lack of an adequate accounting system derails all financial dealings. But with private banking controlled by established laws, with financial reporting overseen by independent auditors and with modern, internationally recognized accounting methods, the Soviet Union will quickly join the world of global commerce.
COPYRIGHT 1990 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Kvint, Vladimir
Publication:Journal of Accountancy
Date:Nov 1, 1990
Previous Article:OPEB: improved reporting or the last straw? The FASB should rethink parts of its proposal on postretirement benefits other than pensions.
Next Article:Collateralized mortgage obligations (CMOs).

Related Articles
Western accounting arrives in Eastern Europe; even in the Soviet Union, managers are being taught to measure profit and loss.
Gronich, Stuckey win Most Ingenious Deal.
Marketing U.S. cosmetics in the CIS.
Turning swords into market shares.
Russia's unseen revolution.
Go-go global.
From Marx to market.
RUSSIA - Jan. 13 - Popularity Of Putin On The Rise.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters