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Russia's unseen revolution.

The U.S.' $2.5 billion trade turnover with Russia is less than that with Sweden and is puny compared with German-Russian trade. Are U.S. firms blinded by short-term political risk? Two years after its first journey to Russia, CE gathered a group of CEOs and their wives for another look inside...

The Soviet Union collapsed in 1991. The Communist system did not. Russia's present predicament stems from this awful truth. While it is true that reform's chief protagonist, President Boris Yeltsin, has lost most of his recent battles with an anti-reform Parliament, far more has been achieved in Russia than most people (journalists in particular) realize. With some exceptions, such as the energy sector, prices have been liberalized, and markets have evolved. When Chief Executive first brought a group of CEOs to Moscow in 1990, many times it was said that Russians would never learn the basics of a market economy. Today, complaints in Moscow and elsewhere are leveled at "entrepreneurs" who practice a rough and bloody form of capitalism veering into the black market.

With 150 million vouchers already distributed to Russian citizens, the world's largest privatization effort is under way. These vouchers can be exchanged for State property, shares in joint-stock companies, agricultural land, residential flats, or cash. A lively secondary market in these vouchers has emerged as people stand at busy intersections or subway stations holding signs signaling a desire to buy or to sell. Anatoly Chubais, first deputy prime minister in charge of privatization, reports that as of January 1993, Russia had 46,815 privately held companies. The next step, he says, is to target the 5,500 State enterprises employing 17 million people. More than 95 percent of all shops in Russia will be in private hands by the end of this year, he believes. "Our main goal is to create a middle class through ownership," Chubais says. "Since our first auction in April 1992, we were surprised how minimal was the negative reaction. Auctions are now routine." The aim is to make this process irreversible.

Much of this activity is centered in cities headed by reform-minded leaders. St. Petersburg has sold 48 percent of its retail shops, 30 percent of its State-run restaurants, and 34 percent of other services. Nizhny Novgorod (formerly Gorky) and Stavropol have privatized half their shops and 80 percent of their restaurants. Nizhny Novgorod's governor is Boris Nemtsov, a 34-year-old radiophysics graduate who has proudly spearheaded the privatization of 1,500 enterprises, including the region's largest truck plant. (Eighty percent of the construction industry and 70 percent of housing should be in private hands by the end of the year.) It's useful to keep in mind that in 1982, before Perestroika, there were 25 joint ventures and no joint-stock companies.

As CE's participants learned in a week of meetings with Russian business and political leaders in Moscow and St. Petersburg, the controversy is not over the transition to a market economy, but over what terms and how quickly. Yegor Gaidar, Yeltsin's deposed prime minister, launched a form of shock therapy by liberalizing prices early last year. Unfortunately, the attempt to de-monopolize State industry did not follow. The situation was aggravated by the large credits given to these monopolies. The managers of these factories are not enthusiastic about reform, accustomed as they are to getting all the resources they want regardless of consumer demand. The leaders of the 2,200 largest State enterprises are represented by Arkady Volsky, a former adviser to Yuri Andropov, who regaled our group (see sidebar) at a dacha formerly used by Khrushchev, claiming he isn't anti-reform, but wishes to take a gradual approach instead. Some worry that this is a smokescreen to throttle reform.

The great fear is hyperinflation. With price levels increasing 30 percent a month in the last quarter of 1992, attempts to slow the growth of the money supply and to halt the generous dole of credits to State enterprises meet with stiff opposition in a legislature that was formed under the old Soviet Union. When Viktor Chernomyrdin replaced Gaidar as prime minister, it was viewed by many as a step back, but he quickly retreated from price controls, learning that the alternatives to reform are illusory.

Whatever the outcome of the constitutional crisis or Yeltsin's future as president, there's no turning back. Even Volsky admits this. Millionaire entrepreneur Konstantin Borovoi, who is running for mayor of Moscow, said, recently "One positive aspect is that the old mentality is gradually dying, but it's not happening as fast as we'd like."

As the dozen American CEO participants and their wives who ventured through Russia discovered, doing business there carries risks, but opportunities also abound. One tack, taken by Cambrex's Cy Baldwin, proved useful. He wanted to pursue contacts with technical institutes with solid research credentials. His aim: Develop new technology for use in the West. As it happened, fellow American Vincent Cook, CEO of SAIC, had developed just this sort of information in an earlier research effort with a state institute. "I came 8,000 miles to meet a guy from California who had all the information I need to get started," quipped Baldwin. The group's discussion over six days of meetings and informal exchanges have been edited into the following narrative. Partici-pants are listed at right.


Marvin E. Miller (PrimeSource): In our 35 years of operations, we have found that different countries do business in different ways. In some countries, we must abide by government trading laws. In others, we deal directly with factories. I am still trying to discover the correct method of conducting business in Russia.

I have to speak directly to the technical people at the factories, but I can't seem to get through to them. I have talked with several foreign trade organizations, but the people there are not experts in our products and don't have any answers. Often, they choose to insulate me from contact with the factories.

Meanwhile, I don't know which trading companies to deal with. I have asked several people for the products we want to buy and bring to the U.S.--nails, plywood, hardwood, particle board--and they each approach the same factories. These factories must think 10 different people are here looking for these products. In the U.S., we would say this convoluted process is like shooting yourself in the foot.

Eric J. Oakes (Ahlstrom Pyropower): We also would like to set up a joint venture in Russia, but we continue to see a big gap between the expertise of group sections below the Minister of Fuel and Energy and that of the individual factories that manufacture the relevant hardware. Another problem is that middle management seems to scrutinize everything indeterminately for feasibility rather than to focus on achievable projects that would set up a basis for manufacturing.

Cyril C. Baldwin Jr. (Cambrex): We have a slightly different problem. In the past, we sold millions of dollars worth of products used to make vitamins in Russia. In the last two to three years, the production of vitamins has dropped dramatically because of the disintegration of the Soviet Union. We can no longer contact our customers, because the infrastructure through which we worked previously cannot provide us with the necessary information.

I would like to contact Russian technical institutes involved in chemical research. Other American companies larger than ours have already made these kinds of contacts, but it is difficult for us to find the information we need.

Pyotr S. Zrelov (Dialogue): We have been trying to solve this information problem. We have a joint venture with a company in Atlanta, the purpose of which is to find prospective partners for the joint production of technology.

We can recommend partners--there are people based in Moscow who have specific information related to your interests. They know what they are talking about--they are former members of the KGB. |Laughter.~

J. Mark Barnes (Western International Media): We don't care whether they are government or private, we just need information.

Valentin S. Mamedov (commercial banks Fonon and Elektronika): In the past, information was controlled by the government, which was arranged in a vertical structure--State, Council of Ministers, the ministries themselves, and individual entities. Information flowed down this structure to companies. Today, this flow is not controlled by the State, nor are our information services funded by the government budget. The result, in some cases, has been no information at all.


Mark V. Masarsky (Volhov Construction): Currently, Russian entrepreneurs are trying to remove the influence of government from the economic sphere. However, in the past, companies found it most profitable to deal exclusively with the government. To outsiders, this can be somewhat confusing.

For instance, I recently met with a couple of businessmen, and they waxed nostalgic about a time in the past when the bribes they had to pay were insignificant. Now, they complained, you have to bribe hundreds of bureaucrats, but you still don't get anything.

Whatever the present difficulties, I suggest you forget about the past--from now on, it's only private capital that has long-term interests. And forget about doing business with the Russian government. It is going to be a very bad partner.

Max W. Dajnowicz (General Motors Overseas Corp.): With some differences, of course, the same holds true in the U.S. Please don't encourage our politicians to get involved in business. They have never sold or manufactured anything. Most of them couldn't sell dancing girls to lumberjacks. If you're talking to government, you're talking to the wrong people.

F. James Anderson (Brush Creek Mining & Development): In America, we do our best to keep our politicians out of the business world. Russia is a good example of what happens when you let politicians run businesses. We all cringe when we hear Russians talk about business contacts in America and hear them mention politicians.

Dajnowicz: With few exceptions, Russian politicians expect Americans to come over here with their bags full of money. On the other side of the coin, American businessmen expect everything will be as easy as it is in the U.S.

J.P. Donlon (CE): Isn't there some degree of mistrust of Western businessmen among the Russian people?

Zrelov: It is regrettable, but 80 percent of the people who come from the U.S. as entrepreneurs turn out to be crooks whose only goal is to steal something and go back home.

Peter Derby (Dialogue Bank): To be successful, you have to be here in Moscow, you cannot do it from New York. You have to live here, suffer through it. But if you stick with it, there is a real opportunity down the road.

Dajnowicz: You have to come here with fortitude and hang in there. It's not easy to travel in this country. It's not easy to make a telephone call. It's not easy to take a bus or a train or a plane. It's not easy to get water or services. But you have to come here and get your foot in the door so you are ready when the country really opens up.

George A. Skouras (Citibank): I disagree. Trying to get a foot in the door is the wrong approach to the Russian market.

If that's your attitude, you'll get burned. Ask German banks what happens when you come simply looking to establish a presence--which they did several years ago. They chalked up big losses.

For banks in particular, there are severe logistical problems. In financial services, there is a need to centralize such mechanisms as a payments clearing house where banks exchange checks with one another. But you cannot do that here, because too many people are gung ho about decentralization.

I think the correct approach is to move cautiously. Russia must decide on what type of reform it wants to institute and how it wants to facilitate communications.

Barnes: I think you may be saying the same thing, George. Max also is calling for a long-term approach. But keep in mind: Citibank and GM are businesses that can afford to wait for things to happen. The entrepreneur can't. We need more support.

Kirill N. Ivanov (Russian Agency for International Cooperation and Development): I speak for a State enterprise. Our organization is responsible for building and developing the proper investment climate in the country. We, the bloody bureaucrats, as people call us, welcome meetings such as this roundtable, but we don't want them to end in toasts, breakfasts, dinners, or seminars. We want them to lead to investment in our country.

We do not want to bottleneck projects, so entrepreneurs who can operate without us are quite welcome to do so. However, whenever a state permit is needed, we hope to organize our agency in such a way that entreprenuers are not forced to go from place to place. If there is a need for issuing a state license or permit, we'll deliver it without delay.

The goal of the government and this country is to develop clear and unambiguous legislation. In this attempt, we need technical training and assistance. So far, most of this assistance has come from European countries. The U.S. seems to talk a lot and do little.


Yuri A. Kanishchev (Rosinter/Kodak): One of the biggest challenges in setting up business in Russia is overcoming the huge number of customs and tax regulations--very often contradictory--that are passed in this country. Sometimes, a regulation passed in October will impose a new tax levy retroactive to August.

Derby: When I came here to start a bank several years ago, there weren't any banking laws, there weren't any corporate laws, and there weren't any collateral laws. And there was no legal foundation for a market economy. So I spent the first six months helping to draft new legislation. We used my CPA book as a model.

I started with the basics--determining what kind of infrastructure my bank would be able to rely on, teaching a teller what a teller needs to do. I did not analyze cash flows or look at long-term capital structures.

James A. Eiting (Midmark): In terms of infrastructure, Russia has excellent schools and research facilities, tremendous resources, and a strong arts background. But on the flip side, there is a decided lack of commercial law and many accounting inconsistencies.

When I look around, I see tremendous pent-up demand for almost everything. Our company is a potential investor in Russia. However, we have a finite limit of capital, which translates into limited time. Companies our size must set a narrow focus and then move quickly or we'll fall flat on our face. It would be useful if the Russian government helped us target available investments, so we could make our move without delay.

Vladimir Scherbakov (International Foundation for Privatization and Foreign Investment): Let's talk about some other financial issues that involve the government, including its effort to stabilize the ruble and make it more convertible. In this area, we have made many mistakes. Many people in this country hold a simplistic view of the ruble and its convertibility. The level of knowledge among our politicians in this respect leaves much to be desired. That's where technical assistance comes in.

Mamedov: Another financial issue is the system of payment that Russian businessmen can use in their dealings with the West. Commercial banks simply do not have hard currency available for our purposes. And a substantial portion of hard currency goes to pay off our debt to the West.

Moreover, our Western partners want government guarantees before they start underwriting loans. It took one year to arrange for a $1 billion credit from a Western bank. Our difficulties in getting it stemmed from the lack of confidence in Russia's political situation and economic stability.

I think there will continue to be a shortage of hard currency available to meet the needs of small and medium-sized companies. And so far, the American business community has underestimated the need for developing these types of businesses in Russia.


Emile Wolters (Parfusale): But there are some success stories in this category. Take, for example, Peremena, a cosmetics joint venture we formed with American consulting firm Alpha International Management Group and Sergei Glushko of Ukraine's Effect company. Parfusale supplies raw materials to Sergei for production of goods sold through the Effect distribution system. All the venture's partners receive a share of the profits.

Sergei Glushko (Effect): We use the raw materials from Parfusale to make our own line of products. But we also distribute products shipped to us by Hazel Bishop Cosmetics, a subsidiary of Englewood Cliffs, NJ-based Continental Health Affiliates. Chief Executive magazine introduced me to Continental Health's CEO, Jack Rosen.

Hazel Bishop contributes inventory and promotional dollars--from which it gets a profit in rubles. Those rubles remain in the CIS and are reinvested in additional promotional materials, packaging, and inventory. Eventually, we hope to export Effect-manufactured cosmetics to the U.S. We are already talking with several consumer chains in the U.S. regarding the sales of our products.

So far, Effect's sales of Hazel Bishop products have been strong. The first shipment was gone within days. These products and our own are complementary; they are sold side by side.

Marc M. Sussman (Alpha International Management Group): Here's yet another example of the opportunities that exist in Russia for entrepreneurs: Sergei recently realized the Bolshoi Theater was no longer receiving financial aid from the government.

We approached the theater and hammered out a licensing arrangement wherein our joint venture with Effect, called Peremena, is the licensee to find a fragrance company to launch a Bolshoi perfume for export.

Ivanov: But these success stories cloud the fact that up until now, total foreign investments in the private sector have amounted to no more than $4 billion. But even this modest figure does not square with reality, because in many of the joint ventures, the stated capital is different from the actual capital. We know from experience that only 20 percent of the 8,000 ventures that were founded in the territory of the former Soviet Union are in operation. And for the most part, they are not in manufacturing; they are in services.


Josif N. Ordjonikidze (vice-premier, Moscow city government): Let's narrow our focus and look at the economic situation in Moscow. Seventy percent of the joint ventures set up in Russia are based in its capital city. Within the foreign business community, Austria and Germany are in the lead in terms of capital investment injected into and the number of joint ventures.

Then there is the state and city privatization process, which we began last year. The experiences of the last three or four years have shown that the most effective way to move toward a market economy is to encourage direct foreign investment.

The law now allows long-term leases and the purchase of real estate. But of the total number of joint ventures in Moscow--this point has been made already on a national level--only 7 percent are in operation. The most promising ones are in defense conversion.

But we're coming up short in many areas--we don't have the capacity to meet our own needs. For example, Moscow needs 5 million square meters of office space. To date, the available space does not exceed 1.5 million square meters. We need 350,000 hotel rooms, but we only have 70,000. We also need 1.5 million square meters of housing space for foreigners who come to work here; we can offer 30,000 square meters.

Here are some other relevant figures: The number of people currently waiting to buy housing from the Moscow government is 170,000. They are prepared to pay hard currency, but we are not able to meet the demand. According to data provided by international tourist agencies, millions of people would like to come to Moscow every year, but our capacity does not exceed 500,000 because of the lack of hotel space, transportation, and food.

Anderson: Despite these statistics, I see Moscow taking giant steps forward in terms of development. Normally, when you enter a city, you count the cranes working in the city to see if it is successful. If there are seven or more, you can be pretty sure the city is vibrant and has an economic future. That's the case here. This city's economic star is on the rise.

Konstantin E. Bouravlyov (first deputy premier, Moscow city government): Let's talk more about privatization. Moscow leads other Russian cities in this area. In the past, almost 100 percent of all housing was owned by the government. Today, 17 percent of housing space is in private hands. Over 12,000 shops, restaurants, and catering facilities have been removed from government control and passed to collective or joint-stock ownership.

In the space of one year, 8 billion rubles ($13.3 million) worth of state-owned property passed into private hands. At present, 700 additional projects are under consideration to be removed from Moscow government control. They will become joint-stock concerns.

Our goal is to pursue privatization, while simultaneously ensuring the efficient operation of enterprises that pass into private hands.

Juergen Woller (Dresdner Bank): May the owners of houses freely dispose of them? Can they sell them on the market and make a profit? What are the maintenance obligations of the private owner?

Bouravlyov: Approximately 20,000 privately owned apartments have been resold at a profit. The title to private ownership includes the right to pass it on as an inheritance. The tax on such a transaction amounts to 1 percent of the cost of the price, or the cost of the property.

A 1993 joint venture with a that deals in real estate maintenance hopefully will allow us to decrease the State's role in the maintenance of properties.

Yuri Proshin (Main Administration for Services to the Diplomatic Corps): My agency was founded to meet the needs and requirements of diplomats and businessmen who have permanent business residence in Moscow. On the issue of upkeep, we have set up six regional bureaus implementing an extensive program of landscaping and other maintenance.

But our most essential service is the lease of office premises. We have 145 mansions and apartment buildings and more than 700 offices at our disposal. Lease terms and conditions vary. Average rents conform to international norms. Many Moscow mansions are being preserved as historical and architectural monuments thanks to the efforts of the city agency.

Zrelov: We lease an office building from the Moscow government. The cost of the lease is rather low and, therefore, when we signed the arrangement five years ago, we committed ourselves to doing a lot of renovations, including improvements of the grounds around the building.

Ordjonikidze: That is often the case with leasing arrangements. The company that holds title to land cannot sell it to another company before it completes all land improvement called for under the original arrangement. The Moscow government must be apprised of any sale, so a new title can be issued to the new owner.

Some big companies have entered our leasing market. Coca-Cola leased land and then built its own factory that produces 40 million liters of the soft drink per year. Siemens leased land from the city and built an office building there.

Scherbakov: One word of caution: Some companies prefer not to get permission from the government, and instead sublease space "under the counter." But companies that do so can be stripped of their titles at any moment.

Zrelov: Concerning a subleasing arrangement, Dialogue Bank won the title to one of the lots and to an old building in downtown Moscow. The initial intention was to use that building as a bank, but we later decided to sublease it to several tenants, including CNN. We obtained a permit to do so from the Moscow government, and we had to pay a levy equivalent to several percentage points of the profit we expected to make on the deal.

Scherbakov: Starting this year, land is also eligible to be sold as private property. Close to one of Moscow's airports, we plan to buy some land where the Olympic training center used to be, and we intend to use the land for hotels and cottages.

Donlon: What specific hurdles must a foreigner clear if he wants to lease or buy property in Moscow?

Ordjonikidze: If a foreign company wants to lease land from the government, it has to file an application with the Moscow land committee. In this application, the firm must specify the type of land it wants to lease, and how it wants to use the land.

The Moscow area is divided into 40 land zones, and each zone has a base price that has been approved by the Moscow City Council. The most expensive is the first land zone, which is located inside the Garden Ring--within 15 minutes walking distance of the Kremlin. The price in that zone is $450,000 per year per one hectare (2.47 acres).

One problem in Moscow is that there are many pseudo-owners. They can point to a building, tell you they own it, and even show you papers. If you accept that on trust and invest money in the property, you may well find in a year or so that your landlord or partner is a fraud. One such scam involved the governor's mansion. As you can see, Moscow, too, has its Brooklyn Bridges and those who sell them.

To protect against such misrepresentation, we have clear procedures for title searches, and we have a real estate management committee that has all the information prospective buyers or lessees need.

Vincent N. Cook (Science Applications International Corp.): Are there price controls to contain leasing costs, or are they open to inflation as are the prices of goods and services?

Bouravlyov: Until recently, we had little idea of property value in the context of an inflationary market economy. As part of a technical assistance program, some experts from the World Bank and the European Bank of Reconstruction and Development helped us in this area.

Given the current inflation rate, which has been running at about 25 percent per month, it was difficult to determine property values. The initial price of one piece of property, for example, was 15,000 rubles per square meter of housing in January 1992. In December, the cost jumped to 200,000 rubles. That's a fourteenfold increase.

In privatization projects, too, we still have not developed an index mechanism that would take into account the inflation rate. In November, we met with the experts from the World Bank and discussed the possibility of introducing estimation methods for factories and plants.


Miller: But all these things take time. How much time do you have before the Russian people change their minds about market reforms? Is stabilization possible within that time frame?

Bouravlyov: Our grace period has already expired. The government must continue to take specific actions, and it must continue to show progress.

Donlon: In that regard, what about the decision to sack Gaidar and to reimpose price controls? How are market-minded businessmen to view these moves?

Bouravlyov: Almost all producers and businessmen viewed these decisions as being opposed to market-oriented reform. But the First Deputy Minister of Finance recently told me the long list of price-controlled products will be canceled, and the only products remaining on the list will be those goods made by monopoly producers.

Meanwhile, I have a question for Westerners: We have made a sincere effort to stabilize our economic and geopolitical situation. How long will it be before Western businessmen are not afraid to bring their money to Russia?

Baldwin: There's a simple answer to that: Businessmen don't like to invest when uncertainties are significant. You could be operating a dictatorship or a democracy--whatever--but as long as we know what it is, it's easy for us to make decisions. American businesses have solid relations with companies in countries across the entire political spectrum.

By the way, we apply this principle at home, too. When the U.S. economy is uncertain--when we don't know whether to expect a recession or a boom, or we don't know which way Washington plans to go on tax policy--we tend to cut back on capital commitments.

Cook: I have experience in opening markets in Korea, Taiwan, and China. It was almost impossible to predict what would happen in China's markets because of the instability of the government. While I would never compare Russian markets to those of China, the same uncertainties exist. Yes, U.S. executives look for stability of the government and its policies.

Scherbakov: Your impressions about our instability come largely from the accounts published in your press. In turn, your press and government rely on people in their 20s, most of whom recently graduated from centers of higher learning. They are ambitious and think they know everything.

Ivanov: It is regrettable that the world is not treating us the way we should be treated. American legislation makes it impossible for American business to work profitably in this country.

Under your legislation, Russia is still in the category of Communist countries. For example, our Most-Favored Nation status was granted only on a temporary basis.

Here's another example of shabby treatment: I was truly shocked when I learned that anti-dumping duties had been put into effect with respect to one of the few products that brings in hard currency for us--uranium. Uranium is a high-technology product that Russia wants to export to the U.S. At stake in the dumping case was the option for Russia to make a deal worth $750 million, which also affects our ability to repay our foreign debt, of course. But the U.S. administration did its best to prevent us from gaining access to American markets.

Scherbakov: Here's another misinterpretation by the Western press. When Viktor Chernomyrdin proposed to extend preferential credits to the energy sector, it was taken to mean a return to the conservative style of management. That's not true. Here are the facts:

If you want to produce more coal, you need to dig deeper, and for that you need timber, metal, and investment. If you want to maintain the current level of oil production, you need additional investment in the production of pipes and pumps. To run a factory, you need spare parts, electric power, and money to pay your workers. If there are no credits, industrial output will shrink to nothing.

In the past, energy enterprises were State-owned. The government allocated operating capital as necessary. But one fine day, the government told them they were on their own--no more supplies and no more money. Go to the bank, officials said. But the annual bank lending rate ranges from 80 percent to 120 percent. When faced with that situation, many companies just fold rather than continue operating.

The same problem applies to agriculture. Collective and State farms were told the government is ready to buy grain from them, paying $13,000 per ton--a fivefold increase from last year's price. But farmers said even if they got that price from the government, they wouldn't be able to plant another crop, because they couldn't afford seed. The price of seed increased fiftyfold. The price of fertilizer went up seventyfold. The cost of agricultural machinery went up 20 to 50 times. Three years ago, the price of one ton of oil was 22 rubles; today it is 7,000 rubles. Farmers cannot buy gasoline for tractors. They cannot repay bank loans, because in some cases in this sector, interest rates are as high as 80 percent over three months.

This is why Chernomyrdin advocates providing lower-interest loans to the energy and agriculture sectors. Low means 20 percent instead of 100 percent. I wonder: How many of you here today would be able to meet these terms?

Therefore, I believe the decision to impose some price controls is not a step backward, but rather a step to protect valuable industry, to maintain production, and to keep people at work.

Baldwin: What's the likelihood of a return to an authoritarian regime?

Bouravlyov: We're certain there won't be a return to our old economic system. Even if this were something that one or two political groups would want, it is not a disposition shared by the Russian people.

Donlon: Any final comments on opportunities for American companies?

Bouravlyov: I believe there are many opportunities for America in terms of business partnerships in our new markets. Already, our children mostly watch U.S. video films and are familiar with American companies such as McDonald's and Coca-Cola.

Ordjonikidze: We have our tasks cut out for us, but we will continue to seek to improve our economic stability. And your participation in our quest is always welcome. We cannot do it alone.


F. James Anderson, chairman, Brush Creek Mining & Development, Grass Valley, CA, partner in a joint venture with Morrison Knudsen and the International Foundation for Privatization and Foreign Investment.

Cyril C. Baldwin Jr., chairman and chief executive, Cambrex, an East Rutherford, NJ, organic/medicinal chemicals company.

J. Mark Barnes, chairman, Outdoor Service, a San Francisco, CA, unit of Western International Media, a communications company.

Yuri N. Belenkov, director, Moscow's A.L. Myasnikov Cardiology Research Institute.

Per Benemar, chief executive, St. Petersburg's Gillette/Petersburg Products International.

Konstantin E. Bouravlyov, first deputy premier, Moscow city government.

Vincent N. Cook, chief executive, Science Applications International Corp., a McLean, VA, computer software systems, analysis, and design firm.

Max W. Dajnowicz, regional director, General Motors Overseas Corp. in Moscow.

Peter Derby, president and chief executive, Dialogue Bank in Moscow, a commercial banking unit of Dialogue joint venture.

James A. Eiting, president, Midmark, a Versailles, OH, medical hardgoods manufacturer.

Sergei N. Glushko, managing director and chief executive, Kharkov, Ukraine-based Effect, the third largest manufacturer of cosmetic products in the CIS. He is a joint-venture partner with Sweden's Parfusale and Alpha International.

Jacques Guillet, president, Export Industries, a St. Petersburg, Russia, manufacturer/exporter of wood products and scrap steel.

Alexander Ilijn, president, Sovin, a Russian computer equipment company.

Jevgenij Isaev, director, Moscow-based Russian Research Institute of Geology of Foreign Countries.

Kirill N. Ivanov, first deputy chairman, Russian Agency for International Cooperation and Development.

Yuri A. Kanishchev, general director, Moscow-based Rosinter/Kodak.

Yuri Luzhkov, mayor of Moscow.

Valentin S. Mamedov, chairman, Moscow-based commercial banks Fonon and Elektronika.

Mark D. Mariska, chairman, The Mariska Group, a Stamford, CT-based investment banking/venture capital concern.

Mark V. Masarsky, chairman, president, and chief executive, Volhov Construction, a Novgorod, Russia, joint-stock company. He is also chairman of Moscow's Council of Entrepreneurs.

Marvin E. Miller, chairman, PrimeSource, a Purchase, NY, lumber and millwork company.

Eric J. Oakes, president, San Diego, CA-based Ahlstrom Pyropower, a division of Finland's A. Ahlstrom Corp. that designs, builds, and supplies power generation systems.

Josif N. Ordjonikidze, vice-premier, minister of External Economic Relations, Moscow city government.

Valerij Petuchov, general director, Pakon, a computer joint venture.

Lennart Pihl, director of CIS operations, Sweden's Volvo.

Stanislav Polzikov, vice president, Moscow-based International Foundation for Privatization and Foreign Investment, a co-sponsor of CE's Russian events.

Yuri Proshin, director general, Moscow's Main Administration for Services to the Diplomatic Corps.

Joseph J. Ritchie, founder and principal, Chicago Research and Trading, a multibillion dollar commodities trading firm. Ritchie is also president of CRT's Management Partnerships International, an American component of Dialogue, a U.S./Russian joint venture.

Vladimir Scherbakov, president, International Foundation for Privatization and Foreign Investment. He is also the former deputy prime minister of the U.S.S.R.

George A. Skouras, Citibank VP; representative, Moscow office.

Vladimir Stepanov, chairman, Russian National Bank in Moscow.

Marc M. Sussman, president and chief executive, New York-based Alpha International Management Group, a joint-venture partner with Glushko of Effect and Parfusale.

Bertil Swedberg, vice president, Sweden-based Tema Fonster, a window manufacturer.

Arkady Volsky, president, Russian Union of Industrialists and Entrepreneurs.

Juergen Woller, Dresdner Bank, principal in Russia.

Emile Wolters, president, Sweden-based Parfusale, a cosmetics manufacturer and joint-venture partner with Glushko of Effect and Alpha International.

Pyotr S. Zrelov, president, Dialogue, a Moscow-based software joint venture with CRT's MPI.

Russian Power Broker: Union Boss Arkady Volsky

As Russia slips deeper into chaos, the old power structures are roaring back to life. Among the beneficiaries is Arkady Volsky, head of the Russian Union of Industrialists and Entrepreneurs, a lobby for State enterprises and their bosses--the influential "industrial nomenklatura."

A slick salesman, Volsky knows how to woo Western businessmen. Witness his presentation to the Chief Executive group, during a luncheon at RUIE's private dacha in the posh Moscow suburb known as Serebryany Bor, The Silver Forest, so-called for its lustrous stands of sugar maple and white birch. Volsky sounded a call for increased American investment, cast a vote of confidence for the Yeltsin government, and spoke glowingly about the prospects for continued economic reform. He's been busy padding his resume, too: For example, he's a founding member of the International Foundation for Privatization and Foreign Investment (FPI), a concern roughly equivalent to Germany's Treuhand and a co-sponsor of CE's Russian event.

But make no mistake about it: Volsky is an old-guard Russian bear in reformer's attire. An adviser to former Soviet General Secretaries--including Yuri Andropov and Konstantin Chernenko--and a longtime boss in the Communist Party Central Committee, he pushed Boris Yeltsin to dump Yegor T. Gaidar, the former acting prime minister, in favor of "moderate" and crony Viktor Chernomyrdin. Sources maintain his lobby was also instrumental in convincing Yeltsin to sack the heads of the energy ministry and the Russian Central Bank. The new man at RCB, Viktor Gerashchenko, is an old face, indeed. The former head of Gosbank, the Soviet central bank, Gerashchenko has vowed to keep the printing presses rolling, pumping billions more rubles into Russia's already inflated economy.

The litany of free-market heresies continues. Volsky, 60, is a leader of the closest thing Russia has to an organized opposition to Yeltsin--the Civic Union, founded with renegade Vice President Alexander Rutskoi. (The group, says Volsky, is pushing hard for "correctives" to economic reform.) He supports State credits to keep afloat even enterprises deeply in the red--despite warnings from the International Monetary Fund and other international agencies that to do so might ignite hyperinflation and set the stage for a return to authoritarianism. He wants to go slow on privatization, and members of his bloc have questioned the public distribution of vouchers to buy shares in State-held companies--prompting observations in the Western press that Volsky and his industrial cronies are the personification of the Communist mentality, a one-time privileged elite scrambling to retain their jobs.

But Volsky may be more interested in climbing the ladder than in staying put. A sweeping spotlight in search of a possible replacement for Yeltsin--should the president fall--has steadied on Civic Union co-founder Rutskoi. Despite disclaimers from Volsky, speculation has been rampant that should Rutskoi snare the corner office in the Russian White House, Volsky would tag along as prime minister.

The union leader insists he supports democratic principles--albeit with a strong interventionist role for government. He draws parallels between the Civic Union's platform and Franklin D. Roosevelt's New Deal.

"We are experiencing not 'shock therapy' but 'shock surgery'--without anesthesia," Volsky recently told English-language Moscow Magazine. "If |industrial~ directors did not try to diminish the burden of the workers with all kinds of social aid, the social tension in this country would be much worse."

An excerpt from Volsky's address to the CE group--and a question-and-answer session that followed--appears below, including a sharp, three-way exchange among Volsky, FPI President Vladimir Scherbakov, and Cambrex Chief Executive Cy Baldwin over whether the Western press accurately portrays the risks of investing in Russia. Under particular scrutiny was coverage of the negotiations that preceded Chevron's May 1992 agreement with Kazakhstan to develop the giant Tenghiz oil field.

Arkady Volsky: These days, American entrepreneurs play an insignificant role in our market. Germany, France, Japan, Korea, and other Asian countries are more active--perhaps because American companies are well-fed. However, we do enjoy fruitful relationships with some U.S. companies, including IBM, which is involved in three pilot projects in Russia, and General Electric, which is involved in the production of gas turbines in St. Petersburg. GE Chairman and CEO Jack Welch is a frequent guest of ours.

One obstacle to wooing foreign companies has been the Western press, which often represents us as laggards in paying our debts. This creates a lack of confidence in our financial markets. I suggest that you must look at Russia's situation with your own eyes, not through those of the press.

Cyril C. Baldwin Jr. (Cambrex): Rather than asking a question, can I make a couple of statements in the spirit of constructive criticism?

Volsky: Sure, you're in a democracy. Go ahead. |Laughter.~

Baldwin: You tell us not to listen to the press. But stories ran in the U.S. media detailing the terrible trouble Chevron had in making a deal with you on the Tenghiz oil operation in Kazakhstan. Were all of those reports simply fabrications?

Vladimir Scherbakov (International Foundation for Privatization and Foreign Investment): Let me tell you a little about the Chevron situation. We were unable to agree on how much the oil fields were worth. We knew that we had sunk $1.5 billion of Western equipment into the field and that we had already invested $6 billion of our own equipment. But Chevron presented a figure of $600 million. It was ridiculous.

After remaining deadlocked for some time, we finally gave Chevron an ultimatum: If it did not agree to our conditions in two weeks, we would open a tender to other leading American companies, including Exxon. Remarkably, all our divergences were settled in eight days.

Baldwin: Great stuff, but I guess the moral of the story is that you have to learn to publicize your side of the story as well as companies such as Chevron. Under capitalism, marketing is half the battle.

Moscow's Mayor Yuri Luzhkov

In some ways, Yuri Luzhkov's battle to remain mayor of Moscow mirrors the turmoil surrounding Russian President Boris Yeltsin, who named Luzhkov as Gavriil Popov's replacement last June. From the start, Luzhkov's appointment sparked controversy, fierce legal battles, and a war of decrees among city agencies and political rivals.

Yeltsin tapped Luzhkov, then deputy mayor, to replace reform-minded Popov without consulting the City Council. The council called the appointment illegal and moved to arrange an election. In turn, the council's move was declared illegal by the Moscow city prosecutor, Gennady Ponamaryov, who sued the body, demanding that the election be canceled. In the latest salvo, the council voted to proceed with election plans and asked Russia's public prosecutor, Valentin Stepankov, to rule on the legality of Ponamaryov's actions.

Luzhkov spent 28 years in the chemical industry before joining the City Council in 1987 as deputy chairman. He quickly scaled the ladder, serving as chairman, deputy mayor, and finally mayor. Luzhkov addressed the CE group at the Moscow Country Club, a resort facility launched as a joint venture between Russian and U.S. partners. He touched on the need to shore up the sagging infrastructure and his ongoing battles against organized crime. But he quickly turned to the confrontation between Yeltsin and the Parliament--and its implications for economic reform. Described as "old-guard" by critics, Luzhkov seems to have warmed to reform--perhaps partly in defense of the president.

You are all familiar with the failed coup d'etat in August 1989. What you may not be familiar with is another coup attempt currently being undertaken by the Russian Parliament. Without any discussion with the business community, our legislators are attempting to blunt the effectiveness of a strong presidency, which is necessary to carry out the difficult course of economic reform we face. Currently, many members of Parliament feel it necessary to pull back from reform because, they say, of hardships imposed on the people by the failures of Yegor Gaidar, our former acting prime minister. But there is another side to the story. Gaidar began to make the ruble a workable entity. And because of the reforms he launched, there are more market-oriented structures in place, including more joint-stock companies.

Whatever interpretation of the Gaidar regime you may take, the overriding question Russians must ask themselves is this: What type of legislation needs to be passed to arrive at a free market economy most quickly and most effectively?

I met recently with Prime Minister Chernomyrdin. I took heart from the fact that despite the economic difficulties we encountered last year, he and the other ministers remain committed to reform.

Regardless of the political opposition, the reform process has the support of the people and is now irreversible. On the local level, we will continue to facilitate the transition to a free market economy by developing our infrastructure. This will include a push to improve our roads, utilities, and transportation systems. I hope all of you will return a year from now to enjoy the fruits of our efforts.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:CE Roundtable; includes related articles
Publication:Chief Executive (U.S.)
Article Type:Panel Discussion
Date:May 1, 1993
Previous Article:Turning swords into market shares.
Next Article:Information, power, and control of the distribution channel.

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