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U.S. Commercial Opportunities in the Soviet Union.

Carvounis, Chris C. and Brinda Z. Carvounis, U.S. Commercial Opportunities in the Sovies Union. New York: Quorum Books, 1989.

Under General Secretary Gorbachev, major changes related to foreign trade and investment have been set into motion. Does this "opening" of the Soviet economy present American firms with new opportunities? This book furnishes the reader with the information he needs to answer this question as it relates to his or her company, explains the mechanics of dealing with the U.S.S.R., and analyzes a possible competitive challenge from Russia.

Before 1987, opportunities for American companies to make money by doing business with the Soviet Union were virtually non-existent. Since then, as an integral part of Mikhail Gorbachev's "perestroika" campaign, the Soviet leadership has made major structural and policies changes in Russia's handling of foreign commerce, including transactions with capitalist economies. In the area of foreign trade, pivotal rights and functions have been transferred from the Ministry of Foreign Trade to select ministries and firms more directly involved in the actual production of exports and use of imports. In the same vein, for the first time in six decades, foreign companies from both socialist and capitalist nations are now permitted to set up joint production enterprises inside the U.S.S.R.

These changes accord with Gorbachev's express goal of expanding Russia's economic ties with the West (including the U.S.), an aim which is written into the current Five Year Plan. For both imports and joint ventures, the Soviets have emphasized particular areas, the purchase of high-tech production equipment in the case of the former, and activities having an export-orientation, in the case of the latter. Although they affect only a modest share of present external flows to and from Russia, it is expected that these openings will be enlarged over time and that the Soviet Union will become more attractive as a market and as a direct investment environment as perestroika unfolds.

Reacting to these changes, some Western analysts believe that the "new" Russia is a potential "goldmine" for U.S. business, while others assert that they are of little or no consequence to American commercial interests. As is often the case, the "truth" lies somewhere in between. There are now some limited opportunities for U.S.-based firms to sell goods to the Soviets and engage in direct investment via joint enterprises located in the U.S.S.R. In answering the "big question" at the forefront of a typical U.S. businessman's mind when he thinks about the "new" Russia, i.e., can my firm turn a profit by doing business with the Soviets, a number of factors must be taken into account. These include:

* U.S. policy controls

* Soviet systemic barriers

* Russia's limited foreign exchange earning capacity

* The "narrow" character of planned Soviet import demand

* The "transitional" state of joint enterprises laws and the "environment" in which joint enterprises will work

* The impact of competition from other foreign firms

* Linkages to and the outlook for perestroika as a whole.

Each of these variables is examined in the course of the texts, and each is related to the working mechanisms, the "how to" of dealing with the U.S.S.R.

After an introductory overview of the subject, chapters 2 and 3 of the book deal respectively with the macroeconomic and microeconomic aspects of exporting to Russia. It is noted that the economy-wide dimensions of Soviet foreign trade have a much more direct influence on the prospects for and handling of specific transactions than is the case in "free-market" economies. In general, the current macroeconomic configuration works against any particular sale to Russia by American exporters. Among other relevant factors, the combination of a narrow export base (oil, gas, gold, and weapons) with a non-convertible currency means that the Russians just don't have the hard currency to buy goods for cash. Moreover, the Soviets do have well-established relations with alternative suppliers in Eastern and Western Europe, so that U.S. companies must "stand in line" and are additionally handicapped by the checkered legacy of U.S.-U.S.S.R. commercial relations in the past. This picture brightens when we look at the microeconomic side. There are about a dozen specific sectors, e.g., energy production and food processing capital goods in which American firms can greatly increase their sales to Russia. Despite restructuring of foreign trade, imports are still largely planned. Although this limits the range of items that can be marketed (consumer goods are not part of the import agenda), it offers some advantages in terms of market research and certainly to U.S. firms. Moreover, ancillary changes in the areas of trade financing and counter-trade requirements now taking place tend to favor American export competitiveness in Soviet markets.

Chapters 4 and 5 cover U.S. direct investment via joint enterprises with Soviet partners. This form of activity presents greater risks and greater potential rewards to U.S. firms than trade. Participating in a joint enterprise means that the U.S. partner becomes part of the Soviet economy, one which has some long-standing structural problems that are only partially addressed by reforms undertaken thus far. Actually, the Soviet economy has two distinct halves, an "old" plan-dominated sector and a "new" market-driven quarter, and this leads to gaps and discrepancies with which joint enterprises must deal. Joint enterprises are clearly part of the "new" Soviet economy; they have rights and powers equal to (or superior to) the most "liberalized" domestic units.

On the other hand, in its desire to reach specific direct investment goals, e.g., increased exports, the Kremlin has created joint enterprise laws that constrict the foreign (U.S.) partner and the ventures themselves. With all this spelled out in Chapter 4, the next chapter lists potential "advantages and disadvantages" of becoming a joint enterprise partner for U.S. firms. The drawbacks are numerous and present major dangers, for example, will production inputs be available from domestic sources on a timely basis. The asset list is shorter, but is substantial. The Soviets have low labor and resource costs, and when Western technology and management is added, market demand for joint enterprise goods within Russia and abroad should be strong. With some notable exceptions, American firms have trailed behind the West Europeans in undertaken joint enterprises in Russia. But, if and as restructuring moves forward and the Soviets remain flexible in applying joint enterprise laws, this mode should become more attractive to U.S. firms.

In chapter 6, it is noted that there is an area where little change can be expected for U.S. commercial interests. While the Soviets have greatly increased their borrowing from western lenders, U.S. bank shares of this growth are minuscule. In fact, Russia is not about to become a major source of capital investment profits for America. The growth of Soviet external debt is viewed in chapter 6 in terms of its possible effects on Russia as a competitor to and collaborator with American firms in third country economies. Should Gorbachev's vision of Russia as a global economic power become reality, American firms may well face a new source of low cost competition overseas, particularly in Southeast Asia and Latin America, regions in which the debt burden and American protectionism afford the Soviets a "window" of opportunity.

Finally, the Russians have been inquiring into their possible membership in the world's major "free market" institutions, the GATT, the World Bank and the IMF. Due mainly to U.S. opposition, prospects for their joining any of these bodies in the near term are slim. The requests themselves generate questions concerning what the role of a revitalized Soviet Union in the global economy might be. Most of the evidence suggests that the Russians will not "rock the boat" of the global, capitalist system, but there is the possibility that as they reach out to the world at large, the Soviets will alter or undermine the capitalist system itself.

No full-length work has yet been written that evaluates the practical meaning of "perestroika" for U.S. corporations. The book fills this gap by looking at trade/direct investment prospects in a way that allows the reader to decide the potential significance of an "outward-looking" U.S.S.R. for his business. Most summary evaluations of U.S.-U.S.S.R. commercil ties are either overly optimistic (Russia as goldmine), or overly pessimistic (Russia as an economic backward). In this book, the approach is even-handed, dispassionate and objective; there is no ideological or political axe to grind.

The book is organized in a manner that presents relevant background information on complex topics, e.g., currently convertibility, when it is called for and allows the reader to locate his particular area of interest (trade, direct investment, etc.) without having to read the entire text. Given the magnitude of recent changes in the Soviet external sector, the book is topical and timely; all analyes written before 1986-1987 in this area are now outdated and misleading. The book takes into account topics that have been neglected even in journal-length articles, for example, the Soviet "savings-inflation" time bomb, Soviet designs in Southeast Asia and Latin America. Its language and level of analysis are geared toward a "typical" businessman's understanding. Statistics are used sparingly; complex, number-crunching exercises do not appear within its covers.

[Chris C. Carvounis is a Professor of Economics in the Colleges of Business Administration, at St. John's University, New York, Brinda Z. Carvounis, an expert in international affairs, has traveled extensively in the Soviet Union and teaches French at Rutgers University, in New Brunswick, New Jersey.]
COPYRIGHT 1989 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:authors' discussion of their book on changes in the Russian economy
Author:Carvounis, Chris C.; Carvounis, Brinda Z.
Publication:Review of Business
Date:Dec 22, 1989
Words:1604
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