Doing Business in the USSR

Jim Garrison and Tankred Golenpolsky

[***(EDITOR’S NOTE: While traveling abroad, Tom asked colleagues to guest-author his column.***]

Winston Churchill once said that Russia is “a riddle wrapped in a mystery inside an enigma.” Over the centuries the Russians built the world’s largest modern empire, sprawling over one-sixth of the land mass of the planet, from Poland to Japan and from the Arctic Circle to India. It is an amalgam of over one hundred nationalities and languages. It has no internal logic but the exercise of power, centralized until 1917 in the bureaucracy around the czar and since then in the bureaucracy established by Stalin.

In natural resources, the Soviet Union is easily the richest nation on earth. It has more oil than Saudi Arabia, more gold than South Africa, more arable land than the U.S., and virtually all the resources needed to operate a modern industrial state.

Yet the Soviet Union is the sick man of Europe. For 70 years it has systemically sought to eradicate initiative, creativity, and individuality in the sense that these values are understood in the West. The Soviets tried to remold human nature according to what was called the Marxist-Leninist pattern cutting the arm to fit the sleeve.

Under the czar, Russia exported wheat; today it must import vast amounts to feed its population. Staple goods such as meat, milk, sugar, and tea are rationed. While it leads the world in the production of heavy industrial goods like iron, the USSR is between 10 to 12 years behind in advanced computer technology. The country is plagued by diseases controlled or eradicated in the other industrial nations. Now AIDS is of major concern mostly because of the repetitive use of unsterilized needles in hospitals. Nearly half of all HIV-infected citizens are children.

In the midst of this systemic failure, Gorbachev is trying to implement reforms that will lead his nation, hopefully in one piece, toward democratization, economic reform, and normal international relations. If he succeeds, he will be not only the man of the decade, as Time called him but the man of the half-century, as Time called Churchill.

Yet if Gorbachev is to succeed he must succeed economically. To do so he needs international economic partners—and Americans can profitably participate.

Over 80 percent of U.S.-Soviet joint venture attempts fail, and of those that are actually signed less than 20 percent become operational. The difficulties in communication and coordination are often insurmountable to people who do not understand how to work in foreign countries, particularly in the Soviet Union.

Still, the potential is enormous for carefully crafted joint ventures, if partners are committed to working creatively in a difficult economic environment. The list of success stories is impressive, despite the high casualty rate. The McDonald’s joint venture, for example, is a spectacular success, covered on front pages around the world.

To succeed in the USSR, keep the following in mind:

1) Plan for the long haul, not the short term. Companies obsessed with quarterly earnings should look elsewhere. The objective should be to establish market position, as McDonald’s has, and to create the kinds of lasting relationships that can sustain the operation during the political and economic changes that are certain to come. Remember what happened to American businesses in China.

2) Change, not stability, is the given. The Soviet Union is undergoing a social revolution as it opens itself to democracy, the free market, and the global economy. Don’t expect smooth sailing.

3) The Soviets want capital and technology, for which they will provide resources and workers. The most successful joint ventures use Western technology and management, combined with Soviet resources and labor, to market a product abroad for hard currency and in the USSR for rubles. Current regulations allow for majority control by the foreign partner.

4) Be creative about the form in which profits can be repatriated. The ruble is not convertible outside the Soviet Union and most forms of barter are restricted. McDonald’s, however, established both a ruble and dollar operation and created, in effect, an internal currency exchange.

In the 1980s, Soviet-American relations were characterized by the Cold War and by citizen diplomacy—private-sector exchanges that demonstrated how Soviets and Americans could work together. The Cold War is now over; the citizen diplomats triumphed. The 1990s will be characterized by economic cooperation more than nuclear competition. Business diplomacy is now the order of the day.

(At the time this piece was written, Jim Garrison was CEO of Diomedes, Inc., a San Francisco-based merchant banking firm engaged in East-West trade. Tankred Golenpolsky was Diomedes’ chief of Soviet operations.)