Why U.S. Business Is Bullish on Reform in Soviet Union

There is great potential for U.S. business in the dramatic changes occurring in the Soviet Union--and in growing Soviet friendship with the United States.

As Presidents Bush and Gorbachev meet in Helsinki against the backdrop of the Persian Gulf crisis, the Soviet economy prepares to launch a New Deal: 500 days of intense effort to transform a centrally planned, state-run economy to one that responds to free markets and is more flexible and productive.

The changes are so elemental, including the possibility that the Soviet Union will become a loose confederation of 15 separate republics, that events and their implications are often obscure to outsiders.

But the implications for U.S. business are not obscure. They begin with huge projects to increase Soviet oil production immediately and go well beyond that to tremendous growth markets--289 million people, $2 trillion-plus in gross national product--for consumer goods and production equipment.

In the reforms likely to begin Oct. 1, the Soviet state will sell farm property, cars and trucks and some housing to individuals. The shift to private property will bring difficulties--70 years of socialism are not transformed overnight. But the sales will also bring an immediate benefit by helping to establish purchasing power for the ruble.

The ruble is the currency of the Soviet Union but, strictly speaking, it is not money because it can’t buy very much. The reason it can’t is that the economy doesn’t produce much for Soviet consumers to buy. Workers have so little to spend their paychecks on that savings accounts are bulging--with 450 billion rubles, says Soviet economist Vladimir Kvint, proportionately more than total U.S. savings deposits.

But how much Soviet savings are worth is arguable. The Soviet government declares that a ruble is worth $1.60 at the official rate, but the same government sets an exchange rate of 16 cents per ruble for foreign tourists and business people. And in unofficial open market transactions, in banks from Vienna to New York, the ruble is worth about 6 cents.

The low rates attest to weak purchasing power. In fact, many people in Moscow and other large cities now carry wads of U.S. dollars because hard currency is needed to buy quality goods and services.

The economic reform hopes to change all that. By selling state property for rubles it establishes purchasing power for the currency, begins the process of setting market prices for private property and thus moves the ruble toward full international convertibility--which is hoped for by next year.

That convertibility is key to opportunities for U.S. business. At present, as an executive of one large U.S. company puts it, “you can do a lot of business in the Soviet Union; the trouble is getting paid.” Since the currency is officially non-convertible, foreign firms cannot legally take ruble profits out of the country. To realize their profit, it is suggested that they take part of their Soviet joint venture’s production or other Soviet goods and sell them in the West for hard currency.

But there are difficulties because a world awash in goods doesn’t need uncompetitive Soviet products. And anyway, the main reason that U.S. business wants to go to the Soviet Union is for its enormous internal market.

The people are longing for consumer goods. The new McDonald’s in Moscow is attracting 50,000 customers a day, a worldwide record for the chain. And it’s only a beginning, the first of 20 stores that McDonald’s plans to build in a joint venture with the Moscow City Council.

McDonald’s also has set up a complete production and distribution operation in a Moscow suburb, producing 10,000 hamburgers and buns per hour and working with Soviet farmers to increase the per-acre yield of potatoes.

Opportunity is everywhere, even in last week’s bread shortage in Moscow stores. “The shortage was caused by antiquated machinery breaking down and the fact that bakers had quit the state-run bakeries to get higher wages elsewhere,” explains Abraham Becker, of the RAND Corp. research firm. Opportunity? Well, U.S. companies make automated baking equipment, and if bakers can now seek higher wages in a changing economy, so much the better--they’ll have cash to buy things.

Opportunity in oil is huge and immediate--and this time it’s for real. There is a long history of proposals to bring the technological skills of U.S. oil companies to bear on the vast oil and gas reserves of Siberia. But Cold War politics have prevented action on such proposals.

But now Commerce Secretary Robert A. Mosbacher is leading a delegation of U.S. oil executives to Soviet oil fields this week. And, says a U.S. oilman, there’s a real possibility of “noteworthy projects” being announced soon to produce more oil immediately from Soviet wells. Such oil is producible because U.S. techniques, which regularly recover 50% of U.S. oil deposits, can get more out of Soviet wells that heretofore have yielded only 20% of each deposit. (Even so, the Soviet Union is the world’s largest oil producer at 12 million barrels a day, compared to 7 million for the United States and 5 million for Saudi Arabia.)

Longer term, there is the immense potential of developing the oil reserves of Eastern Siberia, with access to Alaska and the U.S. West Coast.

To be sure there are political perils. “The present reforms are inevitable, but they are breaking up the Soviet Union,” says Marshall Goldman, head of the Russian Research Center at Harvard University. The republics, led notably by Boris Yeltsin and the 140-million population Russian Republic--which controls all of Siberia--are now taking taxing power and challenging the authority of the Soviet central government.

U.S. companies, uncertain of who to deal with, are bidding for business to both provincial and central government officials. “There are just more people with their hands out,” quips a Soviet expert.

But U.S. business might look past political confusion and reflect on the larger picture--on how the Persian Gulf crisis has changed things for the Soviet Union. A month or so ago it was being classed a worrisome deadbeat by the world’s bankers, who were wary of financing the economic reforms now being launched.

Now, although its debt burden hasn’t changed, the outlook for the Soviet economy is considerably improved. That’s thanks partly to oil, of course, but most of all to growing Soviet friendship with the United States.