Reform Makes It Harder to Do a Soviet Deal : Perestroika: American businessmen complain that emerging layers of bureaucracy have produced a tangle of red tape that makes the bad old days look good.

Moscow’s two Pizza Hut shops were doing a brisk business when, suddenly, the smiles froze. The successful enterprises were forced to shut down for 18 hours while local officials argued over whether the U.S. franchise should report to the Moscow city council or some other government body.

Welcome, American business, to the land of perestroika.

It has never been easy to do business in the Soviet Union. But as the nation wrestles with the Gargantuan task of restructuring the world’s second-largest economy, U.S. executives are finding it more confusing than ever.

“For those entrepreneurs who think chaos is an ideal environment, this is a perfect time,” says Marshall Goldman, associate director of Harvard’s Russian Research Center and an expert on the Soviet economy. “But for others it is a scary time. The society is collapsing. The economy--both the marketing portion and the planning and administrative sectors--is in a shambles.”

The Soviet Parliament has given Soviet President Mikhail S. Gorbachev authority to overhaul the economy, but it remains unclear exactly what form that overhaul will take. Already, the law has been changed to permit foreign firms full ownership of Soviet subsidiaries; eventually special tax breaks and liberal profit repatriation measures are expected.

Meanwhile, the lines of authority are blurred. Before perestroika, foreign companies usually dealt with a Soviet ministry or some other central agency. But now, deals are struck with one of the nation’s 15 republics, with city agencies such as the Moscow city council or even directly with Soviet factories and firms.

As a result, anarchy reigns for many U.S. firms trying to conduct commerce with the Soviets.

“Before (perestroika), the road map was not clear, but at least you had a road map,” says David Mostny, a San Francisco businessman involved in barter trade with the Soviet Union. “You knew who the (right) people were and you knew their limitations.

“Now it is a war zone. Central authority is not recognized and there is no road map--not even for Russians--showing new lines of authority.”

In the trenches of commerce, reaction is mixed. For example, Ford Motor Co., suddenly alarmed that the Soviets might not be able to fulfill financial guarantees, recently dropped out of a project to produce cars in the Soviet Union.

But General Motors Corp. has signed a $1-billion agreement to supply catalytic converters and other parts for a car model Moscow hopes to export. Unlike GM--whose contract requires payment for shipments in hard currency only--Ford faced the much riskier prospect of major direct investment.

In the cigarette business, RJR Nabisco has followed Philip Morris’ plan to bring 20 billion Marlboro cigarettes to Soviet consumers. RJR’s contract calls for supplying up to 14 billion cigarettes.

The tobacco makers now mingle with Eastman Kodak, Pepsi-Cola, Archer Daniels Midland, Chevron, Monsanto, Occidental Petroleum, Johnson & Johnson, IBM and a growing number of other U.S. corporate names on the Soviet scene.

Soon after he came to power in 1985, Gorbachev began working for acceptance in Moscow of the then-unwelcome concept of joint ventures between the Soviet government and Western companies; after two years of persuasion, he got through a law legalizing them.

Eleven months later, at the Soviet Embassy in Washington on the final day of his summit visit, he personally lobbied a group of 50 U.S. corporate and banking executives who had been invited by him to Washington for the occasion. “Let’s have real action,” he exhorted.

According to PlanEcon, a U.S. consulting group, the Soviet Union had signed a total of 1,256 joint venture agreements with Western companies by April 1, 1990--compared to 193 on Jan. 1, 1989.

But, of these 1,256 agreements, only 172 involved U.S. partners and only 244 have led to actual ventures--of which only about 30 have U.S. partners.

Of the U.S. joint ventures in the Soviet Union, two-thirds are in service areas, such as restaurants, hotels and travel. Major ventures, such as a chemical works being built by Combustion Engineering of Stamford, Conn., are relatively few.

One of these, in formation for the past 2 1/2 years, involves Chevron’s joint venture to develop the huge Tengiz oil field northeast of the Caspian Sea in Kazakhstan--a field said by the Soviets to be the largest discovered in the world in the past 10 years with reserves estimated at more than 25 billion barrels.

The case illustrates how Soviet authority is still shifting and how an American company can cope with the new stresses.

At the start, according to William Edman, managing director of Chevron’s Soviet business unit, the company was negotiating exclusively with the Soviet Ministry of Oil and Gas for rights to develop a smaller field--the Korolev field--in Kazakhstan. By the time an agreement was ready to sign, Chevron had determined the field held too little promise for the commitment required and, therefore, announced its intention to drop the matter entirely.

“At that point, the ministry offered to throw in the Tengiz field, which had presented serious technological problems to the Soviet developers,” Edman said. “Tengiz is a world-class oil field, and we went for the package. But by then Kazakhstan authorities wanted in.

On June 4, Edman said, Chevron signed a protocol agreement at the Soviet Embassy in Washington with both parties--the Ministry and the Kazakhstan republic. After that, the company began meeting in Alma Ata, Kazakhstan’s capital, as well as in Moscow.”

Now more complications have set in. At a meeting this month in Alma Ata, Edman said a new player--the Guriev Oblast, the government level below republic--insisted on involvement. The oblast--generally encompassing an area larger than a typical U.S. county--may get its way.

“Anywhere, working in a compatible way in the local area is critical to our success,” Edman said. “So we are working that side of the street now too but making it clear that it is a Soviet problem to work out, that we don’t wish to be in the middle, and that as long as we retain our 50%, how they divvy up their 50% is up to them. We have agreed, for instance, to pay taxes in accordance with the federal tax code. How they divide those revenues is up to them.”

In one instance, a U.S. state has forged a positive relationship with a small Soviet republic--to the benefit of on American company. Ben & Jerry’s Homemade Inc. of Vermont, maker of popular ice cream products, has entered into a 50-50 joint venture with a Soviet retail cooperative in Karelia autonomous republic.

The venture, a tiny operation in Petrozavodsk (population 270,000) on the Finnish border, got its start after Vermont’s Gov. Madeleine Kunin led a goodwill delegation, including Ben & Jerry’s co-owner, Ben Cohen, to the northern Soviet republic of Karelia in March, 1988. After returning to Vermont, Cohen received a letter from a cooperative in Keralia asking if he would be interested in setting up shop in Petrozavodsk.

Investing $100,000 in equipment, which has yet to be installed, the U.S. ice cream company, with annual sales of $53 million, expects to have a 2,000-square-foot ice cream manufacturing plant with an adjacent scoop shop operating in spring of 1991.

With a 50% share of the ruble income, Ben & Jerry’s will be looking for Soviet goods to buy that it can barter with overseas customers who have access to hard currency. Ben & Jerry’s is one of a number of smaller companies with an eye on the Soviet market.

Of the 40 U.S. companies that have signed so far for a U.S. trade show in Moscow next May, all are small- or medium-sized corporations, mostly makers of consumer products, such as cosmetics, health and beauty aids, housewares and consumer electronics.

As for major corporations, one executive stated the problem this way: “Opportunities are there but not for anyone who is worried about getting his company to take the plunge and then if things go wrong . . . have a second guesser down the road ask, ‘Who was the damned fool who got us into this mess in the first place?’ ”

Nobody is more aware of this attitude than the Soviets, according to the Commerce Department’s Susan Lewenz of the Soviet Affairs desk. And, she said, Soviet officials have long memories.

“The Soviets are telling us that the ones who come in now, when it is tough, will be the ones who are doing the best 20 years from now,” she said. “The implication is clear. The authorities are saying they will favor the companies that come in now over the ones who sit back now and come in later.”

To say the least, lines of authority are unclear and confusion often reigns.

For U.S. executives, the problem is how to negotiate an untried business terrain peopled by Marxist bureaucrats raised on socialism and shortages and now aspiring to a society of decent goods and quick fixes based on capitalist marketing techniques.

No matter what the guidelines or principles agreed upon, getting specific terms into a contract can be an ordeal for Western companies dealing with Soviet authorities.

“The experience (of negotiating) after signing an agreement can try the patience,” PlanEcon’s Keith Crane, a Soviet expert, said wryly of the joint venture process. “It took McDonald’s 14 years (from agreement to Gorky Street’s first Big Mac).”

What advice does the U.S. government offer American entrepreneurs these days?

“We counsel them to look but to look carefully,” Lewenz of the Commerce Department said. “Under the new conditions, there is not one central authority that covers the whole country. You have to go to the republics to find people in real authority and sometimes even to the individual enterprises.”

Even then, you can get into serious problems, as Pizza Hut learned.

The mayor of Moscow, for instance, told an American delegation of business executives led by Commerce Secretary Robert A. Mosbacher last month that it was pointless to talk with the national leadership and expect to cut a deal because “they don’t know what they are doing.”

According to a source close to the delegation, the mayor told the executives that they were better off dealing directly with Moscow city officials.

A big question is getting money out of the Soviet Union. The ruble is not convertible and the Soviets have little hard foreign exchange on hand. Extending credit is not popular now that Soviet buyers are somewhere between $2 billion to $4 billion behind in payments to foreign suppliers.

The lack of hard currency in the Soviet Union has spawned some elaborate barter arrangements. Philip Morris, for example, is said to be obtaining hard currency by way of an elaborate three-way agreement. In payment for cigarettes, the Russian Republic supplies urea--used in making fertilizer--which then is shipped by Philip Morris agents to China. The Chinese, short on hard currency themselves, ship glassware to North America for retail sale--and these dollars go to Philip Morris.

The best-known barter arrangement is the 18-year, $3-billion-a-year swap of Pepsi syrup--to 37 bottling plants in the Soviet Union--for Stolichnaya vodka, which is marketed by Pepsico in the United States. In an extension of that arrangement last year--for an additional 10 years--Pepsico’s Pizza Hut subsidiary was included and Moscow agreed to supply Pepsico with 10 Soviet-made freighters to sell on the international market.

Many Westerners are following Pepsi’s example in striking barter deals--albeit usually on smaller scale. “Companies are working out deals based entirely on countertrade (barter) or on countertrade in part and hard currency in part,” Lewenz said. “There’s a heck of a lot of creativity in this area.”