Crisis in the Baltics Jeopardizing Some U.S.-Soviet Projects

The apparent reversal of political and economic reforms in the Soviet Union, starkly illustrated by the ongoing military crackdown in the Baltics, has dramatically altered the climate for American companies hoping to do business in that nation.

Although major projects that are already under way appear to be moving ahead, both new and existing ventures in the Soviet Union will likely be hampered by the rising cost of insurance, problems in securing bank financing and the possibility that the recent liberalization of U.S. government policies on export financing and technology transfer will be reversed.

The cost of political risk insurance--which protects companies against nationalization, civil disorder, trade embargoes and other adverse political events--has doubled since the resignation of Soviet Foreign Minister Eduard P. Shevardnadze last month, according to Price Lowenstein, director of international political risk services at Frank B. Hill, a San Francisco insurance brokerage.

“The situation is certainly very worrisome for our clients, and it will make bank financing much more difficult,” said Stan Polovets, manager of the Eastern European division of Ernst & Young, the big accounting firm. “And if there is a political backlash (against the Soviet Union) in Europe, the financing could dry up altogether.”

If the military crackdown leads to a deterioration in U.S.-Soviet relations, it could derail several programs that had promised to make it far easier for American companies to invest in the Soviet Union, analysts noted.

Specifically, an Export-Import Bank loan-guarantee program was to be made available for projects in the Soviet Union following a congressional vote to lift a prohibition on such programs. But that step is now threatened, Lowenstein and others said.

“Without export financing, it will be very difficult for companies to proceed with ventures in the Soviet Union,” said a Washington lobbyist who asked not to be identified.

In addition, recent moves to ease tech nology-transfer restrictions on the sale of computers and other high-tech goods to Eastern European countries and the Soviet Union could be halted or reversed, trade analysts said. That would severely damage the prospects for many technology companies eagerly eyeing the region.

Still, companies pursuing major long-term projects in the Soviet Union said they expected temporary political setbacks, and that their plans remain in place.

“The events have shaded the attitude, but they have not stopped the process,” said Richard Matze, president of Chevron Overseas Petroleum Co. “When you get disruptions like this, it gives you cause to reflect. Most companies are probably trying to evaluate the long-term significance.”

Chevron last year reached a formal agreement with a Soviet oil firm to study the development of the huge Tengiz oil field in the Soviet Republic of Kazakstan. Matze said he had been in the Soviet Union for discussions two weeks ago, and that further talks were scheduled.

James H. Giffen, chairman of the merchant bank Mercator Corp. and president of the American Trade Consortium, a group of large U.S. firms seeking to develop business ties with the Soviet Union, said it was “business as usual” as far as his organization was concerned.

He expressed confidence that the political and economic reforms pursued under Mikhail S. Gorbachev could not be entirely erased. The crackdown in the Baltic Republics, which some analysts expect to intensify in the coming weeks, could even have some beneficial effects for the business climate if it leads to greater stability, Giffen added.

A spokesman for Pepsico, which has been operating in the Soviet Union since 1974, said the company had restricted employee travel in the Baltic Republics, but that operations at the Pepsi bottling franchises in Lithuania and elsewhere appeared to be unaffected.

The immediate impact of the Baltic crisis might not be too dramatic, in part because the level of U.S. business activity remains very low, despite widespread enthusiasm about the opportunities. Total foreign investment in joint ventures in the Soviet Union amounted to just $850 million in 1990, according to the Soviet trade journal Commersant, and just 11% of the 760 joint ventures registered during the year are actually operational.

Commersant reported that the level of activity fell toward the end of the year, with just 25 U.S.-backed joint ventures registered in the fourth quarter, compared to 32 in the third quarter and 37 in the second quarter.

“The early honeymoon period is coming to an end,” said Jeffrey A. Burt, a Washington attorney who counsels companies on Soviet business matters. “There had been a certain luster associated with projects in the Soviet Union, and the events of the last six weeks suggest that luster might not be there.”

Gordon Feller, an Eastern European specialist with the Austrian bank Creditanstalt, was optimistic that whatever transpired in the Soviet Union would not have a direct impact on reforms in Poland, Hungary and Czechoslovakia, where Western investment is growing very rapidly. “There has been a decoupling, minimizing the political fallout for the rest of the region,” he said.