When the American Trade Center in Moscow opens for business in September, top U.S. and Soviet officials will be on hand to cut the ribbon to the first Western-managed hotel and business complex in the Soviet Union.
The complex is the first Soviet project of Americom International Corp., an Irvine development company. And Americom seems to have scored a hit. The deal may look simple on paper, but it took years of behind-the-scenes political and economic maneuvering to pull it off.
At the helm of Americom is Paul E. Tatum, a veteran Republican Party fund-raiser who has dabbled in U.S.-Soviet trade. Four years ago, Tatum hit upon the idea of establishing a business center in Moscow to provide office and secretarial services to foreign companies in the Soviet Union.
The 36-year-old Laguna Beach resident peddled his idea to a group of seasoned businessmen who knew how the Soviet system works, who understood what was dear to the souls of Soviet policy-makers and who were well-known to Soviet officials. Among that group was H.R. (Bob) Haldeman, the former White House chief of staff during the Nixon Administration.
Americom's success has been the exception rather than the rule among U.S.-Soviet joint ventures. Of the thousands of American companies that have rushed to the Soviet Union amid sweeping economic reforms launched by Soviet President Mikhail S. Gorbachev, only a handful are believed to be operating profitably, according to U.S. trade officials and others familiar with these ventures.
What separates the survivors from the failures? Obviously, the right product or service, contacts within the Soviet bureaucracy and an understanding of Soviet business practices are important. And a little bit of luck doesn't hurt either. Many businesses that rushed into the Soviet Union hoping for a quick return have come away disappointed. Frequently, these companies were poorly informed about the workings of the Soviet system.
As a general rule, the more successful U.S.-Soviet joint ventures have involved larger companies with ample resources or smaller ones that invested in ventures that met economic priorities of the Soviet state and local governments. Among the most sought-after ventures have been those involving food and health-care services and medical and computer technology.
Trade specialists say, however, that even some companies that have done everything else right were unprepared for the political and economic upheaval that has rocked the Soviet Union.
"Many U.S. companies failed to recognize this and make fundamental changes in their business approach, particularly in the way they structure transactions with the Soviets," said Michael Liikala, director of the Bureau of Export Administration's regional office in Newport Beach.
One Orange County company that got caught up in the turmoil was the RHA Group, a small Irvine trading company that had planned to assemble personal computers in the Soviet Union. The deal was scrapped when political and economic chaos in the Soviet Union reduced the amount of convertible currency reserves available to government agencies, limiting their ability to strike deals with Western partners. One of those agencies was RHA's business partner.
Another example is Martin Lopata, a Huntington Beach businessman who is part-owner of a U.S.-Soviet joint venture named Sovaminco, formed in 1988. The venture has put together about 10 small deals, ranging from importing Russian Orthodox icons to the United States to selling "Gorby" T-shirts and trinkets in Moscow hotel gift shops.
Sovaminco's results have been mixed. The hotel gift shops, a silk-screen printing shop and a publishing venture that produces Bibles and other religious materials are making money. But other endeavors are not.
Last October, Sovaminco was forced to relinquish 95% of its stake in a lucrative foreign-exchange venture to Moscow's powerful City Council under a new government regulation to control currency trading. Its video rental business is hemorrhaging, and its Los Angeles partner, J2 Communications, is ready to throw in the towel.
Sovaminco, which originally owned 100% of the currency venture, "was not compensated when the City Council took over the operation," Lopata grumbled. "I wasn't offered any choice, and, in return, they gave Sovaminco 5% of the store's gross sales."
About one-third of the 3,200 foreign-Soviet joint ventures registered with the Soviet Ministry of Finance are now operating, according to Alan B. Sherr, associate director of the Center for Foreign Policy Development at Brown University in Providence, R.I. The others either haven't yet begun operations or have failed. The ministry does not report failed ventures.
Sherr authored a recent study on joint ventures in the Soviet Union that concluded that the projects with the best chance for success are those set up to enhance the Soviet Union's ability to export to the West and generate badly needed foreign currency.
"One (Soviet) motivation that appears constant and strong is to use joint ventures as vehicles for importing goods from Western partners . . . to produce a good that is sold (usually domestically) for hard currency, and these earnings are used to pay the Western partner for the import," the study says.
The study was based on a survey of 66 U.S.-Soviet joint ventures established in the Soviet Union between January, 1987--when a Soviet joint-venture law became effective--and September, 1990.
John Graham, director of international programs at UC Irvine's Graduate School of Management, said that any venture like Americom will probably succeed because the Soviets see it as an incubator for learning Western business practices and management style.
He said the Americom project not only addresses a specific and immediate need of Western businesses in the Soviet Union but also overcomes the hard-currency problem, because foreign tenants will be paying in hard currency.
Tatum's idea for the business center grew out of his own frustrations at doing business in the Soviet Union in the early 1980s. Finding a bilingual secretary in Moscow, let alone a typist, to draft a business proposal in Russian is nearly impossible, he said. He spent three years and thousands of dollars shuttling between Moscow and Irvine trying to set up a trading company with the Soviets but came away empty-handed.
"I found that it takes a lot of money and patience to make a deal work in the Soviet Union," Tatum said. After returning to his fund-raising activities, he met several would-be Soviet traders like himself with whom he swapped horror stories about doing business in the Soviet Union.
Tatum, who is Americom's president and owns 57% of its stock, said foreign companies that lease office space in the American Trade Center pay rent in hard currency directly to Americom's Irvine headquarters, which then distributes the profits to the Soviet partners in Moscow.
The project also guarantees the Soviet partners $12 million annually in hard currency as lease payment for the building, said Bernard Rome, chairman of Americom's executive board. Radisson Hotel Corp. and Americom will receive management fees for jointly operating the American Trade Center.
The business center will be in the same building as the new Radisson Slavjanskaya Hotel, a joint venture between Minneapolis-based Radisson Hotels International, Americom and Intourist, the Soviet tourism agency. Americom officials say that having the hotel and business center in one place will cut travel time for foreign business people.
The American Trade Center will consist of 165 office suites, each outfitted with personal computers, laser printers, video teleconferencing gear, and telex and fax machines, Tatum said. It will offer pooled secretarial services. Each suite will also have its own phone line, permitting direct-dial local and international calls, he said. Most international calls in the Soviet Union have to be made through operators, and it can take hours to get a call out.
Besides the fact that the American Trade Center fulfills specific needs of the Soviets, trade specialists and Americom officials point to several other reasons why the venture has been successful so far.
One reason, trade specialists say, was the group of businessmen that Tatum assembled. There was Rome, a corporate organization man and former chairman of Telefile Inc., an Irvine computer company; Haldeman, who, although out of the political limelight after the Watergate scandal two decades ago, still commands respect among some Soviet officials; Robert Schmidt, a former vice chairman of Control Data Corp., the Minneapolis technology company, who had extensive business experience with the Soviets; and Vladimir Draitser, a Russian-born businessman now living in the United States who has been Americom's liaison with the Soviet government.
Haldeman conceded that his position in the Nixon Administration has made it easier for the group to reach top Soviet officials "and get them to listen to our business proposal."
Nevertheless, he said that using former U.S. government officials or people who are good friends of Soviet officials to help negotiate a deal is "a very overrated concept."
"Peddling old contacts may open the door to start with, but if a proposal can't stand on its own merit, getting the door open doesn't do any good to advance your case in the Soviet Union," said Haldeman, who owns 4.7% of Americom's stock.
Rome and Schmidt said their years of trying to arrange business deals with the Soviets taught them to be flexible during the negotiating process.
Americom was forced to rewrite its project proposal many times to keep in step with political and economic policy changes that were sweeping the Soviet Union.
Americom officials said their negotiating strategy was to stress the benefits of the project to the Soviet business community. They stressed that the center could help Soviet companies strike up business deals while at the same time helping the Soviets learn about Western-style management.
The negotiations began in April, 1989, when Tatum, Rome and Haldeman went to Moscow to meet with Vladimir Pavlov, then the Soviet minister of tourism. Pavlov liked the idea and offered to lease Americom an entire hotel then under construction near the Kiev Railway Station in Moscow.
When the three saw the nine-story hotel, however, they knew it was too big for their project. They opted to accept Pavlov's offer anyway, knowing that it would be tough to find a structure in Moscow.
Haldeman, former president of a Los Angeles hotel development firm, suggested turning half of the building into a hotel and taking in a joint-venture partner to run it.
Within weeks, he was negotiating with Radisson Hotel Corp. On July 31, 1989, Americom and a Radisson subsidiary--Radisson Moscow Inc.--formed a joint-venture company to manage the hotel.
The 600-room hotel is undergoing a $30-million face lift to transform it into 430 guest rooms and 165 office suites. It was originally scheduled to open last December, but construction delays have pushed the opening to September. The project has not escaped the effects of the current chaos in the Soviet Union. Several European companies that had agreed to lease furniture and office equipment for the business center became nervous and wanted to raise their fees. Americom had to do "a little more negotiating to try to maintain the prices," Rome said.
Americom officials said they have twice as many applicants for the suites as they can accommodate. Cargill Inc., a Kansas-based grain concern, moved into a five-room office suite last February, not content to wait until renovation of the building was fully completed. General Motors Corp. and Japan's NEC Corp. are among the many European, Japanese and U.S. companies that have signed long-term leases at the business center.
Once the American Trade Center is up and running, Americom hopes to undertake similar projects elsewhere in Moscow and other Soviet cities.
Of course, there is always the possibility that a change in Soviet politics could create a less favorable climate for foreign business ventures. But Americom's Tatum said he's not too worried about that.
"I doubt if the Soviets will jeopardize a venture that guarantees them millions of dollars every year," he said. "One reason why we feel secure is the tenants send their lease payments to our office in Irvine, not Moscow."
CHRONOLOGY OF A U.S.-SOVIET BUSINESS DEAL 1987 May: Paul Tatum, an Orange County political fund-raiser, begins work on establishing a business center for foreign companies in Moscow. 1988 September-October: Tatum teams up with four other people interested in the Soviet project. They are: Vladimir Draitser, an electronics engineer and Russian immigrant; H.R. (Bob) Haldeman, former White House chief of staff in the Nixon Administration; Bernard Rome, former chairman of Telefile Inc., an Irvine computer company, and Robert Schmidt, the former vice chairman of Control Data Corp. 1989 March: Tatum incorporates Americom International Corp. in Delaware. April: Tatum's group meets Soviet tourism officials in Moscow. They sign a preliminary agreement to establish a business center in a nine-story hotel in Moscow. May: Haldeman begins negotiating with several major U.S. hotel chains for a possible joint venture in Moscow. July: Americom signs an agreement with Radisson Hotel Corp. in Minneapolis to form RadAmer Partnership. August: The partnership reaches an agreement with the Soviet tourism agency, Intourist, to alter the project to include a business center and a U.S.-managed hotel. 1990 May: Americom and Radisson reach final agreement with Intourist to establish the Intourist-RadAmer Hotel and Business Center, also known as the American Trade Center. Source: The companies December: The project hits a snag when the government of the Russian Republic issues a decree that it has sovereignty over all properties within its borders. This puts the republic in conflict with the Soviet state government over who would own the hotel-business complex. 1991 February: After months of wrangling, the parties reach an agreement in which Intourist makes the Moscow City Council a partner in the Intourist-RadAmer Hotel and Business Center. April: Later this month, the RadAmer Partnership expects to agree on a $25-million financing package provided by Chase Investment Bank of London and Austria's Girozentrale Bank. July: The hotel is expected to open for business. September: The hotel and business center are scheduled to be in full operation. U.S.-SOVIET JOINT VENTURES INVOLVING ORANGE COUNTY COMPANIES Company, Based: Adapt International, Villa Park Type of Venture: Biotechnology products marketing. Partner: Allotransplant, a private medical and biotechnology manufacturing company in Moscow Date Announced: November, 1990 Status: Manufacturing drugs for U.S. government approval Company, Based: Americom International Corp., Irvine Type of Venture: Hotel and business center in Moscow Partner: Joint venture with Radisson Hotel International; Intourist, the Soviet tourism agency, and city of Moscow government Date Announced: August, 1989 Status: Hotel scheduled to operate in July, 1991; the business center in September, 1991 Company, Based: Hart Industries Inc., Irvine Type of Venture: Commercial film production, fast-food stands, waste management, commercial bank. Partner: All Union Center for Film and TV for Children and Youth; Russian Capital; Econovatsia. All are Moscow entities. Date Announced: November, 1990 Status: Ventures have yet to be implemented. (Its president says they're proceeding cautiously due to political unrest in the Soviet Union) Company, Based: Phoenix Group International, Irvine Type of Venture: Supply personal computer components for assembly in the Soviet Union Partner: Soviet State Committee for Public Education Date Announced: September, 1989 Status: Cancelled (Phoenix Group filed for liquidation in January, 1991.) Company, Based: RHA Group, Irvine Type of Venture: Personal computer assembly in Moscow Partner: A unit of the Ministry of Transportation/Construction in Moscow Date Announced: May, 1990 Status: Cancelled Company, Based: SensorMedics Corp., Yorba Linda Type of Venture: Assemble medical equipment to diagnose respiratory problems caused by environmental pollution and smoking in Chapaevsk, Soviet Union. Partner: The Pulmonary Research Institute, Ministry of Health in Moscow; Chapaevsk Experimental Factory of Measuring Devices in Chapaevsk; Tradotec SA, Geneva, Switzerland. Date Announced: August, 1990 Status: Operations scheduled to start in June Company, Based: Unicorn Investments International/ Sovaminco, Huntington Beach Type of Venture: Marketing products in the Soviet Union including books, magazines, newspapers, video rentals, printing, charter tour bus and car services, currency exchange services; also, export of Soviet crafts products to the United States. Partner: Various Soviet government entities and government-owned companies Date Announced: First venture started in September, 1988. Status: Marketing and publishing ventures are profitable; other ventures have been canceled or are unprofitable.