East Bloc’s Tough Times Even Tougher on Vietnam : Trade: Soviet hardships, changes in Europe--and a U.S. embargo--have shriveled markets and hurt reform.

Trinh Ngoc Bao has an enormous headache. As deputy director of Hanoi’s Chien Thang Sewing Factory, Bao has been struggling to keep the state-owned firm afloat under economic reforms requiring that he turn a profit or go bankrupt.

Bao has slowly built up a small clientele in Sweden, South Korea and Japan that pays in hard currency. Last year, he built a new executive office complex with the profits.

But this year, like thousands of other Vietnamese businessmen, Bao was poleaxed by the Soviet Union’s decision to pull the plug on an estimated $1.5 billion in annual aid to Vietnam and conduct all trade in dollars. More than 75% of Chien Thang’s business is with a factory in the Urals, and Bao is painfully learning a lesson every Soviet citizen already knows by heart--the Russians don’t have any money.

In a classic Soviet compromise, when the Russians ship out fabric to be sewn by Chien Thang’s 1,000 seamstresses, they now add an extra yard or so for every garment as payment.

“At least it’s something,” Bao noted bitterly. “It’s better than ghost rubles in the bank. The headache is that Soviet fabric is not very popular in Vietnam.”

Vietnam’s economy, still attempting to adjust to the market-oriented reforms adopted by the Communist government in 1986, is coming under tremendous pressure as the result of changes in East Bloc trade--Vietnam’s main overseas partners--since January.

“We have lost our traditional export market in Eastern Europe,” said Le Dang Doanh, a senior Vietnamese economist. “We have been exporting a lot of crap to the Russians and Poles for years and we can’t sell this stuff in Australia. We need to rearrange our whole social system according to a market economy.”

The financial squeeze is being compounded by a continuing U.S. embargo on trade with Vietnam that has effectively blocked all Western aid and loans from foreign lenders such as the International Monetary Fund. The interplay of pressures has forced Vietnamese leaders to apply the brakes to economic reform measures at home and to rethink relations with their neighbors in Asia in an attempt to boost a faltering economy.

Inflation, which had been brought under control last year, shot up by 21% in the first two months of this year before starting to level off again.

The price of gasoline, which was formerly supplied free by the Soviets and is now imported from Singapore, rose 300%.

Electricity costs have doubled, and the national currency, the Vietnamese dong, has lost half its value against the U.S. dollar in a year.

Vigecam, the state fertilizer company, imported 800,000 tons of fertilizer last year from the Soviet Union, according to a Western agricultural official. This year, it has imported nothing because it has no dollars. The director of the firm has been in Moscow since January pleading for supplies.

In a country where 80% of the 68 million population lives on the farm, a severe drop in fertilizer supplies menaces the national livelihood, especially in the north, where the land is not as fertile as it is in the south. It also threatens to undermine rice exports, which last year totaled 1.5 million tons, one of the largest foreign exchange earners in the economy.

The problem is being felt throughout the economy. A northern computer company, one of the few high-tech ventures in Vietnam, formerly sold $70 million worth of goods a year to Moscow. Rather than dollars, it now gets gets paid in thread.

But hardest hit are firms such as the Chien Thang factory, makers of textiles and clothing and handicrafts, which formerly did most of their business with the Soviet Union. As recently as 1988, fully 60% of Vietnam’s foreign trade was conducted with Moscow.

Even Aeroflot, the Soviet state airline, has been hit hard by the new alignment. It formerly carried four full loads of Vietnamese businessmen each week, but when the price rose from $20 to $521 on Jan. 1 for a one-way ticket to Moscow, the airline was forced to cut back to three flights a week, and these are rarely even half full, said Aeroflot manager Arkady P. Kozik.

“It used to be impossible to get a seat,” Kozik recalled. “Now business is so bad we will soon have to cut back to two flights a week.”

Vietnamese Premier Do Muoi traveled to Moscow in late May in an effort to work out new trade terms in the wake of the two countries’ Jan. 31 agreement to “dollarize” their trade. A joint communique spoke of fraternal relations between them and said the answer lies in barter arrangements.

The two countries failed to announce an agreement to settle a dispute about Vietnam’s debt to the Soviets, which totals 9 billion rubles. This could represent as much as $15 billion, at the official Soviet exchange rate, or as little as $300 million, at what the Vietnamese argue reflects the current world market price for the ruble.

Collapse of trade with the Soviets has helped persuade the Communist Party leadership here to proceed with economic reform at a cautious pace, according to government officials.

Begun in December, 1986, when the economy was a shambles and store shelves were empty, Vietnam’s doi moi , or economic renovation, brought a quick injection of consumer goods and checked rampant inflation.

But as government economist Doanh noted, Vietnam “still doesn’t have a market economy.”

Nearly a third of gross domestic product is produced by government-subsidized state enterprises, which were supposed to have been forced to turn a profit or quit. But apart from a few small rural enterprises, the government has not allowed any government-owned factory to close its doors.

The reason seems clear: Unemployment is already at 20% of the work force, with schools producing 1 million graduates a year. The economy has been unable to absorb 500,000 demobilized soldiers and 150,000 workers sent home from the East Bloc, and it could not cope with layoffs from a wave of factory closures.

With salaries between $10 and $25 a month, most workers hold down second, third and even fourth jobs to make ends meet. A key barometer of economic performance is the number of “boat people” arriving in Hong Kong from Vietnam each year. Although only 400 northerners made the trek in all of last year, more than 2,000 have arrived in just three months of 1991.

Le Van Tu, a top official of Vietnam’s Central Bank, said that instead of permitting a wave of bankruptcies like those now taking place in Eastern Europe, the government is setting up committees to identify factories that seem most likely to succeed. Officials would then follow a “step-by-step bankruptcy for those that are too weak to survive.”

Tu cited the example of a needle factory, which he said was the only one in Vietnam producing sewing needles. Faced with the prospect of having no domestic producer of needles, the government decided to continue subsidies until competition arises in the market.

The government now charges factories so-called negative interest, meaning that it lends money at 2.5% a month while paying 4% to savers, a significant loss.

While the effects of such subsidies are difficult to measure, the government deficit is about 16% of its annual budget and must be financed by printing new money.

“Vietnamese economists are very much confused and don’t know how to stop inflation,” Tu said. “We haven’t been able to calculate the amount of money supply needed.”

In addition, the political debate sparked by the collapse of communism in Eastern Europe has made Vietnam’s aging leadership sensitive about questions relating to the Communist system, prompting them to proclaim that Marxism is still the country’s official policy despite market reforms.

There are many contradictions. Housing and land, for instance, can be privately owned but not sold. As one government economist commented acidly, “To speak of socialism these days is like speaking of love. When girls speak of love they mean something different than when boys speak of love.”

For the past several years, the Vietnamese had placed high hopes on normalization of relations with the United States, clearing the way for Vietnam’s entry into the world marketplace. Judging by recent comments from high-ranking officials, they have all but abandoned those hopes, at least for the present.

For Vietnam, improved relations with Washington would mean not just bilateral trade, which is barred by a U.S. trade embargo that has been in place since 1975. The United States also has effectively prevented other Western nations from providing financial assistance and has vetoed loans and other aid from the IMF, the World Bank and the Asian Development Bank.

The Bush Administration’s decision to tie normalization to developments in neighboring Cambodia apparently confronted the Vietnamese with a choice between bread-and-butter needs and national security. National security won out.

As a result, Vietnam is now moving to improve relations with its wealthier neighbors in Southeast Asia, particularly Thailand, Malaysia and Indonesia.

Last year, Vietnam signed an economic agreement with Indonesia and set up a deal to swap Vietnamese oil for Indonesian fertilizer. It has a similar barter arrangement in the works with Malaysia, and both Indonesia and Malaysia recently re-established air links with southern Vietnam.

Collapse of trade with the Soviet Union has also led to a major improvement in economic relations with China, which has opened its border with Vietnam. Chinese goods are now found throughout Vietnam, and Vietnamese food products are sold in southern China.

Japan and Australia, which had observed the American-led embargo, are beginning to loosen their adherence to the ban. Japan has replaced the Soviet Union as Vietnam’s largest trading partner, and Australia has pledged $15 million in aid this year.

But foreign investment has not fulfilled Vietnamese expectations, in part because the Vietnamese have stubbornly clung to arcane laws governing foreigners in Vietnam. These include a special wage structure for foreign companies that is far higher than the local scale.

Lack of an efficient legal mechanism to resolve trade disputes was glaringly illustrated recently when a Thai businessman charged that he had been held hostage by a firm in Vietnam until his wife paid a ransom equal to the amount in dispute.

For all of its difficulties, the government has just published details of an unabashedly rosy draft economic strategy leading up to the year 2000.

The report calls for a number of major improvements, including an increase in the per capita income from $200 to $400 and a boost in rice production from the current 19 million tons to nearly 30 million tons. It also set as a goal a 500% increase in foreign trade.