Baltics Struggle to Cut Cord to Soviet Economy

Alwils Barowskis is racing against time.

Very shortly, he expects the Latvian government to shut down most existing free trade between Latvia and its former parent, the Soviet Union. That means the imposition of duties and import licensing rules. And that, in turn, could dry up the flow of Soviet steel and aluminum that Barowskis has been frantically buying.

It’s not that he so desperately needs the raw materials for his factory, which assembles telephone switching equipment used throughout Eastern Europe. Rather, the bulk purchase of hard commodities is Barowskis’ way of converting his rapidly devaluing Soviet rubles into useful assets. This is not a small consideration: The store of rubles in his company accounts is currently worth around $7 million.

“If I can spend it all on steel and aluminum,” he explains after a day of frenetic trading, “then I’ve effectively converted my rubles at one to a dollar. If I spend only half, then it’s two to a dollar.”

If he has to do it on the open currency market, it would be more than 40 to a dollar. “I’m not buying what I really need,” he said. “Just what I can get.”

Barowskis’ counterparts across the Baltic region face the same desperation in unloading their increasingly worthless Soviet rubles before the paper currency’s value fades to zero, or the new Baltic governments issue their own currency and restrict the terms of ruble conversion.

But beyond that, his dilemma underscores how the change in the Baltics’ business and economic climate brought about by independence and the breakup of the Soviet Union is creating its own set of economic problems. These will affect not only newly independent states such as Latvia, Lithuania and Estonia, but also many of the other shards of the former Soviet Union currently charting a new relationship with Moscow after decades of laboring under Soviet economic policy, indoctrination and training.

The Baltics’ economic divorce from the Soviet Union is likely to be more protracted and painful than the political split that occurred last summer, when the Kremlin formally recognized the independence of the three states. The problems range from eradicating lax Soviet-style work habits in employees and middle managers to overcoming a serious credit crunch created by the unavailability of hard currency.

The process is complicated by ties that still bind the new states to the Soviet regime.

For example, the Baltics are continuing to use Soviet rubles as legal tender, at least until they can establish their own currencies; that process could take another year. Soviet officers still patrol many customs posts, conduct coastal surveillance and staff regulatory bureaus in the Baltic countries because no one else has the requisite training. This is itself a legacy of the Soviet era, for the Kremlin was so mistrustful of Baltic loyalties that it employed almost no natives in sensitive jobs.

Moreover, virtually the entire Baltic industrial infrastructure is Soviet-built. The three Baltic governments regard this bequest as something of a curse. The plants are antiquated, oversized and environmentally dirty. Designed as pieces of a great imperial whole, the factories, refineries, ports and power stations must be operated by Soviet-trained work forces, run with Soviet equipment and supplied with Soviet raw materials.

The Soviet government has served notice that it expects to be compensated for the industrial plants, nuclear generators, oil refineries and other structures that it erected on Baltic soil over the last 50 years and is now leaving behind. This position is likely to create more strains between the two sides, for Baltic leaders argue that when one takes into account nationalized and seized private property and the lives of tens of thousands of Balts deported to Siberia under Stalin, the compensation ledger tilts in their favor. Compensation is among many issues, including a schedule for the withdrawal of the military from Baltic soil, yet to be satisfactorily negotiated.

For this reason and others, the shape of the future relationship between Moscow and its former colonies remains open to question. It’s not only an economic issue but a philosophical one. Some Baltic leaders argue that the region has no reason to deal with Russia at all.

“We must open doors to the West and close doors to the East,” says Tiit Made, an economic adviser to the Estonian Parliament who believes that undemanding Soviet standards destroyed the Baltics’ ability to compete in the world.

“The Soviet market wasn’t about buying and selling, but getting and giving,” he says. “We did not produce high-quality goods because the Soviet market took anything.”

A contrasting view is that of Eduardas Vilkas, an economist in the Lithuanian Parliament, who argues that the best trade opportunities for his country and its neighbors will be with the behemoth to the east.

“Instead of turning our backs on Russia, we must do the contrary,” he says. “The need is to maintain all possible relations, because we don’t have any economic reason to divorce. Look at the problem of energy: If tomorrow we had to pay hard currency for oil, which we get now from the Soviet Union, we would not have any. We’d need a couple of billion dollars per year.”

Introducing Western business methods and ideas into this uncertain environment may be harder than many outsiders assume. For one thing, after 50 years Soviet work habits have been ingrained deeper than many suspect.

“Because they’re racially and culturally related to Americans, there’s a tendency for us to assume there’s a similarity in business mentality,” says Paul Castleman, a former Boston computer executive now working with a nonprofit group helping Baltic businessmen with management skills. “But the average 12-year-old American kid has a much better sense of market economics than all the managing directors of major Soviet enterprises. With very few exceptions, the awareness of even rudimentary market practice is virtually nonexistent.”

Accustomed to shipping whatever they make and receiving working capital from central planners, Soviet business managers have no inkling of such standard Western practices as communicating with their customers or attracting bankers with a carefully wrought business plan.

An even more troubling obstacle to a truly competitive business environment is the “Sovietization” of worker behavior.

“How to teach our society to work is the main question,” says Made. “We have Soviet manners. If we come to work at 9 a.m., the first hour we talk about last night’s news, then we spend an hour smoking a cigarette, then go out to check the shops, then maybe a drink of vodka. Then maybe we’re ready to work for an hour.”

The same thing struck Barowskis in his very first days of operating Tellar, his telecommunications company.

“I started with two managers and four employees, two of whom were fired on the first day,” he recalls. “That was the beginning.”

Over the following seven years he hired and fired more than 3,000 workers to find the core group of 730 he now calls his “team.” The workers are typically paid two to four times as much per month as average Soviet workers, and they also stand to receive stock in Tellar as an incentive (350 employees currently qualify). The higher pay and the lack of Soviet-style job security help maintain a Western work ethic, Barowskis says.

“The state pretended that it paid wages, and the people pretended that they worked,” he says, quoting an aphorism about the Soviet system. “This went on for two or three generations. The people worked the way they were expected to. You have lack of incentive, inertia, low-quality work, low responsibility level. They come late, or drunk. Such people can’t work in my firm.”

Poor work habits are inculcated by the entitlement system of Soviet state firms. Workers in such enterprises are paid relatively low wages but get housing, education for their children, recreational facilities, and even access to food and imported goods at cut-rate prices. Linking such benefits to improved job performance would be a radical departure not likely to go over well.

“Everybody, including me, is a slave to this idea of being equal in all things,” says Yevgeny V. Vasilyev, finance director of a large Soviet-built oil shale plant in Kontle-Jarva, Estonia. “Our workers wouldn’t like it if someone is treated better.”

Not long ago, the plant management tried to introduce the concept of incentive pay by giving every department head a lump sum to distribute as additional salary to his underlings. Almost all of them divided the sum among their workers equally. “This is our old socialist heritage,” says Vasilyev, “and it can’t be solved in a year.”

Another socialist heritage is the Baltics’ macroeconomic mess.

Most economists say currency reform is urgent for the Baltics, if only to avoid getting swept behind a Soviet economic downdraft, which could reduce the ruble’s value against the dollar from the current 40 to as low as 200 or even 500 by the end of next year.

Although the “latis,” “litus” and “kroon” that will eventually be issued by Latvia, Lithuania and Estonia will at first be no more convertible into hard currency than the ruble is now, many economists believe that they will be accepted abroad long before the Soviet currency.

“Estonia and Latvia can get their houses in order more quickly than the Soviet Union,” says George J. Viksnins, an economics professor at Georgetown University who has advised the Latvian government on currency reform.

One reason for urgency is the negative impact that Soviet monetary manipulation has already had on the Baltics. The Soviet central bank, which is running its money presses at top speed just to feed inflationary demand, has refused to send any more currency across the border to the Baltics.

The result is that just as the ruble’s value is shrinking, so is its circulation. Bank depositors with large ruble accounts in the Baltics have lately been unable to withdraw their money in cash. They are thus forced to watch helplessly while its value evaporates--unless, like Barowskis, they can send credits across the Soviet border for hard Soviet goods.

“We’re in a cash crisis because the Soviet central bank can’t provide us with rubles,” says Einar Repse, the newly appointed head of the Estonian State Bank. “When bank accounts cannot be converted into cash, you can see the magnitude of the problem.”

Accordingly, the three Baltic states are working toward an agreement to simultaneously introduce new currencies sometime in mid- or late 1992.

All these circumstances restrict the ability of businessmen such as Alwils Barowskis to take advantage of the Baltics’ real competitive advantages. Labor costs, for example, are as low as 5% of Germany’s. But Barowskis feels that he will not be able to expand his firm unless Western partners come in with capital and orders.

Their reluctance thus far to do so he ascribes to enduring suspicions about the Soviet legacy.

“The Soviet system has done tremendous damage to our ability to compete,” he says. “This is how what they’ve done has affected millions of people.”