Soviet Chocolate Factory Is Facing Bittersweet Times : Economy: The Red October plant, which has survived revolution and war, is struggling with privatization.

For more than 100 years, workers at the Red October chocolate factory have strived to add a dollop of sweetness to the often bitter reality of life in the Soviet Union.

And for most of the time they have done so as a state-owned enterprise, the largest candy manufacturer in all of Russia.

But today, Red October is on the verge of a change as revolutionary as its name, which harks back to the Bolshevik takeover of the Soviet Union in the fall of 1917. The chocolate maker is breaking free of government control and linking its fate to the fledgling system of free enterprise.

“It will become a factory to dream of,” predicts Anatoly N. Daursky, director of the plant, which overlooks the Moscow River in the heart of the city.

As Soviet officials struggle to breathe life into their desperately ill economy, efforts to privatize state-owned industry seem increasingly urgent. Yet the quest of Red October provides a case study of the awkward path that enterprises face as they abandon the old ways of central planning for the new uncertainties of a market economy.

Vaguely worded laws, unpredictable bureaucrats, shifting government policies and insecure employees can hinder change. Indeed, the fate of Russian President Boris Yeltsin’s reform efforts will depend in large part on how well consumer-oriented factories, such as this one, adapt to the freedoms--and risks--of the marketplace, some analysts contend.

“We shouldn’t rely (yet) on privatizing our huge monsters of heavy industry,” maintains Nikolai P. Shmelyov, a well-known economic reformer, noting the tremendous complexity of such conversions. “But for smaller candy factories, it should begin immediately.”

Not that Red October is all that tiny.

It produced 63,000 tons of sweets last year--mostly chocolates, caramels and toffees in quaint wrappers depicting red-cheeked Russian girls, bluebirds, bears and other timeless images. Every day, its mostly female staff reports to work in white laboratory-style jackets to toil at assembly lines, toss broken chocolate bars into trash receptacles and package the finished confections.

They have done so through revolution, purges and world war. Now comes the next chapter in the factory’s colorful history: It plans to give ownership shares to employees within the next few months, creating a Soviet-style stock company.

To succeed in the transition, it also is building up a domestic network of suppliers of sugar and other ingredients and seeking foreign investors to help pay for modern equipment.

“We’re doing everything on the run, and we don’t have enough experience,” acknowledges Daursky, a white-haired mechanical engineer whose office is decorated with packages of candy, including Gold Label chocolates made from a recipe that predates the October Revolution.

For many here, the climate of change is a bit unnerving. Red October has been a paternal employer, the sort of place that lets workers buy eggs in-house instead of leaving them to wait in lengthy lines at stores as does much of the public.

But these days there is talk even of cutting staff, although managers hope to do it through attrition rather than layoffs.

“People are concerned,” said Abramushkina Nadezhda, a 15-year veteran who works on a machine that stuffs chocolate with cream and other fillings. “Maybe workers will face difficulties. But we hope for the best.”

Today’s uncertainties are just the latest in a series of tumultuous events to jolt an enterprise founded in 1867 by a German vendor of chocolate and tea pastries.

The current site, built at the turn of the century, was nearly destroyed in the revolutionary upheavals that led to the Bolshevik takeover 74 years ago. More damaging, key technicians left the chaotic scene, taking with them much of the plant’s candy-making know-how.

“Workers had to learn how to manage the factory,” Daursky said. “It was a very hard period.”

Another hard period came with the purges of the 1930s, under the regime of Josef Stalin. Last year, Red October’s management paid reparations to survivors of six employees who disappeared in those terrifying days.

The candy maker continued to operate during World War II, while strategic industries were being evacuated from Moscow to the east. As German forces menaced the nation, Red October supplied submarine crews and fliers with chocolates; some of its production capacity was converted to flares used by the navy.

Now, like other enterprises in the Soviet Union, it is trying to maneuver through another turbulent time--an economic restructuring as profound, some say, as the revolution of 1917.

For individual companies, among the most complex steps can be setting up a form of private stock ownership, usually including employees among the shareholders. Assigning a value to companies has been vexing, given the Soviet Union’s distorted pricing system. Moreover, there is no uniform approach to allocating stock--to determining, in other words, which workers get how many shares.

Unlike U.S. corporations, Soviet stock companies generally lease their property from the local government rather than own it outright or rent from a private landlord. In addition, Soviet firms often retain the government as a shareholder. Until now, several hundred such stock companies have been formed, but the vast majority are quite small and represent only a minute portion of industry.

If proposed economic reforms are fully adopted, however, privatization could speed up dramatically and the restructured Soviet enterprises could evolve into something much closer to Western corporations over time.

“Little by little, these differences are going to get whittled away,” predicts Paul R. Harter, an attorney in the London office of Gibson, Dunn & Crutcher and a specialist in Soviet business.

In the meantime, it’s hard enough for many Soviet enterprises just to survive. Red October, for example, has had to scramble for sugar to make up for reduced shipments from Cuban sources.

But it has a huge advantage over many factories: Troubled times put little dent in the demand for chocolate. The confectioner has found suppliers in Krasnodar, near the Black Sea, and other regions willing to provide sugar in return for candy--or the technical know-how to produce it for themselves.

To be more specific about his quest for ingredients, Daursky says with a smile, would be to give “a secret of the firm. You’d broadcast it, and I’d lose my advantage.”

Beyond the troubled economy, slow-moving bureaucrats remain an obstacle to the candy maker’s ambitions. Red October has been waiting months for final approval to rent its current location from the Moscow City Council; it has a packet of documents still floating through the bureaucracy.

Still, the director expects to get all the permissions he needs to move forward with privatization by year-end. At that time, ownership shares will be allocated based on employees’ length of service. Under the plan, the City Council and sugar suppliers will also be among the shareholders. Daursky also wants Western investment, to help finance a major overhaul of machinery, much of which is 20 years old.

If it all comes to pass, the plant with a name that commemorates a socialist revolution will become a beacon of free enterprise. The name won’t change, but clearly, many hope that a touch of capitalism will give employees the sense of ownership that they were promised 74 years ago by a very different ideology.

“We’ll know the factory is ours,” said Lydia Simonova, 38, who helps put the coating on chocolate candies each day. “Of course, we’ll work harder.”