Loan Bridges Gap in Caterpillar Sale to Russia

In a deal that speaks volumes about world trade, Russia’s future and U.S. policy, Caterpillar is selling 295 tractors for a natural gas project in the Siberian Arctic.

The Peoria, Ill., company won the $100-million job against stiff competition from Komatsu of Japan, thanks to an $86.5-million loan from the U.S. Export-Import Bank to the Russian gas agency GAZPROM, which will pipe the resulting gas to Western Europe.

There is irony aplenty--and a ray of hope--in Caterpillar’s victory. For it was a 1981 Reagan Administration ban on Cat’s participation in a Soviet-European gas pipeline project that clobbered the company’s Russian business and opened the way for Komatsu to grow internationally.

But the very fact of the deal today and Ex-Im’s prominent role holds out hope that ways can be found for U.S. companies to do business in Russia and other ex-Soviet republics, which are facing economic and political perils. President Clinton, in a major speech last week, said the United States must work for democracy in the newly independent states. “If we are willing to spend trillions to ensure communism’s defeat, we should be willing to spend a tiny fraction to support democracy’s success,” the President said.

Talk is cheap, and stakes are high. Clinton better be prepared to back his words with action, say experts on Russia. “Bush talked a lot about helping Russia but did absolutely nothing,” says Stephen F. Cohen, professor of Russian history at Princeton University.

One result is that attitudes have hardened, and the economy has weakened.

Two years ago, when President Boris N. Yeltsin came to power in Moscow, hopes were high in Russia, Ukraine, Belarus, Kazakhstan and the 11 other republics that--with the West’s help--economic life would improve. Now there is suspicion that Western business only wants a fast buck.

Disenchantment is understandable in a seemingly chaotic country where the ruble has fallen to one-sixth of a penny (600 rubles to $1), 1/3,600th of its theoretical value before the Soviet breakup. The former Soviet republics owe world bankers $70 billion; private lenders have closed the door to more credit, and the situation seems hopeless.

That’s unfortunate, because a nation of 290 million people, with educational attainments comparable to far more developed countries, could provide a great business opportunity. It’s also unfortunate because an economic basket case with nuclear weapons is a danger to the world.

However, the real world of Russian ingenuity offers a rosier view, says Charles Wolf, director of RAND, the international research firm. You can’t trust the numbers. Life in Russia today is better than statistics indicate, Wolf says.

He has been right before. In the 1980s, when U.S. government statistics described a powerful Soviet Union, Wolf’s analysis showed that military spending was crippling the country.

Now he says the ruble has more purchasing power within Russia than it appears from outside, that the $1-trillion economy has not really fallen almost 50% in output.

And change from central planning to consumer choice is being worked out in the underground economy, where people are trading apartments, making deals.

In the days of the police state, Russians risked their lives to make commercial deals--trading hockey tickets for plumbing services, working schemes to get dollars or deutsch marks, etc. And deal making is hotter and heavier now that the threat of Siberian prison is no longer there.

Plumbing and hockey tickets don’t offer business for international companies, true enough. But that’s why big projects in energy and mining are so important: They earn Russia the foreign currency needed to buy equipment, build industries and increase trade with the West.

Caterpillar has sold hundreds of heavy trucks and bulldozers to gold mining projects, as well as tractors to the gas project. There’s opportunity for suppliers of oil field equipment, of small tractors for individual farms--which will replace state agriculture if Russia is to prosper.

Financing is key. Russia can’t borrow, and nobody is in a mood to give away money, so business can only be done if governments and international investors come up with ways to finance projects.

The Export-Import Bank is trying to devise a $2-billion arrangement in which loans backing U.S. exporters would be collateralized by Russian gas or oil or mining output. Other government agencies could guarantee financing to help U.S. companies get the business.

Why government finance? Because Russia is so disorganized that legal problems impede normal business--and because it’s necessary to be competitive.

The GAZPROM deal was put together by Japan’s Mitsui Trading Co. and involves mostly Japanese companies. Cat, which gets 60% of its $10 billion in sales from overseas, got a piece of the deal on the strength of its own competitiveness and of Ex-Im’s willingness to finance.

The $100 million in business will maintain 5,000 jobs in Peoria for years to come. By any reckoning, that’s money well lent.