The Multinational Monitor



Calling the Tune:

The Corporate Raid
on the Soviet Union

by Carl Mayer

Moscow - For the past 32 years, the Soviet Union has sponsored one of the world's most important music events, the quadrennial Tchaikovsky competition. This event is held for a one month period in the dazzling Tchaikovsky Hall, located in Moscow a few hundred yards from the Kremlin.

In 1990, however, the Soviet government served notice that the ninth holding of the competition would not take place because of a lack of funds. The government simply did not have the hard currency to fly in hundreds of contestants from around the globe.

Hearing this, the Japanese Pioneer Electronic Corporation agreed to salvage the competition, becoming the event's first sponsor.

On Saturday, July 7, 1990, a crowd of almost 1,000 packed Tchaikovsky Hall for the final awards. After speeches from the Soviet Minister of Culture and Gary Karpov, the chess champion, the guest of honor rose to speak: Seiya Matsumoto, chairman of Pioneer. Against a backdrop that read in English "Ninth Annual Tchaikovsky Competition, Sponsored by Pioneer," he presented thousands of yen of Pioneer stereo equipment to the victors, and wrapped a fur coat around the competition's organizer.

Half the crowd applauded wildly for the display of Western goods unimaginable to the average Soviet citizen; the other half sat in stunned disbelief at the unprecedented foreign invasion.

This incident illustrates both the extent and limits of multinational corporate presence in the Soviet Union. While corporations are laying the foundation for a full-scale invasion, their current role is limited primarily to acts of goodwill and jockeying for position.

Despite the massive changes wrought by Gorbachev's perestroika and the ever-intensifying moves toward a market economy, there remain formidable obstacles to multinational investment in the Soviet Union.

Three points are critical to understanding the future of multinationals in the Soviet Union: 1) Japanese and German corporations are far ahead of U.S. corporations in their level of activity; 2) multinationals treat the Soviet Union like a Third World country: they covet Soviet raw materials while offering little in return; and 3) beyond the extractive industries, very few multinationals are now operating in the Soviet Union, and it will be a long time before they overcome the many obstacles to investment in the U.S.S.R.

The Germans and the Japanese are coming

Although the Gold Rush atmosphere isn't quite as palpable in Moscow as in Eastern European capitals, the hotels in the Soviet Union's largest city are overbooked with foreign business people. Most are Japanese or German.

The Japanese and Germans have always been larger trading partners with the Soviet Union, and their governments encouraged more multinational investment in the Soviet Union than did the United States' (see Multinational Monitor, Nov. 1987).

Now, with the Soviet economy opening, the Japanese, German and other European corporations which have not been as hamstrung by Cold War ideological considerations have a jump on doing business with the Soviet Union.

Business-government cooperation has paid off for both Japan and Germany. Most of the 1,500 to 2,000 joint ventures signed between the Soviet government and foreign multinationals are with German or Japanese corporations. Only 10 percent are with U.S. firms.

U.S. corporations operate with, at best, the indifference of the U.S. government. Maria Aronson, commercial attache at the U.S. Embassy in Moscow, says matter of factly that while Japanese and German governments assist their corporations, "Americans don't operate that way. Maggie Thatcher or Helmut Kohl doesn't think twice about coming in and signing a deal [for a European corporation]. But we leave business to the businesses."

In fact, the U.S. Embassy in Moscow could produce a list of only 16 U.S. corporations doing business in the Soviet Union. Explains Aronson, "Many firms are reluctant to give details about their operations, even to the Embassy."

Targeting natural resources and the national diet

The attitude of the U.S. government and U.S. corporations is summarized by a large handwritten sign posted in Aronson's office: "The Soviet Union is a Third World Country with a Big Army." (Compare this to the more diplomatic approach of Pioneer Corporation.)

Whether they advertise it or not, most foreign corporations view the Soviet Union as a Third World country in at least two respects: they are most interested in deals involving the extractive industries; and the large junk-food conglomerates peddle their wares with little benefit to the local population.

Foreign multinationals are virtually euphoric over the

prospect of harvesting such bountiful Soviet natural resources as oil, coal, gold and diamonds. The Soviet Union, for its part, is so desperate for hard currency that it is willing to enter into arrangements to allow companies to extract its resources on almost any terms.

Perhaps the ultimate confirmation of the Soviet Union's Third World status came on July 25, 1990, when the Soviets concluded an agreement that will allow the South African De Beers corporation to sell the entire diamond production of the Soviet Union for the next five years. In return, De Beers advanced the Soviets $1 billion � even though experts believe Soviet diamond production will be worth $5 billion over the five-year period. (The Soviet Union's production of between 10-14 million carats ranks third in the world behind South Africa and Botswana.)

Only a country desperate for cash would make such a Faustian bargain with a corporation that has long been the target of anti-apartheid activists and a symbol of capitalist excess. Created in 1888, De Beers exercises a virtual monopoly over world diamond production (controlling 70 percent of the planet's yearly diamond output of 50-55 million carats). The company pays near-slave wages in its South African mines; for years it was run by Harry Oppenheimer, nicknamed "Goldfinger" by anti-apartheid activists for his reputed ruthlessness.

Not just the South Africans are interested in Soviet resources. The Soviet Union is rapidly auctioning off its natural resources to the highest bidders.

  • Chevron is negotiating for an oil and gas consortium joint venture; it also signed a letter of intent to begin surveying an oilfield in Siberia.
  • Hunt oil corporation has agreed to a prospecting arrangement with the Soviets.
  • The Korean Electric Power Co. has agreed to import 40 tons of uranium from the U.S.S.R. for nuclear plants over the next 10 years. This paves the way for Korean-Soviet cooperation in the nuclear field.
  • DuPont's Conoco unit, Royal/Dutch Group, Amoco and Haliburton have held discussions with the Soviet agency responsible for Siberia's oil and gas industry.

Western multinationals are primarily interested in the vast oil reserves of western Siberia, which account for almost two-thirds of Soviet oil output. But other natural resource locations are also of interest.

Sakhalin island, located at the extreme east of the Soviet Union, eight time zones removed from Moscow, is among the other investment targets. This North Pacific Island of 700,000 people is like a miniature Alaska of the Soviet Union: rich in natural resources � oil, timber, fish, and minerals � it is also home to a substantial indigenous population.

Until now, the island has been closed to foreign exploration and development. This is now changing, thanks to the Apri11990 election of a new mayor who has proposed making the island a free economic zone. Already, several Finnish, Japanese and Korean corporations have expressed interest in the Island's resources. Last year, Korean Airlines initiated direct flights from Seoul to the capital of Sakhalin. For Vladimir Koslov, a former staff attorney for the Supreme Soviet who is now working to protect the natives of Sakhalin, the arrival of the multinationals is an ominous sign: "It is difficult to say what the foreign corporations will do once they arrive, but I am fairly certain that they will be harmful to the natives. My feeling is that many foreign corporations will simply want to get something for nothing. I certainly believe that a free economic zone � that allows foreign investment with no restrictions � will not be in the best interests of the natives."

Eventually, Koslov expects that Japanese corporations will colonize the Sakhalin Islands because of their proximity to Japan. (The Japanese must first settle a dispute with the Soviets over the nearby Kuril islands, which the Japanese claim were improperly seized during World War II.)

On the heels of multinationals anxious to exploit natural resources are the junk food merchants. McDonald's has already opened a Moscow branch, the largest in the world. PepsiCo has agreed to a $3 billion deal that will remain in force until the year 2000. In exchange for Pepsi concentrate, the Soviet Union will supply ships and vodka.

The most visible critic of the Pepsi venture is Anatoly Sobchak, the Leningrad Mayor who made an historic break with the Communist Party this summer in a bid to form his own Social Democratic party. "In general, I'm against such contracts and against gigantomania," Sobchak told a Moscow magazine in an interview.

Sobchak and other reformers (all of whom see some role for the market in a reconstituted Soviet society) believe that multinationals in general, not just PepsiCo, offer the wrong solution at the wrong time. "When I think about our economy, I'm reminded of a humanprganism which has veins and arteries, but no capillaries. You don't have to be medically qualified to know an organism of this kind cannot survive," observes Sobchak. "If you use this metaphor for our economy, you see we have enormous industrial monopolies, but we lack a well-developed network of small and medium enterprises which act like capillaries by pumping the economy full of goods and are directly linked to the consumer.

He worries that the country and its people are being cheated by businesspeople with greater economic savvy. "Our country is not only attracting honest businesspeople. 'Cowboys' are coming in looking for quick and easy profits. And we are easy pickings, as our inability to do business makes us look like foolish savages who give valuable things in exchange for trinkets like computers."

Sticks in the multinationals' spokes

If multinational corporations are not suited to Soviet society, the converse is also true: beyond the extractive industries, the U.S.S.R. presents daunting difficulties for foreign corporations, particularly U.S. multinationals oriented toward short-term profits. One U.S. attorney working at a major American law firm in Moscow confides that none of his corporate clients has made a penny, even after years of dealing with the Soviets.

As a theoretical matter, the Soviet people are simply unfamiliar with either the lexicon or practice of the free market. Unlike Eastern European countries such as Poland, Czechoslovokia and Hungary, there have been no markets in the Soviet Union for 70 years. Introducing a culture of bargaining, contracts and distribution could take a generation.

The practical problems with doing business in the U.S.S.R. are almost as daunting. Under current law, multinational corporations cannot control more than 50 percent of a joint venture. Even if they could, the expatriation of profits is almost impossible because of the lack of convertibility of the ruble. And massive infrastructural problems confront the putative Soviet business partner. As the U.S. commercial attache notes, "Right now it is just impossible to get a phone call or a fax through. Office space is nonexistent." Finally, capital formation is exceedingly difficult: there is no Soviet stock exchange, although a bill is being drafted which will propose the formation of one.

Even worse, from the multinationals' perspective, it now turns out that the Soviet Government is a deadbeat. In January of this year, the government � after years, ironically, of being one of the best credit risks in the world � stopped payments to a number of foreign multinationals, including U.S. corporations, doing business in the U.S.S.R. The U.S. corporations have asked the U.S. Ambassador to file grievances. Though Aronson, the commercial attache, refuses to identify which companies are involved, she does say, "The ambassador made the complaints in January; the situation still has not been resolved. About 12 corporations are involved; the payments are in hard currency � for several billion dollars � mostly for work in the petrochemical field."

Perhaps the most serious obstacle to multinational investment is the growing restlessness of the Soviet republics. The Soviet Union is reaching a point of economic balkanization, if not anarchy, as each republic, tired of directives from Moscow, proclaims its independence by announcing local controls over resources. No sooner had DeBeers signed a deal with a Soviet state agency for diamond production than the Russian Republic � where most of the diamonds are produced - disputed the national government's right to enter into the arrangement. If the Republics reject national sovereignty to enter into arrangements with foreign corporations, the result could be years of confusion as multinationals struggle to determine which government groups to negotiate with. It might also result in years of exploitation, as divided and uninformed regional and local officials give away the store to foreign corporations.

Some in the Soviet Union advocate a third way of developing their country � one that rejects foreign multinationals as well as large state-run enterprises. In this scheme, small cooperatives would dominate the economy. One advocate of this approach is Koslov, who is attempting to create a cooperative corporation, run by the people of Sakhalin Island, to develop the Island's resources. While critical of multinationals, Koslov is equally critical of Soviet state-run companies. "State enterprises were created for mass exploitation of the people for the profit of the state. This simply means that the people work for a capitalist without a name," says Koslov. "In America at least you have some accountability � but our capitalist is quite nameless."

Koslov believes that both foreign multinationals and state-run enterprises are antithetical to any attempt to create cooperatives that would provide an alternative model of development for the Soviet Union. If Koslov is right, the Soviet future is bleak, for it is likely that the Soviet people will continue to suffer, not only under the regime of state-run monopolies, but from the centralized and unaccountable power of multinational corporations as well.

The Soviet Environment and the Law

Soviet legal scholar Dr. Alexandre Timoshenko, an adviser to the Council of Ministers (the Soviet Union's equivalent of the Executive Branch), is now drafting the Soviet Union's first comprehensive law on the environment. If enacted, it will have an effect on multinationals operating in the Soviet Union for years to come.

Timoshenko is the director of environmental law at Moscow's Institute for State and Law in Moscow, which advises government bodies on drafting legislation. The Institute has close contacts with the Environmental Law Institute in Washington, D.C.

Timoshenko has written two books and over 60 essays and articles.

Multinational Monitor: What are the most important provisions of the new law on the environment?

Alexandre Timoshenko: The most important provisions of the law are mechanical. The first is a provision that will make it illegal to use a technology in the Soviet Union if such technology is banned in another country. For example, if Occidental Petroleum corporation cannot manufacture PCBs or DDT in the United States it will not be able to manufacture such substances here.

The second important provision relates to standing. We have a provision that allows citizens to sue to uphold the law.

MM: Do you believe that the environmental law will pass?

Timoshenko: Yes, it will certainly pass. It is being proposed to the Council of Ministers and then they will refer it to the Ecological Committee of the Supreme Soviet.

MM: Are there any multinational corporations that the environmental law is directed against specifically?

Timoshenko: No. There are few if any multinational interests represented now in the Soviet Union. This is all simply theoretical thinking and planning, because as yet the foreign corporations are not represented in flesh and blood.

MM: Aren't multinationals making a big push to enter the country?

Timoshenko: They may be, but they are not yet here. Serious multinationals are not now in the Soviet Union. The serious capitalists are not yet here. Before perestroika only a fraction were allowed here. Now, the laws are changing, but multinationals still have to consider [several] obstacles to coming to the Soviet Union:

  1. A multinational corporation, if it enters into a joint venture with the Soviet government, wants to control more than 50 percent of the investment. Under current law this is impossible.
  2. There is a problem of taking profits out of the country--the currency is not convertible and nobody wants rubles.
  3. Infrastructure--Not only can you not own an office building, but the infrastructure in the country is terrible. There are tremendous difficulties in transportation, in secretarial help and in placing telephone calls.
  4. Capital formation--since there is no private stock market, it is virtually impossible to raise capital in the Soviet Union, although I understand that there is a bill proposed that would create a stock exchange.

MM: If you were the Soviet president, what would be your environmental priority?

Timoshenko: First, I would develop a political consensus on a national and international level that the environmental problem is the only real security issue. It is really a survival problem. We now have environmental problems, not military problems. If you cut military spending, you can spend [the savings on] many important things....

At a recent summit, Bush made a proposal to Gorbachev on the environment, to which Gorbachev responded, "I can't answer you now because I don't have my environmental adviser." This means the environment is not a high enough priority.

After Malta, Bush said we have extra money due to arms reductions, but we won't be using it for the environment. This [also] means that the problem of the environment has not reached the highest level.

MM: Do you have other general concerns about the environment?

Timoshenko: Yes. The lack of data on the environment is a very serious problem. There is almost no information about the problem of the environment in the Soviet Union.

Carl Mayer is assistant professor of law at Hofstra University

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