>From Johnsons Russia List 3268  2 May 1999
Forwarded by Andrew Jameson, Lancaster UK
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#9
Excerpt
New York Times
May 1, 1999
[for personal use only]
Economic Crisis Not Scaring Some Companies Out of Russia
By NEELA BANERJEE

TOSNO, Russia -- Caterpillar had just cleared away a patch of spindly trees
in this town outside St. Petersburg and begun building a new $50 million 
factory when, one day last August, the Russian financial system collapsed. 

Overnight, the Russian government devalued its currency and simultaneously 
defaulted on $40 billion in domestic debt. Prices doubled over the next seven 
months, and the spending power of ordinary Russians decreased 40 percent. 

The ruble, worth around 15 cents before the crisis, has fallen to about 4 
cents. Many smaller companies, such as those Caterpillar had envisioned as 
customers for its Russian-made construction equipment, were ruined. 

"We asked ourselves some hard questions," said Stu Levenick, general director 
of Caterpillar Overseas in Moscow, "mainly about whether this was the right 
time to invest $50 million." 

The economic collapse confirmed the worst corporate fears about Russia: It is 
too unstable to operate here. Companies such as Pizza Hut and Hershey have 
pulled out, and many that had considered entering Russia shelved their plans. 

Caterpillar could have easily followed the conventional wisdom. Yet a number 
of Western multinationals -- not just Caterpillar but Nestle, Lucent 
Technologies and others -- are coping with the economic crisis by settling 
deeper into Russia rather than pulling out. 

They are not blind to the problems, so they have developed a variety of 
strategies to cope. Most have started by picking areas where the local 
government now supports business, regardless of broader upheaval in Russia. 
This is one such area. In St. Petersburg and the surrounding region, six 
American projects are expected to bring more than $500 million of direct 
foreign investment over the next 18 months. 

Caterpillar is pushing ahead with its plant, and production there should 
begin on schedule in December. Up the highway from Tosno, the Wm. Wrigley Jr. 
Co. opened a new factory this winter, and Gillette is building one next door. 
Philip Morris is constructing a $330 million plant, and International Paper 
recently paid an estimated $65 million to acquire controlling interest in a 
local paper mill. 

Meanwhile, Ford Motor is in final negotiations with the Russian government to 
invest more than $150 million in an auto plant in the region surrounding what 
was once the city of Leningrad. 

Beyond this region, still known by its old Leningrad name, Bayerische 
Motorwerken recently announced a joint venture in the far western Kaliningrad 
region. Lucent Technologies began to produce fiber optics in the Voronezh 
region of central Russia. And Nestle will be investing $30 million in six 
existing factories throughout the country. 

Many of these companies had bucked the prevailing corporate trend before, 
coming to Russia in the mid-1990s while competitors hesitated. That 
experience has made them less skittish than they might have been five years 
ago about the turmoil that can damage emerging market economies. 

Attracted by Russia's enormous potential to consume and produce their goods, 
these corporations have made a long-term commitment regardless of short-term 
disruptions. 

"When will the crisis end?" Nigel Brackenbury, general director of Ford's 
operation in Moscow, asked. "It won't. It's the challenge for all of us in 
Russia to put together strategies to promote growth in the conditions we 
have. It's not time to wait around for external circumstances to change and 
help us." 

Indeed, while Western executives are relieved that Russia reached agreement 
this week on a $4.5 billion loan from the International Monetary Fund to 
avoid default on its existing debts to the international agency, they are 
paying much more attention these days to the action closer to the ground. 

"From New York or Washington, Russia looks hopeless," said Scott Blacklin, 
president of the American Chamber of Commerce in Moscow. "But you can have a 
successful business here and not at all be tied to reforms." 

Even before the collapse, few foreign investors had the nerves for Russia. 
The government treats most businesses, domestic and foreign, equally poorly, 
burdening them with onerous taxes, hostile and corrupt bureaucracies and 
ever-changing regulations. Direct foreign investment in Russia totaled a 
paltry $2 billion last year, according to the American Chamber of Commerce in 
Moscow. 

But the chamber expects direct investment in 1999 to at least stay at that 
level. One reason is that some places in Russia are easier to work in than 
others, and the willingness of certain regional and local authorities to 
cooperate with investors has been critical to keeping Western money here. The 
economic crisis has not made regions historically wary of foreigners any 
friendlier, but it has made fence sitters like the city of St. Petersburg 
more flexible. 

"Before, the city's attitude was something like 'Kiss our ring, and maybe 
we'll do a deal with you,"' said James T. Hitch, managing partner at the St. 
Petersburg office of Baker & McKenzie, the law firm. "Now, it's like: 'You've 
decided to stay in Russia after the crisis? You're dedicated to us? Well, how 
can we work together?"' 

The city understands that it faces competition for scarce investment from its 
neighbor, the Leningrad region. Two years ago, the regional government 
developed a set of laws and tax breaks to attract investors. 

The region attracted about $290 million in foreign investment in 1997 and 
1998 and is expected to get another $350 million this year. "No crisis 
influences us," said Sergei Naryshkin, head of the region's committee on 
external economic relations. "We won't step back from our investment politics 
or from our commitments." 

That attitude has seeped to the local level. Tosno, at a passing glance, 
could be any small Russian town. Old wooden shacks that have begun to list 
toward the swampy earth line its outskirts. The main road that cuts through 
the center of town is still called Lenin Prospekt, and one mild Saturday 
residents were out raking leaves in the parks and squares as they had during 
the many springs spent under Communism. 

Unemployment is widespread among the 30,000 people of Tosno, and people pack 
the suburban trains to St. Petersburg to seek work there. 

The town's young mayor and his staff are eager to draw foreign investment. As 
part of the Caterpillar deal, the town reduced the local portion of the 
profit tax. It helped win federal permission to cut the trees at the site. It 
worked with the local utility company to get Caterpillar the electrical power 
it will need, and it offered the Americans a 49-year lease on the site, since 
private ownership of commercial land is still not allowed in Russia. 

"What's most important to investors is the good will of the authorities," 
said the deputy mayor, Galina Karpova. "We're willing to help them solve 
their problems." 

Many multinationals realize that Russia, stable or not, is ultimately too big 
a market to be ignored. In Russia, there's still great unmet demand for 
everything from chewing gum and beer to trucks and bulldozers. And when the 
ruble weakened badly, imports -- paid for in dollars and other foreign 
currency -- were suddenly out of reach for most Russians, who get their 
skimpy wages in rubles. That made local production look better....

*******

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David Johnson
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