Interview with Sarah Carey

Multinational Monitor: How do you view the recent Soviet reforms in domestic, economic and foreign trade management? Sarah Carey: I think that the reforms are far reaching and extensive. I don't think that they are superficial. In terms of foreign trade, the major difference between now and the previous regime is that American and other foreign countries can deal directly with enterprises in the Soviet Union, without having to go through the extra layers of bureaucracy represented by the Ministry of Foreign Trade. There are also, from the Soviet perspective, new incentives for generating hard-currency and increasing exports which makes them more eager trading partners. I think that foreign trade reforms go hand in hand with the domestic reforms. At the same time, you are having foreign investment for the first time through joint ventures. Included in the reforms is a basic reorganization of planning, of pricing, of banking, of accounting, of employment regulations. All of this moves toward greater independence of the enterprise and increases market incentives, which from the perspective of an American business is a plus. Monitor: Are the Soviets looking at Yugoslavia, Hungary or China as models for reform, particularly in the area of foreign trade management ? Carey: They have been studying the reforms in other planned economies for months now in great detail. I think there is no question that they are trying to learn from the experience of the Hungarians particularly, and also the People's Republic of China (P.R.C.). They have historical ties that make it natural for them to emulate the East Europeans. They see the P.R.C. as a driving force because of the immense border between the two countries and the tremendous drive that China has made in certain areas such as agriculture over the past few years. Monitor: Is the Soviet Union trying to integrate into the world economy? Carey: I think that there is no question that Gorbachev is serious about making the Soviet Union a legitimate player in international markets and in the international trade establishment. His overtures to become involved in the General Agreement on Trade and Tariffs (GATT), the World Bank, and the International Monetary Fund (IMF) as well as the establishment of official relations to the European Economic Community (EEC), reflect a very serious intent. The United States initially reacted by saying the Soviets would only want to participate in international forums in order to disrupt them, but I think that there is a changing attitude here. I personally feel that the Russians would be much easier to deal with if they were not isolated, but rather if they were fully integrated as normal world citizens into these organizations. Monitor: To what extent do you think the modernization of foreign trade management is going to improve access of Western firms? Carey: The reorganization of foreign trade does have an ambivalence in that you have an increased role for the Council of Ministers and yet at the same time greater delegation of authority for day-to-day decision-making to the enterprises. That's similar to the way they've reorganized planning. Gosplan has been stripped of its dayto-day involvement in supplier contracts, but still has heavy responsibility for the broad outlines of the planned economy. There is no question, absolutely no question, that the changes in foreign trade have created many more opportunities for U.S. and other foreign companies. The level of involvement in terms of opening offices in Moscow and sending people to negotiate regularly has increased dramatically in the past year. That alone, I think, is one measurement. Beyond that, the size of projects that Western companies are talking about getting involved in and their interactions with the Soviets are very different. The projects are of a very large scale, the interaction is very intimate in doing business together, where both sides are dependent upon each other for the success of the joint venture. That is a radical change from the past. There is confusion because the Soviets are reorganizing so many bureaucracies. When we reorganize any new cabinet level organization, there is high chaos for months. The Soviets are experiencing the same thing. Monitor: What firms are most attracted to joint ventures with the Soviet Union? Carey: There is a fairly broad range of companies that have been interested in joint ventures. In fact, I heard recently that something like 59 U.S. companies have signed "letters of intent" to negotiate joint ventures. The sectors vary, but clearly those moving very fast are ones related to the energy sector, agricultural sector, modernization of heavy industry facilities and transportation to some extent. There also has been quite a bit of activity in light industry in things like fast food and clothes. But the big ticket items are in heavy industry related to energy and agriculture primarily. Companies that have passed the letter of intent phase have included Occidental Petroleum, Dresser, Combustion Engineering, Monsanto, Singer, Dow Chemical, Honeywell and on the light industry side, Pepsi-Cola, Coca Cola, a couple of fashion houses and Nike shoes. Monitor: How are Western companies reacting to the specifications of the Soviet joint venture decree? Carey: The big question is really how appealing the Soviet investment is compared to alternative investments in other parts of the world. Once you get outside of the OECD countries, you're dealing in a world of highly regulated bureaucratic economies. I don't think the Soviet Union is any worse than some of the Latin American, African or other economies in terms of regulation. On the other hand, it has pluses that those countries don't have, including a stable political situation, a highly educated work force and unlimited natural resources. So, companies that have gone in there are used to highly regulated economies. I think they are all pretty knowledgeable about how to live with certain types of regulations. The decree gives special status to joint ventures. They're hybrid, partly international and partly domestic, and they have greater flexibility by far than Soviet domestic enterprises. I think that is part of the reason that a lot of Soviets are very eager to get involved in them, to take advantage of that flexibility. They can write almost anything that they want into their charter. If you go through the decree and look at all the items that can be spelled out in the foundation documents, you'll see that there are many aspects of the operation that can be defined by the parties as opposed to Soviet law. Regarding financing, there do not appear to be any guarantees offered by Soviet banks on either capital or credit, and it does not appear that hard-currency loans would be available from Soviet sources. Although the joint venture, through its Western partner, can borrow hard-currency from other international sources, (for example, French banks or German banks). There are about 15 European banks that have special relationships with Gosbank and part of that relationship is to fund joint ventures from those countries and other Western countries. Regarding the valuation of each partner's contributions, that's a horse trading deal and most companies view that as part of the overall transaction. If they are getting tax breaks, or custom breaks or some other benefits from the Soviets, then Westerners are willing to be very flexible in valuing their contribution. The question is not valuating the contributions properly, it's how the over all financial deal is going to work. Valuation is just a component of that overall assessment. Most companies are really comfortable with the process. They don't feel that they are being subject to unfair pressure. Regarding management responsibilities, the Soviets are being totally fair with the Western partners. They are allowing for board representation that gives Soviets only one extra vote, and they're allowing for unanimous votes on key issues facing the venture. They're allowing for equal participation on audit commissions and on senior management committees. So, I would say in terms of division of management responsibilities, that Western partners have been pleasantly surprised by the Soviet interest in having them equally involved. Regarding wages and salaries, the Soviet nationals get paid Soviet salaries and the foreign nationals get paid foreign salaries, so there is a big differential there. However, the Soviets are looking to higher salaries for their workers engaged in joint ventures and are open to using performance bonuses, as are the American partners. The Soviets want the best laborers to be drained off from domestic enterprises to work for joint ventures because they are going to be learning for the whole nation how to do things the way the Westerners do. Nobody knows for sure if you can fire employees from a venture, but they are saying you can. One way around it is that people are getting their Soviet partner to supply workers from its workforce or from organizations with which it has established relationships, so that if they're fired they can go back to those places. The regulations for transferring profits out are contained in the joint venture decree itself. That assures the repatriation of profits for the Western partner. A 20 percent rate is being applied to corporate profits, but the decree allows for waiver of that with the approval of the Ministry of Finance. It also allows for different tax rates, including lower rates. Almost all companies I know are negotiating some type of tax concession. Regarding the relationship of the joint venture to the plan, the decree says that the joint venture operates independent of the plan. This leaves open the question of how you guarantee that your suppliers will include their commitments to you in their plans. That isn't fully answered, but the decentralization of planning effective as of June provides for a system of advanced contracts, as opposed to the previous system of administrative orders for fulfilling the plan. It is anticipated that the joint venture will get its contracts from suppliers lined up a year in advance or whatever the period required, so that it will be reflected in the supplier's plan. Monitor: Do you think a joint venture law has the potential to alter dramatically East-West economic and political relations? Carey: I think the Soviet reforms overall, not just the joint venture law, but the whole complex of economic reforms for foreign trade and otherwise will alter East-West trade relations dramatically. I think the opportunities in the Soviet Union today are at least twice what they were during detente, and that was estimated at anywhere between $5 and $7 billion in two-way trade. I think we are talking about between $10 and $15 billion and probably higher where we limp along now with roughly $2 billion in two-way trade. So, I think the opportunities are immense. If the U.S. doesn't get in there, the West Europeans will or the Japanese. On the political side, I think the question is the other way around. I think that U.S. trade policies could prevent U.S. companies from fully participating in this new market. There is very little sign in either the administration or Congress that the U.S. is going to adopt a pro-trade policy with the Soviets, and that is the kind of policy that our allies have. So, I would say that the political relationship is lagging behind the potential of the economic relationship. I do think that if joint ventures are successfully applied, the patterns of working together long-term will be very positive. It will create a whole group of people in the United States that will know much more about the Soviet Union. It will create new ways of doing things and new attitudes on the part of the Soviets that could be very beneficial to the political relationship. The political relationship needs trade desperately. Monitor:What are your views of the Jackson-Vanik and Stevenson amendments and their impact on U.S.- Soviet trade? What do you see as prerequisites for Congress to reconsider this legislation? Carey: I personally don't agree that linking trade and human rights made sense in the first place, and it makes less sense now than it did originally. There's been absolutely no evidence that emigration has increased as a result of those amendments. In fact, the patterns of emigration tend to suggest that when U.S.-Soviet bilateral relations are positive, there is more emigration and when they are negative emigration declines, because the Soviets pull in. So, they do not achieve their stated purpose and they are a tremendous irritant to the Soviets. I think they probably do as much symbolic harm as they do actual harm. There area lot of goods that the Soviets bring in tariff-free because they are not manufactured products, and "most-favored-nation" status (hIFM effects the category of manufactured products only. In that category it is a deterrent, because it does make a significant difference in the cost of goods to the importer and hence to the American consumer. About 25 percent of all imports are adversely affected. Of course, that doesn't include the potential exports the Soviets would like to send here but don't because of the price differential. As far as getting Congress to move, I think that's a very tough question. Certainly continued alleviation of restrictions on emigration by the Soviets would help. Leadership from the executive branch would help. We don't have any right now on that issue. Congress actually becoming educated about what's happening in the Soviet Union would also help. Monitor: Has the atmosphere and practice of negotiating with the Soviets changed lately? Carey: Yes, the Soviets compared to a year ago and certainly further back are much more open, much more candid, and much more forthcoming in providing market data and information about their problems than they ever were in the past. They are being very ingenious in fashioning new business arrangements and taking advantage of the joint venture law. I think the economic reforms have unleashed a real creativitv and enthusiasm among a lot of Soviet business people running enterprises, an energy that can only result in improvement in their economy. U.S. Companies Involved in Trade with the Soviet Union Abbott Laboratories pharmaceuticals Air Products and Chemicals, Inc. chemicals Allis-Chalmers Corp. engineering Aluminum Company of America (ALCOA) aluminum American Standard, Inc. plumbing products Archer Daniels Midland Co. agricultural products Armco., Inc. oil equipment; metallurgy Baxter-Travenol Laboratories, Inc. health care products Black & Decker Corp. power tools Bristol-Myers pharmaceuticals Cargill, Inc. agricultural products Caterpillar Tractor Co. construction machinery Coca-Cola Co. beverages Control Data Corp. computers; electronics Cooper Industries construction machinery Conring Glass Works glasswear; ceramics Digital Equipment Corp. computers Dow Chemical, Inc. chemicals Dresser Industries oil and gas equipment E.I. du Pont de Nemours % Co., Inc chemicals FMC Corp. machinery; chemicals General Electric, Co. electronics Hewlett Packard Co. measurement instruments Honeywell, Inc. electronics, computers Ingersoll-Rand Co. heavy machinery     International Business Machines Corp. (IBM) computers; office equipment Kaiser Aluminum and Chemical Corp. aluminum; chemicals Maxwell Laboratories energy systems McDermott International, Inc. marine construction Minesota Mining and Manufacturing Co. (3M) medial equipment Mobil Corp. petrochemicals Monsanto Corp. chemicals Navistar agricultural machinery Nike, Inc. footwear; sportswear Occidental Petroleum Corp. chemicals; petrochemicals Olin Corp. chemicals; metals Owens-Illinois, Inc. packaging products Pan American Corp. air transportation PepsiCo., Inc beverages Procter and Gamble Corp. household products Ralston Purina Co. animal feed Reynolds Aluminum aluminum The Singer Co. sewing machines The Stanley Works tools; hardware products Tenneco, Inc. petrochemicals; gas TRW, Inc. electronics Union Carbide Corp. chemicals USX Corp. mining; metals Wang Laboratories. Inc. computers Westinghouse Electric, Corp. electronics; engineering Wolverine World Wide, Inc. footwear Xerox. Corp. office equipment