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Russia: `The Fears Are Gone'


International Business

RUSSIA: `THE FEARS ARE GONE'

In the post-Soviet era, the dominant noise at U.S.-Russia summits has been the clink of the beggar's cup brandished by forlorn Moscow officials. The key policy question for the U.S. has been how much aid to offer a shaky regime. But when Russian leader Boris Yeltsin and President Bill Clinton get together in Washington on Sept. 27-28, a different sound will be heard: the soft rustle of new accords to promote trade and investments in a stabilizing Russia.

If all goes as planned, Clinton and Yeltsin will ink agreements to provide more than $750 million in U.S. risk insurance, financing, and loan guarantees for American-Russian joint ventures in oil, aviation, and telecommunications (table). More government-backed deals will follow within weeks. The two leaders will also put their signatures on pacts expanding access to each other's markets. And the Clintonites are making sure Yeltsin has plenty of opportunities to hobnob with America's corporate elite.

The President will still endorse expanded global financial assistance to Russia and pledge to keep bilateral aid flowing, including a possible resumption of grain credits. But the thrust of the summit's agenda reflects the new priorities. "We're shifting from an aid-oriented strategy to one that brings the private sector more deeply into the picture," says a senior Administration official.

DELIVERING REFORM. To some extent, the new approach is making a virtue of necessity. Political support for generous dollops of Russian aid is fading. Congress cut $50 million from the Administration's $900 million request for fiscal 1995 assistance to the former Soviet republics. The revised total is a far cry from the $2.5 billion the U.S. ponied up this year.

The new focus on investment and trade is in keeping with broad Clinton foreign policy thinking. In the long run, Administration officials say, such measures yield a bigger bang for American taxpayer bucks than foreign aid. Says a White House aide: "We found that government [aid] is not the sole answer to the problem." Boosting investment also creates jobs back home. That's because a high percentage of U.S. exports go to overseas subsidiaries of American companies.

In Russia's case, the new emphasis on trade is well-timed. The Russian economy seems to be righting itself after much turmoil. Inflation was down to a monthly rate of 4.6% in August, vs. 29% a year before. A nosedive in industrial production may be bottoming out. The incredible shrinking ruble has hovered around 2,000 to the dollar for several months. Economic reform continues apace. "They've delivered, and the performance has been quite positive," a top U.S. official says of Yeltsin and Prime Minister Viktor Chernomyrdin.

The brightening economic picture enhances Russia's chances of reeling in billions more in multilateral aid by yearend. Moscow and the International Monetary Fund have launched negotiations on $4 billion in fresh loans. An expected IMF rule change could unlock as much as $5 billion more in credits for Russia over the next two years.

IN THE VANGUARD. The good economic news is luring back foreign investors, too. Many were scared off by the stunning success of ultranationalists in last December's parliamentary elections. But now, says Russian privatization chief Anatoli Chubais, foreign investment is pouring in at a rate of $500 million a month. The total foreign inflow for 1994 could top $10 billion, well above earlier predictions of $3 billion.

U.S. institutions and corporations want to be in the vanguard. At the summit, the U.S. Overseas Private Investment Corp. (OPIC) will announce that a Russia equity fund it partly underwrites is 20% oversubscribed. "The fears are gone," says Sarah Carey, a Washington attorney who heads Steptoe & Johnson's practice in former Soviet states. Carey says the size of deals her firm handles has jumped from less than $1 million to as much as $1 billion.

To prime the pump, Clinton will announce he is earmarking $77 million of trade and investment aid for former Soviet republics, with Russia getting about $50 million of that. While small, the amount will draw in many times that in U.S. private investment. That's because loan guarantees, for example, can be leveraged up to support 10 times as much in commercial credits that would otherwise be unavailable. OPIC, which this year will provide $2.3 billion in political-risk insurance, loans, and guarantees for Russia, expects to do close to $3 billion worth next year.

Within weeks of the summit, the U.S. Export-Import Bank expects to approve financing for $500 million worth of American exports to Russia on top of $1 billion in sales it has already backed this year. The bulk will underwrite exports of pumps, storage tanks, and other equipment needed to modernize Russia's antiquated oil-and-gas sector.

COLD WAR RELICS. The President will also pledge support for Russia's entry into the General Agreement on Tariffs & Trade and for legislation that will expand Russia's access to U.S. markets. Congress balked at the latter this year after affected industries registered complaints. To persuade lawmakers to reconsider, Clinton will press Yeltsin to lower tariffs on U.S. aviation equipment, autos, auto parts, and confectioner's sugar. Already, Boeing is set to deliver two 767s to Aeroflot, the first such sale ever. Says an Administration official: "We have to be able to show them that the Russians are sensitive to our trade complaints."

Yeltsin, in turn, will lobby hard for a level playing field for trade and elimination of cold war relics such as the Jackson-Vanik Amendment, the 1974 legislation that denies Russia automatic most-favored-nation trade status. The Russian leader will also press for easing of export curbs on high-tech products such as optical

fiber.

For example, US West, Deutsche Bundespost Telekom, and France Telecom are about to proceed with a $40 billion, 10-year project to upgrade Russia's phone system. But because of U.S. restrictions, a phone link spanning the country must rely on microwave rather than on fiber-optic transmissions. That's because it's easier for U.S. intelligence to monitor microwaves, says Oleg G. Belov, president of Rostelekom, the Russian partner in the deal.

SUMMIT BOOST. The need to beef up Russia's own export controls will figure prominently in the summit's political and security sessions. Clinton will offer a multilateral package of initiatives to safeguard Russian plutonium and other fissile materials. The plan involves training Russian customs officials and other technical support. Clinton will also urge Yeltsin to put pressure on Bosnia's Serbs to accept a negotiated settlement of their bloody civil war with Muslims in the former Yugoslavia.

Clearly, however, the emphasis will be on the upbeat. Given the widespread public opposition to a possible invasion of Haiti as well as continuing doubts about his grip on foreign policy generally, Clinton badly needs the fillip that U.S.-Russia summits often provide. The President's unwavering backing of Yeltsin and other Russian reformers has been vindicated so far. Stepping up support for trade and investment ties will make this rare foreign policy victory even sweeter.

WHAT YELTSIN MAY TAKE HOME

The Overseas Private Investment Corp. is expected to finance more than $750 million worth of U.S.-Russian deals, big and small. A few likely agreements:

TEXACO $400 million to support Texaco's investment in the $6 billion-plus Timan-Pechora oil development project

PRATT & WHITNEY $250 million in insurance and financing for a $300 million joint venture to design and build commercial aircraft engines

SFMT $60 million loan guaranty to back the N.Y.-based company's plans to invest $120 million in voice and data communications across Russia

MIDCOM $23.5 million for the Seattle company to acquire a 50% stake in a Khabarovsk-based telecom company and expand its phone network throughout Russia's Far East

EAST WEST INVEST Unspecified amount of insurance to support network of Subway shop franchises and management training centers

DATA: OVERSEAS PRIVATE INVESTMENT CORP., BUSINESS WEEKAmy Borrus in Washington and Peter Galuszka in Moscow, with Paula Dwyer in London


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