As the Iron Curtain opens, some businesses rush in, while others react warily to economic changes

David Fettig | Managing Editor

Published September 1, 1990  | September 1990 issue

The requests read like personal ads for the lovelorn:

U.S.S.R. seeks a cooperation partner to design, assemble and market automation equipment.

Yugoslavia seeks a joint venture partner for the manufacture of jeeps.

Czechoslovakia seeks a partner to retread used car tires.

Hungary seeks a partner for the construction of a warehouse in Budapest.

International newsletters are full of such notices these days as the former state-controlled economies of Eastern Europe and the Soviet Union make their way toward market freedom.

But seeking partners is one thing; finding the right partner and signing a contract is quite another. As Ninth District companies are discovering, that process can be both rewarding and challenging. While a number of Ninth District companies have formed successful partnerships in Eastern Europe and Russia, many analysts still urge caution when dealing with countries in the throes of fundamental economic change.

Russia: get it while it's hot?

His disarming smile aside, Mikhail Gorbachev left a distinct impression with state businesses during his recent trip to Minnesota when he reportedly warned that if companies did not become involved with the Soviet Union now—when the U.S.S.R. needs help the most—they may find themselves left out of future opportunities.

A threat, perhaps, but one that shouldn't be taken too seriously, according to Ronald M. Bosrock, president and CEO of Bosrock & Co., a St. Paul-based international management and market service company with affiliate offices throughout the world.

Bosrock, who travels frequently to the Soviet Union and Eastern Europe, is circumspect about rushing into business deals with the Soviet Union. While he agrees that it is important to establish business contacts—as soon as possible—he said many questions about the Soviet legal and financial structure still need to be answered. As he learned from his extensive experience with China (a country he says is better suited for American investment than the Soviet Union), Bosrock says the Soviets must make advances in three areas to help pave the way for foreign businesses. The Soviet Union must:

  • Reform its legal structure to guarantee property and contract rights.
  • Restructure its financial system.
  • Improve telecommunications.

And of those three, Pete Roble, vice president of International Marketing for Melroe Co. of Fargo, believes financial reform is most essential. "The whole game in the U.S.S.R. is to get them into a convertible currency," Roble says. Melroe, maker of construction equipment, recently sold $2.7 million worth of products to the Soviet Union and was paid in Indian rupees, which were then converted to U.S. dollars.

The need for basic reform in the Soviet system, and the time such reform will take, makes Bosrock take a pretty dim view of all the initial euphoria. "You can say it all you want: we're a market economy, we're a market economy, we're a market economy. That doesn't make you one," Bosrock says.

With the current turmoil in many Soviet republics and the seeming resistance to many proposed market reforms, Bosrock says that the best time for Soviet investment was probably about two years ago, at the height of perestroika's popularity. The changing face of Soviet politics has already affected Melroe; whereas the company used to operate with just one representative in Moscow, it now plans to use five or six throughout the country, according to Roble.

Eastern Europe joins the West

But if the recent past was perhaps the most opportune time for the Soviet Union, the time is now for many Eastern European countries, which, along with the rest of Europe, is beginning to form a united market of major proportions. "Try and imagine the economic and political implications of the changes in Eastern Europe," Michael R. Bonsignore, president of Honeywell International Inc., recently told Honeywell's shareholders.

"Will we see one day 25 Western and Eastern bloc states united toward economic cooperation and political stability? The implications are staggering: 520 million people, a total [real] GNP of nearly $5 trillion, 20 percent larger than that of the United States, and more than twice that of Japan," Bonsignore said.

Many analysts believe that Eastern European countries offer better investment opportunities than Russia. Some Eastern European countries, like Hungary, made market advances even before last year's revolution. Also, unlike the Soviet Union, with its 70-year history of state-controlled economics, most Eastern bloc countries still retain strong memories of life before communism.

Again, Bosrock urges caution in dealing with Eastern European countries that are on the fast-track to capitalism, because there are risks in getting involved with a country that has not yet settled into a new economic system. For example, opportunities come and go as new groups or individuals take power, and valued contacts can be lost very quickly. The same can be said of almost any other foreign country, Bosrock acknowledges, but the situation is currently extreme in Eastern Europe.

In total, Ninth District may play small role

One Ninth District economist, Won Koo of North Dakota State University in Fargo, doesn't believe there will be much room for U.S. companies—let alone the Ninth District—as Eastern European countries open their borders to foreign investment.

Koo's pessimism stems from the proximity of Western European countries and the mutual relationship that already exists between the two forces. That relationship extends beyond cultures to economic need, Koo says: the West needs natural resources, the East needs manufactured products, each of which can be supplied by the other. A perfect fit.

"These are exciting times, but it's happening over there," Koo says.

A recent report on joint ventures in Poland confirms Woo's point: of 1,231 ventures filed in the first quarter of this year, 506 were started by West German companies, 112 by Sweden, 81 by Austria and 81 by the United States. (Japan had just one joint venture during that time—a testimony to that country's cautious approach.)

If American companies—especially small to mid-sized—do have a reticence toward Eastern Europe, it may stem from their relative inexperience in foreign trade. In South Dakota, for example, where the Governor's Office of Economic Development has been active in developing business ties with Eastern Europe, the emphasis is still on existing relationships with Japan and Western Europe, according to Paul Knecht. Knecht says South Dakota investors are moving cautiously in Eastern Europe. "You have to look at the long term," he says, adding that firms may be better off waiting until the new governments are firmly established.

Also, Michael Munro, president and CEO of Experience Inc., and a contributor in the fedgazette's special panel of trade analysts, says the opportunities for small to mid-sized businesses are for either high-tech merchandise sales, or businesses that export goods to the West or that cater to Western tourists.

"There is little opportunity at this stage for small and medium-sized companies seeking to sell consumer goods in the domestic market," Munro says.

Still, while America's 81 Polish joint ventures may, for example, pale in comparison to West Germany's total and attests to that country's geographical advantage, 81 is still a start. And Poland, along with Hungary, Czechoslovakia and East Germany, appear to be the countries best-suited for American investment, at least according to the fedgazette's international trade panel.

As for the Ninth District, Richard Bohr, executive director of the Minnesota Trade Office, believes the region should use its supply of natural resources and its strong Eastern European ethnic base to their full advantages. In addition, he calls for regional leaders to use their power to give "the Upper Midwest a preeminent place in the economic development of the half-billion people in Eastern Europe and the Soviet Union."