These comments reflect both the opportunities and the threats involved in international joint ventures (IJVs) in the CIS. Those opportunities include abundant natural resources and cheap land, a highly educated and low-cost workforce with high quality basic research skills, and a huge, relatively untapped, market of peopJe who have had little previous opportunity for quality consumer products. Those taking advantage of those opportunities include 35,000 Western companies that have set up shop in Moscow alone, and over 20,000 joint ventures in Russia. Of those IJVs, 2,800 are U.S - Russian. They include Caterpillar, IBM, GE, Ford, Hewlett-Packard, Pepsi-Co., Eastman Kodak, and AT&T, as well as thousands of smaller lJVs - primarlly in software, hotels, and heavy industrial production. Many, like Bell Labs, are involved in research and development, taking advantage of the high level of education and technical capabilities of the Russians.
The roadblocks to successful IJVs in the CIS are many. The overriding concern as of this writing in 2002 continues to be the possibility of a repeat of the 1998 economic collapse with the devalued ruble, the lack of debt and equity capital, and the nonconvertibility of currency. In fact, the barter system had taken over, with individuals, companies, and governments trading services and goods with no money changing hands. Russian teachers were being paid in vodka. Many foreign companies were losing large amounts of money, and some, such as RJR Nabisco, had withdrawn altogether. Most potential new alliances were put on hold by Western companies. In fact, as a result of the economic problems, many Russian companies benefited by reinforcing their market positions, with some strong local players gaining a foothold, such as Will-Bffl-Dann, which produces dairy products, canned vegetables, and juices.
Western companies had varied reactions to the financial problems. Pizza Hut and KFC (whose food was a luxury at that time) withdrew from Moscow, feeling that the market did not warrant their presence. Pizza Hut was in a joint venture with the city of Moscow, which held 51 percent. But when sales tumbled and at the same time its agreement with the City of Moscow was expiring and the city was demanding excessive increases in rent, the company decided to leave.'8 However, most large global companies - accustomed to economic upheavals in Russia - stuck to their long-term plans. Gillette, for example, which has had a joint venture with Leriinets, forming Petersburg Products International (PPI) since 1990, stayed and continues its commitment there. But it was not without its problems during the difficult 1998 - 99 period. The effective distribution systems it had painstakingly built up collapsed, as their wholesalers and retailers ran out of money and stopped their orders.
Overnight, the abifity to invoice and receive payment disappeared. So Gillette had to rebuild the distribution system and develop financial
support for its suppliers, offering them credit to be paid upon their next orders.
Gillette now employs over 500 people throughout Russia and has built another $40 million razor blade manufacturing plant near St. Petersburg. Other Western companies are trying to move into locally based production in order to cut down on the expenses of a lot of expatriate staff:
Danone, the French dairy group, opened its second Russian factory in
2000; Merloni, the Italian fridge manufacturer, bought Stinol, a local
competitor with which it already had links; and in 2001, the Greek-based
Chipita acquired a bakery in St. Petersburg.
In spite of continued economic progress since then, however, long-standing problems continue, including the lack of clear legal protection for investments, contracts, or rights to natural resources, and the lack of efficient infrastructure for sourcing materials, communication, transportation, and living arrangements. Problems involving organized crime - often referred to in the media as “the Mafia,” and called “the racket” by Russians - add considerably to the cost of operating businesses such as hotels. When MNCs refuse to pay for “protection,” they often suffer, as with the bazooka attack on the bottling plant that Coca-Cola was building in Moscow.
During 2001 and 2002, Russia's inflation rate continued to decline and consumer demand was growing again, especially for Western products. President Vladimir Futin continues to support free-market mechanisms, and Russia's stock market has performed very wellP In spite of the continuing political uncertainty and economic risk, joint ventures in the CIS offer great opportunities for both partners. Western companies willing to take the risk can pick up assets very cheaply because of the Russian need for hard currency, capital, new technology, and management skills. Foreigners may now own 100 percent of a venture, although to get office space, supplies, and other essentials, it is often
necessary to have the local partner own at least half. All registered citizens may now own and operate a business, and the governments in most parts of the CIS are encouraging the privatization of businesses, to move rapidly to a market economy - and to stave off economic disastet
Exhibit 7-3 shows the joint venture relationship between a U.S. firm and a CIS firm, the different goals that they bring to the venture, and the barriers caused by their different operating environments.
Success requires clearly defined goals, and any proposal must contain solutions to the systemic problems, such as the establishment of efficient supply channels and the repatriation of profits in hard currency. Most managers in the CIS are inexperienced in solving commercial problems based on a capitalist market economy, such as the sourcing of inputs and financing. Western managers still have to teach their joint venture partners about competition, advertising, pricing, distribution networks, and accountability.
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