The Global Emerging Market in Transition: Articles, Forecasts, and Studies

Despite Rough Waters, Market Economy Cruises Ahead: Opportunities Abound in NIS for Intrepid Investors

DESPITE ROUGH WATERS, MARKET ECONOMY CRUISES AHEAD: OPPORTUNITIES ABOUND IN NIS FOR INTREPID INVESTORS Recent political events in Moscow and their coverage in the media have been misleading about the situation in Russia. The battles of October have had no real impact on the development of a free market economy. As practically all Russian leaders (except a few stupid Fascists) understand, without the cooperation of the West it will be impossible to revive Russia and the other countries of the Newly Independent States (NIS). Even the recently dissolved Russian parliament was not opposed to foreign investment; rather, it was, in its own time and manner, enacting legislation necessary to create a favorable business environment insulated from changing political winds. While the media devoted its attention to the political fighting, it completely forgot about Russia’s far more serious economic crisis. The crisis began not after the 1991 coup, not even during Gorbachev ’s time, but actually around 1969–70. Back then, the annual growth rate of the USSR’s GNP was 7.5%. When Gorbachev came to power in 1985, annual GNP growth had dropped to 3.5%. In 1991 when he left office, it was down to negative 2%. It seems to me that the newly independent Russian government mistakenly ‘‘liberalized’’ prices before decentralization, demonopolization, and privatization could take hold. This increased prices, pushing 85% of the Russian people below the poverty line and perpetuating an inflationary environment . As a result, during 1992 the rate of industrial output in Russia decreased by more than 24%. Even more dangerous, food production has decreased to 1988 levels, and meat production has decreased by The Kvint Newsletter, 1, No. 2 (November 1993). market economy cruises ahead 153 60%. This situation continues in 1993; the decrease in industrial output will be about 15%–17% for this year. However, the process of economic stabilization will begin in 1994, when the decrease in industrial output will drop to 10%–12%. How does this economic situation impact the interests of foreign investors? Make no mistake: as the necessary business infrastructure is rapidly created, sizable profits and plentiful growth can be achieved by joint ventures and foreign investments that capitalize on the current economic situation; this, in turn, will help build a free market economy. The level of profitability can be quite high once joint ventures are created—between 35% and 38%—which is higher than that of businesses in Manhattan or Zurich. But the path is filled with land mines, and one must have a good guide. All You Need Is Parts For example, about 20% of all industrial companies and 35% of all infrastructure companies in Russia are not profitable. Many, however , once were profitable and could be so again. These firms desperately need components that Russia doesn’t produce, particularly those used in light industry. Most got into trouble because the fall of the centralized Soviet Union destroyed all their internal (and often, ineffective) connections with suppliers from other former Soviet republics . New market connections are just beginning to develop. Small investments into these companies’ unfinished products can provide the basis for very profitable businesses. The products of these joint ventures will be competitive in terms of quality and price due to a cheaper, educated labor force, inexpensive natural resources , very inexpensive energy for intra-Russian use, and inexpensive production and office facilities A similar situation is also found in other NIS markets. Catalysts of Foreign Investment The pace of investment has been slow in virtually all countries of the NIS, but some regions have created special programs to attract for- 154 understanding the global emerging market eign investment. Thirteen free economic zones (FEZs) have been established in Russia, and one each in Ukraine and Belarus. Not all regions present the same political risks for investment. For example, Azerbaijan and Georgia have quite favorable regulations regarding foreign investment, but I would not recommend investing in these regions at this time. Georgia is practically in a state of civil war, while more than 20% of the former Azerbaijan is under control of Armenian forces. Hard currency in private hands totals $13–$15 billion; NIS governments hold about $38–$45 billion, most of which they are spending on emergency needs such as food, pharmaceuticals, chemicals, and some military industries. Prices Rise, Along with Dollar’s Value The price of consumer goods and food continues to rise faster than the rate of inflation. I forecast...