Perestroika To Pizza

By Janice Castro

Pizza Huts in the land of Pushkin? Oreo cookies in Omsk? Big Macs in Belgrade? ! Yes, all that -- and more. Maybe.

American companies have long viewed doing business with the Soviet Union as a dubious proposition, given the stormy politics of the superpower relationship. But under perestroika, General Secretary Mikhail Gorbachev's campaign to revitalize his country's economy, the Soviets are trying to attract American know-how to help step up the tempo of development. Encouraged by their overtures, dozens of U.S. companies -- among them Honeywell, Occidental Petroleum and Archer Daniels Midland -- are forming joint ventures in the Soviet Union.

Though the prospects for profits are hazy at best, the opportunities are manifold: helping modernize Soviet factories, enhancing agricultural production and marketing consumer goods ranging from toothpaste to tires. "The Soviets now realize they need to attract people," says Deputy Secretary of State John Whitehead, who closely follows U.S.-Soviet trade. "It would appear the Soviets in the last few months have dramatically changed their attitude."

The Kremlin's welcome mat came out after President Reagan's summit conference with Gorbachev in Washington last December. Besides reaching agreement on arms control, the two leaders promised to improve the business relationship between their countries. Earlier this month Commerce Secretary William Verity led a delegation of Administration officials to Moscow, where U.S. and Soviet leaders signed an agreement to explore mutual opportunities in such industries as food processing and construction equipment.

The official warming trend even revived the often sleepy U.S.-U.S.S.R. Trade and Economic Council, a group of 315 U.S. companies and 150 Soviet enterprises and ministries, which staged a four-day conference in Moscow in April to talk about prospective joint ventures. In a display of Madison Avenue glitz, council members from the U.S. gave their Soviet counterparts a crash course in marketing that included razzle-dazzle TV commercials for Diet Coke, NutraSweet and the American Express Card. Gorbachev invited the U.S. visitors to the Kremlin's Palace of Congresses for a seven-course feast of caviar, pheasant, grouse and other delicacies. After exchanging toasts with the capitalists, the Soviet leader described perestroika as an "invitation" to a business partnership with the West. Said he: "New thinking should, at long last, enter the sphere of economic relations."

Even so, Gorbachev's ambitious plan to infuse his economy with U.S. commercial vigor will face deep-rooted obstacles. Many Americans believe that helping strengthen the Soviet Union could damage U.S. interests. And because of Western security concerns, many U.S. commercial technologies will remain off limits to ventures with the Soviets. The Paris-based Coordinating Committee on Export Controls, for example, restricts exports of equipment and processes to the East bloc that might be used in military applications. Under COCOM rules, Western firms cannot do business with the Soviet Union in such areas as nuclear energy, high-speed computers and aircraft components. Last week four top executives of a French machine-tool firm were arrested on charges of shipping millions of dollars' worth of sophisticated milling machinery to the Soviets in violation of COCOM regulations. Intelligence sources contended that the equipment could be used to manufacture fuselages for fighter planes and turbine blades for high-performance jet engines.

Beyond national security concerns, there are other legal hurdles. Imports of Soviet goods to the U.S. are inhibited by an American law that withholds favorable trading status from certain countries practicing repressive emigration policies. Result: the Soviets have turned to West Germany, Japan and other industrial partners for investment capital and production expertise. Says Donald Kendall, chairman of the executive committee at PepsiCo, which operates 25 bottling plants in the Soviet Union: "They found that we're not the only fountain of knowledge." Since 1972, Soviet trade with the West has surged from $7 billion to $41 billion. But American companies accounted for only $2 billion of that business last year, and more than half the U.S. trade involved grain sales.

For its part, the Soviet Union moved boldly to expand joint ventures with the West in 1987. For the first time in more than half a century, Western companies are now permitted to own up to 49% of a Soviet enterprise. Foreign corporations have set up more than 35 such ventures.

Several industrial agreements have been signed since November. In the first of these ventures, Connecticut-based Combustion Engineering will provide machinery and software for managing petroleum production at refineries. Minnesota's Honeywell will equip Soviet fertilizer plants with high-tech manufacturing equipment. Occidental Petroleum will build two factories to supply plastics for food packaging, vinyl floors and other uses. Chevron is * discussing an oil-exploration venture, while Monsanto is negotiating joint production of a weed-killing herbicide.

Economic detente with the Soviets has spawned consumer-oriented ventures as well. For the past two weeks, Muscovites have been lining up to buy slices of the first American pizza in the Soviet Union, for 1.25 rubles ($2.10) each at the AstroPizza truck that makes stops around the city. The 18-ft. mobile pizzeria is operated under a joint venture of New Jersey-based Roma Food Enterprises (1987 sales: $100 million) and the City of Moscow.

A shopping cartful of other American consumer goods may be on the way. RJR Nabisco is seeking a Soviet partner to make its snacks and cookies, and wants to market its cigarettes as well. Illinois-based Archer Daniels Midland, a longtime exporter of grain to the Soviet Union, hopes to produce vegetable oils, starches and sweeteners with a Soviet partner. The company may also take part in a Soviet plan to increase the annual production of chickens from the current 500 million to 5 billion by the early 1990s. Starting next June, the growing legion of Soviet personal-computer users will be able to catch up on everything from software to peripherals in a new quarterly called PC World USSR, a spin-off of Massachusetts-based IDG Communications' PC World that will incorporate articles written by Soviet technical journalists.

One reason the Soviets are so enthusiastic about attracting ventures from the West is that they can see the budding success of such arrangements by their East European neighbors. According to a report released last month by the U.N. Economic Commission for Europe, the number of Western joint ventures in the East bloc has surged from just five in 1981 to 166 last year. Hungary leads the Soviet bloc in joint ventures, with 140 formed since 1972. Western firms are allowed to own the majority share of a venture in Hungary, and sometimes receive generous tax breaks. Yugoslavia, the first East European country to seek joint ventures with the West, has formed 225 since 1967. One of the largest: a $62 million auto-parts plant co-owned by General Motors. In Belgrade the first McDonald's in Eastern Europe has been drawing more than 2,500 customers daily since it opened its doors last month. Says Pedrag Tostanic, Yugoslav managing director of the joint venture: "At all times I have people lined up outside my door waiting to get in." A highflying East- West business opportunity opened up two weeks ago, when COCOM granted Boeing preliminary approval to sell its jets to Soviet satellite countries.

Yet the Soviet Union, with its population of 282 million, represents by far the most tempting future marketplace in the East bloc, even though Soviet and U.S. business interests still conflict in many ways. The Soviets are primarily interested in producing goods that they can export to the West in exchange for hard currency. They hope to find an American partner, for instance, to manufacture their designer fashions, some of which were shown at the Dallas Apparel Mart in March. But like the clothes, many of the products they want to make are already produced in abundant quantities elsewhere. Meanwhile, their Western partners, who are mainly eager to sell products and services in the Soviet Union, must cope with the nonconvertibility of Soviet currency. No matter how profitable a Soviet joint venture may be, U.S. companies have little use for rubles.

Some American companies have found ways around the currency problem. PepsiCo, which plans to build two Pizza Hut shops in Moscow later this year, will accept rubles at one outlet and collect foreign currencies at another one, in a tourist neighborhood. Occidental, on the other hand, will export 25% of the plastics produced in its Soviet factories for sale in Western Europe and other markets.

For the U.S. and the Soviet Union, the greatest problem still haunting the new economic partnership is their long history of embargoes and broken promises. In the early 1970s, for example, Ford withdrew from participation in the vast Kama River truck plant some 500 miles east of Moscow after the Pentagon argued that the trucks made there might end up carrying Soviet troops. The vehicles later did -- in Afghanistan. Skepticism still runs deep on both sides. At the marketing meeting in Moscow, a Soviet official expressed a sentiment shared by many of his colleagues. Staring at a picture of an American shopper browsing in a vast supermarket unlike any in the Soviet Union, he whispered to a friend, "I don't believe their stores look like that. They're trying to trick us." U.S. executives planning joint ventures are just as wary of the Soviet Union's new warmth. If the promising economic initiative is to develop, Washington and Moscow must preserve an atmosphere in which the new business partners can concentrate on manufacturing and marketing, rather than politics.

With reporting by Ann Blackman/Moscow and Frederick Ungeheuer/New York, with other bureaus