THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, April 2, 1995 TAG: 9503310523
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
TYPE: Interview
LENGTH: Long : 110 lines
As United States ambassador to Moscow from 1987 to 1991, Jack F. Matlock Jr. had a ringside seat during the collapse of the Soviet Union.
Today, the Greensboro native and retired Foreign Service officer teaches diplomacy at Columbia University, where he also writes about Russia and the former Soviet Union.
Matlock, who spent three tours in Moscow in the early 1960s, the 1970s and in 1981 before being named ambassador, has written a book about the Soviet Union's demise. His book, ``Autopsy on an Empire,'' is due to be published in October by Random House.
Matlock, who also served as ambassador to the former Czechoslovakia from 1981 to 1983, was in Norfolk last week to speak to the Economics Club of Hampton Roads. During his stay, he spoke with staff writer Tom Shean about investment activity and business conditions in Russia.
How difficult is it for a foreigner to buy a business in Russia or to start one?
There are real opportunities, but you have to be extraordinarily careful. Like investments here, you've got to look at each one individually.
Those investors who start by locating their business in a favorable local climate and work with their local supporters are much better off than those who start with the Russian government. Most government organizations are corrupt and highly inefficient. I think most of the bad business deals have come about because there was too much reliance on contacts in the government.
Russian companies have been searching aggressively for capital in the United States and western Europe, but many investors have been reluctant to put their money into Russian enterprises. Why?
The problem is that the system has been so stacked against investment - and against entrpreneurship - that Russians themselves are not investing. Izvestia, one of the leading Russian daily newspapers, recently reported that there is $100 billion of Russian capital outside the country. I think this is going to force the Russians to create better conditions for their own investors and entrepreneurs.
How promising are investments in state-owned companies that the Russian government is selling off?
For foreigners, it is very, very dangerous to buy a state enterprise. By all classic measures, they look grossly undervalued, but you get into a whole host of problems that you're not accustomed to here. These companies are overstaffed, and to make them profitable, you have to fire a lot of people. This immediately makes you the bad guy in the community and sets you up for all sorts of other problems.
I advise that you find a situation where plants are closing down and start from scratch and hire people. Then you're the good guy because you're bringing jobs.
What about investing in the securities of Russian companies?
I think portfolio investment is premature. There is a stock market of sorts, and there are securities, but I'm very dubious about them. Right now, their whole securities industry is so unregulated that it's like the Wild West. Unless a person is extremely well tuned in, I don't advise portfolio investments.
There are a number of funds, most of them closed-end funds, being organized to make direct investments. Those that will be successful are ones that take a position in the management of companies they invest in. One fund has a policy of going in for five to seven years and selling out sometime between seven and nine years.
I have to stress doing your homework and being very careful.
Prospective investors have questioned the reliability of financial statements issued by Russian companies. Has there been any improvement in the quality of their financial reporting?
I'm told that a few firms are coming up to our accounting standards, but I suspect they are still the exception. The problem is that the Russians used to keep books in a way that really was not relevant. There was no bottom line as we would define it. One reason why I advise extreme caution when buying state enterprises is that you're not apt to find a set of books that you can understand.
Has there been any pressure on Russia to provide better protection of investors' property rights?
They still haven't totally cleared up the right to own land, but I think the law is in pretty good shape. What's lacking is reliable enforcement.
How have foreign investors been treated by the Russian tax system?
The tax system is still nearly impossible. One of the problems in Russia has been that changes to the tax system have been unpredictable. You have taxes, which if they are paid honestly, are prohibitive. If they have a big enough deal, some firms have been able to negotiate with the government for exemptions.
The tax system got to be impossible not only in terms of the overall tax burden but it became impossible to keep up with the changes. There was always some Catch-22 out there so that if somebody wanted to go after you, they could create a problem.
What effect has the rise in violent crime in Russia had on the willingness of foreigners to do business there?
It's more of a problem in Moscow than in the rest of the country, and there has been very little violent crime directed at foreigners. It is true that organized crime tries to move in on a business if it is very profitable. If anyone runs a risk, it is the Russian employees of a firm. For Westerners, bureaucratic corruption is more of a worry than violent crime.
Will the Russians' recent war in Chechnya have an effect on economic growth in Russia?
It will have some because obviously the war is very expensive. There are worries that the cost will bust the budget, but the budget was already in pretty sorry shape. In the final analysis, I'm not convinced that it will have that profound an impact. ILLUSTRATION: Color photo
JIM WALKER/Staff
Jack F. Matlock Jr.
by CNB