USSR: AGGRESSIVELY PURSUING JOINT VENTURES WITH THE UNITED STATES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000800600001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 27, 2016
• Document Release Date: March 16, 2012
• Sequence Number: 1
• Publication Date: November 30, 1987
• Content Type: REPORT

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DATE ~".~ ~~ ~ l ~ ~"'
DOC NO ~ ~ ~''~ g(~'~II
OI R -~
PF,PD I
Central Intelligence Agenry
DIRECTORATE OF INTELLIGENCE
USSR: Aggressively Pursuing Joint Ventures
with the United States
Summary
The USSR has stepped up efforts in recent weeks to sign
joint venture deals with US firms. General Secretary Gorbachev
probably will raise the topic at the upcoming summit meeting.
The Soviet leadership has expressed particular interest in joint
venture deals with US companies in the energy, agroindustrial,
transportation, and consumer goods sectors. Moscow may be
pressing the issue, in part, to demonstrate that expanded
economic cooperation would benefit both countries, especially if
various trade impediments between the two countries were
removed. But the sudden explosion of interest in joint ventures
with the US, coupled with recent Soviet moves to be more flexible
and conciliatory in project negotiations, also suggests that
Moscow is more urgently seeking an infusion of Western technology
and equipment to aid its industrial modernization program.
Moscow's tactics may result in a few deals being more quickly
concluded, but Western firms will remain wary until key questions
of profitability and profit repatriation are answered. The small
number of joint venture deals likely to be concluded in the near
term will have only a limited impact on the performance of the
Soviet economy during the current (1986-90) five-year plan. Over
the longer term, joint ventures could help improve the
performance of certain industries, increase the skills of
selected ersonnel and provide access to some new foreign
markets. 25X1
This typescript was prepared by Office of Soviet 25X1
Analysis. Questions and comments are we come and should be
directed to Chief, Economic Performance Divison 25X1
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USSR Aggressively Pursuing Joint Ventures with the US
Soviet officials are seeking to revive flagging economic
ties with the United States across the board, and at present are
making a particularly strong effort to establish joint ventures
with US firms.
-- Earlier this month the USSR concluded its first joint-
venture deal with a US company--Combusion Engineering will
help produce control instrumentation for use in the Soviet
petrochemical and oil-refining industries--and a venture
with Pepsico involving restaurants reportedly is
imminent. The Soviets also announced that a "letter of
intent" has been signed with Occidental Petroleum and
Italian and Japanese firms to build a petrochemical
complex, which, if the deal is concluded, would be the
largest joint venture to date.
Gorbachev may also.
address US businessmen on the issue during his Washington
visit as well as at the US-USSR Trade and Economic Council
meeting scheduled for early next year in Moscow.
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The recent flurry of activity and high-level Soviet interest
in joint ventures with US firms stand in sharp contrast to the
sluggish pace of joint venture signings that have occurred over
the past year. Moscow has received about 300 proposals from
various Western firms, but just 10 contracts, including the one
with Combustion Engineering, have been signed since the Soviet
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SOVIET-US JOINT-VENTURE NEGOTIATIONS:
AREAS OF INTERESTa
Metallurgy & Mining
10.0
Agro-Industrial Sector
32.0
25X1
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law permitting joint ventures took effect on 1 January.
Gorbachev may believe that discussion of joint ventures at the
highest levels while he is in Washington will provide the
endorsement needed to spur additional signings.
Soviet Motivations
The Soviets' sudden rush to joint ventures may, in part,
reflect a desire to have something concrete to present at the
summit regarding the economic agenda. With a number of
impediments on both sides still stifling US-Soviet trade in
general, joint ventures appear to be one area where some progress
might be made. Gorbachev may believe that by having a few joint
venture agreements with US firms either in hand, or nearly so, he
can demonstrate the enthusiasm that exists on both sides for
expanded economic links and thus press for easing US impediments
to expanded bilateral trade.
The joint venture push, however, undoubtedly extends beyond
a desire to improve the US-Soviet economic climate; it signals a
real Soviet need for US and other Western technology and
equipment to fuel Gorbachev's modernization effort. The Soviet
leadership is not satisfied with the current pace of its
industrial modernization program and probably believes that
indigenous efforts alone will not achieve the desired results.
Moscow probably views joint ventures as a better vehicle than
current trade and economic relationships for acquiring and
assimilating Western technology, managerial expertise, and
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i
marketing skills. In the long run, joint ventures are aimed
primarily at improving the quality of Soviet manufactured goods
for export and reducing Soviet reliance on exports of oil and
other raw materials. But Moscow probably views the short-run
benefits from a quick infusion of Western capital and technology
as more urgent. Indeed, the up-front contributions of machinery
and equipment by the Western partners reduces the initial hard
currency outlays by the Soviets, an important financial concern
at the moment given the Soviets' hard currency constraints.
Outlook for US Firms
The Soviet leadership is showing more flexibility in the
formation and operation of joint ventures which will help make
such projects more attractive to US and other Western firms. For
example, Moscow published a decree in early October that gives
the Western partner more control over sales in the Soviet market,
simplifies the procedure for joint-venture approval, and
clarifies provisions for a tax holiday. According to the US
Embassy in Moscow, twelve new instructions covering a host of
problems such as taxes, currency regulations, and customs have
already been written but need additional work before they will be
released.
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25X1
In addition, the Soviets are pushing barter and other
arrangements to enable Western firms to earn hard currency for
profit repatriation without having to export the joint venture's
output, as mandated by the current legislation. For example,
Combustion Engineering will recoup its investment by receiving
Soviet petrochemical products to sell in the West.
Given the high visibility of the issue and the Soviet
leadership's willingness to compromise, we believe that some
additional joint ventures will be formed with US companies in the
near future. US firms are likely to move cautiously, however, as
many questions remain about the profitability of such endeavors
(see inset). Additionally, West European and Japanese firms
appear to have the upper hand for the bulk of deals that are
likely to be struck in the near future. US firms will probably
remain at a disadvantage in negotiating with the Soviets because
of their perceived vulnerability to government-imposed trade
sanctions. Moreover, non-US firms usually can, in most
instances, offer the Soviets.comparable equipment and technology
with the added advantage of having access to government-backed
insurance and credits.
25X1
25X1
6 25X1
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Obstacles Abound
Besides concerns about profit repatriation, Western firms
are troubled by a number of other provisions in the joint-venture
regulations that could affect the operation of the enterprise,
including:
o Management control. Although responsible for quality
control of production, the Western partner will not be
given the flexibility to manage the labor force. At
present, this power is likely to reside with the general
manager who, according to regulations, must be a Soviet
citizen.
o Material supply. The joint enterprise will be dependent
on the state planning process for allocation of material
inputs, thereby depriving Western firms of the freedom and
flexibility under which most of them work.
o Valuation of capital contribution. The value of the
contributions to joint ventures, which will determine
profit distribution, may be difficult to evaluate. The
process will be further complicated if the Soviets insist
on using their inflated official exchange rate which would
undervalue Western contributions.
o Accounting.. Joint-venture regulations require that the
accounting method used by the joint enterprise must be the
same method employed by all Soviet enterprises--a system
that would most likely result in lower tax deductions than
if Western practices were used.
25X1
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Limited Impact on the Soviet Economy
The Soviets will likely have only a limited number of joint
ventures with firms from the US and other Western countries in
operation during the next few years. Indeed, Moscow plans to
conclude agreements for only 20 to 30 projects during the first
year or two and then impose a temporary moratorium on signings,
according to
the US Embassy in
Moscow. The Soviet leadership hopes to use the breathing space
to ensure the success of those projects already under way and to
review and change the regulations as needed. We believe that
these ventures will not have much of an impact on Soviet hard
currency earnings or the quality of domestic production during
the current (1986-90) five-year plan. Most of the deals
concluded so far appear to be relatively small endeavors,
involving simple production processes, low-level technology, and
little foreign capital (see table). Even if a few larger deals--
such as the petrochemical complex with Occidental Petroleum--are
struck in the near term, actual construction will take several
years years to complete.
Over the longer term, Moscow stands to reap some benefits
from even a small number of joint ventures. The close
interaction between Western managers and laborers and their
Soviet counterparts afforded by joint ventures will familiarize
more Soviets with Western production practices and marketing
techniques. These improved skills and work habits will
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Western Firm Soviet Partner Project
Combustion Engineering Ministry of the Petroleum Production of
(United States) Refining and Petrochemical instrumentation for
Industry petroleum refineries and
petrochemical plants
Finnair (Finland) In tourist (State Committee Refurbishment of Hotel
for Foreign Tourism) Berlin in Moscow
FATA (Italy) Ministry of Machine Build- Production of commercial
ing for Light and Food and industrial
Industry and Household refrigerators
Appliances
Joint Venture Projects Signed in 1987
Heinemann Machine and Sergo Ordzhonikidze Production of
Installations Con- Machine Tool Building lathes and flexible
struction (West Plant production modules
Germany)
India's Tourist
Corporation
Moscow City Council
of People's Deputies
Indian-cuisine restaurant
in Moscow
Liebhern (West
Germany)
Mineraloel and
Rohstoff Handel
(West Germany)
January Uprising
Production Association
Nizhnekamskneftekhim
Production Amalgamation
Suomen Kati-Myynti Tallin Sewn Goods
Osakeyhtioe (Finland) Production Association
i men i V . I~1 emen t
Production of self-
propelled cranes
Production of ethylene
glycol
Production of women's
clothing
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Western Firm Soviet Partner Project
Sadolin (Finnish sub- Estonian Republic Associ- Production of paints,
sidiary of Danish ation Estkolkhozstroy varnishes, and wood
Sadolin) preservatives
Tairiku Boeki All-Union Association Process high-quality
(Japan)s Irkutsklesprom Siberian broadleaved
trees into furniture
paneling
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be diffused to other Soviet industries in time, as Soviet
personnel move on from their joint-venture assignments. How far
and how fast this occurs, however, will hinge largely on the
progress Moscow makes with its ambitious domestic economic reform
package, not on the number of joint ventures in hand. Joint-
venture arrangements with reputable Western firms will also
probably provide the Soviets access to new foreign markets,
albeit on a smaller scale than currently envisioned by Moscow.
Finally, the production from some joint ventures could eventually
improve the performance of certain industries. For example, the
process-control systems from Combustion Engineering's joint
venture could potentially maximize output of gasoline and other
light petroleum products at Soviet refining facilities.
We believe that the transfer of COCOM-controlled technology
will probably not be a problem for the West in the near term, but
it could become one further down the road, especially if the
first few joint ventures are successful. If competition develops
among Western firms to form joint ventures, Moscow would be in a
position to exert more pressure on them to ante up high
technology to secure a place in the Soviet market. Moreover, a
growing number of joint ventures--even those not requiring high
technology--expands the opportunities for the recruitment of
Westerners with access to such technology.
25X1
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USSR: Aggressively Pursuing Joint Ventures
with the United States
Internal?
- D/BONA
- DD/BONA
- ES/PDB
- RIG
- RIG/RPD
- SIG
- SIG/SPD
- SOVA/FLCO
- ES/CIB
- DEIG
- DEIG/DID
- NIG
- NIG/EPD
- EPD/RM
- EPD/FT
- EPD/EP
- EPD/IA
- NIG/DPD
- Robert M. Gates, Deputy Director for
Central Intelligence
20 - Director, Executive Staff (7E12 HQ)
21 - Director, Intelligence Community Staff, Community
HQs Building
22 - Chairman, NIC (7E47 HQ)
23 - Deane Hoffman, NIO/Economics (7E47 HQ)
24 - Vice Chairman, NIC (7E47)
25 - Richard J, Kerr, DDI (7E44)
26 - Chief, Products Evaluation Staff (7F24) via
CPAS registry
27 - D/ALA (3F45)
28 - D/OEA (4F18)
29 - D/EUR (6G421
30 - D/OGI (3G00)
31 - Economics Division/OGI (3G46)
32 - D/NESA (6G02)
33 - D/OSWR (5G151
34 - D/CPAS (7F16)
35 - C Current Su ort Group/CPAS (7F33)
36 - Current Intelligence Group/CPAS (7F30) 25X1
37 - 3 - CPAS CDP IMC ICB 7G07
44 - D/OIA, 25X1
45 - OIA/Interns Iona ssues ivision, 25X1
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47 - C/RS/LDA
(1H19)
48 - C/UE/LDA
1G23)
49 -
OIR/DSD/DB 25X1
50 -
(912 Key1 25X1
51 -
5 25X1
~, 2 -
25X1
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USSR: A ressivel Pursuin Joint Ventures
with the Unite States
External?
53 The Honorable C. William Verity Jr., Secretary of Commerce
Department of Commerce
Rm 5851
54 Susanne Lotarski
Director, Office of Eastern Europe and Soviet Affairs
Department of Commerce
Room 3410 (Main Commerce)
55 Jack Brougher, Jr.
Chief, USSR Division
Office of Eastern Europe and Soviet Affairs
Department of Commerce
Room 6854 (Main Commerce)
56 Kim Fitzgerald
Director, Office of Intelligence Liason
Department of Commerce
Room 6854 (Main Commerce)
57 Michael Farren
Deputy Under Secretary for International Trade
Department of Commerce
Room 3$40 (Main Commerce)
58 Franklin J. Vargo
Deputy Assistant Secretary for International Trade
Economic Policy
Department of Commerce
Room 3850 (Main Commerce)
59 Barry Kostinsky
Chief, Soviet Economic Studies Branch
Center for International Research
Bureau of Census
Department of Commerce
Room 706 (Scuderi Building)
60 The Honorable Richard E. Lyng, Secretary of Agriculture
Department of Agriculture
Room 200A, Admin Building
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61 Evan Wilson
Assistant Secretary of Economics
Department of Agriculture
Room 227-E
62 Stephan Danzansky
Senior Director for International Economic Affairs
National Security Council
Room 365 EOB
63 Col. Tyrus W. Cobb
Director, East-West Section
European and Soviet Affairs
National Security Council (373 EOB)
64 David Tarbell
Deputy Director for International
Economic Affairs
National Security Council (365 E06)
65 Paula J. Dobriansky
European and Soviet Affairs
National Security Council (368 E0B)
66 Andrew W. Marshall
Director, Office of Net Assessments
Department of Defense
3A930 Pentagon
67 David Epstein
osD
Office of Net Assessments
3A930 Pentagon
68 Dave Wigg
Deputy Assistant Secretary
Policy Analysis
OSD
46940 Pentagon
69 Morton Abramowitz
Assistant Secretary
Intelligence and Research Bureau
Department of State
70 Robert German
Director, Office of Analysis for the Soviet Union
and East Europe
Bureau of Intelligence and Research
Department of State
Room 4758
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71
Mark M. Parris
Director, Office of Soviet Union Affairs
Bureau of European and Canadian Affairs
Department of State
Room 4217
72
John Danylyk
Chief, Communist Economic Relations Division
Bureau of Intelligence and Research
Department of State
Room 8662
73
Robert W. Clark
Deputy Director (Economic Affairs)
Office of Soviet Union Affairs
Bureau of European and Canadian Affairs
Department of State
Room 4223
74
Randall Fort
Special Assistant to the Secretary (National Security)
Department of the Treasury
Room 4324 (Main Treasury)
75
James Griffin
Director, Office of East-West
Department of the Treasury
Room 4446 (Main Treasury)
Policy
76
James Murphy
Assistant Trade Representative for Europe and the
Middle East
Office of The US Trade Representative
600 17th St.
Office of the US Trade Representative
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