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Study Trip to USSR: Perestroika Close Up

(This article appeared in Stanford Business School Magazine in March 1989.)

A pale young face with watery blue eyes and a blonde crew-cut greeted us at the "documents" station in the airport. He looked up at us searchingly, flipped through our papers, and looked again. He called another man in a pea-green uniform and they conferred in harsh, choppy sentences.

Bundled against the frigid December cold, I began to sweat in my fur coat, long underwear, and heavy snow boots. Finally, the officer shrugged and started to pound our documents with a large stamp, as though trying to flatten some hapless insect. He smiled a cold smile and gestured us through the gate. We were in the USSR.

For nearly two weeks, 25 members of a Business School group toured the Soviet Union, meeting with economic advisers to Mikhail Gorbachev, officials of the USSR Chamber of Commerce, the Ministry of Foreign Trade, the Estonian Management Development Institute, business leaders, and students, and taking a very spirited tour of the Stolichnaya plant.

In nearly all our meetings, a portrait of Lenin stared down on one end of the table while Gorbachev, minus his famous birthmark, watched from the opposite wall as we listened and asked questions trying to assess the effects of perestroika-or restructuring-on the nation. Discussions ranged from the Soviet need for hard currency and the problems this poses to Western companies seeking to export goods to the Soviet Union to the desire of Estonian business leaders to make their region the Hong Kong of the Eastern bloc with economic independence and their own currency.

The trip was part of a major educational effort organized by MBA students to help understand the impact of current social and political changes in the Soviet Union. For the first time this fall, a seminar on East-West economic relations was offered at the Business School, taught by Henry S. Rowen, the Edward B. Rust Professor of Public Management and a Soviet scholar. The program also involved a series of speakers from both U.S. and Soviet business, government, and academia.

We learned that only one of every 100 companies that explore the possibility of doing business in the Soviet Union actually attempts it. There is much hope for perestroika among those who hold little power to influence its success and a great deal of skepticism from the people holding most of the cards. Though Gorbachev continues to announce new laws that will make it easier and more attractive for foreign companies to enter joint ventures with the Soviets, U.S. and Soviet interests remain at odds.

The manager of a candy factory told us he must import the flavors for his chewing gum and most of the machinery used in the operation. His experience is not unique. Many Soviet businesses must buy raw materials and machinery abroad to improve both product quality and factory efficiency. Soviet business leaders need to learn the basic business vocabulary used by Westerners. They need to understand the concepts of market forces and competition in order to overcome a half century of a centralized economy that has meant disincentives for innovation and quality control.

They want to maintain fixed prices to keep "the greedy entrepreneurs from raising them unfairly to line their own pockets at the expense of the consumer." This means there will continue to be wildly distorted prices that bear no relationship to actual market value.

The way Soviet citizens line up to buy cheese or soap is evidence that supply is as serious a concern as price. In GUM, the giant department store off Red Square, a long line had formed. Soap had been impossible to find in Moscow for two weeks and shoppers were now lining up because a shipment had been received. In grocery stores we saw large piles of salami and rounds of cheese, but no variety. The only fruits or vegetables we saw were sold on street corners, probably by cooperative farmers.

Between business appointments, we tried to glimpse bits of daily life in the Soviet Union. Several of us had visited a beautiful little church near our hotel during morning Mass, enjoying the warmth and glittering gold of the ceiling, walls, and icons. Religion had survived, it seemed. Yet over lunch one day, an extremely polished Soviet saleswoman at Dow Chemical told us that God and religion had played no part in her or her peers' lives while growing up. However, religion is making a comeback now, she said, because the government has realized the need for a code of ethics and a value system to teach the young people in society. The government has decided that Christianity offers the best set of guidelines.

We also had a few chances at informal contact with our hosts from the business world. In Moscow, a tour of the Stolichnaya vodka factory was followed by a tasting that turned out to be a three-hour affair with five different types of vodka, caviar, fresh fruits, and vegetables. The toasting started along the lines of "may you meet your five-year plan" and ended with expansive discussions about friendship among all peoples and peace between nations. The evening was capped with a huge snowball fight after a dinner where the vodka continued to flow freely.

But much of the trip was spent exploring the Soviet business and economic issues that are increasingly interesting to Western business. We learned that in forming joint ventures, U.S. companies want to realize their profits in hard currency, yet there is only a very small pot of that currency available. The next best alternative is to counter-trade for unfinished Soviet goods to finish and sell in foreign markets. But the Soviets want to counter-trade without giving up rights to the best quality goods. The result is that Soviets often barter with second-rate goods. So far, European companies, subsidized by their governments, have shown a much greater flexibility on this and other issues with the Soviets.

There appear to be only three viable ways for U.S. companies to make money in the USSR. The first, and most difficult, is a straight sale of goods. This requires more manpower and research now that there is no longer only one ministry doing purchasing. The second and third involve analyzing the flow of hard currency into and out of the USSR. If a U.S. corporation can figure out how to help the Soviets either decrease the amount of hard currency spent on imports or increase the hard currency through exports, this market offers an opportunity for profit.

Dedicated and creative U.S. companies can make money in the Soviet Union. Dow Chemical has successfully produced and sold internally coated pipes, which the Soviets had previously imported, for the gas pipeline. Combustion Engineering has sold controllers to increase the efficiency of drilling equipment in oil fields, thereby increasing the amount of hard currency from export of oil.

In the Estonian city of Tallinn, there was a sense of private enterprise bubbling up everywhere. When Stalin annexed Estonia in 1940, it had an efficient economy, a well-developed infrastructure, and an industrious people. The Estonians have not forgotten how to operate in a market economy and they are angry at what they see as the rape of their resources by "all-union Soviet enterprises." These have been set up in Estonia by importing Russian laborers, utilizing Estonian resources and its infrastructure, and exporting products to the rest of the Soviet Union.

Although Estonia looked like it might be a site for experimentation, we were told that since demonstrations supporting the separatist movement had become more forceful, Moscow was threatening to cut off petrol and chemicals for purifying the water to the region.

The distance the average Soviet business manager must travel to understand the workings of a market economy were driven home by an overhead slide we were shown at the Institute for Management Development in Tallinn. It outlined the factors that determine Soviet managers' rewards under the current centralized economy and stated: "If a manager fulfills plans, follows instructions, and provides personal services to key personnel in supervisory bodies, then he will receive low quotas, investment options will be available, resources will be available, staff quotas will be raised, the enterprise salary fund will be increased, and the plant will have easy inspections."

A far cry from "Who is the customer? What does he want? How can we best meet his needs?"