Defense Conversion Aid Planned

The U.S. Overseas Private Investment Corp. is undertaking a $500 million initiative to finance and insure American investment in defense conversion projects in Russia and the former Soviet Union, according to the agency.

The first project financed under the scheme will convert a plant that formerly made equipment for MiG jet fighters into one that will make air-conditioning and cabin pressure control systems for commercial aircraft, the U.S. government agency said in an announcement to be made public Friday. A second venture to launch U.S. satellites using Russian rockets will be insured against political risk.

"These projects build partnerships between former antagonists," said OPIC president Ruth Harkin. "They are peaceful, they will be profitable and they serve as vivid examples of the revolution in relations between our two countries."

Russia's defense plants have been among the worst hit by the slump in industrial output since the collapse of the Soviet Union, and the disgruntled military lobby has been vocal in its opposition to market reforms, prompting the West to look for ways of converting weapons factories to civilian use.

OPIC has provided $2.2 billion in loans, loan guarantees and political risk insurance to U.S. companies for more than 40 projects in the former Soviet Union that range from major energy projects to food retailing.

In an interview earlier this week, however, Harkin said doing business with the former Soviet Union's energy sector had been particularly problematic for American investors.

"There have been many, many problems," Harkin said. "Sometimes tariffs and taxes have been laid on and then taken off and then laid on again. It's been a very tricky area."

In the last year, OPIC has financed energy-related projects by Anderman/Smith Overseas and Snyder in addition to insuring Phibro and Du Pont.

One project, however, where delays are threatening to forestall substantial backing from OPIC is the troubled Timan-Pechora oil project in Russia's Far North.

The venture, which involves Texaco, Amoco, Exxon and Norsk Hydro, is currently embroiled in a profit-sharing dispute. The project, which is intended to attract up to $15 billion in investment over 10 years, stands to lose as much as $200 million in financing plus $200 million in insurance if the dispute is not resolved soon, Harkin said.

"From our point of view, if this isn't going forward, we would then use those resources for some other investment," she said.

Experiences likes this, however, are unlikely to deter OPIC from its strategic goal of promoting investment in Russia, Harkin said.

"There are many other places in the world where American investors can go, but we happen to have a foreign-policy interest in ensuring that American investors come here."

And while the slow pace of change in Russia was an irritant, she said, her agency's working relationship with both the Russian government and the Duma had improved over the past year.

"I'm frustrated with the lack of reform, but you have to put it in perspective: How long does it take us to pass a law in the United States?"

One area, however, where OPIC is convinced it can make some rapid headway is defense conversion. Harkin and Defense Secretary William Perry are planning to lead a delegation of U.S. industrialists in April to look at potential investment projects in Russia's defense plants.

"We're addressing ourselves to see what part is usable and what part is plainly unusable," Harkin said. "It's not unlike some things we've done in our own defense sector: How to turn it into something citizens can use?"

OPIC's first stab at defense conversion will be guaranteeing a $15.5 million loan to Hamilton Standard Holdings Inc., a subsidiary of the Connecticut-based United Technologies Corp., for a joint venture with the Nauka plant in central Moscow.

Nauka, which formerly designed and produced life-support and environmental-control systems for military aircraft produced by Mikoyan and Tupolev, will receive an injection of U.S. funds and technology that will enable the company to produce air-conditioning and pressure-control systems for civilian aircraft.

OPIC will also provide $175 million worth of insurance to the Lockheed Missiles and Space Company Inc. for a venture that will launch U.S. satellites from the Baikonaur Cosmodrome in Kazakhstan using Russian rockets.

In a separate project announced this week, OPIC is to provide a $29.9 million loan guarantee to International Telcell Inc. of Connecticut to expand its cable television system in Moscow, Tbilisi, Riga, Kishinev and Tashkent.