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. Last Updated: 07/27/2016

A Few Multinationals Investing Amid the Crisis




In a town near St. Petersburg , Caterpillar and Philip Morris are among Western companies plowing ahead with plans to build or acquire factories, as Neela Bannerjee reports.


When the ruble lost 50 percent of its value in a few disastrous weeks last year, the collapse drove many smaller companies out of business. Caterpillar f which had counted such firms as being its main customers for Russian-made construction equipment f had to ask itself whether it wanted to push ahead with the just-started Tosno plant, said Stu Levenick, general director of Caterpillar Overseas in Moscow.


"We asked ourselves some hard questions, mainly about whether this was the right time to invest $50 million.''


Just 12 days before the August crash then-Leningrad region Governor Vadim Gustov laid the foundation stone at the factory.


But Caterpillar and a number of Western multinationals f Nestl?, Lucent Technologies and others f are answering the dilemma posed by the economic crisis by settling deeper into Russia rather than pulling out.


They are not blind to the problems, so they have developed a variety of strategies to cope. Most have started by picking areas where the local government supports business, regardless of broader upheaval in Russia.


In St. Petersburg and in the Leningrad region that surrounds the city but does not include it, six American projects are expected to bring more than $500 million of direct foreign investment over the next 18 months.


Caterpillar is pushing ahead with its plant, and production there should begin on schedule in December. Up the highway from Tosno, the Wm. Wrigley Jr. Co. opened a factory this winter across from Pulkovo International Airport, and Gillette is building one next door. Philip Morris is constructing a $330 million plant, and International Paper recently paid an estimated $65 million to acquire controlling interest in a local paper mill.


Beyond this region, BMW recently announced a joint venture in the far western Kaliningrad region. Lucent Technologies began to produce fiber optics in the Voronezh region of central Russia. And Nestl? will be investing $30 million in six existing factories throughout the country.


Many of these companies had bucked the prevailing corporate trend before, coming to Russia in the mid-1990s while competitors hesitated. That experience has made them less skittish than they might have been five years ago about the turmoil that can damage emerging market economies.


These corporations have made a long-term commitment regardless of short-term disruptions. "When will the crisis end?'' Nigel Brackenbury, general director of Ford's operation in Moscow, asked. "It won't. It's the challenge for all of us in Russia to put together strategies to promote growth in the conditions we have. It's not time to wait around for external circumstances to change and help us.''


Even before the collapse, few foreign investors had the nerves for Russia. The government treats most businesses, domestic and foreign, equally poorly, burdening them with onerous taxes, hostile and corrupt bureaucracies and ever-changing regulations. Direct foreign investment in Russia totaled a paltry $2 billion last year, according to the American Chamber of Commerce in Moscow.


But the chamber expects direct investment in 1999 to at least stay at that level. One reason is that some places in Russia are easier to work in than others, and the willingness of certain regional and local authorities to cooperate with investors has been critical to keeping Western money here. The economic crisis has not made regions historically wary of foreigners any friendlier, but it has made fence sitters like thecity of St. Petersburg more flexible.


"Before, the city's attitude was something like 'Kiss our ring, and maybe we'll do a deal with you,'" said James Hitch, managing partner at the St. Petersburg office of Baker & McKenzie, the law firm. "Now, it's like: 'You've decided to stay in Russia after the crisis? You're dedicated to us? Well, how can we work together?'"


The city understands that it faces competition for scarce investment from its neighbor, the Leningrad region. Two years ago, the regional government developed a set of laws and tax breaks to attract investors.


The region attracted about $290 million in foreign investment in 1997 and 1998 and is expected to get another $350 million this year.


"No crisis influences us,'' said Sergei Naryshkin, head of the region's committee on external economic relations. "We won't step back from our investment politics or from our commitments.''


That attitude has seeped to the local level. Tosno, at a passing glance, could be any small Russian town. Old wooden shacks that have begun to list toward the swampy earth line its outskirts. The main road that cuts through the center of town is still called Leninsky Prospekt, and one mild Saturday residents were out raking leaves in the parks and squares on a Subbotnik as they had during the many springs spent under Communism.


Unemployment is widespread among the 30,000 people of Tosno, and people pack the suburban trains to St. Petersburg to seek work there.


The town's young mayor and his staff are eager to draw foreign investment. As part of the Caterpillar deal, the town reduced the local portion of the profit tax. It helped win federal permission to cut the trees at the site. It worked with the local utility company to get Caterpillar the electrical power it will need, and it offered the Americans a 49-year lease on the site, since private ownership of commercial land still is not allowed in Russia.


"What's most important to investors is the good will of the authorities,'' said Deputy Mayor Galina Karpova. "We're willing to help them solve their problems.''


Russia's sizable consumer goods market and industrial base are also factors. When the ruble weakened badly, imports f paid for in hard currency f were suddenly out of reach for most Russians.


"All the companies that were importing stopped,'' Hitch said. "By contrast, all the companies that were already producing here or in the process of doing so kept moving forward.''


For those already here, the crisis forced them to work more effectively.


Wrigley's, like most makers of consumer goods, suffered a drop in sales of between 20 percent and 30 percent. But the company gained market share from competitors in this period, it says, because it encouraged its sales force to work harder to get its products on store shelves to make up for a cut in advertising expenditures.


Another strategy will be to focus on the export market, as Caterpillar plans to do, until demand in Russia rises again.