MUCH TO LEARN IN THE SOVIET UNION

Oil companies in what used to be the non-Communist world function according to elegantly simple precepts. They invest labor and money where they find opportunities to earn revenues sufficient to cover expenses, recover capital, and return profits justifying the trouble and risk. In Soviet law and habit, these precepts are just beginning to take shape. For that and other reasons, companies seeking business in the U.S.S.R. should plan for surprise.
June 11, 1990
3 min read

Oil companies in what used to be the non-Communist world function according to elegantly simple precepts. They invest labor and money where they find opportunities to earn revenues sufficient to cover expenses, recover capital, and return profits justifying the trouble and risk. In Soviet law and habit, these precepts are just beginning to take shape. For that and other reasons, companies seeking business in the U.S.S.R. should plan for surprise.

The Soviets want western help with their struggling oil industry. They have signed an exploration/development contract with Ste. Nationale Elf Aquitaine and preliminary agreements for a major Chevron Corp. joint venture. They're negotiating a deal with British Gas plc. And they're inviting smaller companies, including U.S. independents, to discuss ventures. The trade pact signed this month by President Bush and Soviet leader Mikhail Gorbachev brightens the atmosphere.

KEEP HAZARDS IN MIND

But companies, especially small ones, must keep all the hazards in mind. Their forays into the Soviet Union are subject not just to business precepts still in the making but to foreign policy complexities as well. Foreign policy doesn't work like business. It has two precepts: the threat of war and the notion that governments ought to abide by their agreements. And it functions by connecting otherwise disparate issues in a process called linkage.

Bush signed the Soviet trade agreement only after suspending linkage between that matter and the U.S.S.R.'s trade embargo of secessionist Lithuania. In Congress, Lithuanian linkage still might scuttle the accord. Similarly, the next U.S. trade step, granting of most favored nation status to the U.S.S.R., depends on Soviet emigration policy. And the Bush decision not to link Lithuania and trade may have resulted from Gorbachev's linking of the trade pact, vital to his domestic political standing, to grain purchases important to U.S. farmers.

That's how foreign policy works. Inevitably, expatriate companies become part of the process, susceptible to its shocks. Major international operators with broad asset bases can ride through the tough periods, absorbing the costs of delayed-sometimes lost-access to profits. Smaller companies by nature wear thinner financial armor. They can't assume as much foreign policy risk as the majors.

Soviet officials will have to accommodate differences like these among firms of various type and size. Their country will benefit if they do. Independent operators can explore and develop prospects the majors would ignore. Small service firms might offer technology and equipment that only they possess.

But attracting small companies will require flexibility not characteristic of the Soviet system. That flexibility, in turn, must grow out of a better Soviet grasp of the basic relationships between capital and profit. Simply put, one cannot exist without the other, and values of both are sensitive to time.

FLEXIBILITY ON BOTH SIDES

The Soviets have been forced into a welcome new appreciation for capital. Yet they cling in varying degrees to elements of a Marxist orthodoxy that rejects profit in principle. And their world renown bureaucracy often delays projects into oblivion. All that must change if the U.S.S.R. is to attract all the capital and technology it needs. It can if Soviet officials pay closer attention to western business precepts.

For their part, western companies must not underestimate the political significance of their Soviet ventures or the role foreign policy plays in them. They must practice as much flexibility as they expect from the Soviets. For now, each side of the negotiating table has much to learn from the other.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.

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