• ACI Russia

08/06/1998 23:31:09 FEATURE - Crisis? What crisis? Some in Russia unfazed

By Peter Graff

MOSCOW, Aug 7 (Reuters) - Ask Bruce Macdonald about Russia's economic crisis

and he laughs: "What economic crisis?"

Question Lennart Dahlgren about the alarming reports and he says they're

music to his ears: they have scared off his competitors.

Macdonald is the marketing director for Rosinter, a privately held

Venezuelan firm that runs 32 restaurants in Russia and plans to open seven more

before the end of the year.

Dahlgren is the Moscow representative for the Swedish furniture giant Ikea,

which is set to open the first of several planned Moscow superstores in October

next year.

"We made a decision to start activities in Russia last autumn and what has

come since then, the crisis and whatever else, has not influenced us, not a

bit," he said.

Russia's financial and economic squeeze has sent many foreign investors

scrambling for the exits. But despite the latest lurch on the road to economic

reform, a handful of companies remain decidedly bullish about a market of 150

million people needing quality goods and services, reasonably priced.

The Turkish group Migros opened a $34 million hypermarket in Moscow last

December and is already building another one. Independent Media, the Dutch

publishers of the Russian editions of "Playboy" and "Cosmopolitan" are launching

two more glossy magazines in December.

Goldman Sachs, the Wall Street house which shut its Moscow office in 1994,

returned with great fanfare in June and has already played a key role in a major

government debt swap.

Paul Heth, an American entrepreneur who opened a cinema in Moscow in 1996

says his group plans to spend $110 million to build 105 new screens over five


"We see nothing but upside," he said.


Freshly-bloodied portfolio investors might think such optimism is downright

bizarre. After all, anybody who bet $10,000 on the shares in Russia's benchmark

RTS index last October would have lost a heart-stopping $7,500 by now.

Foreign direct investment remains among the world's lowest.

So how can these people be so cheerful?

One answer is that stock indices do not provide an overall picture of the

market. Most of Russia's largest blue chip firms, and therefore most of the

principal shares on its stock exchange, are privatised oil and gas behemoths.

They have taken a severe beating as world oil prices have crashed.

But Russia's stock market accounts for only a fraction of the country's

economic activity. Analysts say many successful firms are small or medium-sized

and often privately owned.

Rosinter's Macdonald blamed some of the near-universalpessimism on

relative newcomers to the market who lack the perspective to see how far the

country has come since the worst days of Soviet communism and post-Soviet


"Those are the guys who stepped off the plane two years ago and got upset

when their laundry didn't come back in a plastic bag," he said. "This place

fosters negativity. Being upbeat is seen as a sign of ignorance and if you want

to fit in you are supposed to see the worst in everything."


"We started a business here at a time when prices changed every week and

inflation was several hundred percent. We view the current situation as

something far more modest and well within our ability to cope," Macdonald said.

"If I were an investor in New York and getting the kind of information that

people there are getting, I too would be reluctant to invest here. But when

you're here on the ground and you have some experience it doesn't seem like such

a disaster."

He may have a point. Compared to the social and political tidal waves that

have crashed down on this country over the past decade, the crunch of 1998 has

so far barely caused a ripple.

In less than 10 years Russia has seen four-digit inflation, the collapse of

an empire, tanks in the streets for two attempted coups, a vicious war of

secession in Chechnya and a long-lingering threat of a bloody Communist


Now, the rouble remains broadly stable. Anti-government protests that a few

years ago regularly brought tens of thousands of angry demonstrators onto the

streets now generally attract only a few hundred isolated malcontents at a time.

President Boris Yeltsin is unpopular, his health is weak and his behaviour

often seen as erratic. But his commitment to the reformists in his circle has

never seemed more straightforward and the economic team led since March by

36-year-old Prime Minister Sergei Kiriyenko has slowly won widespread praise.

But even with that perspective, the crisis is no illusion.

Falling oil prices, fleeing capital, chaotic and ineffective tax collection

and stubborn corruption have sucked so much cash out of the economy that the

government and private firms cannot pay the bills they owe one another.

Many companies have been reduced to bartering for supplies and withholding

wages from their impoverished employees.

Russian politics are likely to heat up as the days grow shorter and colder.

Coal miners who have not been paid for months have already begun to protest.

Yeltsin himself has warned of a poltically tumultuous autumn. The rouble has

come under pressure and a forced devaluation could be ruinous.


Even if the non-payments crisis does not lead to wider social unrest, it has

all but extinguished hopes for a rapid countrywide explosion of purchasing power

that was supposed to fuel a consumer boom.

"People were over-estimating the pace that consumer spending was going to

grow at, especially in the regions," said Oleg Pavlov, an analyst at investment

house Brunswick Warburg.

The results were over-optimistic business plans and disappointed investors.

Companies that have been shielded from the shock include those that have

focused mainly on Moscow, as well as St Petersburg and a few other major cities,

where the cash crunch is much less strongly felt than in outlying regions.

Those markets, especially Moscow, should begin to pick up again in 1999 and

2000, Pavlov said.

He sees a long-term future in service businesses, both for the consumer and

business-to-business markets.

"There are a lot of infrastructure gaps still present in the whole economy,

and as the economy rationalises itself there will be considerable demand for all

kinds of services," he said.

Growth will be driven not by the high-end luxury goods favoured by Russia's

notorious new rich, but by "value for money" products and services aimed at the

middle class, he said.

It is advice that seems to fit Ikea's modestly-priced, functional furniture

and Rosinter's plans for low-key pizzerias.

"Our customers come from a class that simply did not exist five years ago,"

said Rosinter's Macdonald.

Most of the restaurant chain's patrons are Russian office workers who

typically earn about $1,500 a month, a far cry from the mobsters and their molls

or hard-currency-carrying foreigners who filled the handful of restaurants that

were open in the darkest post-Communist days.

"We think there is a growing interest in your home, your dacha, in making a

nice place around you," said Ikea's Dahlgren.

"Bad times are good times," he said. "If you want to invest for the long

term, then coming in during a short-term crisis is a positive thing."

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