WASHINGTON-In a move that has jolted global telecommunications and financial institutions and may have repercussions for U.S. wireless traders, Russian President Boris Yeltsin ousted western investors from a $1 billion deal to privatize state-run telecommunications facilities and replaced them with political backers who bankrolled his re-election campaign last summer.
The action, reportedly fueled by a growing anti-foreign investment mood in Russia that Yeltsin’s market-reform supporters appear to be capitalizing on, comes as the United States and other nations try to reach accords to end tariffs on telecommunications and computer products by 2000 and to allow free trade in telecommunications services.
The Clinton administration quietly backed Yeltsin through his re-election last July, but appears poised to rethink U.S.-Russian relations with a new foreign policy team headed by Secretary of State designate Madeleine Albright now in place.
A related matter that heightens concern in the West is the possibility of Russia merging Rostelecom, the country’s largest long-distance operator, with Svyazinvest, a holding company for the government’s share in 85 regional telephone companies providing local service.
“Clearly it’s not going to help,” said a World Bank official. “It’s going to have an anti-competitive effect.”
The official said a $90 million World Bank public infrastructure loan to Russia will cease unless Yeltsin agrees to integrate competitive safeguards into his country’s telecom market, a threat that if carried out would carry mostly symbolic punch.
Russian Communications Minister Vladimir Bulgak played down the changes. “The doors are open for all investors … abroad or in Russia,” he was quoted as saying at a press conference in Moscow last Thursday.
While it is technically correct that foreign capital would not be precluded in the new offering, reporting requirements and other accounting measures will go by the wayside under Russian bank underwriting.
Now, instead of an international tender that R.M. Rothschild & Sons was to oversee, Russian banks are expected to orchestrate a largely domestic offer encompassing a 25 percent stake in the nation’s telecommunications properties.
According to a Financial Times report late last month, the offering has been taken over “by a Russian grouping believed to be led by Vladimir Gussinsky’s Most group and Peter Aven’s Alfa Bank, two of the largest financial contributors of Yeltsin’s re-election campaign.”
Bulgak defended the dismissal of R.M. Rothschild, saying, “Unfortunately, there isn’t just one strategic investor in the world who could be Svyazinvest’s sole partner.”
So far, the unexpected turn of events in recent weeks does not appear to have negatively affected wireless ventures in Russia that include U S West Inc., Motorola Inc., Hughes Network Systems Inc., Loral Corp. and Comsat Corp. AT&T Corp. and Sprint Corp. also have offices in Russia.
Foreign telecom firms doing business in the country include L.M. Ericsson, Alcatel Telecom, Deutsche Telekom and Siemens AG. Businesses seem reluctant to comment on or criticize Yeltsin’s moves.
“I think the fact that we have local partners is very helpful to us,” said Cathy Fowler, a spokeswoman for U S West Inc. “We’re busy.”
Through its 66.5 percent share in Russian Telecommunications Development Corp., U S West has stakes in analog and digital mobile phone systems in Moscow, St. Petersburg, Nizhni Novgorod, Rostov on Don, Valdivostock, Irkutsk and Yekaterinburg.
But while U.S.-Russian wireless joint ventures may not feel the impact of the failed Rothschild deal, there is still reason for American firms to be concerned despite the lure of business opportunities in this Eastern European nation of 150 million people.
Russia is in the grip of massive political corruption and organized crime that has not subsided since communism fell and gave way to pro-democracy market reforms in 1991. Where one ends and the other begins baffles even Russian experts like Clifford Gaddy of the Brookings Institution.
“This has been going on for a while,” said Gaddy. “The roots are deep.”
Indeed, Paul Tatum, a 41-year-old American businessman from Edmond, Okla., was gunned down Nov. 3 in Moscow in what some believe was a hit by the Russian mafia.
“Russian criminal groups have siphoned off vast amounts of wealth from the Russian economy, often in conjunction with criminals from the United States, including former Soviet emigres,” said Louis Freeh, FBI director, in written testimony submitted at a Senate investigations subcommittee hearing two years ago.
“These organizations have demonstrated utter ruthlessness in pursuit of those objections,” Freeh added. “As a consequence, some legitimate enterprises have expressed reluctance to do business in Russia, which could ultimately retard economic development and precipitate the flight of legitimate capital.”
