As the Russian Parliament convenes in Moscow this week, many Western companies are wondering if the country's ambitious experiment in free enterprise will continue to move forward or if hard-line factions will rise to power and revert to state-controlled economy.
The 2,000 Western companies involved in Russia through joint ventures have a good deal to be concerned about.Over the last few months, the Russian ruble has plunged against the dollar and other stable currencies. At the same time, industrial output has fallen by 25 percent in 1992 and inflation has steadily risen, now hovering at an annualized rate of about 1,350 percent.
With three potent forces vying for power - managers of industrial complexes, hard-line former communists and President Yeltsin - many say that Russia's economic and political outlook has never been more uncertain.
The exchange rate of the ruble is a glaring indication of the country's economic slide in recent months. Trading at a rate of about 165 to the dollar in August, a dollar now brings about 450 rubles.
Many believe the rate of decline will continue until the government reigns in its policy of granting large scale credits to former state-run industries to enable them to continue operating. Although industrial output has fallen substantially since the fall of communism, the unemployment rate is still one of the smallest in the world.
In the meantime, foreign companies continue to be able to buy and sell rubles, although they are subject to different rules depending on whether they are operating as a joint venture with a Russian business partner, or as a wholly owned unit of a foreign entity, according to Jonathan Hines, a lawyer with Debevoise & Plimpton in New York.
Russia's rules relating to currency transactions were adopted into a new law passed by the Supreme Soviet in October, according to Debevoise & Plimpton.
"Trading rubles into dollars is allowed at the market rate, subject to availability of hard currency, which is a very iffy proposition these days since there is far more demand for currency than there is supply," Mr. Hines said. The law makes it more difficult for a company without a Russian partner to obtain rubles and then convert them back into dollars. Companies with a local partner, according to the law, are able to freely exchange rubles for hard currency, if it's available.
But many familiar with business conditions in Russia say that laws there can't be relied on.
"Russian law is interpreted by exception. If you have powerful friends you can get a ruling that will exempt you from the law," said one businessman who has been operating in Russia for several years.
Because converting currencies in the Russian system can be difficult, many companies have turned to outside services that will effect an out of country currency exchange without circumventing Russian regulations.
One such service, performed by Seattle-based Palms & Co. enables companies to sell in Russia, yet receive payment in the United States in dollars. Entities in Russia pay for products in rubles, but instead of going directly to the seller, the money goes into an account controlled by Palms, which will transfer an equivalent value in dollars into the seller's account in the United States, and make the rubles available to other foreign companies or organizations that may require them to carry on activities in Russia.