Businesses Delay Plans To Invest Billions In Russia Many Fear Communist Victory At Polls Will Jeopardize Reforms

Fearing that a Communist return to power would jeopardize market reforms, businesses are putting off plans to invest billions of dollars in Russia until after the June presidential elections.

The delay reflects investors’ newfound doubts about the Communist presidential candidate, Gennady Zyuganov, who leads President Boris N.Yeltsin in most polls, and provides a measure of just how important the vote is for Russia’s future.

At stake is an estimated $5 billion in direct private investment for 1996 alone, nearly five times the amount of private capital invested here since the collapse of the Soviet Union in 1991 and the launching of Russia’s market reforms.

Even more money is waiting to arrive in the form of investment in burgeoning capital markets, as investors line up to be a part of what one Western economist here called “a boom waiting to happen.”

“They’re coming, they’re looking around, trying to find what companies to buy, what companies to invest in. They’ve done everything but commit,” said the economist, who spoke on condition of anonymity. “A lot of money will go to industry, if the election goes right.”

Investors who until recently shunned Russia because of its runaway inflation, political instability and shifting legislation became attracted last year when the government’s tight-spending policies yielded a stable, convertible ruble and inflation consistently under 3 percent a month.

But mixed signals about the economic rules Zyuganov would lay down if he took power are causing many potential investors to wait for the outcome of the June 16 vote.

Zyuganov has promised to restore the Soviet-era socialist safety net, providing free education, free medical care and jobs for all workers. To make good on these pledges, a Communist government will probably have to print money, possibly wrecking the tight budget and fueling a new spiral of inflation.

“The main achievement of the last year of reforms is that people have been able to trust the ruble,” said Andrei Volgin, president of Adamant, a Moscow finance company. “If Communists come to power nobody really knows whether it will be possible to convert rubles to dollars.”

The uncertainty has caused delays in desperately needed foreign investment in Russian industry and technology. Last week, officials for the state property committee announced they would put off the sale of a stake in the huge and potentially lucrative state-owned telecommunications firm, Svyazinvest, until after the election.

Plans to invest in Russia’s oil and energy companies, which need foreign capital to bring technology up to date and finance mountains of debt and back taxes, have been on hold in the absence of legislation on product sharing that will not be finalized until after the election. The heads of Russia’s top oil companies added to investors’ concerns last week when they said they would face a fight for survival if the Communists return to power.

“At this point people are probably concerned, but no one is pulling out yet,” said Steven Sandweiss, a partner at Arthur Andersen consultants. “They’re taking a wait-and-see attitude.”

Last week, Russian stock prices soared after a poll commissioned by the Moscow Times and CNN showed that a resurgent Yeltsin had opened a small lead over Zyuganov. It was the latest sign that investors are hoping that Yeltsin will be reelected, and are no longer trying to put a positive spin on a possible Zyuganov presidency.

This is a marked change from the situation at the beginning of the year, when Yeltsin, besieged by health woes and humiliated by hostage-taking Chechen rebels, saw his popularity sink to low single digits, while Zyuganov, fresh from a victory in parliamentary elections, looked unbeatable.

At an economic forum in Davos, Switzerland, in February, the Communist leader wowed and wooed Western business leaders with his fluency in matters of market economies and assurances that his presidency would not mean cancellation of Russia’s economic changes of the past five years.

But during his campaign trips in the Russian provinces, Zyuganov has railed against what he called the inequities bred by capitalism and extolled the virtues of collectivism and state control over the economy.

Some observers have dismissed Zyuganov’s hard-line posturing as politicking aimed at the votes of those nostalgic for the stable security of the Soviet past, rather than a sincere statement of intention to roll back reforms. Others are not so sure.

“There is nothing in Communist Party history or the current platform to suggest anything other than a serious disruption of the factors that have allowed business to prosper, other than what Zyuganov says,” said Bernard Sucher, managing director of Troika Dialog, a Russian brokerage and investment bank. “And now, even that is not very encouraging.”

One reason for Zyuganov’s confusing line is that the party behind him is no longer the monolithic team of Communist parties of Soviet yore. Zyuganov has assembled a hodge-podge of Stalinist firebrands, former party bureaucrats and ultranationalists in a coalition whose leaders disagree sharply about what is to be done. They are united, as Valentin Kuptsov, the party’s second-in-command, said recently, “by our nonacceptance of the current course.”

Hard-line factions favor a sweeping revision of privatization, including confiscation of property they say was acquired illegally or too cheaply. Other proposals include renationalizing banks and stock markets and resurrecting the Soviet state planning agency Gosplan. And they would go back to calling buying and selling for profit - “speculation” in Soviet-speak - a crime.

This would undo Yeltsin’s reforms that put thousands of factories and shops into private hands and out of the control of the state.

Few in Russia acutally believe the Communists have the muscle, or even the desire, to try to pull off such sweeping reversals. Business insiders say leading Russian bankers, oil producers and industrialists are cutting deals with Zyuganov to keep things running smoothly no matter who wins in June.

Some Western companies apparently also believe a Communist win will mean business as usual.

Pepsi announced last week that it will spend $550 million in Russia over the next five years to build 11 plants and 47 warehouses and purchase 450 trucks, in addition to an expensive ad campaign that features cosmonauts on the Mir space station pitching the soft drink from orbit.