Joint Ventures in the Soviet Union: Problems Emerge

COMMENT Joint Ventures in the Soviet Union: Problems Emerge* I. INTRODUCTION On January 13, 1987, the Presidium1 of the USSR Supreme Soviet and the Soviet Union's Council of Ministers2 issued laws3 that authorized the establishment of joint ventures 4 in * The author would like to thank Bill Frenkel, Esq. of LeBoeuf, Lamb, Leiby & MacRae for his generous advice and assistance. The author also acknowledges the valuable assistance and comments of Professor Michael Newcity of the University of Puget Sound School of Law and David Kelley of the Russian Research Center, Harvard University. 1. According to the Soviet Constitution, the Presidium is the highest policy making body of the Soviet Union. KONST. SSSR (Constitution) art. 118-20 (USSR). 2. "The Council of Ministers of the USSR, i.e., the Government of the USSR, is the highest executive and administrative body of state authority of the USSR." KONST. SSSR (Constitution) art. 128 (USSR). 3. The initial laws consisted of an Edict and a Decree. The Presidium of the USSR on January 13, 1987, passed the Edict On Questions Concerning the Establishment in the Territory of the USSR and Operations of Joint Ventures, InternationalAmalgamations and Organizationswith the Participationof Soviet and Foreign Organizations,Firms and Management Bodies [hereinafter Edict] (the official Russian text appears in Vedomosti Verkhovnovo Sovieta SSSR (1987), no. 2, item 35). The USSR Council of Ministers on January 13, 1987, enacted the Decree On the Establishment of the Territory of the USSR and Operationof Joint Ventures with the Participation of Soviet Corporations and Firms from Capitalist and Developing Countries [hereinafter Decree] (the official Russian text appears in the official gazette, Sobranie Postanovlenii i Pravitelstva SSSR (1987), no. 9, item 40). The Edict authorized the formation of joint ventures, while the Decree provided the basic guidelines for their operation and establishment. Both laws were retroactive to January 1, 1987. Many English translations of the laws are available. E.g., Pravda, Jan. 27, 1987, at 2, col. 1 (Eng. ed.); E. THEROUX & A. GEORGE, JOINT VENTURES IN THE SOVIET UNION: LAW AND PRACTICE (1988) [hereinafter LAW AND PRACTICE] (published by Baker & McKenzie, Washington, D.C.) Kelley, The Soviet Joint Venture Decree: Law and Structure (available at Russian Research Center, Harvard University); The Soviet Socialist Republics: Decree of Joint Enterprises with Western and Developing Countries, 26 INT'L LEGAL MATERIALS 749 (1987) [hereinafter Joint Venture Decree]; Union of Soviet Socialist Republics: Edict Concerning Taxation of Joint Enterprises in the Soviet Union and Dispute Settlement, 26 INT'L LEGAL MATERIALS 759 (1987) [hereinafter Joint Enterprises]. 4. The principle characteristics of a joint venture are the pooling of assets to 166 University of Puget Sound Law Review [Vol. 13:165 the Soviet Union for the first time in nearly 60 years.5 The Soviets outlawed joint ventures in 1930 because "foreign control over any sector of the Soviet Union was ideologically unacceptable." 6 However, the promulgation of the new Soviet laws, confirmed in the West in October 1986,7 was another important move in General Secretary Mikhail Gorbachev's bold perestroika8 (restructuring). The main question for potential American investors 9 is whether they can profit under the new joint venture laws, in an atmosphere of perestroika, knowing that such efforts failed in the past. 10 The primary purpose of this Comment is to examine the problems facing Americans who want to set up joint ventures in the Soviet Union. Before examining the challenges, the create a new economic entity, sharing of profits and losses, and managing the new entity jointly. Pederson, Joint Ventures in the Soviet Union: A Legal and Economic Perspective, 16 HARV. INT'L L.J. 390, 390 (1975). 5. Dean, Updating Soviet Joint Venture Law and Practice,23 COLUM. J. WORLD Bus. 53 (1988). For an excellent comparison of the current joint venture laws and the 1923 laws, see Comment, Joint Venture Law in the Soviet Union: The 1920's and the 1980's, 9 Nw. J. INT'L L. & Bus. 633 (1989). 6. Ross, Foreign Investment: New Soviet Joint Venture Law, 28 HARV. INT'L L.J. 473, 473 (1987). 7. Yuri Scherbima confirmed on October 23, 1986, in Washington, D.C., the Soviet decision to permit joint ventures in the Soviet Union. Dunn, The New Soviet Joint Venture Regulations, 12 N.C.J. INT'L L. & COM. REG. 171 (1987). 8. Perestroika has three parts: economic reform, economic discipline, and industrial modernization. Though Gorbachev has implemented many plans under perestroika,all three parts must succeed for perestroika to work. Central Intelligence Agency and Defense Intelligence Agency, Report to the Subcommittee on National Security Economics of the Joint Economic Committee, 100th Cong., 2d Sess., Gorbachev's Economic Program: Problems Emerge 6 (Comm. Print 1988) [hereinafter Gorbachev's Program]. Perestroika should not be confused with glasnost (openness). Perestroika deals with economic restructuring; glasnost deals with increasing democratic freedoms in the Soviet Union. Marshall Goldman has argued that glasnost is necessary to help perestroika succeed. Goldman, Perestroika in the Soviet Union, CURRENT HISTORY, Oct. 1988, at 313 [hereinafter Perestroikain the Soviet Union]; Goldman and Goldman, Soviet and Chinese Economic Reform, FOREIGN AFF. 1987/1988, at 551, 560 [hereinafter Soviet and Chinese Economic Reform]. 9. This Comment focuses on the American viewpoint and experiences in dealing with joint ventures in the Soviet Union. According to Anatoly Belov, chief of the Department of Legal Protection of Foreign Economic Relations in the Soviet Ministry of Justice, two problems are holding up many joint ventures. One problem is the insistence that profits be transferable in hard currency, although made in rubles. A second problem is that the West wants all disputes between the Soviet partners and the foreign investors to be arbitrated by a third party. Trade Policy: Soviet Official Says Western Demands Impede Further Joint Venture Accords, DAILY REPORT FOR EXECUTIVES (BNA) July 21, 1988, No. 140, at 1 [hereinafter Trade Policy]. 10. E.g., N.Y. Times, Jan. 18, 1987, § 3, at 4, col. 3. 1989] Joint Ventures in the Soviet Union rationale for the decision to permit joint ventures and the objectives that the Soviets hope to achieve will be addressed. This Comment will then discuss the major provisions of the laws and the major problems these laws have caused for American investors. Finally, the major systemic and political problems confronting joint ventures will be examined. II. JOINT VENTURES AND SOVIET GOALS The Soviet decision to permit joint ventures in the Soviet Union is a vital part of perestroika. The success of joint ventures and of perestroika will depend somewhat on the success of the other. Likewise, the failure of one also will affect the other. Consequent (...truncated)