In From The Cold

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At the edge of the Baltic Sea, just past the rusting hulks of the trawlers that crowd the port of Kaliningrad, sits a nondescript, seemingly abandoned factory. Inside, however, scores of mechanics are assembling classy sedans, while nearby, engineers in white lab coats huddle to discuss production levels with their Russian colleagues in German-inflected English. It's an incongruous setting for one of Europe's most prestigious automotive marques, the Bayerische Motorwerken, better known as BMW.

In a move that struck many in Moscow's downtrodden business circles as quixotic, BMW set up shop in Russia last fall. The arrival represents a return to an area closely linked with German history. Before World War II, the Russian region of Kaliningrad, separated from the motherland by Poland and Lithuania, was Konigsberg, capital of East Prussia. From 1945 until the collapse of the Soviet Union, it served as a major Soviet naval base and was off limits to Westerners. But now BMW's $25 million joint venture is up and running and--mirabile dictu--is actually assembling cars from so-called knockdown kits. "The Russian market may be chaotic," says Klaus Liske, BMW's local production director, "but we're confident that we've found a good home." As it happens, BMW's latest plant is a former Soviet naval factory that was built by Germans before the war to make U-boats. "A good German foundation," Liske notes, "for our move into Russia."

Good foundations for foreign investments are hard to come by in Russia these days, at least according to recent headlines that lend new meaning to the term hostile takeover. From Vyborg to Vladivostok, court fights over shareholders' rights have even led to bloody clashes between riot troops and local workers. "If you want to empty a boardroom on Wall Street," quips an American investment banker in Moscow, "just say the word Russia." For too many foreigners, investing in Russia has proved to be tortuous and hugely expensive. Just ask the folks at BP Amoco. Last fall the company nearly saw its $484 million investment in Russian oil giant Sidanko all but disappear in a maze of Russian corporate shenanigans. In a complex scheme with a brutishly simple result, Sidanko's most prodigious subsidiary was declared bankrupt and sold for a song to a rival, the Tyumen Oil Co. (TNK). BP Amoco vehemently objected and in late December reached a tentative settlement with TNK. But the Sidanko affair is still cited in expatriate business circles as a symbol of the hurdles foreigners face in Russia.

Yet as BMW shows, hurdles are there to be leaped. Along with the German automaker last year, Ikea, Nestle, Caterpillar, Lucent Technologies, Ford Motor Co., Gillette and Philip Morris quietly added to their investments--nearly all built production plants with local partners, pouring more than half a billion dollars in direct foreign investment into Russia. In all cases, investors have developed a range of protection plans to help ensure that they prosper, even if that word is somewhat loosely defined.