In the midst of yet another economic downturn, the business climate in Russia fluctuates almost daily. "Frankly, I cannot say whether we are going to be in the red or black this year. Our main customers nationwide are municipal governments. The common budget problems in Russia have knocked down their ability to pay us fully and on time. They are paying what they can, but they just don't have the means. The cities don't generally renounce the unpaid amounts but want to find ways to pay us some of these overdue debts. If we succeeded in collecting the amounts cities owe us, we would be in black. If not �"

George Channin, area director for Otis Elevator in Moscow, is ready for either result. What he feels sorry about is the lost year. "The first part [of 1998] we were on track for our planned growth," he says. "In fact, we were even exceeding it in some respects. The crisis has hit us as hard as everybody else. We are seeing new orders now at half the level we were seeing just prior to the crisis. Because of the crisis. in our orders, we extended the Christmas holiday shutdown of our main factory in St. Petersburg from a normal 10 days to a month. We are looking to reopening it at a lower volume than we had planned in the earlier part of the year. There is hope that we will have enough volume for that facility to continue to operate normally. Our present order intake level is a little bit below what we want it to be for that to happen."

As a matter of fact, Otis is in big company. Facing what one foreign businessman nicknamed "Russian Fall," all U.S. multinationals in Russia are either reducing salaries or hours, or laying off staff. For instance, RJR fired 1,200 employees, 974 of them in St. Petersburg. However, it is still proceeding with its investment in a new plant in the region. According to the American Chamber of Commerce in Russia, U.S. companies have reported market downturns of at least 25 percent in sectors ranging from automobiles to telecommunications. So far, the only highly publicized U.S. company declaring its intention to pull out of the Russian market entirely is McDermott International. The general approach remains, "The show must go on."

Will it last, though? Otis Elevator, a subsidiary of United Technologies Corporation and the world's largest manufacturer of people-moving equipment, came into the Soviet Union in 1990 on the tide of "perestrojka." Then the tide was gone, taking the USSR away as well. But Otis stayed, attracted by the huge Russian market. At the time, there were about 400,000 elevators in the country and at least one-third of this number had been exploited beyond the age limit. This was an opportunity.

By mid-1993, Otis had four separate operating companies in Russia. The first and oldest was Shcherbinka Otis Lift. It has been and remains quite a small factory producing lift machines and the components for elevators. Second came the company that today is called Otis St. Petersburg. It contains Otis' largest Russian factory, which produces complete elevators with components from various places, including the machines from Shcherbinka. It also engages in selling, installing and maintaining elevators, and repairing, modernizing, restoring and replacing them in the Northwest of Russia. Finally, Mos Otis was established to be responsible for the city of Moscow exclusively and Rus Otis for the rest of the country. Rus Otis now has 36 branches spread across Russia from the Baltic to the Far East. Otis does not disclose the details of its investments, but Channin says that, in the former Soviet Union including sites in Ukraine and Kazakhstan, it was approximately $50 million of capital investment in the form of the shares of the operating companies.

After all these years, Channin admits, Russia "is not so important to Otis now as it seemed to be. Otis is nearly $6 billion in sales globally, and Russia was $100 million before the crisis and is only half that now; so Russia still has a big potential, but it is not the hottest market any longer. China is."

That being true, Channin also admits that Otis "didn't come in for quick profits. We still have a strong confidence in the future of our operations here. Such a country as Russia is going to need new elevators every year, sometimes more, sometimes less. I think that because we take such a long-term view, we believe we should be in Russia, we are in Russia and we are going to stay in Russia. When you sell an elevator and put your name on it, and it gets installed into the building and remains there with your name on it for 20, 30, 40 years, as long as the building is there — that's a very long-term commitment."

Of course it is. But the story of Otis in Russia looks like the story of hopes that have never fully materialized. Otis St. Petersburg, Mos Otis, and Rus Otis together serve more than 90,000 elevators, most of which are Soviet-era production installed in various cities over the past decades. Service business is about 60 percent of their total activity in money terms. Where did those elevators come from? In Moscow, Otis serves, according to Channin, 34,000 elevators. Most of them were handed over to newly established Mos Otis by the former state servicing monopoly Moslift, as part of Moslift's contribution to the new company's business activity. In return, Moslift became a partner with Otis. However, the city anti-monopoly committee determined it to be inappropriate for Moslift to be a partner with Otis in one company providing maintenance while simultaneously being a competitor by continuing its other operations. In Ekaterinburg in Central Russia, the state servicing monopoly, Sredurallift, contributed to Rus Otis a portion of its assets and activity as payment for shares in Rus Otis.

This made a pretty good start indeed. What also played into the Otis hands was an old Soviet system. There was a company which made elevators, another one which installed them, and yet another which provided the service. Only Otis offered all in one. Result: 5,500 Otis people maintain 50 percent more elevators nationwide than 5,000 Moslift employees did in the much more compact metropolitan area. In any other country it would mean victory. Not in Russia.

Channin explains philosophically: "Slowly and gradually, through the ups and downs of the business cycles, economic cycles, government cycles we are going to establish our permanent presence here, to build a stable and profitable business. Circumstances change but one has to operate as best as one can, waiting while the future resolves itself."

However, some experts conclude from the way the Russian "bubble economy" has burst, it will never recover again. The World Bank has predicted recently that Russia will suffer another 5 to 15 percent drop in gross domestic product in 1999. Optimists disagree, but even they do not argue that the period of cheap money in Russia is over. This might be bad news for Otis and good news for its Russian competitors.

Otis got involved in servicing thousands of crumbled Russian elevators for obvious reason — when the time comes to replace or modernize them, chances are high it is Otis who will get the order. But high inflation, the falling ruble and high import duties made Otis elevators — even those assembled in Russia — more expensive than ever. "We are working very hard to reduce our costs," Channin comments. "We can share with our customers a lower price level which is more adjusted to what they are capable of paying." However, the risk that cash-starving local governments will be eagerly opting for cheaper Russian-made elevators is increasing.

As if that wasn't enough, voices are becoming louder to support and protect the two ailing Russian elevator plants against "foreign capital invasion." At a time when Russia is apparently turning more xenophobic, those calls could add to the total campaign to preserve the national economy from being destroyed. In the country where inefficiency and lack of entrepreneurial spirit easily become the matter of political agenda, this can signal another headache for Otis and other foreign investors. About the Author

Sergey B. Panasenko is a journalist covering the Eastern European manufacturing and business market for Evolving Enterprise from Moscow. He is a newspaper and news magazine writer with an education in aviation engineering and journalism.

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