[Congressional Record Volume 140, Number 80 (Wednesday, June 22, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: June 22, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                    RUSSIAN-AMERICAN ENTERPRISE FUND

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Wednesday, June 22, 1994

  Mr. HAMILTON. Mr. Speaker, one of the innovative assistance 
mechanisms that the United States has developed in its programs for 
Eastern and Central Europe is the enterprise fund. Under this 
mechanism, the U.S. Government provides grant funds to a privately 
incorporated entity, with a board of directors approved by the 
executive branch, to fund private sector investment projects and 
related technical assistance for the purpose of energizing the private 
sector in a formerly statist economy. While intended to support only 
financially viable enterprises and to make a profit itself, an 
enterprise fund is able to make investments at an early stage in the 
transformation process before most private investors would take an 
equivalent risk, thereby serving as a demonstration and to encourage 
those few investors willing to risk their time and money.
  This experience from Eastern Europe is now being transfered to Russia 
in the form of the Russian-American Enterprise Fund. The fund is just 
beginning to operate. The president of the fund, Bob Towbin, recently 
made a speech outlining the purposes and operating procedures of the 
fund. In order to inform members of the operations of this important 
component of United States assistance to Russia, Mr. Towbin's speech is 
reprinted below.

    Remarks by A. Robert Towbin, President & CEO, Russian-American 
                            Enterprise Fund

       Thank you for inviting me to participate in this program 
     today. I want to say something about the goals and objectives 
     of the Russian-American Enterprise Fund, tell you a little 
     about the present stage of our activities, and describe 
     briefly the programs that we are implementing to fulfill our 
     mandate.


                         philosophy and origins

       As part of the US government's efforts to assist Russia in 
     its transition to a market economy, President Clinton 
     announced the intention to create the Fund last spring. 
     Modeled on similar Funds that were established in Eastern 
     Europe, the Russian-American Enterprise Fund was intended to 
     assist in the development of the private sector in the 
     Russian Federation by committing capital and mobilizing other 
     investors and technical assistance to support private firms 
     and entrepreneurs.
       There is, of course, no blueprint for how the private 
     sector will develop in Russia. A transition of this type in a 
     country of this scale would, in itself, be difficult enough 
     to conceive, but is an even more formidable task to execute. 
     The Fund brings one important element to the process--
     external investment capital for small and medium sized 
     private sector businesses. Foreign investment was central 
     to the development of our own economy, and still is today, 
     and we expect it will play an important role in the 
     Russian transformation as well. Ultimately, however, the 
     key to success in Russia will be the energy and 
     resourcefulness of the Russian people, complemented by 
     working with individuals and companies from abroad that 
     are willing to invest in the future prosperity of Russia 
     and its people.
       Through the Fund, in other words, the United States is 
     committed to a long term process to assist Russian 
     businessmen and women from European Russia and Siberia to the 
     northern Pacific Rim--the Far East Republics--in the 
     reorientation of their activities from a planned economy to 
     one in which market factors and individual initiative play a 
     key role.
       How can public sector funding help create private sector 
     institutions? The structure of the Fund reflects both 
     elements. By its funding, the Fund is the child of the US 
     Government. With $340 million of funds appropriated by 
     Congress--$40 million of which is to be devoted to projects 
     in the Russian Far East, your neighboring region--the Fund is 
     currently the largest pool of US investment capital available 
     for projects in Russia. By its legal structure, the Fund is a 
     private entity--a not-for-profit corporation. The corporation 
     is required under its by-laws to make investments and loans 
     to companies on sound economic principles--that is, the 
     investments must be made in companies that have a reasonable 
     chance of succeeding as private companies in the new Russia. 
     The investments are not grants, gifts or any form of 
     governmental subsidy--if the Fund were to view its activities 
     in that way, it would fail to meet the very specific mandate 
     under which it was created, but more importantly would fail 
     to impart the business fundamentals essential to long term 
     success.
       At the same time, it is clear that the Fund is operating in 
     an environment in Russia that does not fit standard Western 
     investment criteria, and the criteria for investment 
     decisions must reflect the extremely difficult conditions 
     under which the Russian managers, investors and owners are 
     operating. The well-known list of issues facing investors in 
     Russia today--lack of a clear legal and regulatory 
     environment, lack of the full range of banking capabilities, 
     limited enforceability of contracts--is precisely the reason 
     why the Enterprise Fund can play a constructive role in this 
     period. The Russian-American Enterprise Fund exists to take a 
     level of risk that typically would not be acceptable by 
     Western norms and, through the demonstration effect of these 
     investments, encourage the development of a stronger and 
     healthier private sector.
       It is our intention that the Fund be an example to other 
     private investment pools of capital that are considering 
     investing in the Russian Federation. Some of the experiences 
     of the Fund's management can be passed on to these potential 
     investors as an aid to their initial forays into this immense 
     country and her economy. In order to do this, however, we 
     recognize that we must do two things: first, we must approach 
     our investments with a long-term view of the prospects of 
     potential investments and of the private sector more 
     generally. Second, we must take care to develop standards 
     and criteria that are appropriate to the unique Russian 
     environment, and not attempt to impose what we are 
     accustomed to in the West for its own sake. Only if we 
     approach our task in this spirit will we succeed in making 
     worthwhile investments that will stand the test of time 
     and serve as a constructive example to other investors, 
     both Russian and foreign.


                                startup

       Before getting into some of the details of where we stand 
     now, I want to just briefly review what has been accomplished 
     over the past nine months in getting the Fund underway. The 
     startup process has been complex, and often frustrating. 
     Nevertheless, I believe that we have come a very long way in 
     a short time.
       Since September, when the Fund was incorporated, we have 
     concentrated on a number of key organizational and start-up 
     tasks to lay the groundwork for the Fund's investment 
     activities. This work took place in three distinct phases. 
     First, the basic scope of activity and legal structure were 
     agreed with the U.S. government. A wide range of contacts 
     were initiated with relevant Russian government entities to 
     clear the way for the Fund to initiate operations there. The 
     Board began the process of sketching out how the Fund would 
     pursue its goals and the attributes and responsibilities of 
     key staff, and the search for a president and other senior 
     staff got underway.
       In early January, after I was named as president, the focus 
     shifted to creating the personnel and administrative 
     infrastructure for the Fund and beginning to build the 
     networks and conduct the outreach that we would need to 
     identify and assess investment possibilities. Temporary 
     offices were opened in both Moscow and New York and permanent 
     office space was located. Staff was hired for both locations 
     such that the Fund now employs about 35 individuals of which 
     more than half are Russian nationals, nearly all are Russian 
     speaking, and most are based in Russia. A series of visits to 
     cities all over Russia were undertaken by Fund staff to meet 
     local businessmen and officials and familiarize ourselves 
     with the issues we would confront in undertaking investments.
       Beginning in March, within six months of incorporation, and 
     with staff and basic administrative support in place, we were 
     able to begin the process of reviewing proposals and 
     identifying concrete business opportunities consistent with 
     the Fund's mandate and philosophy. Many inquiries and 
     proposals from US and Russian companies had already been 
     received; these were responded to where appropriate with 
     requests for further information. Basic procedures for 
     submitting investment proposals to the Fund--emphasizing 
     accessibility and flexibility--were put into place. As of 
     today, the process of reviewing proposals and examining and 
     structuring transactions is fully underway.
       As mentioned below, we intend to complement our financing 
     efforts with technical assistance. In addition, we want to 
     leverage our own resources with co-financing by other 
     investors--Russian, Western, official and private. We will 
     also cooperate with the sister funds involved in Russia--
     the Fund for Large Enterprises in Russia, and the 
     Demilitarization Enterprise Fund. While these funds are 
     separately managed, and each of us has a separate focus, 
     we are cooperating wherever possible to economize.


                          program orientation

       The Fund is committed to working with businesses and 
     entrepreneurs representing the entire range of small and 
     medium sized businesses, from the smallest start-ups to 
     larger firms being modernized or restructured.
       At the smaller end, one of the Fund's first initiatives 
     will be a small business lending program for firms with no 
     more than a few dozen employees and often less than that. 
     Such loans could be as small as a few thousand dollars to as 
     much as $100,000. Maturities will be six to 24 months for 
     purchases of equipment or key inputs. Typical loans might be 
     to a small food processor or business services enterprise to 
     improve productivity or quality by upgrading equipment; the 
     loan would be paid back from the proceeds of the business. 
     For the most part, loans of the sort contemplated by this 
     program are not now available to small firms for these 
     purposes through Russian banks. Under this program, we will 
     work with Russian banks as partners and provide the great 
     bulk of the funding to support this lending.
       Aside from the direct and immediate benefits to small 
     businesses, a key objective of the program will be providing 
     training and experience to Russian bankers, which will 
     enhance the capabilities of the participating Russian banks 
     to locate small business clients and develop products to meet 
     their needs.
       The small business lending program will begin within the 
     next two weeks on a trial basis with two banks. Within a 
     month we expect to get a $2 million pilot program underway 
     with an additional 4-5 banks in 2-3 cities. By year end we 
     think it is certainly within the realm of possibility that 
     the program could grow to include several more cities, 
     another dozen banks and $10 million or more in loanable 
     funds. If we think in terms of an average loan size of $40-50 
     thousand, this implies a revolving fund supporting more than 
     200 loans at any one time. Depending on the success of the 
     program, it is conceivable its scope could be enlarged even 
     further. Eventually, we hope, the program will induce an 
     ongoing commitment to similar types of lending by Russian 
     banks on a much larger scale.
       A second major focus of our activities is direct loans and 
     investments in emerging small and medium sized companies. In 
     this case, the Fund is actively seeking out business 
     opportunities requiring investments that might range from a 
     few hundred thousand dollars up to several million. While we 
     will be flexible, we expect the typical enterprise receiving 
     support with this facility will have several hundred workers, 
     although some will be larger.
       We are open to and are actively exploring a wide range of 
     financial structures, including loans, loans with equity and 
     equity investments. In at least several cases, we are 
     actively looking for co-financing partners. We are looking at 
     investments in a wide range of sectors, all over the 
     Russian Federation. The process is, as you can imagine, a 
     painstaking one in an environment where there are few of 
     the traditional guideposts for investment decision-making. 
     Indeed, while we recognized this process would be labor 
     intensive, if anything we underestimated the extent to 
     which this is proving to be true.
       As of today we have developed a solid inventory of 
     proposals, 6-8 of which we are very actively pursuing as I 
     speak. These projects and others under consideration cover 
     sectors such as furniture manufacturing, apparel 
     manufacturing, chemical processing equipment, timber 
     processing, retailing, electronic components, food 
     processing, data processing, and telecommunications. They are 
     located throughout the country, including Moscow, St. 
     Petersburg, Nizhny Novgorod, Yekaterinburg, Omsk, 
     Novosibirsk, Chuvashia, Tula, Khabarovsk and Nahodkha.
       Without being repetitive, what I want to emphasize about 
     the Fund's activities to date are their breadth; we are 
     looking at proposals in many sectors, cities and of very 
     different sizes and structures. There is no limit to how 
     small a company in which we will invest either directly or 
     through our small loan program can be. The only real 
     requirement is that projects be sensible, well documented and 
     have a reasonable prospect for viability over time. It goes 
     without saying that to the extent that they are viable, they 
     will be profitable and will provide returns to the Fund, 
     returns which I want to strongly emphasize, will be 
     reinvested to broaden the scope and reach of the Fund's 
     activities over time. And if a project proves profitable to 
     the Fund, it should also be profitable for its Russian 
     partners as well as other partners, like you.


                          technical assistance

       So far, I have addressed mostly the financial side of the 
     Fund's investments. However, in all the Fund's investments, 
     ranging from small lending to larger equity or debt 
     investments, the Fund's goal is to combine financial support 
     with critical investments in human capital, training, 
     management systems and, where necessary, technology. In many 
     cases we expect that the human capital or technical 
     assistance component of the package will prove more critical 
     to the success of an investment than the financial capital.
       This technical assistance can take many forms. Help with 
     Western financial formats used worldwide is one important 
     need; aid in building to international design standards and 
     creating products that are acceptable to both the Russian and 
     the world consumer is another. In conversations with 
     potential joint venture partners it has become apparent that 
     these companies want to have feasibility studies made to 
     convince them of the viability of proceeding with major 
     activities in Russia. We intend to help in this area as well.
       A final example involves marketing of products produced in 
     Russia. The challenge of bringing products to a market in an 
     efficient, customer-driven manner was non-existent in the 
     past; consequently technical assistance in this very 
     important area, focusing on both the domestic as well as 
     the international market, is paramount to the Fund's 
     strategy.


                             joint ventures

       A word about joint ventures might be appropriate. As 
     representatives of American companies you may desire to take 
     advantage of the Russian market and its ability to 
     manufacture products at a lower cost with pride in quality 
     workmanship, and we at the Fund can help to share your risk 
     in investing there. I can visualize any number of specific 
     formulations or structures that have promise or potential and 
     that we are open to consider. For example, a Russian company 
     might supply the plant, equipment and people, the American 
     company might supply technical assistance sent as production 
     and design talent along with financial support, and the Fund 
     would provide a larger share of capital and expertise in 
     appraising and structuring the transaction. This new, jointly 
     owned business could be a brand new company offering a fresh 
     approach to the market for our Russian partner. We have been 
     looking at several projects like this and we are encouraged 
     with what we have seen.


                   activities in the russian far east

       With respect specifically to the Russian Far East, the Fund 
     is actively seeking investment opportunities in the region. 
     We have visited Khabarovsk on the Chinese border several 
     times, and Fund staff was there again just last week. We have 
     established excellent relations with the local business 
     community, bankers, officials and various Western groups, 
     including the Peace Corps. and the International Executive 
     Service Corps. We visit both Vladivostok and Khabarovsk again 
     next week and will open our Far East office shortly. We will 
     also be interviewing candidates for key personnel in those 
     cities.
       The Russian Far East is dominated by trading, fishing, 
     extractive industries and timber. It is an immensely rich 
     area with enormous natural resources and natural beauty, much 
     of which is underdeveloped. It obviously presents enormous 
     investment opportunities. The future of areas like the 
     Russian Far East will become increasingly important to the 
     success of the overall Russian economy. With these facts in 
     mind, I feel confident that the Fund will more than achieve 
     its goal of investing $40 million in this region.
       Obviously, some of the people in this room have experience 
     working in the Russian Far East. We at the Fund look forward 
     to working with you closely as we move ahead with investments 
     in this region.

                          ____________________