AKRIHIN, Russia -- This factory town on the outskirts of Moscow, built around a massive chemical plant bearing the same name, is now frozen in a series of Catch-22s gripping Russia's pharmaceutical industry.


Raging inflation has squelched consumer drug purchases, although demand is believed to be high and supply inadequate for most products. Concurrently, the old Soviet distribution system and fat state subsidies are disappearing, with no apparent successors.


Such market conditions have left this factory's warehouses filled with unsold medicinal raw materials and threaten the jobs of this plant's 3, 500 workers. Many workers have been "temporarily" laid off under "privatization restructuring". Akrihin is by no means alone.


Despite this almost unworkable situation, most Western drug makers say they must be here, at least to maintain a market presence. Some, who are optimistic, have even invested.


"In pharmaceutical terms, these markets are the future, but the market we had yesterday is not the market we have today. Nobody knows what the real situation here is now", said Jeffrey Lack, general manager CIS Region, for Bristol-Myers Squibb, the New York-based drug maker, a partner with Akrihin in a new $5 million pharmaceutical plant.


Production of Capoten, a cardiovascular drug, began last week after a year of negotiations, and then a year of construction during which 16 Russian workers were trained to strict Western standards.


The plant can produce 2. 2 million packages of Capoten (40 tablets a box) annually with one shift. But once produced, will this drug sell?


Drug makers here say inflation has forced consumers to focus on food purchases and revert back to traditional, cheaper herbal medicines. Consumption may not be dropping in hospitals and medical clinics, though.


"The alleged drastic drop in medicine consumption is untrue. Consumption has dropped at the local apothecary, but hospital consumption remains on par with 1991 levels", Alexei Ulukayev, senior economic adviser to Russia's cabinet of ministers, said last week after a briefing by the Ministry of Health.


Still, consumption now doesnt mean purchasing power tomorrow Russia owes Western drug companies more than $300 million for sales made last year. This year the government allocated more than $2 billion for medicine purchases. Lack says the government will likely not buy more than $750 million.


Thus, Bristol-Myers Squibb may be one of the lucky ones. When it launched its investment, market conditions were relatively normal.


But since chaos engulfed this market few Western producers have moved towards production ventures, because many still haven't been paid and the cash-strapped government is unable to support new investment.


"Now, it's a very risky business. We're all faced with the same situation", said a representative of Ciba-Geigy, the Swiss drug maker. The company produces Voltarin, an anti-inflammatory, through a joint venture, Suramed, and sells it for hard currency.


Johnson & Johnson has started construction on a plant in Belarus to produce estrogens, and Upjohn says it plans to manufacture here. Other than that, there have been few comments or announced deals by drug companies.


Besides high risk, manufacturing barriers include inadequate domestic packaging and inconsistent local raw materials, nebulous patent protection and high education costs for training local workers. Virtually all materials and equipment, for now, must be imported and finished products are usually sold for rubles. Manufacturer's also fight old attitudes. The Soviet Union purchased half of its medicines abroad, many from Eastern Europe and India through barter deals for fuel. As a result the market here is largely low quality and generic, a philosophy reflected in domestic production.


"It's a totally different operating principal here. GMP (Good Manufacturing Practices) means quality and quantity. Here they were looking only at quantity", said Dr. Walter Prechel, director of technical operations in Russia for Bristol-Myers Squibb. The company's gleaming manufacturing facility here boasts strict sanitary rules and quality standards -- in stark contrast to Akrihin's surrounding dilapidated buildings.


The plant was built by Bristol-Myers Squibb but is operated under a cooperation agreement. It is not a joint venture, rather more of an export arrangement for the Western partner.


"Because it's a simple agreement, it works", Lack said. He said his company only makes a small margin on imported raw materials and packaging but now has a "foot in the door". The company's next step is to build its own factory on Akrihin's territory to produce injectable and possibly chemotherapy drugs.


"A step-by-step process is very, very important. Unfortunately, it may no longer be the way you can do it today", Lack said.