Thomas J. Donohue, President of CIPE and the U.S. Chamber of Commerce, traveled to Russia last September to participate in a high-level roundtable discussion on the business climate in Russia. Organized by CIPE and the Russian Federation of Chambers of Commerce and Industry, the roundtable discussion attracted some 80 participants.
In his remarks to the group, Donohue stated that investments by American companies in Russia could amount to billions more dollars if the Russian market were open and transparent. He noted that Boeing has already invested more than $1 billion in the Russian economy and that Lockheed Martin has been financing a number of aerospace projects there. In addition to stimulating the economy, these investments have been creating jobs and enabling highly skilled Russians to remain employed in Russia, thereby averting a "brain drain" of some of the country's most valuable human resources.
The petroleum and natural gas sectors are also major areas of American investment, Donohue noted. American companies are contributing substantially to Russia's ability to produce, process, and transport fossil fuels. U.S. firms have long been active in the field of insurance and financial services, he continued, and consolidations and mergers of insurance and financial companies with Russian firms are a future possibility.
In the same vein, agribusiness is an area where there is considerable potential for growth. American investments are already being used to supply equipment, seed stock, and mineral fertilizers to this sector.
According to Donohue, future American-Russian business relations will be defined by such factors as protection of investors' rights, market openness, and transparency. In addition, he urged, the Russian business community needs to adopt international standards of accounting. With further progress in these areas, Donohue predicted, cooperation and investment by the American and Russian private sectors will continue to grow.
Roundtable participants identified several key factors that currently shape Russia's investment climate. First and foremost is the importance of developing financial mechanisms capable of converting personal savings into investment. There is a clear relationship, they said, between foreign and domestic investment: It is necessary to cultivate domestic investment in the Russian economy in order to attract foreign investment.
The second key factor is the widespread myth that a good investor is one who provides money as a sponsor and asks nothing in return. A major impediment to foreign investment in Russia, participants noted, is the poor quality of corporate governance that exists in the country. As a result, only major foreign corporations that are capable of protecting themselves legally and politically can survive in the Russian market.
Finally, participants pointed out that Russia has lost a considerable amount of investment over the past decade as potential investors encountered the "anti-investment" elements of the Russian market and took their investments elsewhere. The main challenge facing Russia over the next 12 to 18 months, they said, is to reverse this trend and make the changes necessary to attract and retain foreign investment.
Andrei Illarionov, Director of the Institute of Economic Analysis, a CIPE partner in Russia, discussed the link between quality of government and the business environment. He identified five major categories that can be used to evaluate the quality of government:
Illarionov stressed that the protection of ownership rights is the cornerstone of a market economy, and that rights of financial assets owners are no less important than are the rights of property owners. He attributed the crisis of August 1998 to large-scale government confiscation of financial assets.
According to Illarionov, the Russian Government has taken a number of actions in recent years that have damaged the business climate there. These include:
Maintaining an unrealistic exchange rate infringes on businesses, Illarionov said, by increasing the tax burden and decreasing the competitiveness of domestic producers in local and international markets. Illarionov also stated that recommendations of the International Monetary Fund to increase the tax burden are unrealistic and counterproductive in that they result in an out-flow of resources from the private sector to the government.
Aleksei Ulyukayev, Deputy Director of the Institute of Transition Economy Problems, focused his remarks on the relationship between government economic policy and the investment climate. He pointed out that prior to the 1998 financial crisis, Russia's economy was characterized by high risks and high yields. In the wake of the crisis, all forms of investment in Russia have declined abruptly, while the level of risk has remained extraordinarily high.
Ulyukayev noted that foreign investors have a distinct advantage over domestic investors in that they are fewer in number and operate with larger sums of money. As a result, they are able to find a highly placed patron in the Russian Government to whom they can turn to help resolve problems. The plight of Russian entrepreneurs is exacerbated by the numerous government departments with which they must interact. There should be a single "window," Ulyukayev said, through which the entrepreneur can interact with all regulatory and oversight authorities. Moreover, he argued, the rules governing this interaction, such as the period of time necessary to process applications, should be explicitly stated and followed.
Andrei Klepach, Deputy Director of the Development Center, noted that there has been actual growth in Russian industry, particularly in those sectors associated with final processing, such as food and machinery. This growth is largely attributed to the devaluation of the ruble which, in turn, has led to more competitive pricing. At the same time, however, the scale of import-substitution has been lower than expected, he said, apparently due to insufficient product quality, inadequate inventories, and an inability to organize sales.
Whether industry is able to capitalize on this opportunity depends both on industry and the government, Klepach maintained. Among other things, effective mechanisms for "filtering out" unprofitable enterprises is badly needed. Considerable machine and equipment wear call for higher levels of investment, Klepach noted, including investment provided through Russia's banking system. Other sectors, such as metallurgy and petroleum, need foreign loans to provide a sufficient level of financing.
Alexander Panikin, Director of Paninter, a Russian textile company, emphasized that investment alone is no guarantee of success. Invest-ments may not be used effectively, particularly as long as inefficient producers remain in the market. Regarding the large proportion of "gray" business in the Russian economy, Panikin stated, "The shadow economy helps people survive, but it doesn't let the economy develop." Panikin also pointed out that unmonitored financial aid does not help society because its use is controlled by bureaucrats whose interests do not necessarily coincide with those of society in general.
Timofei Nizhegorodtsev, Director of the Moscow-Helsinki Group's "Entrepreneurs for Legality" project, also commented on the absence of checks and balances in the Russian system, especially in the relationship between business and the judicial system. According to Nizhegorodtsev, high-ranking Russian officials always have business interests of their own and, in the absence of an effective judicial system, there is nothing to prevent them from manipulating the system to their personal benefit.
Nizhegorodtsev also called attention to domestic entrepreneurs' relative lack of interest in developing civil society. When faced with a choice between paying off an official or investing funds in the development of civil society, the entrepreneur has almost always chosen to "invest" in the official. Only recently, Nizhegorodtsev said, has there been a gradual recognition that, while officials come and go, civil society remains.
By all accounts, the roundtable discussion on the business climate in Russia was highly successful. Concluded Ivan Lazarko, President of the National Association of Stock Market Participants, "We need to hold these kinds of discussions more often because they can help us to shape a contract between business and government." In turn, he said, this would enhance Russia's investment climate, strengthening and expanding the Russian economy, and improving the quality of life for Russia's citizens.
| Coming Soon . . . As Russia prepares for the first presidential elections of the new century, CIPE is actively working with its Russian partners to promote issues that are crucial to Russia's democratic and economic development. A number of events are currently being planned to support this effort.
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