The program for Russia: openness, investment, and reform

April 18, 2013

 

The investment world is looking for a safe harbor amid instability in the global economy, volatility in the markets, and a worsening of the debt crisis in Europe. According to the participants of The Russia Forum 2013, which is being hosted by Sberbank and got underway on April 18 in Moscow, Russia should exert maximum effort in order to raise its attractiveness to investors and business.

“Russia has both a grand and dramatic history. No other country compares,” said Herman Gref Chairman of the Board and CEO of Sberbank, at the opening of the event. Sergei Ivanov, Chief of Staff of the Presidential Executive Office, opened his remarks by reading an address to the guests and participants of The Russia Forum 2013 from Vladimir Putin in which the President emphasized that, “Today large-scale economic transformations are taking place in Russia, and it’s important to take into account positive as well as critical expert opinion.” Mr. Ivanov promised that Russia’s leadership would work on improving the nation’s investment climate and raising the quality of management, adding, “We want to make use of all the best practices from around the world amid the current uncertainty in the global economy.”

The focus of the plenary session titled “Turning point: Communism was Russia’s answer to the challenges of the 20th century. What can we expect in the 21st century?” turned out to be the problems currently facing Russia such as ineffective government administration, underdeveloped institutions and political systems, insufficient diversification of the economy, the need for new specialists, and the country’s infrastructure gaps. According to Tony Blair, ex-Prime Minister of Great Britain, the 20th century was one of absolute ideologies, while the 21st century will be the era of efficient government administration. Mr. Blair commented that “the ability to attract investment and the level of development of a society are related. The more open Russia becomes, the better people’s lives will be here.” Vaclav Klaus, ex-President of the Czech Republic, recommended that Russia not look to Europe as a model, as Europe itself is on the threshold of serious transformations. “The EU is looking for political and economic stability from Russia as well as steps toward parliamentary pluralism,” added Mr. Klaus. For his part, Charles Wyplosz, Professor of International Economics and Director of the International Centre for Monetary and Banking Studies, believes that Russia first and foremost needs to solve the problem of the rule of law. Li Zhaoxing, former Foreign Minister of China, recommended that Russia not choose between East and West, but rather remain itself. For this, it’s important to make innovative development and progress a priority, while monitoring the quality of the progress being achieved. “In China, we believe that the country belongs to the people and that the government is the people’s servant,” emphasized Mr. Zhaoxing.

During the plenary session titled “Investing in Russia: What Drives Investors Today?” moderated by Sberbank CIB Co-head Ruben Vardanian, the discussion focused on the necessity of serious changes in Russia. What is preventing an increase in investment? There are several reasons: both a lack of clearly defined rules and effective institutions, as well as

inconsistent management, and a shortage of domestic investors. Leonid Fedun, Vice President for Strategic Development and Management Committee Member of Lukoil, believes that the government will be dominant in a number of industries in the foreseeable future. Is that good or bad? It depends on how it’s done. According to Mr. Fedun, the situation will change around the year 2018, when Russia begins to experience a fall-off in oil production. “In terms of Russia, investors generally mention corruption as one of the main problems,” said Mark Mobius, Executive Chairman of Templeton Emerging Markets Group. Nevertheless, he believes that the role of the state can be very positive, as is the case in China, for example. Mr. Mobius added, however, that “it’s important that the state not act in a way that’s detrimental to minority shareholders.” Marс Samwer, CEO and Managing Director of the European Founders Fund, believes that Russia is the best emerging markets for brave companies which know how to take risks. Right now, the inflow of investment into Russia is not particularly impressive because private capital is concentrated in the U.S. and China.

The discussions during the afternoon sessions were devoted to the potential of Russia’s regions and the state of affairs in the commodity and securities markets. The panelists of the session titled “Tapping the Potential of Siberia and Russia’s Far East” talked about what is holding these regions back and how to attract maximum investment. The government, which recently passed legislation which will provide for RUB 11 trillion worth of investment into the region, is attempting to turn Siberia and the Far East into catalysts for the growth of the nation’s economy overall. Artem Volynets, General Director of En+, called for the development of physical infrastructure such as roads and electricity grids, business infrastructure such as hotels, airports, and aviation routes, as well as the development of the human potential of the region. Vitaly Nesis, CEO of Polymetal, shared his opinion that government investment often leads to a displacement of private capital and called for the creation of fundamentally new possibilities for conducting business in the Far East.

The lack of domestic investors and inefficient corporate management were among the discussion points for the panel session titled “How Can the Valuation Gap of Russian Companies Be Overcome?” Jean-Michael Six, Managing Director and Chief EMEA Economist for Standard and Poor’s commented that the outflow of private capital from Russia exceeds 10% of GDP, which speaks to a lack of trust among private investors. Russia’s curse is to be an economy based on raw materials, added Mr. Six. Anton Karazmin, Senior Vice President of Sberbank, expressed a more optimistic view of the future, “Everyone feels the desperate need for reforms, particularly those individuals who are the catalysts for those reforms.” The issue of the protection of ownership rights was also raised. Albert Ganyushin, Head of International Listings, NYSE Euronext said, “The Russian government must at least stop sending the market negative signals.”

The contours of the new paradigm in the commodity markets were traced by the panelists of the session titled “Commodities Markets: the New Reality.” According to Christof Reuhl, Group Chief Economist and Vice President of BP, a fall in the price of oil would force the OPEC countries to cut production. This would benefit Russia insofar as reduced commodity prices would compel the country to carry out reforms and develop at a quickened pace. Paul Robinson, Director of Multi Commodity Projects at CRU, forecasted rising metal prices and expects new technologies to emerge which will reduce costs without harming the environment.

Igor Shuvalov, First Deputy Prime Minister of the Russian Federation, answered questions from investors in the closing part of the Forum’s opening day. Mr. Shuvalov believes that Russia is currently not in a recession but there are unsatisfactory growth rates despite relatively high oil prices. The most important thing, according to the Deputy Prime Minister, is to not overstate the matter, fall into panic, and run off to stimulate the economy. Summarizing the discussions of the first day, Mr. Shuvalov took a philosophical tone: “Russia has its own path. We take the best from other cultures. Russia is not a country but a continent.”