Actions speak louder than words

At the 10th International Investment Forum in Sochi, Prime Minister Vladimir Putin declared that Russia is a reliable partner and a good place to do business, but investors remain skeptical.

Russian Prime Minister Vladimir Putin addressed the 10th International Investment Forum in Sochi on Sept. 16 and gave a typical Russian speech: technocratic, mired in detail and figures to one or two decimal places, with several digs at the West and only a grudging acceptance of Russia’s problems – and a complete absence of any inspiring vision of Russia’s future.The West’s problems, said Putin, show that it is not the world’s teacher, as it had assumed until the very recent past. Russia, on the other hand, feels very self-assured, with the third-biggest foreign currency reserves in the world after China and Japan, a far lower debt-to-GDP ratio than developed countries, no short-term corporate debt and quick reactions to unfolding events characterised by close coordination between the government, the Central Bank of Russia and regulators.This is not quite the whole truth. Russia was very late to recognize that problems in China, the U.S. and Europe would lead to problems in Russia, which still remains far too dependent on energy and suffered the biggest fall in GDP among the G20 during 2009.Despite its huge financial and economic problems, the West remains the repository of the best science, technology and innovation in the world, all of which Russia needs. But Moscow still refuses to declare the country “open for business” and work to attract cash-rich European, North American and Japanese companies with world-class expertise (or announce visa-free travel for tourists and businesspeople to stimulate and diversify the economy). It’s no wonder then that Putin forecast Russian GDP would grow at just 4 percent per year over the next three years.

Putin criticized the rating agencies for their evaluation of Russia, but said it was good that they showed the country its shortcomings. Again, this view is divorced from reality because both western and Russian experts have been telling the authorities for 20 years that the country needs to improve its investment climate by introducing the right laws and incentives and sharply reducing corruption and bureaucracy.

Corruption, Putin claimed, occurs everywhere, including in developed countries, although he admitted it was worse in transitional economies. But in fact, the scale of corruption in Russia is vastly greater than the level in Western countries.

The reluctance to admit fully to failings is typical for Russia, which focuses instead on alleged and superficial similarities between individual cases of crime and corruption. Both Putin and President Dmitry Medvedev have, for instance, compared U.S. financier Bernie Madoff’s huge fraud with the alleged crimes of Mikhail Khodorkovsky’s, overlooking the fact that no one suspects that Madoff was arrested for political reasons.

They believe this approach bolsters their own authority and fends off international criticism, while at the same time avoiding the unwelcome conclusion that there are profound systemic differences in the rule of law, governance and democracy between developed and developing countries.

Speaking after Putin, Alexander Tkachev, the governor of Krasnodar Territory, gave a good indication of Russia’s other perennial problem – bureaucracy. He pointed out that many problems could not be solved at the regional level or were delayed inordinately due to interference from federal authorities.

In the 1990’s, former Russian president Boris Yeltsin told the regions to take as much sovereignty as they could swallow to free them from Moscow’s heavy-handed control, but under Putin, a major recentralization has taken place which, in conjunction with bureaucracy and corruption, forms a very effective barrier to investment and business. Tkachev therefore pleaded for more regional autonomy on the business and investment front, but it remains to be seen whether the government really will cut some slack.

Another typical feature of Putin’s address and Russia’s approach in general was the emphasis on big projects under government control and the virtual absence of ideas to develop small and medium-sized businesses, which account for over 60 percent of developed economies.

Kirill Dmitriev, CEO of the Russian Direct Investment Fund, a Kremlin-backed sovereign wealth vehicle with $10 billion of government money, appeared on the panel with Putin and reminded the audience that Russia was the sixth-biggest economy in the world. The fund intends to invest in major projects together with foreign partners and to attract highly experienced international investors to its expert advisory council. The hope is that this will meet concerns about investing in risky Russia.

But it is hard to see how Russia can attract the serious investment it really needs given the high level of flight capital from Russia and when, as another panelist, Andrei Nikitin, pointed out, one quarter of Russians would like to emigrate, according to opinion polls. Earlier this year, Sergei Stepashin, head of Russia’s Audit Chamber, claimed that 1.25 million Russians had actually left the country in the last several years – including many of Russia’s best and brightest.

Putin did, however, strike some positive notes for investors. The government, he said, had no intention of creating “state capitalism,” but would withdraw from state-owned companies as soon as they were strong enough to compete on their own both in Russia and internationally. He explicitly backed U.S. President Barack Obama’s call for companies to invest to stimulate the economy, but in Russia, as elsewhere, investment will not occur if politicians cannot get the overall framework right in terms of both the economy and the law. Putin also saw some positive signs in Europe – for instance, Italian Prime Minister Silvio Berlusconi’s decision to push through austerity measures because it was the right thing to do, although many people objected.

Putin also maintained “there was no need to fear Russia, we are civilized partners” – without actually asking how this image had arisen in the first place. Most international investors doubtless believe that the rhetoric and high-profile events since 2000 belie that view.

So if Russia is serious about international investment, Moscow needs to start sending more positive signals to the outside world by concrete action. That means, as with Skolkovo, improving the general situation across the board rather than going for ad hoc and piecemeal solutions at the microlevel.

For the moment, however, the constant reluctance fully to admit problems and blame others, poor economic understanding and innate conservatism are still preventing real change.

Ian Pryde is the CEO of Eurasia Strategy & Communications in Moscow

Published by Russia Beyond The Headlines at

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