Ideas for Russian Business Aired on the Seine

(Moscow News – themoscownews.com – Nathan Gray – March 21, 2013)

PARIS – Before an audience of mostly French businesspeople in Paris on Tuesday, political and business representatives outlined the benefits and risks of conducting business in Russia at The Economist magazine’s Russia Business Summit.

Targeted at Western European investors, the event at times took on the air of a campaigning push to attract companies to the country, but speakers still identified problems in Russia’s investment climate.

One inexorable trend, which overlay much of the discussion, was the growth in the Russian consumer market and in Russians’ spending power.

“The appeal of Russia from a business or investment standpoint is obvious,” said Joshua Yaffa, a Moscow contributor to The Economist and one of the moderators. “The opportunities are huge and perhaps are only going to grow, especially as Russia shifts more into a consumer economy.”

The central issues for debate were how to harness this movement toward consumption in order to develop the economy and corporate performance in Russia, how big a role the government should take, and how to overcome the unpredictable and non-transparent regulation that prevents development of long-term investment strategies.

Questions of policy

While Russia’s accession to the World Trade Organization in August was a positive step in terms of fostering an environment for global rules to take root and foreign investment to grow, it was not the end point in the process, said Alejandro Jara, the organization’s deputy director general.

“There is a strong correlation that we have observed between accession to the WTO and foreign direct investment, if the countries do the smart thing and take advantage of it,” he said, citing sharp increases in FDI in China, Vietnam and Saudi Arabia following accession. “This is all potential – it will only happen if the obligations are implemented and the country adopts the right policies and modernizes its services…. Russia has a huge task ahead, maybe more difficult than the process of accession itself.”

Peter Balas, deputy director general for trade at the European Commission, said that Russia’s WTO accession was positive on several levels, not least for the EU due to the strong trading relationship.

He described the accession as “good news, but…,” the “but” element consisting either of inherited trade restriction measures that Russia has not abolished, or new measures that have been introduced.

“You might say that this is a lack of experience, and in some cases it might be so,” Balas said. “In other cases, it’s very clearly a question of policy.”

Citing a negative view of accession by Russian producers and the organization’s negative public image in Russia, he said the government’s retention or institution of protectionist measures were contradicting the accession agreement.

“The top Russian leadership has made certain promises that the liberalization commitment will be somewhat limited,” he said, “so there are new restrictions introduced.”

While Russia’s general attitude toward its commitments under the WTO has been positive, he added, in certain “sensitive sectors” it has retained protectionist rules, as in agricultural imports and – particularly important for EU members – exports of wood.

EU trade chief Karel de Gucht was expected in Moscow on Thursday and Friday to discuss these and other disputes, Reuters reported.

The government’s view

National policy is not the only determinant of Russia’s investment attractiveness. Igor Koval, director of investment policy and public-private partnership at the Economic Development Ministry, said that the sheer size of Russia meant that the investment climate varied between regions. Some, such as Tatarstan and the Kaluga and Ulyanovsk regions, get very good reviews from foreign companies for their business environments – reviews that are being taken seriously at the federal level.

“We have actually collected the best regional practices from a number of those pioneering regions and have put them together in a ‘standard for regional investment climate development,'” he said. “We have adopted that standard in 13 Russian regions at this point, and by the end of 2013, we’re going to implement it throughout the whole country.”

Additionally, Koval cited the government’s openness to business contributions to policy development, not only in the appointment of Boris Titov as business ombudsman in 2012, but also in the formation of policy “road maps.” These contributions, including assessments of the road maps themselves, are expected to strengthen the documents’ implementation.

Case studies

Representatives of companies doing business in Russia, as diverse as Bosch, Volvo, General Electric and port operator APM Terminals, were on hand to give their personal experiences.

The report of Jean-Francois Decaux, co-CEO of the JCDecaux outdoor advertising firm, reflected the two sides of conducting business in Russia. The company had had entry into the Russian market under consideration twice before finally investing in 2012, he said, buying a 25 percent stake with state bank VTB in the firm RusOutdoor.

Decaux praised the quality of much of Russia’s public administration, using Moscow as an example. The core of JCDecaux’s investment in Russia, he said, would be the application of infrastructure investment schemes in place worldwide, especially for bus shelters in Moscow: the company would finance the project completely, in exchange for a 15- to 20-year advertising contract.

“This kind of investment requires long-term contracts, simply because we don’t use taxpayers’ money,” Decaux said. “We use the advertising market to refinance those public services.”

The problem is that local authorities are not allowed to sign contracts for longer than five years, which impedes longer-term investment from a company the size of JCDecaux. A bill currently before the State Duma will, if passed, allow the extension of these contracts to 15 years, but, Decaux said, “The jury is still out.”

Still, Decaux’s experience has made him optimistic about the future direction of Russia’s attitude to foreign investment, an optimism felt by many of the contributors to the summit due to the country’s potential. What remains, as the WTO’s Jara said, is for Russia to take advantage of it.