[A-List] Russia: prospecting by UK capital

["Michael Keaney" <michael.keaney@xxxxxx>]

To Russia with hope. Warily, the bear opens its arms to overseas investors
Will this week's trade mission make UK firms more willing to venture into
the East?
By Mary Dejevsky in Moscow
The Independent, 11 October 2002

Another key package of reform legislation - the deregulation of the national
power grid - is finally on its way through the Russian parliament. The bill
had its long-awaited first reading this week and was approved by a sizeable
majority after a ferocious debate and much backroom bargaining. After two
more readings, it should be signed into law by the year-end.

The break-up of the power grid, together with the law permitting sales of
farmland which was enacted in May, are crucial elements in the painful
transition of the Russian economy from the chaos of failed central planning
to its functioning as a "normal" market economy.

Regarded by many Western analysts and Russian business leaders as the
minimum needed to make Russia's nascent economic revival irreversible, these
measures remain highly contentious among the population - which is why their
reception has been wary rather than euphoric, and why Western investors are
still hesitant to commit themselves to Russia. Among the most hesitant of
all have been the British. So the visit this week of British business
leaders under the auspices of the CBI can be seen as a straw in the wind.

The occasion was the annual UK/Russia round-table, the sixth year that it
has been held. But the seniority of this year's representation set it apart,
as did the fact that the CBI has now established a formal link with the
Russian Union of Industrialists and Entrepreneurs - a group with roots that
go back into the elite of the late Soviet era, now led by some of Russia's
richest, most influential and ambitious "oligarchs".

There was also a noticeable shift in the composition of the British group.
As always, the oil and gas sectors were strongly represented. But there were
senior representatives also from banking - Barclays Capital, Citibank - and
from consumer-orientated companies, such as Tesco. Moreover the group was
led by the president of the CBI, Sir John Egan, and the director-general,
Digby Jones, who were both making their first visits to Russia.

Sir John professed himself fascinated and excited by what he was seeing and
hearing, which included presentations by more adventurous European
investors, such as Ikea, whose biggest store, in terms of size and turnover,
is on the outskirts of Moscow.

Almost 11 years after the collapse of the Soviet Union and four years after
what Russians refer to simply as "the crisis" - the 1998 debt default that
left banks insolvent, the rouble sharply devalued and foreign investors
scurrying to leave - Russia still presents would-be investors with a
dilemma. On the one hand, Moscow and its immediate area are experiencing a
minor consumer boom. On the other, it is mostly domestically generated and
geographically limited. And while there are signs that Western business
confidence is starting to return, this is not happening nearly as quickly or
strongly as many in Russia had hoped.

Moscow's business constituency, which has flourished largely by risk-taking,
finds it especially hard to understand why foreign investment and even
interest are so scarce when the country's recent economic indicators, on
paper at least, are so exemplary.

Russia has largely escaped the ravages of the global recession. Partly, it
has been insulated by its relatively low level of exposure to world trade;
another reason is the escalating price of oil. The country is expected to
end the year with its current account, its domestic and foreign trade
budgets all in surplus and a growth rate running at more than 4 per cent.

That is lower than in the past two years, but still higher than most of its
East and Central European competitors. If, as expected, it pays off the
$17bn (£11bn) in foreign debt that falls due next year, this will leave
Russia's indebtedness at no more than 38 per cent of GDP- one-third that of
Italy's. At about 14 per cent, the inflation rate is still high, but
slowing.

A third reason for Russia's strong performance is higher tax revenue. A
reduction in the basic rate of income tax from 34 to 13 per cent - the
lowest in Europe - produced a sharp rise in revenue as more people
legitimised their black-economy income and paid up. Compliance is still
poor - the black market accounts for 40 per cent of GDP - but the trend is
positive.

Legal protection for investors and business is also improving. Western
lawyers practising in Russia say that the odds are no longer so stacked
against foreign companies, which have started to win cases on appeal,
especially tax cases. Property rights , while still alarming fluid on paper,
are settling down, and one big source of friction - conflicts between
federal and regional regulations - is much reduced. "It's not nearly as
'wild east' out there as it used to be," says one Western consultant.

Wages, with a few lamentable exceptions at regional level over the summer,
are being paid on time, and there is a new sense of political stability that
reinforces public confidence in the economy. President Vladimir Putin's
popularity ratings stand at an unprecedented 70 per cent and he is seen as
being on course for re-election in two years' time. To be able to look even
six years ahead allows for planning that in recent Russian experience counts
as long-term.

The evidence is in the cities and on the streets. In Moscow, new shops and
restaurants open almost every week. The latest big venture in Moscow is a
vast Auchan hypermarket every bit as diverse in its offerings as the stores
outside Paris. Ikea has one of its largest outlets on the edge of Moscow.

Russians are better dressed, better nourished, better supplied than I have
seen them in more than 25 years of visiting this country. Of course, as many
correctly warn, Moscow is another world, "a foreign country", compared with
the rest of Russia. But improvements are showing not just in what is known
as "European Russia" and the visible money now is less flashy and more
widely distributed than it was before the 1998 crash.

So why is Russia not flooded with Western investment? One reason is bad
luck: Russia's "green shoots" appeared just as the Western economies fell
into recession, and Germany, a major investor in Russia, has woes of its
own. The psychological impact of the 1998 crash on over-optimistic and
over-trusting foreign investors should not be underestimated either.

But one peculiarity of Russia today is that many of the positives also
conceal negatives. Russia's most reforming economists and successful
entrepreneurs regard Russia's budget surpluses as an over-reaction to the
1998 default and a brake on the sort of healthy borrowing that is needed for
growth.

Legal and regulatory procedures may have settled down, but the attendant
bureaucracy has been curbed only slowly. The number of signatures required
to set up a company may have been cut from 50 to 15, but that is still 15
opportunities to solicit a bribe. Although the racketeering,
contract-killing and kidnapping have declined sharply since the early
Nineties, bribery is again on the increase, according tothe anti-corruption
group, Transparency International.

But with a mortage market about to take off, the personal banking and
credit-card sector inching out of its post-1998 malaise, and the market for
food and consumer goods far from saturated, even in Moscow, there are good
reasons for British companies to dip a toe in the Russian market.