Investment climate factors in the balance.

25.10.2011

Has the government been doing anything in recent years to improve the investment climate? It certainly has - but many of the measures will have little or virtually no effect because there are still factors hampering normal investment operations. The multitude of “pros” are balanced by weighty “cons”. It is still difficult today to predict which of these factors will ultimately be of decisive significance for the economy’s development over the next ten years. The “pro” side of the scales has recently been seeing more and more arguments in favour of a new wave of investment.

The Skolkovo project for setting up an innovation centre with an unprecedentedly beneficial legal framework for investors is setting the tone somewhat. Many major market players are already prepared to take part in the centre’s work. The Skolkovo Development Fund has signed memoranda of intent with Microsoft and Nokia Siemens, EADS and Alstom, as well as a number of other companies and educational institutions. This is quite a narrow sphere but, it must be admitted, a very important one from the image point of view.

It was recently announced that a Russian Direct Investment Fund was to be set up for supporting major investments from abroad. The Fund is to provide for state participation in co-investment projects -- up to purchase of 25% of the shares. The state must also share all the risks with the investors. I believe this mechanism might be helpful for implementing large-scale projects requiring serious financing.

The work to create a financial centre in Russia should also be taken into consideration. Consolidation of trading floors, with MICEX gradually swallowing RTS, is an important trend. For the purpose of exercising unified control over the financial services markets, the Russian Insurance Supervisory Agency has been absorbed into the Federal Service for the Financial Markets.

Let us also note that the privatisation programme is being consistently implemented. As anticipated, certain major state-owned assets have come under its umbrella: for instance, the company Sovkomflot, VTB Bank and others. It must be admitted that, in this area, the government is keeping its word.

One more important measure is the recent ratification of the International Convention on simplification and harmonisation of customs procedures. Work towards the Russian Federation adhering to the Convention was launched in 2005 -- and it has been a thorny path. Adherence to the Convention means, in essence, acceptance of the relevant obligations for implementation domestically. Theoretically, this should facilitate goods flows across customs frontiers for investment purposes -- though it is difficult to predict how things will turn out in practice.

Employment has been simplified for highly-qualified foreign specialists: it is easier to obtain visas for them and their families. The new procedure will undoubtedly be more convenient for both foreign companies doing business here and for Russian employers needing to engage specialists from abroad.

Finally, a few words about the most recent steps. I would note especially the Presidential instructions, approved on 30 March 2011 by the Commission for modernisation and technological development of the Russian economy. These might well be called the “March Theses”. The instructions include, in particular, cutting contribution rates for mandatory pension, social and medical insurance from 1 January 2012. It is also proposed to institute a special procedure for considering petitions relating to corruption, local insurance representatives and mobile Presidential reception centres. The idea is that these people will rapidly resolve investors’ problems (and those of Russian businessmen too, I hope) without getting bogged down in obtaining approval from various departments or disputing with them. We will just have to wait and see.

Now let us take a look at the changes in federal laws affecting the business climate. Over the last eighteen months, quite a few useful innovations have been introduced into these laws. For instance, participants in limited liability companies and shareholders in joint-stock companies are now entitled to conclude corporate agreements with one another. Positive changes have been made to the legislation on insolvency (bankruptcy). Zero customs duty and VAT rates have been introduced for importing high-tech equipment into Russia provided it is not manufactured domestically. Federal laws have been passed on insider information, prohibition of market manipulation and clearing. Amendments have been made to the federal law on concession agreements to make it more applicable in practice.

All these measures could have a positive effect on the inflow of foreign investment. But the side of the balance holding the “cons” is still heavy. It must be admitted that business still shoulders a heavy tax burden, including social security contributions. Corruption is rife among officials working in administrations at various levels and providing for practical implementation of investment projects (connection to electricity, gas and heat supplies, formalisation of construction processes, etc.) and, so far, combating it has proved ineffective. Mention might also be made of the unfounded or evidently prejudiced court rulings, which send out serious signals to investors.

So what is the outcome? The investment climate in Russia is “very bad” according to President Medvedev, speaking at a modernisation conference in Magnitogorsk. What exactly does that mean? It means that it is simply very difficult to conduct business here. Difficult because of corruption; difficult because of bureaucracy; difficult because it is hard to determine who is for you and who is against. On the other hand, I do not personally agree that the investment climate is “very bad”. True, it is not all honey, but there is investment, and not only in oil and gas. What about Pepsi, Danone, Boeing, and so on? There are hundreds of them. Foreign enterprises are currently actively buying up Russian ones. The capital outflow, I do believe, can be stopped. It is possible.

According to the annual UNCTAD (United Nations Conference on Trade and Development) Report published recently on global investment, in 2010 the inflow of direct foreign investment into the economies of Eastern Europe, including the CIS, increased somewhat, with the growth of such investment in Russia’s economy amounting to 4.7%. For comparison, the respective figure for Ukraine was 1.7%.  In general, there are grounds for moderate, very moderate optimism.  The same Report also notes the key factors for a successful foreign trade policy. These are liberalisation and stimulation of direct foreign investment. Even so, the Report goes on, there remains a danger of investment protectionism deriving from the restrictions and administrative procedures accumulated over recent years. 

The Russian government should evidently bear this last comment constantly in mind, as it will be applicable even if we encounter another wave of crisis -- of which there are already some signs. Development of the global economy is currently unstable. Yet this is hardly likely to change the perception of the conditions required for a favourable economic climate.

In general, every investor, when putting his money down, would like to be sure that no-one will take it off him, that the police will defend him and justice will protect him from being cheated by either his partners or the state, that no bribery will be necessary. Ask yourself: will implementation of all the President’s March Theses provide such confidence?

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