RUSSIA’S JAMBOREE EVENT
REFORMS AND CALLS FOR MORE INVESTMENT
Dr James Warren 20 July 2011
Russia, once a constituent part of the Soviet/US bipolar superpower world has had a tumultuous journey both politically and economically in its post-Soviet history since 1991 and, like the vast majority of Europe, suffered badly from the banking crisis and subsequent recession over the last 2 years. Is it now doing enough domestically to stimulate and reform its economy to warrant further investment from foreign markets. Not yet a rival to the more influential World Economic Forum in Davos, the St. Petersburg International Economic Forum, held in June in Russia's second largest city, began life 15 years ago as the Nevsky Summit by discussing issues relating to integration after the Soviet disintegration and economic cooperation, in a bid to secure foreign investment in other Commonwealth of Independent States (CIS) members. At that first meeting, Russia agreed a loan of the equivalent to $100 million to Belarus. So what has changed in the intervening decade and a half, apart from the appearance of veteran pop star, Sting, at this year's annual jamboree?
RUSSIAN REFORM
The former Soviet republics are still in need of investment - foreign or otherwise and Belarus is in the midst of financial crisis. Russia itself is looking to secure deals and investments in a bid to fight its way out of the financial mire and the St. Petersburg Forum is seen, by those in positions of influence, as a way of demonstrating Russia's potential to foreign investors and a bid to emphasis Russia is moving forward and away from the more damaging spectres of corruption, bureaucracy, visa issues and state intervention that plague popular notions of a country that is all but alien to most. Manufacturing and foreign investment are key to Russia's economic recovery and, in his keynote speech at the St. Petersburg forum, the Russian Federation President, Dmitry Medvedev argued for integration into the global economy as one of the top priorities for Russia, and entry into the World Trade Organisation in 2011 with the caveat of an absence of political obstacles. In providing an air of optimism for foreign investors, Medvedev highlighted shortcomings in the current economic system and the requisite actions to improve it. Decentralising power is key he stated, to give up state control over some of Russia's largest companies such as Gazprom and Rosneft in a bid to stimulate the economy and also to fight the endemic corruption and cut the corporate tax burden. Furthermore, he called for the abolition of visas for foreign investors in a bid to stimulate income flow. Such measures will be a welcome sight to foreign investors, providing they become a reality and not merely rhetoric.
THE RESPONSE?
So what was the response to Medvedev’s reforms? It appears that both domestic and foreign investors left somewhat ‘heartened’ by Medvedev's speech which focused on reform. However, in a poll held by Sberbank at the St. Petersburg forum, businessmen were asked to cite 6 factors that hampered Russia's economic growth. Of those polled, corruption topped the list with 45% citing it as of primary concern. Second on the list was low competition, with 17% stating this as a significant obstacle for operating their business in Russia. A further 69% noted that reform of the judicial system and the battle against corruption as paramount. One could argue that the president’s speech resembled a manifesto to gain more political leverage for the upcoming presidential elections in early 2012, whether Medvedev cedes power to Putin is a different matter. Further uncertainty over who will run Russia come 2012 is also a source of potential volatility, particularly for foreign investors. It is all very well for Medvedev to outline policies that will get Russia moving in the global economic sphere, but will he be the one to guide her along this difficult path? Many investors - both foreign and domestic have had enough of the slow pace of reform and capital flight is still a significant problem with some $35 billion flowing out of Russia thus far in 2011. If Russia is to move forward, it would appear this pace must reverse and investment seen to be more inbound.
VODKA- A CASE OF ENTREPRENEURSHIP?
Medvedev argued that, 'we are not building state capitalism' and that private investors should be dominant players and the state should support private property and entrepreneurship. One example of such private enterprise- is Drova, a new entrant in the premium vodka market which is owned by the Organic Vodka Group. However the market is dominated by Russky Standart with 30% sales. Is there space for another player in the market? Oleg Krazimer, acting director of Finland's Saimaa Beverages of which Organic Vodka is a subsidiary argues that Drova's unique selling point is the lake from which water is sourced to make the vodka. There are plans to roll out their product to 62 regions but whether it’s an ambitious plan to become a major player in a tough market with even tougher economic times remains to be seen. Whether it plans to export to an even more crowded and competitive global market will depend much upon its success at home?
THE FIELDS OF GOLD
Russia is still dependent on its mineral wealth that is oil and gas as 56% of the world’s gas reserves are in Russia. The state is the dominant player however while corruption is still a debilitating facet, Russia will seemingly struggle to move forward to revitalise its economy with foreign investment. According to UNESCO, Russia may have the highest educated population among the BRICS countries, but unless it is able to utilise this population in the labour market, their value is severely limited and volatile. As Sting himself might question, is Russia awash with 'Fields of Gold' for investors, both foreign and private alike? Is "the current excessive use of 'easy money' as global inflation accelerates" a "dangerous policy" as Medvedev himself claims? Have your say….