RS Especially for web Summary of the Petersburg Forum: The President knows how to attract investors

Summary of the Petersburg Forum: The President knows how to attract investors

© RIA Novosti, Alexey Nikolskiy
Vladimir Putin, Presindet of Russia,
speaks at a plenary session at XIV International Economic Forum in St Petersburg

In the near future it is possible that more than 360 billion dollars will be invested in the Russian economy. Contracts for that exact amount were signed at the St. Petersburg International Economic Forum which recently wrapped up. Last year the amount of signed contracts totaled 338 billion dollars.

Investments are the main priority

Vladimir Putin articulated the development strategy for the country over the course of the next six years on the very first day of the forum. Investors were expecting that the leader would lay out a “road map”, meaning that he would outline the upcoming reforms, economic strategy and plans for promoting entrepreneurship; therefore a capacity crowd was anticipating Putin’s speech.

The government leader pointed out that the number of investors desiring to invest in the Russian economy almost doubled over the past year. The president confirmed this figure by referring to surveys completed by “respected international companies” which state that last autumn out of 150 surveyed companies only 25% expressed a desire to invest in Russia, but already as of this spring that figure increased up to 48%. “We would like to count on direct investments, on capital which covers strategic projects”, - declared Putin. The president did not forget to mention that in 2011 the growth rates of foreign investments reached 22%.

Almost 53 billion dollars of direct foreign investments (DFI) came into Russia last year, but “that is not close to enough and we are already setting the bar at 70 billion for this year”, declared Andrey Belousov, the Minister of Economic Development of the Russian Federation, at the 2012 St. Petersburg International Economic Forum. He added that in the future the government is intending to boost up that statistic. “If there will not be a crisis we are planning to increase {this statistic}; why should we stop”?

The authorities are planning on attracting investors by improving the investment climate. The president reiterated this task, which was already formulated in April, by saying that by 2020, Russia should crack the top 20 for countries with a comfortable business environment. In the current World Bank Doing Business ranking, whose compilers research how government regulation impacts the activities of small and medium-sized companies; Russia occupies the 120th spot out of 183 countries.

The traditional promise to improve Russia’s business climate can now be practically outlined quite clearly. For example, three “road maps” for the most problematic areas have already been prepared (there are ten total areas in the World Bank rating): access to power grids (the Russian Federation is dead last in this area), construction regulation (Russia found itself in the 178th spot) and customs procedures (160th place).

Promising stability

Macroeconomic stability is yet another argument in favour when considering attracting investors’ funds into Russia. Nobody is ready to promise that Russia will be a ‘calm harbour’, as was the case during the crisis in 2008, but the authorities are predicting that there will be small, stable growth.

In 2011 inflation in the Russian Federation amounted to 6.1% (the lowest it has been over the past two decades). The country’s government debt is 9.2% of GDP, which is the lowest level amongst all BRICS and “Big 8” countries. However, Vladimir Putin emphasised that “macroeconomic indices do not give one a reason to experience a feeling of euphoria. The fraction of old production capacities is quite great; the dependency on energy commodities is still high, while corruption is even more dangerous than a decrease in oil prices. Putin pointed out that “the domestic economy is vulnerable and susceptible to risks”.

In order to ensure a higher level of macroeconomic stability, the president promised to adopt a new budget rule: the volume of obligations, budget expenses and long-term investment programmes with government involvement will not be linked to the current price of oil. Expenses will be planned using as a benchmark the base price of oil averaged over the last five years in 2013, six years in 2014 and so forth, up to the next 10 years. Additional rent income will be funneled into reserve funds.

Creating a risk-forecasting system which will allow Russia to minimise the consequences of external shocks is yet another measure aimed at maintaining and multiplying investments. The government is entrusted with coming up with such a system.

The business world will have its own ombudsman

In the near future, a businessmen’s rights commissioner, who will protect the interests of Russian and foreign investors, will take office for the first time in Russia. Boris Titov, the head of “Delovaya Rossiya (Business Russia)” will be the ombudsman. He will obtain the right to defend companies’ rights in court, suspend departmental rules and regulations based on court decisions and if necessary, take matters to court to immediately put a stop to certain government officials’ actions.

Boris Titov declared that he is intending to accelerate the process of reexamining criminal cases brought against businessmen. Additionally, he is attempting to adjust legislation so that criminal cases are not brought against businessmen unless there is a civil court decision.

Next stop: New privatisation

There were perhaps two other important topics besides attracting investments at the 2012 St. Petersburg International Economic Forum: searching for ways out of the economic crisis (primarily for Eurozone countries) and the upcoming new wave of privatisation in Russia.

Vladimir Putin stated that “the government will withdraw from numerous sectors of the economy and assets. Analogous privatisation plans are to be approved on the regional level too. But the president warns that these plans are not supposed to manifest themselves in shares-for-loans auctions and dubious transactions which were commonplace in the 90’s. The government leader emphasised that “it is difficult to gain the respect of society for shady business deals resulting in property changing hands”. Putin said that during the new privatisation, property should be sold to the best buyer (including one who will develop production) and at the highest price.

However, according to Aleksey Kudrin (the former Minister of Finance in Russia), it will be nearly impossible to receive maximal funds during the new privatisation. He believes that the time to optimally privatise Russian assets has already passed since “it is already too late. Prices have decreased by approximately 30%”. Also, in the next three to four months as the situation in the world economy will continue to degrade, “it will only get worse”.

Internal resources

If foreign investors on the backdrop of the crisis are unwilling to invest money in the Russian economy, then the authorities will seek out resources for privatisation within the country. Two such long-term money resources already exist: citizens’ pension savings and National Wealth Fund resources.

Putin is quoted as saying at the St. Petersburg International Economic Forum that “it is about time to start funneling part of citizens’ pension savings into long-term bonds for financing infrastructure projects”. The president clarified that the pension savings which need to be invested in long-term and reliable projects (those which will keep the pension savings of future retirees intact) may exceed 4 trillion roubles by 2015. Putin clarified that “it is important to ensure that these funds set aside will be profitable. We will think this issue over and will make decisions only if both of these conditions can be satisfied”.

As of now, pension money is being spent on buying US and European bonds and it is by no means linked to the Russian economy; therefore such a decision would be more than reasonable. The most important thing is to determine a mechanism which will maintain and multiply such investments.

The National Wealth Fund was set up to finance the deficit in the country’s pension budget. Igor Shuvalov, the First Deputy Prime Minister, stated at the St. Petersburg International Economic Forum that he does not rule out the possibility of using part of the National Wealth Fund resources for purchasing privatised shares belonging to government companies. He is banking on multiplying such shares and returning them in the future. For the past few years government officials have been discussing moving away from the conservative investment policies of the National Wealth Fund, which are intended for covering the pension system deficit, in order to invest part of this money in more profitable and risky assets within the country. A decision is to be made by the end of 2012.

Maria Selivanova
Economic observer for RIA Novosti
Special for RS