Putin backs moves to improve Russia’s investment climate.

May 29, 2014 3:53 pm

Putin backs moves to improve Russia’s investment climate

By Kathrin Hille in Moscow /Financial Times / http://www.ft.com/intl/cms/s/0/9b7592ac-e738-11e3-aa93-00144feabdc0.html?siteedition=intl#axzz33B1nYzfV

When Lanxess, the German chemicals maker, tried to get the Russian city of Dzerzhinsk to supply power to the industrial park where it planned to build a factory, nothing happened for five years. But after bringing the problem to the federal government’s attention in 2012, everything suddenly became very easy.

“Within two days, everyone from the vice-minister level down promised that they’d help, and within six months, the transformer was built,” says Georges Barbey, the company’s general director for Russia. “It is possible to get good conditions for investment in Russia – when the federal authorities come in like a deus ex machina.”

That pretty much sums up how Russia approaches its key macroeconomic problem: widespread complaints about its business climate which have kept companies from investing enough to boost ailing economic growth.

Investment, historically already low compared with other emerging markets at just 25 per cent of gross domestic product, contracted by 0.3 per cent last year and slid another 4 per cent in the first quarter as fears of potential systemic sanctions over Russia’s annexation of Crimea have strangled foreign credit inflows and driven many businesses to put off expansion plans.

But the government of President Vladimir Putin is undeterred. Introducing a rating that ranks the investment environment for Russian regions last week, Mr Putin said the survey would become “a tool for real change”.

The survey is designed with the help of Boston Consulting Group and a number of Russian and foreign business associations and based on polls among companies across the country. It brought to light, for example, that while it is possible to get power for a factory within 60 days in some regions, it takes 288 days on average elsewhere. Equally, the availability of financial support for small companies, the number of documents required to register property rights and local authorities’ basic understanding of business processes varies vastly.

Andrei Belousov, Mr Putin’s economic adviser, says Moscow is trying to use businesses’ expertise to improve the regulatory framework. “The most important thing is not just that we receive information about how a particular region is ranked but that we are collecting best practices,” he says. “We are going to closely monitor the changes in the performance indicators, especially in the worst regions, in order to improve.”

Such efforts are being appreciated. Last year, Russia jumped by 19 places to rank 92 in the World Bank’s survey on doing business in 189 countries.

Still, some argue that such efforts only scratch the surface. Many Russian businesses continue to structure themselves under offshore holding companies in order not to fall under Russian law. “There is no real rule of law in Russia, and you can never be sure that your property rights will be protected,” says a senior executive at one of Russia’s largest conglomerates.

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Memories of the forced bankruptcy and sell-off of Yukos, once Russia’s largest oil company, after its main owner Mikhail Khodorkovsky fell foul of Mr Putin more than 10 years ago, are still vivid, although most investors concede that similar cases occur much less frequently.

The government argues that the difference between the focus of its efforts and the big rule of law issues is artificial, and that the devil is in the detail.

“No doubt problems [with rule of law and political interference in business] exist, but not on a massive scale,” says Mr Belousov. “If you look at the polls, especially those conducted among foreign companies, you can see that what they are concerned about most in Russia is bureaucracy, the very lengthy procedures of decision-making, corruption, the fact that inspections of businesses are unregulated, and the lack of efficiency in the judicial system.”

Moscow’s other response is a complete overhaul of the civil law system. “The government is trying to create a more balanced and business-oriented set of rules, which could regulate business relationships more flexibly and effectively protect their participants’ rights and interests,” says a lawyer at a foreign law firm in Moscow.

For example, the presumption of acting in good faith has been replaced by an obligation to do so – in line with many European jurisdictions. Escrow accounts will soon be recognised by law, and legislation regarding a host of financial and contractual activity was modernised.

Moscow is seeing some results to its push to improve the investment climate. In the industrial park in Dzerzhinsk, which was empty until 2012, 16 new companies set up shop within a year after Lanxess’s lobbying victory.

But it may take much more to build sustainable trust. Says a representative of a foreign business association: “In the end, it all boils down to how often and how much Putin can intervene, and when he intervenes, if he does the right thing.”