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Moscow Times
October 31, 2001
Putin's Pep Talk Fires Up Investors
By Victoria Lavrentieva
Staff Writer

President Vladimir Putin poured on the charm Tuesday as he fielded questions from a gathering of more than 350 business leaders at the World Economic Forum, leaving participants clearly impressed with the Kremlin's plans for economic reform.

On the sidelines of the talks, ExxonMobil Corp., the world's largest oil producer, announced Monday night that it was ready to start developing Sakhalin-1 early next year. It pledged to invest $4 billion over the next five years in the $12 billion Far East oil project.

Putin told investors at the opening of the second and final day of the forum in the Marriott Grand hotel that the government is working on further reform and new tax breaks.

"We will further develop the pace and quality of reform," Putin said.

"A first direction is further reform of the tax regime," he said. "Maybe it is somewhat premature to speak about it, but we are thinking about cutting a few taxes, including taxes such as VAT."

Value-added tax is currently 20 percent, with the exception of some food taxed at 10 percent.

Many of Putin's comments were on a lighter note as he bantered with investors in an attempt to convince them that it is worth doing business in Russia. His presentation was interrupted several times by laughter and applause.

One investor asked Putin whether new anti-money laundering measures would lead to a ban on commercial secrets at banks.

"How do you know that there are any now?" Putin replied.

Later, Putin said, "I want both Russian and foreign investors to feel at home in Russia."

Foreign attendees said they were impressed.

"This is the first time that I saw Putin, and I can say he is a wonderful speaker and a talented politician," said James Balashak, a Russia partner with Deloitte & Touche. "I was particularly impressed by his knowledge of technical details and ability to address any particular issue."

Other participants praised the government for its commitment to market reforms and the results that have been reached. "The progress we have seen in six months between the last two sessions of the Foreign Investment Advisory Council meeting can be compared with changes between the first and the seventh FIAC," said Nevill Isdell, vice chairman with Coca-Cola HBS, referring to regularly scheduled investor talks headed by Prime Minister Mikhail Kasyanov that coincided with the World Economic Forum.

Government officials said some reforms are going faster than planned.

"We have prepared 126 new laws for this Duma session, and sometimes we can't remember what has already been approved," Economic Development and Trade Minister German Gref told the conference.

"It was in June 2000 that we were sitting with Mr. Gref at the Davos forum in Salzburg and I was asked what I think of the new Russian government," Johannes Linn, a World Bank vice president, recalled in an interview. "At the time I was impressed by the government's ambitious reform program. Now, 1 1/2 years later, we are impressed by the results."

With legislation for many reforms now in place, the focus is now shifting toward their implementation.

"It is within the administrative framework that reforms should be implemented and WTO accession can become a self-reinforcing clue," EBRD president Jean Lemierre said.

Finance Minister Alexei Kudrin said Russia could join the World Trade Organization by 2004. "I think it is possible," he said, pointing out that a 2004 entry depends on the findings of a working group of WTO member states that are expected at the end of next summer.

The fact that the U.S. administration has begun consulting with members of Congress retracting the Jackson-Vanick amendments to the country's trade law, which has blocked Russia from receiving most-favored-nation status, is an important step in this direction.

"The sooner we play by common rules, the better. Nowadays, business cannot be done is one separate country -- we are all connected," Igor Bocharov, general director for Airbus Russia, said in an interview.

"WTO will give everyone equal chances for competition," he said. "We have serious contracts in Russia, but if we have cooperation with a certain industry, we also need access to the domestic market. We think that the Russian aviation industry should be opened for all international companies."

Aeroflot announced recently that as of Nov. 1 its will phase out the use of 28 Ilyushin aircraft -- 13 Il-62s and 15 Il-86s -- on regularly scheduled flights and replace them with its fleet of 11 Airbus A-310s, which are more cost efficient.

Despite Russia's strong economic performance and continued reform, foreign investors at the forum largely avoided the big question on the Kremlin's mind -- when they will invest in Russia.

The notable exception was the announcement by U.S.-based ExxonMobil on Monday. The Sakhalin-1 project, with $12 billion in financing over its expected life of 30 to 40 years, would be the biggest single foreign investment in Russia. Oil production is set to start in 2005.

The fields, located off Sakhalin Island, contain an estimated 2.3 billion barrels of oil, much of which is to be shipped to Japan.

The Sakhalin-1 project had been stalled since the mid-1990s while investors negotiated what tax breaks they would get under a product-sharing agreement.

Some $600 million has already been spent on exploration.

Russia is expected to receive $35 billion to $40 billion in taxes from this project over the next 30 years.

ExxonMobil is the operator of the project and 30 percent owner in a Sakhalin-1 consortium that includes Sakhalin Oil & Gas Development Co. of Japan (30 percent) India's ONGC Videsh Limited (20 percent) and Russian companies Sakhalinmorneftegaz-Shelf (11.5 percent) and RN-Astra (8.5 percent).

"This declaration is an important step forward in the process of attracting significant foreign investment to Russia, whether in the oil and gas sector or elsewhere," the United Financial Group brokerage wrote in a research note Tuesday.

Other investment projects will be announced if Russia keeps up with reforms, said Linn of the World Bank.

"If the Russian government continues reforms at their current pace, then after 10 years of hard work the history of the previous 80 years of isolation and centralized economy may be overcome," Linn said.

"The Hungarian economy was very questionable in the mid-'90s, and it took China almost 10 years to reform its economy. But now both countries are enjoying huge inflow of foreign investments," he said. "So Russia's 1 1/2 years of reform is a rather short period."

Putin agreed that 10 years would be a good timeframe to work toward reform.

"The Russian economy has always been very promising with a great potential that was underestimated because of big risk," Putin said. "We see our major goal is to eliminate these risks."

Asked how he sees Russia in 2010, Putin said simply, "Russians will be happy."

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