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Moscow Times
November 5, 2001
Harvard Offers a Dose of Reality
By Anna Raff
Staff Writer

BOSTON -- Alfred Kokh, of Gazprom-Media fame, has given Russia's relations with the United States new depth and a new twist, calling it a marriage of sorts.

"America demands more from Russia than it does her other international neighbors," a wry Kokh told Harvard's fifth annual Russian Investment Symposium here on Saturday. "It's like an Italian-Sicilian marriage with passionate dish-breaking and tears followed by a passionate reconciliation filled with kisses and embraces."

The events of Sept. 11 have brought Russia and America closer together politically, and investors and the government hope this will translate into increased economic cooperation.

Stanley Fischer, advisor to the managing director of the International Monetary Fund, said it's about time the United States took notice of the changes that have taken place in Russia since the August 1998 financial crisis. America, he said, has effectively been ignoring its spouse for the past 18 months.

Unlike in years past, delegates to the symposium -- who included leading investors, businessmen, government officials and academics -- were cautious about proclaiming Russia's recent economic upsurge another false dawn. While growth in the stock market and gross domestic product outpaced depressed economies -- most notably the United States' -- a corrupt judicial system and a weak banking sector are still keeping large portfolio investors on the sidelines.

The major financial industrial groups like Alpha Group, Interros and Millhouse, together with the Moscow elite, have fallen out of favor as foreign investors look for greener pastures in the regions and small business, participants at the symposium said.

"All of us tend to get mesmerized by big corporations," said Johannes Linn, the World Bank's vice president for Europe and Central Asia. "The thing to watch is small- and medium-sized businesses. If they don't start to quickly grow, growth will not continue."

On the first day of the three-day conference, Economic Development and Trade Minister German Gref proudly recited Russia's statistical achievements over the past year of President Vladimir Putin's reign. A third more in collected tax revenues this year and an 8 percent increase in overall investment didn't shock anyone who is already "on the ground" in Russia, but they did catch the attention of investors and entrepreneurs waiting in the wings.

"The government is not pro-Western, it's pro-Russian," Linn said. "They're asking themselves, 'What can we do to turn this economy around?' And they're doing it with their hearts, not because someone is paying them."

While established strategic investors have earned robust returns on investments made after the 1998 crisis, large and influential portfolio investors such as the California Public Employees Retirement System, or CalPERS, remain unconvinced that their money will be safe in Russia.

"If CalPERS comes into the market, then it would mean that Russia is an investment market, not a speculative market," said William Crist, CalPERS president and chairman. But such a watershed -- if it ever happens -- will not be in the immediate future, despite much-ballyhooed improvements in corporate governance.

Putin's push for a code on corporate governance, presented last month by Russia's Federal Securities Commission and the European Bank for Reconstruction and Development, inspired vociferous debate in private conversations during the symposium. Off the record, many argued that the code was purely cosmetic, to be used as a trap for naive foreign investors.

Ironically, the recent behavior of Sibneft, which often brags about its corporate governance, was cited as a prime example of bad corporate behavior. Last month the company spooked investors and analysts with a post-facto announcement of a murky transaction involving 27 percent of the company's shares. "The large dividends were the only thing that saved its reputation," one Western fund manager said.

Others argued that a written, concrete code was better than nothing.

"While the code may not deter behavior, it will let us say, 'Hey, you guys passed this thing' when we feel our rights as minority shareholders have been violated," said Ronald Freeman, CEO of Lipper & Company International.

No one doubts that Russia's economy has achieved a market orientation after 10 years of turbulent and often painful reform, said Anders Aslund, a senior associate at the Carnegie Endowment for International Peace and former advisor to President Boris Yeltsin.

But with a third of the country's assets still under government ownership, the economic structure is still a work in progress until these businesses are privatized in the much-hyped "third wave" of selling anticipated to occur between 2005 and 2010.

This privatization -- in contrast to the loans-for-shares schemes of the mid-1990s -- will strive to include foreign investors in the process, said First Deputy Property Minister Alexander Braverman. Last week, a proposed single procedure for all privatizations passed a Duma committee hearing, in which limits on foreign investors during privatization can only be defined by federal law.

In addition, Braverman said -- without going into much detail -- that the sale of government shares in natural gas monopoly Gazprom and in the Railways Ministry has already been planned. Next year should see the sale of stakes in 365 companies estimated to be worth a billion dollars. This includes the government's 6.1 percent in LUKoil, Russia's largest oil company, in the first quarter of 2002 and parts of the Magnitogorsk Metal Factory.

The Property Ministry has repeatedly put off the sale of this LUKoil stake, which is to be issued in American Depository Receipts, due to adverse political and economic conditions on international markets. The potential listing was shifted to London earlier this year after U.S. Senator Jesse Helms wrote a letter to U.S. securities officials that criticized the oil company's "roughish behavior" and business practices.

With political interference from the U.S. side now relegated to background noise -- and with Helms about to retire -- the ministry is reconsidering a placement on the New York Stock Exchange, Braverman said.

Russia's politicians have in the past publicly doubted the desirability of foreign investment, but those present at the symposium said these feelings -- an outgrowth of anti-Western sentiment -- have passed.

Viktor Pleskachevsky, chairman of the Duma's property committee, was quick to point out that the new Land Code would decrease the risk of investing in businesses located on non-agricultural plots. Changes to the Criminal Code -- one of which would make the release of false information to the markets a crime -- have already passed a first reading.

This new frankness and openness is based on self-interest, and in a relatively new development, Russia's interests coincide with those of investors. The $50 billion in investment Russia saw in 2001 is well below the $100 billion needed to offset the depreciation -- and obsoleteness -- of its capital base.

Listening to the politicians speak, Alexander Kochergin, the managing director of MDM Bank's international business department, was amazed. He said the unity of business and government -- compared to years past when deputies were at the ministers' throats and when politicians like Boris Nemtsov, despite official statements to the contrary, announced that Russia would not pay its debt obligations -- was unprecedented.

"That's how it's always been," Kochergin said. "When we have a good story to tell, we don't have anyone to tell it."

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