April 4, 2003
Russian Economic Forum: Shadow of Wild '90s at Forum in London
By Catherine Belton and Andrei Zolotov Jr.
LONDON -- Hundreds of Russian business leaders, politicians and their bodyguards gathered Thursday to present their case to investors at a packed Russian Economic Forum, an annual investment powwow that influential Alfa Bank president Pyotr Aven jokingly said was beginning to resemble a "Partkhozaktiv," the Soviet-era conference between party leaders and enterprise directors.
With more than three years of stability under Russia's belt and steady economic growth pushed along by high oil prices, no headline grabbing scandals spilled out at the forum's opening session. Instead, the emphasis was on mundane but vital issues for Russia to modernize its economy, such as corporate restructuring, cutting back bureaucracy, reform of its dinosaur natural monopolies and accession to the World Trade Organization.
But the shadow of the more scandalous days of Russia's transition to a market economy nevertheless hung over the conference. Surrounded by bodyguards and dressed playboy style in a white open-necked shirt, former Kremlin powerbroker Boris Berezovsky, now in self-imposed exile in London and facing extradition hearings on fraud charges, watched on the sidelines as former "partners in crime" at the top of Boris Yeltsin's administration, such as Anatoly Chubais, carried on the show of Russia's development, telling investors of new reform projects.
When Chubais was asked by a BBC World reporter whether he feared his reputation as Russia's most hated man would have a negative impact on investor perceptions of his drive to restructure Unified Energy Systems, the electricity monopoly he now heads, Berezovsky, who attended the informal press conference Chubais held in a side lounge, jumped in to joke that he was in fact Russia's most hated man.
Berezovsky earlier had trained his sights on Chubais during his formal presentation to the full forum, standing at the back of auditorium in the middle of the central aisle.
Even though Berezovsky at his own press conference Wednesday said he believed Russia's business barons would by the end of the autumn join him in opposing Putin's regime as being damaging to the business climate, not one of the business leaders here was seen openly to speak with him.
And, even though the Queen Elizabeth II Conference Centre was filled to overcapacity, some delegates feared worsening relations between Russia and the United States and its ally Britain over the war in Iraq could hit investment flows.
"It is a big risk for Russia to allow relations with the U.S. to sour. This is extremely dangerous," Chubais told reporters after his presentation. "This is against Russia's national interests."
Anatoly Karachinsky, the president of Russian IT giant Information Business Systems, also warned that the stand-off could damage investment.
"Our alliance with the United States has opened huge new horizons for the Russian IT industry. It has already paid real dividends," Karachinsky said in an interview. "If relations worsen we could lose a big opportunity: the chance to become the programmer of choice for the countries of the coalition, which have markets worth tens of billions of dollars."
But Boris Nemtsov, a leader of Union of Right Forces, assured the conference any damage was only temporary.
Other investors have feared a collapse in Russia's mainly oil-driven economy should the end of the Iraqi war lead to an oil price downturn. But Alfa Bank's Aven was on hand to tell the conference the exact scenarios he plotted for the Russian economy under a drop in crude prices.
He said a fall to $18 per barrel would mean the Central Bank would stop being able to build its foreign currency reserves, while a drop to $14 would mean the end of the government's ability to preserve a budget surplus. Down to $10, however, and that's the end of Russia's economic growth, he said in a presentation. "Everything looks very presentable," he said, however.
He said the fundamentals of Russia's economy looked bright, with a boom in the services sector helping drive overall GDP growth ahead of industrial growth for the first time last year.
But he warned that growth of small and medium businesses was still low and state savings bank Sberbank's stranglehold on the banking industry was still stifling the rest of the sector.
Nemtsov also criticized the government for slowing down reforms. "High oil prices have a sleep-inducing effect on the government while upcoming elections have a paralyzing effect," he said.
In a sign there could be future conflict between the government and Russia's leading tycoons, Aven during his presentation lashed out at plans being mulled by the government to find ways to take a greater share of the oil giants' windfall profits from high oil prices.
"It is a fundamental mistake to take something away from the oilmen," he said, stressing that economic growth so far had been driven by the oil sector.
"Taking into account the current state of the government apparatus, it would be a big mistake to take something away from the oil barons thinking that someone else would know better where to invest it. This would be a measure that would put economic growth under threat."
The government has been considering proposals to levy a greater royalty tax on the oil giants for their use of natural resources in order to push for a greater diversification of the economy out of its raw materials base.
The influential head of the Russian National Investment Council, Alexander Lebedev, said in an interview that levying greater royalty taxes would free up funds for the government to cut taxes for other sectors of the economy.
"A few people are getting billions in profits and this is not going to the rest of the economy. The president has to find the will to raise royalty payments and cut taxes in other sectors of the economy to encourage growth in other sectors," he said. "The government could gain an extra $40 billion to $50 billion from the natural resources sector if this happens."
Anti-Monopoly Minister Ilya Yuzhanov also said the government should take such steps. "It's important to increase efforts to build a mechanism for the state to play its role as the owner of natural resources and balance out access to these natural resources," he told the conference.
William Browder, the director of Moscow-based Hermitage Capital management, a fund that has minority stakes in many of Russia's leading companies, also lashed out at the lack of progress in cleaning up Russia's investment climate.
He said the fabled rise in Russia's stock market was largely a sham, with much of the 61 percent climb in the Russian Trading System over the last three years being driven by two oil majors alone, Yukos and Sibneft. Without their climb, which was driven by these companies' improvements in corporate governance and productivity, he said the RTS would have only risen 13 percent.
"Institutional investors don't buy the hype and they're not buying Russia," he said, citing corruption in the court system and lax enforcement of laws as killers for global investor appetite for Russian stocks.
Ian Hague, the director of the Firebird Fund, a hedge fund with big investments in Unified Energy Systems, slammed Chubais for attempting during his presentation to portray a new group of Russian minority investors in the electricity monopoly as being better than the foreign portfolio investors who have yelled out against plans to restructure the company that could see assets sold for a song to crony businessmen.
Chubais said Thursday that a pool of financial-industrial groups had acquired more than 10 percent of the company and spent $700 million buying shares on the market.
"This is a critical moment for the Russian electricity sector. These are not portfolio investments. This is something closer in character to strategic investments," Chubais said.
That group of Russian investors is headed by metals giant Oleg Deripaska's Base Element, a major shareholder in Russia's biggest aluminum producers.
"The new shareholders are those who are interested in getting access to cheap electricity," Hague said. "That's a fundamental problem that's not being addressed."
The conference center, which looks out on Westminster Abbey, was bursting at the seams with 1,480 registered delegates, members of the press and bodyguards, up from 1,150 last year. The center has a capacity for 700.