#11 - JRL 7232
June 20, 2003
Business Is Ballast in Rocky Politics
By Caroline McGregor
Three weeks after the U.S. and Russian presidents met in St. Petersburg and three months before they meet again in Camp David, the U.S. government's top foreign trade official described business ties between the two countries as the ballast that will carry bilateral relations through rough political waters.
Speaking to a conference hall full of Russian and American businessmen, U.S. Undersecretary of Commerce for international trade Grant Aldonas on Thursday argued that the countries need to see a common economic future. "Right now we share the same perspective on a lot of political issues, but commercial ties are the ballast in the relationship," he said.
Later in the afternoon, Aldonas met with Economic Development and Trade Minister German Gref, as part of the groundwork being laid for the trade mission to be led by U.S. Commerce Secretary Don Evans in the second half of September, in connection with the Second Commercial Energy Summit in St. Petersburg.
Evans is also due to hold meetings with small-business entrepreneurs in Moscow and visit an as yet undetermined site in western Siberia, home to the bulk of Russia's oil and gas. Later in September, President Vladimir Putin plans to travel to Camp David, Maryland, for a summit with U.S. President George W. Bush.
Both sides are looking to give deeper roots to political ties after they were buffeted by a chilly divergence of views over the United States' actions in Iraq. The political fallout over Iraq between the United States and France this spring was arguably worse, but the relationship was not fundamentally shaken because shared economic interests anchor them together.
Economic ties, Aldonas said, are the ties that bind.
John Beyrle, the deputy chief of mission at the U.S. Embassy in Moscow, echoed those remarks, though he noted that despite commendable improvements to the investment climate here over the last three years, much remains to be done to attract U.S. companies.
"It's still too hard to do business in Russia," Beyrle said two times, for emphasis.
Recent restrictions by the Sakhalin governor barring foreigners from traveling outside the capital, Yuzhno-Sakhalinsk, is one vivid example of an obstacle to be overcome, he said.
As ExxonMobil and Conoco develop their projects there, the island could be home to 15,000 expats in the coming years, but this suggests a worrying "mini-resurgence of a climate of suspicion," he said, and it counteracts gains made elsewhere.
The common goal of integrating Russia into the world economy has been established, Beyrle said. "Now the question is how to get there."
Aldonas said he hoped to see more tangible success stories. "We need to show the American business community that investment can work in Russia in the short and long terms," he said.
"As Secretary Evans likes to say, capital is a coward," Aldonas said. "It needs to know there's a strong foundation for investment in Russia. We need to make Moscow as familiar as Los Angeles for an investor sitting in Washington, D.C."
An attendee, Barry Morris, a former banker who now runs PCG, an investment advisory firm, said investors have been encouraged by increasingly balanced, frank talk about the difficulties of the Russian market, not just its opportunities. "It's easier to appreciate the upside when the downside is identified."
When Putin and Bush met in St. Petersburg during the city's 300th anniversary festivities, the economic agenda was "the center of gravity," Beyrle said. Besides some fence mending on Iraq, in the space of their one-hour conversation, the two covered energy-sector cooperation and graduating Russia from Jackson-Vanik, an embedded trade-related thorn in Russia's side, as well as potential new General Electric and Boeing investment projects and the Murmansk pipeline.
The distance from the deepwater port of Murmansk to New Jersey is relatively very short, Beyrle noted, so if the pipeline is ultimately built, the project could pay "tremendous dividends" in the coming years. If that flow of oil gets up and running, it will reduce the United States' dependence on the Middle East, one of Washington's strategic priorities. "Russia is a tremendous partner in that."
Another, eternal item on the bilateral agenda is the hurdles to Russia's WTO accession.
Beyrle said the growing sense among Russians that the U.S. government does not fully support Russia's bid is "absolutely wrong."
"We're four-square behind accession and have been from the earliest possible moment," Aldonas concurred. "The time is now," he said, before the feet-dragging deprives Russia of the chance to take part in the Doha round of revisions to the international trade framework. The first talks have been held and are due to wrap up in 2005.
Along with low simmering disputes over exports of Russian steel and U.S. poultry, increasing U.S. investment in Russia and getting Russian legislation in line with WTO requirements topped Aldonas' agenda for his meeting with Gref, a member of his staff said. Aldonas also had talks with Natural Resources Ministry officials on issues related to subsoil legislation.
Eximbank, the U.S. government's export credit agency, has long been one part of the constellation of government agencies working to link the two countries economically.
Paul Tumminia, the bank's director for Russia and the NIS, said the Russia portfolio has fallen to around $200 million in the past few years, but he expected an upturn this year.
"The number of transactions is up but their size is falling -- and that's a good thing," he said. No longer do sovereign loans, or those backed by the government, drown out lending to private sector firms, as they did in the 1990s.
Eugene Lawson, the president of the U.S.-Russia Business Council, which sponsored the conference to mark its 10th anniversary, said his 300 members "are the most optimistic they've ever been about doing business in Russia.
"The pace and magnitude of change here has been simply extraordinary," he added.
Blake Marshall, the council's deputy director, said he expected a wave of American firms to join the market in sectors like financial services, advertising, IT and telecoms. An A.T. Kearney study last fall said one in 10 firms with a global presence would expand into Russia within the next three years. "Based on the knocking on our door, I think that's borne out," he said.
Parallel to that, Russian companies' interest in boosting trade and investment in the United States is growing, he said. These firms are in metals and mining, like Norilsk Nickel, which concluded its acquisition of Montana palladium producer Stillwater Mining this week, as well as IT firms in Novosibirsk and Tomsk, which ship software to technology firms outside Washington, along what is known as the Dulles tech corridor.
The kinds of firms eyeing Russia are becoming more diverse, but it's still energy sector heavyweights that grab the headlines for foreign direct investment.
"The energy sector is the thin end of the wedge of Russia entering the international business community," Aldonas said. "There's still some distance to go, but there's an awful lot of good activity."
"It's easy to sit back and say, it'll never happen. Russia will never be a good place to do business," said Jim Clawson, head of JBC International, an international customs consulting group. "You can always find excuses. But you only move forward when there's a public-private partnership. That's what has brought us to where we are today."