#16 - JRL 9118 - JRL Home
Moscow Times
April 12, 2005
Big Business Issues a Wake-Up Call
By Greg Walters
Staff Writer

LONDON -- Resorting to unusually sharp criticism and even hinting at a possible revolution, Russia's business elite told the Russian Economic Forum on Monday that the government must kick-start reforms and reach out to foreign investors if it hopes to maintain stability and strong economic growth.

Many of the 2,000 Russian and foreign business leaders at the annual London conference called the remarks a wake-up call for Russia's dozing reform policy. But some pointed to the absence of senior government officials as a troubling sign that the alarm bells might not be ringing loudly enough in the halls of government.

Forum speakers hailed the strong growth of the economy, and the most senior state official in attendance, presidential economic adviser Andrei Illarionov, noted that industries including oil, metals and forestry are more robust now than they were at their previous peaks before the Soviet collapse in 1991. But he and other speakers stressed that future growth would not come easily.

"It is high time today not only to speak about the successes but also to speak about the truth," said Mikhail Kasyanov, the former prime minister, who has hinted that he might run for president in 2008.

"I don't think that the best way to restore confidence is to draw a rosy picture but to tell it as it is," he said.

In a hard-hitting speech, Kasyanov took aim at growing inflation and the government's unpopular monetization of state benefits. "This lopsided attempt that brought people out into the street ended any hope of successful social reforms," he said.

Kasyanov also criticized the judicial system and the tax regime. "The asymmetric actions of tax officials are forcing businesses into the gray," he said.

He warned that if the government does not get its act together, the country could lose its current investment grade status.

Alfa Bank president Pyotr Aven conceded that living standards have steadily improved over the past 14 years but said that was not enough. With a colorful slide presentation, Aven showed how living standards had increased in Russia in the years before the 1917 Revolution, in Greece before its 1967 revolution and in Iran before its 1979 revolution.

He complained that the government has dragged its feet at passing any meaningful reforms over the past year. "We are essentially at the same place that we were a year ago," he said.

"Without making any forecasts, popular support [for reforms] may disappear," Aven said. "The government must make reforms in the shortest amount of time."

He lambasted the government over the social reform, which came into force Jan. 1, and said that federal money spent on the reform now accounted for 25 percent of all cash in circulation.

Aven cautioned that foreign direct investment was just 16 percent of gross domestic product -- and that much of the investment is actually Russian money being re-injected into the economy. "Many of the foreign investors investing through Cyprus are, I believe, sitting in this room," he said as the packed hall rippled with laughter.

Charles Ryan, chairman and CEO of United Financial Group, said Russia will need 15 percent investment growth to achieve its goal of 7 percent annual economic growth in the coming years. "Growth going forward is going to be tough," he said.

Ryan also said Russia should soften its immigration policy to take into consideration that 350,000 new migrants are needed to boost economic growth by two-thirds of one percentage point.

London Mayor Ken Livingstone also made a case for immigration, saying he welcomed Russians and people from other countries to live, work in London or just go sightseeing. "Russians are welcome in this city both as individuals and for the spending that they bring," he said.

Livingstone said Russian tourists for the first time last year spent as much as U.S. tourists -- previously the biggest spenders -- and accounted for 8 percent of all tourist spending.

Several conference participants grumbled that senior government officials -- especially liberal reformers such as Economic Development and Trade Minister German Gref and Finance Minster Alexei Kudrin -- had not attended the forum.

"The Russian government made a major political mistake in deciding not to attend," said one participant, an influential member of the business community who asked for anonymity to speak more frankly. "They're making Russian business look like the political opposition, when all business wants is the right economic policies. Some people here think Kasyanov's speech was clearly political and not appropriate."

Yet many attendees lauded the government for its current financial policies. "The Russian financial position is pretty strong. That's the facade of the Russian economy," said Alexei Novikov, head of research at Standard & Poor's Moscow office. "But there are two faces of the Russian economy we're seeing here. The other face is unpredictability with regard to the direction that the government will be following in the nearest future.

"It will be interesting to see to what extent the people here can influence government decisions going forward."

Anatoly Chubais, CEO of Unified Energy Systems, made a pitch for private investment in the power sector, saying that an end to the long-awaited reorganization was in sight. He said the reform "has gone through very difficult political battles. It is about to be completed, something I could not have mentioned earlier."

Russia had $9.4 billion in FDI in 2004, Illarionov said. Aven pointed out that this was one-fifth of China's.

A research note last week from Peter Westin, chief economist at Aton Capital, citing Central Bank figures, put FDI higher for 2004, at $11.4 billion. More interesting, it forecast FDI of $5.4 billion for the first quarter of 2005, which Westin said showed that investors have not been overly frightened by the legal assault on Yukos.

Yet others argued the government could do much more. Andrew Somers, president of the American Chamber of Commerce in Russia, said on the sidelines of the Russian Economic Forum that Russian authorities "haven't understood that other countries attract investment because they're making concessions."