Moscow News
www.MN.Ru
October 26-November 1, 2005
The Russian Market: Lucrative But Risky
Foreigners want to earn money in Russia, but fear our tax regulation
By Dmitry Dokuchayev
Last week, hundreds of executives of global corporations and financial organizations active on the Russian market came to Moscow to attend two prestigious events - a visiting session of the World Economic Forum and the annual meeting of the Consultative Council for Foreign Investment (CCFI), chaired by Prime Minister Mikhail Fradkov. One of those who attended the CCFI meeting on the Russian side was well-known economist Yevgeny Yasin. He spoke to MN.
Foreign investors wanted representatives of the Russian government to answer certain questions. What were those questions?
They concerned mostly the law governing foreign investors' access to strategic enterprises. The foreign partners wanted to be clear on whether they could gain access to any of them, and on what terms. Our departments differed on this point. The Industry and Energy Ministry, which was represented by Minister Victor Khristenko, believes that the decision on this or that deal should be made on an individual basis. The position of the Economic Development Ministry and its head German Gref is different: We must have a list of strategic enterprises in black and white, and we must introduce clear rules on whether foreigners may or may not invest in these enterprises. In principle, Gref's stand is more to my liking; however, if we act on it, we might close vast sectors of our economy to foreign investment. Seen from this viewpoint, Khristenko's position is a compromise, as it saves us from giving definite answers to these questions: How many strategic sectors and enterprises are we going to have, and will they be open to foreign investment or not? On the other hand, Khristenko's stand can be conducive to red tape, bureaucracy, and corruption.
What other issues did you discus at the Consultative Council for Foreign Investment? I attended the sitting of the Commission for State Administration, which brought together many foreign investors. Present on the Russian side were not only government representatives (Gref, Khristenko, Vyugin, Shatalov), but also heads of business associations (Shokhin, Primakov) and Chairman of the Arbitration Court Anatoly Ivanov. The commission's session raised the issue of electronic documenting and archiving. In these matters, we are still living in the last century. The whole of Europe and America have long switched to electronic documenting, while we have only decided the question of electronic signature, within narrow limits at that. When it comes to a tax audit, the company concerned has to produce its primary accounting records made on paper. These records have to be preserved, although elsewhere in the world today, you don't take your documents to a tax inspectorate by truck. Our Western partners insisted that we should at last abandon our caveman methods. Gref roused his subordinates and representatives of other departments; he demanded an answer from them, and gave them a timeframe within which they should make major improvements in this field.
Do you think that the sitting with foreign investors was something of a ritual, which will hardly lead to any specific decisions?
No, I don't think so. My belief is that it will be of great benefit to everyone concerned. From the speeches made at the session by representatives of many big-name foreign companies that invest heavily in the Russian economy, it was clear that they were very serious about the issues under discussion. They participated in the discussion and gave advice and recommendations. Because they can see that we are doing something for foreign investors - slowly but surely. Overall, there have been some positive advances.
Do you mean that you are optimistic about foreign investment in Russia?
To my mind, the situation with foreign investment in this country is quite favorable now. According to Central Bank's estimates, we have received over $10 billion in foreign investments this year. However, it seems to me it is not so much financial infusions from foreigners that we now need but expertise, technologies, management, and other things that come with Western business. Apart from that, this is a very important factor in Russia's integration into the world economy, as well as a means of influencing our ruling establishment.
In foreign investment volume, however, we lag behind China several times over...
But in per capita foreign investment volume, we have been ahead of China since 2003 - China's population is eight times larger than Russia's. Yet today Russia's economy is far smaller than China's. Whereas the gross domestic product of China is approximately $3.5 trillion, ours is $1.35 trillion. Thus, the difference in the absolute volume of investment is logical, and saying that we are lagging behind China does not make much sense. Quite recently, Russia was compared with the Czech Republic, Hungary, and Poland in absolute volume of investment. Now we have surpassed them on this indicator. The reason is simple: Russia today is financially sound owing to its petrodollars. This money is finding its way into all economic sectors, whether slowly or quickly. Foreigners working in Russia get far larger incomes than those working in many other countries. In this respect, the Russian market is very lucrative these days. Whether it will be the same tomorrow, however, I don't know.
Do foreign investors share your optimism?
My mood is optimistic but not euphoric, since our current prosperity hinges solely on high oil prices. In my opinion, the fact that Russia does not have much need for foreign investment right now and that it does not know what to do with its petrodollar windfall creates serious problems for us. The fact that here, at the Consultative Council for Foreign Investment, maximum attention was paid to foreign investors actually means nothing. For among other things, the law on new rules of tax administration practically makes no concession to business, both local and foreign. Foreign investors are well aware of that. Discontent over our tax regulations was not due to tax rates but to the way taxes are collected and the fact that taxpayers feel unprotected before the state. Their view of Russia is this: You come to Russia to make money. They don't come here to stay for good. They may tell you that they have come here to stay for a long time but actually, they don't think so. They are wary of the actions of our ruling establishment. Every time it makes a move, they suspect that the number of strategic sectors where foreigners will come under state pressure will increase. These are such sectors as telecommunications, power machinery construction, and the like. However, considering the big earnings that doing business in Russia promises them, they avoided talking about acute problems. Moreover, they know that even such an issue as the list of strategic areas of investment is decided not at a session of the council and not even at a government session. This issue, like other matters of major importance, will be decided later by the Kremlin. Thus, figuratively speaking, the Kremlin's shadow hovered over the hall where the council sat.
MN File
* The Consultative Council for Foreign Investment was set up 11 years ago for the purpose of lifting the barriers in the way of foreign capital. It held its 19th session last week.
* According to Prime Minister Mikhail Fradkov, the amount of foreign capital accumulated in the first half of 2005 has seen a year-on-year increase of 37.4%, topping $90 billion.
* The major nations investing in Russia are Cyprus, Luxemburg, the Netherlands, Germany, Britain, the United States, and France. They account for nearly 82% of cumulative foreign investments.
* According to the results of a poll by the All-Russia Center for the Study of Public Opinion, the majority of Russians are dead set against foreign capital's participation in the military-industrial complex (80% of the respondents), oil and gas sector, power industry, and forestry (66% to 69%).