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Business leaders, government officials and representatives of international organizations met in Paris on March 19 for The Economist magazine's Russia Business Summit. The World Trade Organization, the Organization for Economic Cooperation and Development and the European Commission were all represented, as were a diverse group of companies doing business in Russia. Business delegates offered their companies' perspectives on the country's investment climate, and officials outlined the potential and challenges ahead. An edited selection of comments is below.
For an overview of the summit, please click here.
Pier Carlo Padoan, deputy secretary-general and chief economist, Organization for Economic Cooperation and Development
We think that in the medium term, while deflation should make progress - meaning that the price dynamic should moderate a little bit - ultimately, Russia should aim at an inflation-targeting monetary policy regime coupled with a flexible exchange rate.
But also, on the fiscal side, there is something that Russia has done and could improve. There is a new fiscal rule, which makes the balancing of the budget at a reference price for crude oil, which, again, signals the fact that the economy is really dependent on oil.
We would rather have a different mechanism in which there is a non-oil deficit rule, which, in our view, on the one hand, gives a more accurate picture where the fiscal fence lies, but also generates more effective incentives to boost diversification away [from oil]....
We recommend structural measures that are country-specific to all countries we deal with. This is the first step: what are the structural policy priorities for a country? The next step, however, is implementing structural policies.
We find that in countries where corruption - at least perceived corruption - is large, a given structural measure, even if it's passed as a law, will not be implemented effectively, and therefore the benefits of structural policies will be short of what they could deliver....
If you have poor competition, you are "forced" to look at corruption as a way of operating in an environment. So if there is little competition, the incentive to go to corruption practices increases. Conversely, if corruption practices are deep in a situation, then incentives and pressure to open up competition are weaker, so you are maybe bound to fall into a vicious circle of persistent corruption and low competition, which, we feel, in the case of Russia - but not only in the case of Russia - is particularly of concern.
Kim Fejfer, chief executive officer, APM Terminals
We made a $900 million acquisition into the Russian transportation sector in November 2012, and that's the largest foreign direct investment into the sector up to this point. APM Terminals is part of the A.P. Moller-Maersk Group, which [has] been represented in Russia since '92. Maersk Line is by far the biggest provider of import and export containers into Russia, with a market share of 23 percent. We transport roughly 600,000 containers a year, thereby generating $800 million of revenue in doing business with Russia, so we have quite some experience with Russia....
When we look around the world, there's a huge need for infrastructure, and Russia is one of the places in the world where the need is highest. If you talk about container transportation, import-export into Russia, then that has been growing by 15 percent over the last five years, and what we expect in our own [estimates] is that it will continue to grow by 8 percent annually over the next 15-20 years.
In Russia, roughly 41 containers are imported-exported per 1 million people a year, and that's much lower than you see in Europe, where it's 89 containers, and much lower than China, where it's 122. So the conversion that is ongoing, from non-containers into containers, is just another factor adding to the need for appropriate port, rail and road infrastructure.
So my recommendation here is that Russia needs to focus on three elements to improve and facilitate trade: that is, to reduce the tariffs that we talked about earlier today; it is to invest in physical transportation infrastructure; and it is to facilitate the ease of doing business.
I think that Russia is moving on this, and, obviously with our huge investment, then we firmly believe that Russia is on the right path.
Margarita Louis-Dreyfus, chairman, Louis-Dreyfus
[Russia] produces an average of 85 million tons of grain annually. Russia is the second-largest exporter of wheat in the world, just behind the United States, which makes Russia's grain vital to the worldwide grain equilibrium.
Agriculture is a key contributor to the Russian economy and the strategy of diversification. Despite representing a modest 4.2 percent share of GDP, it employs more than 10 percent of the labor force, with significant contribution to rural development. That is why agriculture today is receiving special attention from the Russian government.
But the conditions for agriculture are contrasting in Russia. On the one hand, it is one of the few countries in the world that still has massive land available for agricultural use at a reasonable price and with rich soil. On the other hand, due to difficult weather conditions and lack of investment in the past, those lands produce only moderate yields with volatile production. These results show that the development of agro-industry in Russia is a challenge and an opportunity for the near future....
The success of farmers is the cornerstone of the flourishing of the agricultural economy in the country as a whole. Actually, the country still has room to significantly grow its agricultural productivity and production. The most apparent opportunity for improvement is the implementation of new farming technologies and ongoing farming education to increase the expertise and knowledge of modern techniques that could enhance productivity.
Where 20 to 24 people are required to work 1,000 hectares of land in Russia, fewer than 10 people are needed for the same amount of land in other developed countries.
The following characteristics would force Russia's agricultural development and [improve] the chance of receiving foreign investments supporting agriculture. First, a strong and efficient economic structure to deliver agricultural products at a competitive price on the world market. Second, stability and predictability of the business environment to allow farmers, and especially foreign investors, to adopt a long-term vision.... Third, a clear and transparent legal system allowing [easier] investments and property rights to function efficiently and reliably.
Artyom Volynets, chief executive officer, En+ Group, member of the board of directors, Rusal and Eurosibenergo
What you currently have in the Asian part of Russia is a unique situation that is quite similar perhaps to what was in Canada and the United States a hundred years ago. You have a large uninhabited territory with every possible mineral resource in the ground, limited infrastructure, and huge, quickly growing southern neighbor that is in need of those resources.
Luckily for Russia, we have three neighbors around that can compete for Siberian resources, and therefore we can perhaps negotiate better deals than the Canadians could do with America: you have China, you have Korea, you have Japan, all in a very close geographic proximity.
At the moment, the Chinese get their raw materials from Australia, South Africa, South America. It will take 12 days for the boat to go from Australia to Shanghai, it takes 21 days for a boat to go from South Africa to Shanghai, and 35 days for the same trip from South America. Now, when the rates are low, there is perhaps not a huge difference, but nothing stays low forever, so when the rates will increase, we believe that the attractiveness of Siberia and Russia will be even more important....
But it is not only physical infrastructure.... It is human infrastructure and it's business infrastructure. By business infrastructure, I mean things like hotels, airports, restaurants. If you have a Korean businessman coming to Irkutsk, hopefully he'll fly directly and not from Moscow, and then, after going to a reasonable four-star hotel, he may want to have dinner with his business partners in a reasonable restaurant, and that could help to develop business relationships.
But also human infrastructure is extremely important. You want to have those young people that finish their education in Irkutsk, Krasnoyarsk and other cities in Siberia and the Far East, instead of trying to go and look for jobs in Moscow, to work on projects that can create the level of income and career paths that they deserve in their home regions.
So unlocking that very significant potential requires investment in physical infrastructure - roads - business infrastructure and human infrastructure.
Thomas Gomart, director of strategic development, French Institute of International Relations
1. What potential do you see in economic relations between Russia and France ?
We have to start by underlining the significant intensification in commercial relations between the two countries over the past few years. This leads to three conclusions. First, these exchanges benefit from political support on one side and the other ; the governments of the two countries are encouraging the exchanges, and support structures contribute directly to them. Second, the large French and Russian enterprises have learned to get to know each other ; the stakes in the future are at the intermediate level of medium-sized enterprises that, in both countries, have to work hard to open up paths to export. Third, with the global fragmentation of production chains, the bilateral prism can be deceiving about the reality of trade. Finally, there are sectors that are bound to develop: energy, of course, but also banking, luxury, agriculture and food, and education.
2. What risks are there for Russian investors or companies on the French market?
The conditions of bringing foreign investors to France are good, as is seen in the annual volume of investment. In France, Russian investors can sometimes encounter image problems even if this risk is tending to soften. They have to come to terms with a certain legislative and regulatory complexity and, of course, with a labor law that favors the protection of employees. On the other hand, they benefit from a high level of security for their investments due to the solidity of the banking sector, as well as from infrastructure and from the qualification level of employees.
3. How much importance does the ban on the use of shale gas have for relations between the two countries? Will the work of Gazprom on the French market increase, in case it is lifted
This is an important question, which is notably outlined in the "principle of precaution" inscribed by President Jacques Chirac in the constitution in the name of environmental protection. France is today engaged in a debate on "energy transition," all the time being aware of that one of the comparative advantages of its industry rests on moderate energy prices, bound to increase in the coming years. Taking into account its current business model, Gazprom evidently is interested in the maintenance of this ban.Read other articles of the print issue "The Moscow News #11"
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