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Russian pledge in race to catch Bric rivals

February 5, 2010

Russia’s investment tsar yesterday sought to convince the business community that the country is serious about transforming the economic environment as it seeks to catch up with its counterparts in the Bric group of emerging nations.

The move follows a renewed pledge by Dmitry Medvedev, Russian president, that the nation would embark on a modernisation drive.

Igor Shuvalov, first deputy prime minister, told hundreds of international and Russian investors at a conference organised by Troika Dialog, the Moscow investment bank, that Russia would be transformed into a “new country” by 2020 through innovation and investment in “human capital”.

He said the investment climate would be significantly improved within a year through a reduction of red tape and a clean-up of the court system.

Foreign investors are once again eyeing Russia’s stock market after a recovery last year fuelled by oil prices. But the economic resilience of its Bric counterparts ? Brazil, India and China ? highlights the problems dogging Russia’s investment climate despite earlier pledges to improve it. Russia suffered its worst recession in a decade last year.

There is still investor scepticism about Moscow’s ability to tackle rampant corruption and diversify the economy away from a raw-materials base to emulate its more innovative Bric competitors.

Anatoly Chubais, Russia’s privatisation tsar in the mid-1990s and now head of Rosnano, the state-owned nanotechnology corporation, said the country had not learnt how to convert knowledge into money-making businesses, despite its rich scientific heritage. “We know how to turn money into knowledge, but we still have problems turning knowledge into money,” he told the conference.

German Gref, the head of Sberbank, Russia’s biggest state bank, said much remained to be done to foster a climate that would encourage innovation. “The entrepreneur is not valued: if we hear of an entrepreneur today it is when they are being dragged out of their office by men in masks or in another not very positive sense.”

Mr Shuvalov called for a new culture of respect for the Russian business community. But many delegates doubted whether cultural change and economic diversification could be achieved without freeing up the political system and curbing the heavy hand of the state.

“You can’t have a burgeoning tech sector in a closed society,” said Ian Hague, a co-founder of the New York-based Firebird Fund, which invests in Russia. Mr Hague said China had grown by adapting existing technology. “Here there isn’t even long-term investment in non-modern parts of the economy. Why they think they can suddenly make innovation spring like Apollo out of Zeus’s head is beyond me.”

Questioning why Russian bonds were trading at a 20-25 per cent discount to Brazil’s when Russia had accumulated reserves of more than $400bn (?285bn, ?250bn), Jochen Wermuth, head of Wermuth Asset Management and a seasoned Russia investor, said he had problems convincing big western money managers to invest in the country.

“Perceptions are 10 times worse than reality. But the reality is 10 times worse than it should be too,” he said.

One big pension fund manager had told him: “Russia defaulted in ’91, restructured in ’95, defaulted in ’98, took assets away from Yukos, from Shell and then BP. If you complain, you get expelled from the country and then if you continue to complain you may die in London from polonium poisoning, or die in pre-trial detention in Russia. Now tell me why I should invest in Russia?”

Mr Wermuth added that the government had “realised the problem they have with the judicial system and with corrupt police, and they have committed this year to make major progress on the investment climate. The question is whether they can do it without more political competition”.

 

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