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Analysis & Opinion
10.06.08 A Productive Debate
Blog by Andrei Zolotov, Jr.

ST. PETERSBURG/ With $14.6 billion worth of signed contracts, the cr?me de la cr?me of the Russian political elite mingling with a record number of CEOs, pride over the country’s economic achievements and a candid discussion of domestic and global challenges, the International Economic Forum held here on June 7th and 8th was more than just a vanity fair of show-offs and lavish parties.

The new Russian government presented the world with its ambition to become part of the global economic problem solution, while the international business community showed an increased interest in the flourishing Russia against the backdrop of the faltering Western economy.

“I think it’s a good and traditional Russian gathering,” said Dutch Ambassador Jan-Paul Dirkse.

“Everybody who has to be seen is to be seen, everybody who thinks to be important can get the feeling that he or she is important and, well, the show goes on on the stage, but what is happening backstage is even more interesting.”

Participants noted that the breakout sessions this year, ranging in subjects from clear water issues to financial markets, from charity to infrastructure, and from Internet technologies to Russia’s search for identity, offered more content and real discussion than before. Yet the consensus was that the ability to meet many important players in one place was what mattered most.

“One of the big challenges of doing business in Russia is still that basic business intelligence, market intelligence that is reliable and timely, is hard to come by,” said Birger Steen, General Director of Microsoft Rus, LLC. “Therefore, the person to person contact and the importance of a random meeting is much higher than in a fully analyzed, completely transparent market.”

Looking for culprits

While formally the twelfth in a row, the St. Petersburg International Economic Forum was in a second year of glory, since the Kremlin discouraged officials from going to the Russian Economic Forum in London, which till then, had been the main party for the Russian elite, and thus thrust the St. Petersburg event to even more prominence. Last year, the succession to then President Vladimir Putin was on everybody’s mind, and Sergei Ivanov’s programmatic speech made participants believe that he was the leading candidate at that moment. This year, with the transition formally complete and prime-minister Putin nowhere to be seen, President Dmitry Medvedev, who was at one point mistakenly announced as Vladimir, confidently took center stage on day one. He stressed the tension between globalization and “economic egoism,” blaming the United States for the global economic crises, but offering an analysis of the relevant issues and a liberal prospect for Russia’s increasing role in the world economy, which impressed the participants.

“It is precisely the disparity between the formal role of the United States of America in the world economic system and its real capabilities, that was one of the central reasons for the current crisis,” Medvedev said. “No matter how large the American market is, and how reliable the American financial system is, they are not capable of supplanting the global financial and commodities’ markets.”

Russia, Medvedev said, would like to take part in the forming of the new rules of the game, and in ameliorating the “global financial architecture.” For that, he proposed for a conference to be held in Moscow, and said the project is under way to turn Moscow into a “powerful international financial center,” and the ruble -- into a regional reserve currency. Russia wants to be better integrated into the global capital markets, and the government will continue to support Russian companies’ investments abroad.

Highlighting protectionist measures and the emphasis on biofuel as the reasons behind the food crisis, Medvedev said that only collective action would help break the barriers erected by “selfish” governments. While the energy deficiency issue cannot be solved without resorting to hydro-energy and safe nuclear technologies, Russia will help the world resolve the food problem by increasing domestic agricultural production, he said.

He also reiterated the concept of the “four I’s” – institutions, infrastructure, investment and innovation – for Russia’s development, adding that intellectual and human capital with an emphasis on education are the keys to the country’s success.

Later in the day, Medvedev met with a group of international businesses. “Everybody came out really impressed by his willingness to have an open dialogue with business,” said Muhtar Kent, President and COO of Coca Cola, who partook in the meeting.

Shuvalov Shines

On day two, First Deputy Prime Minister Igor Shuvalov stole the show by delivering a surprisingly candid keynote speech on the challenges of Russia’s development. He listed five problems and outlined the government’s strategy to tackle them: the “catching-up psychology,” which should be replaced by the psychology of Russia’s own leadership; the “energy trap,” which so far prevents the necessary shift to efficiency; an outdated education system, which results in a lack of modern management; an absence of healthy lifestyle values in society; and the inflated role of the state in the economy, which is driven also by the desire to assign the responsibility for many industries to the state. Bureaucrats will be gradually replaced by professional managers on the boards of state companies, he stated.
Thomas Graham, the former aide to President George Bush on Russia, who is now a senior director with Kissinger Associates Inc., said that the panel was marked by a new feeling of openness and readiness to invite liberal thinkers to join the discussion. “There is a clear effort to identify what the real challenges are, and an effort to try to talk about how you solve them,” Graham said. “There are no ready plans, government officials are willing to admit that they don’t know exactly how to do this, and they are inviting other people to participate in the discussion. If you look at this panel with Shuvalov – Sergei Guriev, Anatoly Chubais, Mikhail Zadornov – this panel would not have been possible two or three years ago.”

In the context of global economic difficulties, the forum appeared to bridge the old debate between the proponents of the market’s “invisible hand” and the advocates of the government’s active role in steering the economy. Chubais admitted that, unlike the situation in the 1990s, when he was vehemently opposed to any industrial policy on behalf of the government, today Russia is “rich enough” to have one. In another session, Russian railways chief Vladimir Yakunin, who represents the opposing school of thought, reveled in the fact that even U.S. Secretary of Commerce Carlos Gutierrez mentioned the word “policy.”

“Even four years ago, it was considered scandalous to speak about an economic policy or an investment policy,” Yakunin said. “Today, these theoretical approaches are fading into the past.”

Foreign business leaders – from the parade of CEOs of the Western energy giants BP, Chevron, ConocoPhilips, Total, Exxon Mobil and others, who sat on the energy panel together with their Russian counterparts from Gazprom, Lukoil and Rosatom, to numerous bankers, telecoms, and high tech industry captains – all attested to the importance of Russia’s growing economy at the time of a worldwide recession. The shift in the correlation between the slowing, mature economies, and the growth in developing economies has been one of the dominant subjects of the congress. A Dutch banker, who came to Russia for the first time, was overheard replying to a British colleague, who asked him how business was going: “Not good, and that’s why I am here.”

Andrew Sommers, President of the U.S. Chamber of Commerce in Russia, agreed that Russia’s economic success, compared to the rest of the world, is one of the driving forces behind increased business interest in Russia.
“Russia is doing so well, and the rest of the stable economies are not doing so well, plus Russia has all this mineral wealth,” Sommers said. “But the other thing that’s driving interest is the recognition on the business side that Russia’s continuing integration into the global economy is going to be good for everybody. Maybe for the first time in 100 years, Russia can be part of the global picture, and not just a competitor.”

The Spirit of Victory

The forum has become a traditional site for announcing major deals, signifying this Russian integration into the world economy. Last year, Sukhoi and Boeing signed a deal on their cooperation in the development of the Sukhoi Superjet 100. This year, the Boeing leadership congratulated the triumphant Sukhoi head Mikhail Pogosyan on last month’s first flight of the new mid-range jet, which is seen as the pioneering project of the reviving Russian aviation industry, and an example of how Russia can serve as an integrator of a major international high-tech project, involving 40 suppliers from ten countries. Among the new deals announced this year is the contract between Severstal’s subsidiary and FIAT, on the construction of a car assembly plant in Tatarstan and an engine maker in the Nizhny Novgorod region. Another deal was signed between Sberbank and Deutsche Bank. Several regional governments announced major investment contracts, including St. Petersburg offering the first international concession on a road construction in the region.

The video recording of the Superjet’s first flight was heralded at the forum as one of Russia’s long awaited victories, and the spirit of a victorious Russia permeated the entire event. Businessmen and security guards alike lined up to be photographed with the soccer UEFA cup, won last month by St. Petersburg’s Zenit club, proudly exhibited at the display of the club’s sponsor Gazprom. But more victories are expected in the economy and the social sphere, with many speakers taking President Medvedev’s lead in quoting Winston Churchill’s saying that “the problems of victory are more agreeable than the problems of defeat, but they are no less difficult.”

One such problem overshadowing the otherwise entirely bullish forum was the current dispute between the shareholders of TNK-BP – to date, the highest profile foreign investment in the Russian economy. The issue came up again and again in questions from journalists and during backstage discussions. But government officials have consistently shed any responsibility for the conflict.

“We consider that the [British and Russian] shareholders are fully capable of resolving their difficulties,” said presidential economic advisor Arkady Dvorkovich. “We will not interfere with the process. But we hope that it can be resolved fairly quickly, so that it does not obstruct the growing attractiveness of Russia’s investment image.”
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