Debt Free 2008 Preview
Alexander Zhukov, Deputy Prime Minister. Born in Moscow on June 1, 1956, graduated from the Department of Economics, Moscow State University, in 1976 and was granted a Harvard University certificate in 1991. From 1981 to 1991, he worked at the Russian Finance Ministry's Currency Department where he climbed the career ladder from junior economist to section chief. Alexander Zhukov was a Deputy of the State Duma of the first, second and third convocations (1993-2003). On December 7, 2003, he was elected Deputy of the Duma of the fourth convocation from the United Russia party to become First Vice-Speaker on December 29. In March 2004, Zhukov was appointed first deputy prime minister, under Prime Minister Mikhail Fradkov. He is a Master of Sports in chess and was elected President of the Russian chess federation.
Elvira Nabiullina, a Russian economist, was appointed the Minister of Economic Development and Trade of Russia on September 24th, 2007. She is an ethnic Tatar and was born in 1963 in Bashkortostan. In 1986 she graduated from the Moscow State University faculty of economics, where she received her PhD in economics. She studied economics there along with many of the economists who formed the intellectual backbone of liberal economic reforms in Russia.
Deputy Prime Minister Shares His Views on Investment Opportunities in the Russian Economy
Increased Reserves Make 2007 a Success
2007 has been a very successful year for the Russian economy, showing almost 7.5% growth in the first nine months. These are the highest rates ever in recent years in Russia. And, what is perhaps more important, the main components and factors of this growth have changed.
It is still claimed that the Russian economy is developing and growing thanks to high world oil and gas prices. This is misleading. To be sure, Russia is reaping great dividends from high oil prices, but two-thirds of economic growth in Russia today stems from an upsurge in internal demand, fuelled by the increasing incomes of the Russian population - and they are rising much faster than the economy in general.
In the first nine months of this year, wages in Russia rose almost 14%, i.e. after adjustments for inflation. And, most gratifying of all, the current year is seeing an unprecedented inflow of capital into Russia. It began last year when $40 billion was invested in the Russian economy. In 2007, $60 billion was invested in the Russian economy during the first 6 months of the year.
True, the reverberations of the financial crisis in the United States and the rest of the world has caused some turbulence. However, it is not too great a cause of concern - in the past two months outflow of capital from Russia amounted to no more than $10 billion. In general, Russia has successfully overcome the financial crisis that overtook many countries this summer.
Perhaps it is not accidental that we have been able to achieve a high margin of safety in the economy. To begin with, we have paid back practically all of our external debts. On top of everything else, Russia's currency reserves, at over $430 billion, are now the third largest in the world. Thanks to a standing surplus, the government has been able to accumulate some very serious reserves, which would allow the state to finance all its necessary expenses for a three-year period even if oil prices dropped to one-third of their present value.
This suggests that the economy has all the conditions for investors coming to Russia to feel absolutely confident and not fear another default like the one that hit the country in the late 1990s. There is no such threat now.
We no longer consider foreign capital as a purely financial resource. Russia has a great deal of money as it is. Rather, we view foreign capital as a supplier of high technologies and, above all, up-to-date equipment. Incidentally, imports into Russia rose by about 30% in the past year, and almost half of these were of machines and equipment. That means that the Russian industry is rapidly re-equipping itself. The goal set by the Russian government is, above all, to relieve the economy of its dependence on oil, to diversify and develop high-tech sectors.
Within the reasonably foreseeable future, or in 10 or 15 years, Russia will join the world's top five most developed nations. A medium-term development program until 2020, which will be approved very soon, pursues this goal.
In the next 15 years, huge funds will be invested in infrastructure projects, particularly in roads, the energy sector, electric power generation, and the construction of sea ports and airports.
Estimates show that to ensure that Russia's infrastructure does not slow down the current high rates of economic growth, it will be necessary to invest about $1 trillion until 2020. This is a staggering sum. And Russia naturally looks forward to an increased inflow of foreign investment, while furnishing all the required mechanisms for this purpose.
It is frequently discussed in Russia whether or not restrictions on the free inflow and outflow of capital should be lifted. For a long time the country applied very strict rules to currency regulation. But after lengthy debates the government finally decided to abolish all bans and curbs.
Today capital is free to come and go. The fears of those who warned that capital would flee once the doors were flung open have not been realized. In fact, the opposite proved to be the case: capital began flowing in.
Current efforts are focused on maximizing protection of private property in Russia. Work is underway to reformulate weak corporate legislation. But in the next few years Russia will protect investors rights and private ownership rights and have in place all the necessary corporate procedures to contribute to protecting private property.
There are many attractive destinations for investment in the Russian regions. Last summer's investment forum in St. Petersburg demonstrated how the Russian regions presented their investment projects, and how they brought results. Contracts in the tens of billions of dollars were recently concluded in St. Petersburg and Sochi, which a short while ago played host to a similar investment forum.
Sochi is now very much in fashion, not only in Russia but also in the world, owing to the 2014 Winter Olympics. The forum in that city alone saw projects totaling more than $20 billion. They included both state-sponsored and completely private projects, including creating an artificial island in the Black Sea to build hotels and spas on.
Not so long ago, I visited Penza, which has no minerals, but many old factories which used to work for the Soviet-era defense industry. In the 1990s, many of these went to the wall. Penza, too, held an investment forum. And to my surprise, the region, which has a population of just a million and a half, was able to negotiate investment contracts worth more than $2 billion, including a large cement works, an oil refinery and a great number of greenhouses to grow roses. In fact, roses are already being grown in that far from mild climate - those are Dutch roses. Such seemingly exotic projects are now being realized in Russia.
Another interesting fact is that whenever foreign businesspeople are asked if they like the investment climate in Russia, those who work in the country answer "yes" twice as often as those who do not. Improving Russia's investment image in the world is a serious problem, and one which must be solved. To make judgments about business opportunities in Russia from newspaper reports and television stories is to be misled. It is necessary to see everything with your own eyes, to network with your Russian colleagues and try to start your own business.
The Russian government, local authorities and public organizations will, in turn, do everything in their power to ease the process of initiation. International exhibitions, conferences and business forums, where information is exchanged directly and freely, are of immense importance. There should be more of them, and they should be held more often.
Economics Minister Nabiullina Confirms Course for Market Reforms, Points out Positive Trends in Russia - U.S. Trade, and Predicts Soon Accession of Russia into the WTO
Nabiullina: The Vision for Russia's 2008 Economic Development
In recent years the Russian economy has developed at a high rate, registering 6-7% growth every year, which is much higher than the average growth rate in the world. In terms of GDP calculated in U.S. dollars, it has grown from $260 billion in 2000 to $985 billion in 2006. This year our GDP is set to top the $1.2 trillion mark.
Per capita GDP at the current exchange rate increased from about $3,000 in 2003 to $7,000 in 2006, and to about $12,000 according to purchasing power parity.
Industrial output increased by 6.6% in January-September 2007, with the processing industry making the biggest contribution to growth. The success of the Russian economy did not go unnoticed by foreign investors. In the first half of 2007, the net flow of foreign investments into Russia exceeded $60 billion, an increase of 150% compared to the first half of last year. Foreign direct investments increased by 50% to some $25 billion in the first half of the year.
The performance of the stock market is similarly impressive. Between 2000 and 2006 the capitalization of the Russian stock market increased more than 12-fold equaling the annual GDP in 2006. In terms of stock market capitalization, Russia ranks 18th in the world and eighth in Europe. The IPOs of Russian companies have been growing: in the first half of 2007 the volume of IPOs increased by 150% compared to the same period in 2006.
Thus, the stock market is emerging as an instrument for attracting long-term investments into the real sector of the Russian economy.
A good "strength margin"
The balanced economic and monetary policy of recent years has given the Russian economy a good "strength margin." Huge gold and currency reserves (more than $400 billion), the growing Stabilization Fund (more than $140 billion as of October 1), the low level of the government debt, and the budget surplus (7.4% of GDP in 2006 and 4.8% of GDP in 2007) provide a safety net that will ensure sustained development of the Russian economy even in the event of external upheavals, such as a drop in oil prices or the currently observed worldwide decline of liquidity.
To be sure, the performance of the Russian economy is not only attributable to the favorable situation in the world markets but above all to the economic policy recently pursued, which ensured political and economic stability and strengthened the market institutions. I would like to stress the importance of the continuity of economic policy, which emphasizes institutional change, market transformations as well as the formation of a system of development institutions, which provide a catalyst for attracting long-term private investments to the real sector of the Russian economy.
Among the more tangible proof of the continuity of the economic course is the adoption of some long-term strategic documents. This year the federal budget, for the first time, determined government revenues and expenditures three years ahead (including 2010). In November and December the government will consider the Concept of Long-Term Social and Economic Development of the Russian Federation to 2020.
The strategic documents already adopted or to be adopted shortly set a clear course of economic policy for the years to come.
What is this course? The government remains unreservedly committed to market transformations. Improving the investment climate and bringing down the barriers that impede free enterprise remain the strategic areas of the ministry's activity.
It has to be noted that there will be no sweeping reforms like in the 1990s and in the early 2000s. Nevertheless, the targeted reforms currently underway in the areas of corporate law, taxation, and the judicial system are no less important because they are aimed at changing the institutional environment in a qualitative way.
Some of the most important problems that call for serious institutional transformations have to do, in our opinion, with the effectiveness of government control and regulation, and with social policy.
Creating clear-cut and transparent mechanisms of the interaction between the state and business, effective mechanisms of delivering public services, a transparent mechanism of government procurement and coherent administrative regulations are all key institutions that contribute to a favorable business environment, including the development of small businesses.
Also important is a transparent and understandable mechanism of private capital investment, including foreign investment in strategic sectors of the Russian economy. Combating corruption is another goal of institutional reforms. Identifying the powers of government bodies that generate corruption and screening legislation for corruption is the basis of the programs that will be adopted and implemented in each governmental body and region of the Russian Federation.
Reforms in social sphere are needed
The social sphere is another major area in need of serious institutional transformation. Reforms are needed across a whole spectrum of issues, including education, public health and social security.
In addition to the above mentioned areas of institutional reform, one could name dozens of other individual problems on which we are working and will continue to work.
I would like to stress once again that a favorable business environment is a necessary condition to ensure sustained social and economic development. That is why the improvement of economic institutions has been and will remain our key task.
To achieve the goal of accelerated development, it is necessary to create special instruments that stimulate the development of infrastructure and high technology areas. These instruments, known as development institutions, have been created in Russia in recent years.
The first is the Investment Fund, which supports infrastructure projects as well as projects of nationwide significance. The budget will earmark more than 450 billion rubles ($18 billion) for these purposes in the period before 2010. The Investment Fund is a powerful catalyst for the inflow of private investment. Under the projects already approved one ruble of government investments is matched by three to five rubles in private investments as part of public-private partnership.
The second is special economic zones. Four types of zones are being created:
- technical innovation zones in Zelenograd, Dubna (Moscow Region), St. Petersburg and Tomsk;
- industrial production zones in the Lipetsk Region and in Tatarstan (Yelabuga);
- tourist and recreation zones in the Kaliningrad Region, the Stavropol Territory, the Krasnodar Territory, the Altai Territory, the Republic of Altai, the Irkutsk Region and the Republic of Buryatia;
- special port economic zones.
Concession agreements are another important development institution, which offers one of the most effective models of interaction between business and the state. Federal tenders have been announced for the first four concession projects worth a total of 203.8 billion rubles ($8 billion).
The recent years have seen positive trends in bilateral trade. In 2006, the Russian-U.S. trade increased by 41% on 2005 to $15.3 billion, according to Russian statistics. The U.S. is Russia's eighth largest trading partner, accounting for about 3% of Russia's foreign trade. From the results of 2006, the U.S. is the sixth largest foreign investor in Russia in terms of accumulated investments. Unlike most other countries, the largest part of U.S. investments (about 60%) is direct investments.
American direct investments in Russia are mainly concentrated in the production sector (about 75%, according to American data).
However, it is obvious that American companies have not fully tapped the investment potential of our market. One restraining factor is the absence of a bilateral agreement on capital investment protection and incentives. The U.S. is the only large economy with which Russia does not have such an agreement.
We expect Russian-American trade and economic relations to increase in the coming years. This will be aided by the expected accession of Russia into the WTO.
Russia's membership in that organization is one of the most effective instruments for consolidating the positions of American exporters in our market. Because of international obligations, Russia will assume, in the framework of the WTO, that the instrument will also guarantee a transparent and predictable legal environment for the activities of American companies, an environment that meets international standards.
Here is an example of how the mere prospect of Russia's accession into the WTO improves the situation in the Russian market. The negotiating process has given a powerful impetus to the fight against violations of intellectual property rights. Illegal production facilities are being shut down, controls are tightened and legislation is improved.
We estimate that about 90% of the work of accession has been done in the course of the negotiations. As usual, the final steps require the most effort. For our part we are doing all we can to bring the negotiations to a successful conclusion at an early date. -
Facts and Figures
The Russian Finance Ministry expects GDP to go up by 7.3% this year, and has reported a growth of 7.7% in the period January to August.
Foreign direct investment in the Russian economy is expected to reach $40-$50 billion in 2007, although some experts think it could soar to a record high of $70 billion. Last year FDI totaled $31 billion, or 3% of GDP.
Investment in fixed assets went up by 21.2% in the first nine months of the year (13.7% last year). The Finance Ministry forecast a 150% increase in investment in fixed assets in ruble and dollar equivalent in 2007-2010.
The ministry also forecast a 14%-15% growth in consumer demand and reported an annual increase of 10% in take-home incomes over the past several years.
