Russia close to taking seat at economic table

By Kathy Lally
Washington Post Foreign Service
Thursday, October 21, 2010

MOSCOW - After a century in the economic cold, Russia is close to coming inside, with encouragement and promises of help from an array of Americans, including President Obama, Arnold Schwarzenegger and intrigued venture capitalists.

First comes membership in the World Trade Organization, which has been under negotiation for 17 years. Russia is expected to join the global economic club within a matter of months after resolving lingering economic issues with the United States, high among them clamping down on piracy and enforcing intellectual property rights.

And now Russia, which has often been interested in foreign cash unaccompanied by foreign ownership, is courting investors. Last week, California's Gov. Schwarzenegger tweeted his way through a Moscow visit - "Just landed in Moscow. Beautiful day. Can't wait to see Pres Medvedev" - with a bevy of venture capitalists in tow who wanted to look over the landscape.

This week brought still more executives, this time from Alcoa, Procter & Gamble and Ernst & Young, who listened to a speech by Prime Minister Vladimir Putin and then talked to officials from his government about the opportunities - and impediments - they saw in investing here.

What kind of economic world will be created if Russia joins the WTO and opens up more to investment remains to be seen. This is still a country notorious for corruption - a 2009 Transparency International report said 31 percent of those surveyed reported having paid a bribe in the last year, and public officials are widely distrusted.

But President Obama and President Dmitry Medvedev made WTO membership a priority during a White House meeting in June, setting a Sept. 30 deadline to resolve certain disagreements between the two countries, and they met the deadline. WTO membership would give Russia a voice in setting global economic policy in return for agreeing to submit to world trade rules and regulations.

And the Obama administration, after declaring its diplomatic "reset" with Russia successful - citing agreements on Afghanistan, arms control and cooperation on Iran - is turning its attention to developing a deeper economic relationship.

"The potential of this market for American business is very great," Lawrence H. Summers, Obama's top economic adviser, said at a press briefing here Wednesday, "and it's important for the goal President Obama has set for doubling exports over the next five years."

Medvedev, who had toured Silicon Valley before meeting with Obama in June, asked for U.S. help in creating a Russian version. Schwarzenegger (R) answered that call by bringing a delegation of Google, Oracle, Trident Capital and more to meet with Medvedev at Skolkovo, a new graduate business school near Moscow that Russia hopes will nurture its Silicon Valley.

The venture capitalists suggested that Russia follow China's example: set rules, get things up and running and then get out of the way, allowing venture capitalists to support the entrepreneurs they deemed promising.

John T. Connor Jr., founder and portfolio manager of the Third Millennium Russia Fund, who accompanied the delegation, said many of the executives were impressed. They liked the 13 percent flat tax on personal income. "Oh boy, these guys get it," was the way they put it, Connor said.

Thus far, Russia's journey toward deeper economic ties with the rest of the world has been unpredictable. When Putin first became president a decade ago, he was very interested in the WTO, according to Dmitri V. Trenin, director of the Carnegie Moscow Center, but as he grew cynical about the West, he changed his mind and thought Russia was better off going it alone, buoyed by its oil and gas revenue.

"The economic crisis made him change his mind again," Trenin said. "He realized that Russia was very much a part of the global economy and needed to be at the table when decisions were made."

Now, with Medvedev pledging to modernize Russia, there's a desire to develop an economy that goes beyond exporting raw materials and importing finished goods, and that means joining the economic club.

Trenin said membership will be a good thing, even though farmers are worried about a cut in agricultural subsidies - part of the WTO agreement. "Russia will be integrated into the global system of rules and norms," he said. "Eventually, that will help in establishing rule of law."

Complications still lie ahead. The European Union has concerns over timber export duties. Georgia, which lost territory in a war with Russia in 2008, could put up obstacles. The United States would have to repeal the Cold War-era Jackson-Vanik amendment, which imposed trade penalties on Russia for preventing the emigration of Soviet Jews.

"A process like this is not finished until it's finished," said Summers, who was optimistic nonetheless. "I can now say the end is in sight."

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