Transcript of the meeting:
Dmitry Medvedev: Good afternoon ladies and gentlemen,
I am glad to see you all. It has always been my belief that direct communication is best because it provides an opportunity to hear what foreign business executives think of the Russian economic situation and to discuss with them what has been done and what we have failed to do.
I am referring to the investment climate, of course. For me, this meeting is particularly interesting because it is the first time I’m chairing it in this format, that I’m meeting with you as members of the Foreign Investment Advisory Council, which includes 40 major companies and has been active in Russia for the past 18 years. All of these companies are Russia’s long-standing and trusted partners.
I don’t want to cite a lot of figures, but let me mention just a few: the total investment that your companies have made in Russia has exceeded $110 billion. This is a good amount, and what’s more, many of those present have plans to invest more. Winston Churchill once said that a nation’s reputation is determined by how much it can borrow. It is clear today that this maxim does not only apply to debt, but also to the amount of capital invested in a country.
I have another curious figure for you: according to the survey we are presenting today, in 2007, only 8% of foreign companies believed that Russia was making progress in terms of attracting foreign investment; now more than one-third do. Foreign direct investment alone accounted for $53 billion last year, or 22% greater than in 2010. Yet, despite the obvious progress, we know that we must work harder still to improve the investment climate, because even one-third is still a minority – this means that two-thirds still think that Russia has not made any significant progress so far, and needs to improve. This is a cause to stop and think.
Investing in production is more like a sprint rather than a marathon. Decisions have to be made for decades, and must take into account many details, forecasts and both global and country-specific risks. There is a widespread stereotype that the only worthwhile sector for investment in Russia is commodities such as oil, gas and other natural resources. Although everyone knows this is not true, the stereotype persists. But members of this council are certainly aware that Russia offers long-term opportunities for investors that no other country can offer. In this regard, I would like to call your attention to three important issues.
The first one is infrastructure. Russia is the perfect place for an international transport hub and a natural provider of logistics services. More infrastructure projects are now being implemented in Siberia and Russia’s Far East. I must tell you frankly that we plan to put major emphasis on the development of our Far Eastern regions – which should not in any way affect our European partners and projects – with a focus on building transport networks and plants and certainly on a number of local social issues as well. Therefore, I am inviting anyone who is interested in investing in Russia’s Far East to join these projects.
The second important issue is privatisation. We are planning to sell shares of several large, important companies. Some of them have been sold over the past few months. Privatisation should make companies more efficient. I talked about its importance at a meeting with the Davos-Russia forum on Sunday, which some of you attended. But let me stress this again: privatisation is not about boosting government revenues, at least not entirely. The idea is to add value to Russia’s economy and to spur development. We must issue clear signals to the outside world about where we are going from here and what we want to achieve. Do we want an efficient economy based on private property, or one that is government-regulated, dominated by red tape and consequently prone to corruption? I think the answer is obvious. But it is not enough to make a statement – what we need is to act on our intentions, and this is exactly what privatisation does. It is a policy. It needs to be guided by some reasonable economic logic, but I do not think that I need to even mention this, not to this audience.
One of the largest recent financial market deals, the initial public offering by Russia’s Sberbank, was a success overall. The deal involved several respected investment funds that have never before invested in Sberbank or Russia.
My third point is the growing consumer market and everything related to the growing middle class. I am referring to retail, residential development, healthcare services, and telecoms. In fact, 40% of business executives said they decided to invest in Russia because they see a clear competitive edge here.
You are certainly aware of how fast the Russian economy is growing, shrewd observers that you are. I won’t keep you long; every head of state or government is tempted to praise and advertise what he or she has done, and this is only normal. But allow me to cite just one more little figure, because it is very telling – I am referring to the growth of GDP in Russia in 2011. You know that Russia recorded solid growth of 4.3%, which was actually the highest growth rate among the leading European economies and among the highest in the world, after China and India. We hope that it will not shrink significantly in 2012 despite the difficulties in the global economy.
I would also like to mention several new opportunities. One of them is the Customs Union, which is an integrated market across three countries, or nearly 200 million consumers. This market is now governed by rules that have been harmonised with international regulations. These rules were not adopted in spite of the WTO, but rather in strict compliance with WTO rules. I spoke about this yesterday and I will say this again: I think that we have actually managed to solve two problems that seemed mutually exclusive at first – to join the WTO and to build an integrated market across three countries. This is good and I hope that those present will also benefit from this. This was a difficult process but it has created a competitive environment.
Colleagues, I would like to thank the council members for your meaningful contribution to improving Russia’s business climate. This is the most important issue for us, I think. We are working hard on this, quite successfully at times and less so at other times. What is important is that, apart from your regular business activity, you are engaged in extensive analysis, studying our legislation and law enforcement practices and discussing problems from your own first-hand experience. This is very valuable and we do appreciate this, thank you again. I know that a whole series of initiatives that you have helped the previous Government prepare have been implemented and translated into a number of projects. The Russian Direct Investment Fund began operating last year (that was one of my instructions) and is now attracting 4 roubles to 1 from the co-investors and has accrued quite substantial funds. The fund is currently involved in 50 investment projects worth a total of $11 billion and expects $30 billion worth of foreign investment, which is not bad. The Skolkovo Innovative Centre has shown adequate results. This project is very important to me not only because I was one of its originators but also because it represents a crucial stage in the development of the Russian economy. It comprises hi-tech and innovative businesses and start-ups that are, unfortunately, still quite new to our economy in this modern, competitive environment.
We are developing roadmaps for the most sensitive business issues. These issues are quite sensitive for you, too. There are four roadmaps currently in place. I have approved them in the past few months. They include supporting access to foreign markets and supporting exports, making energy infrastructure more accessible, improving customs administration and, finally, improving the business climate in the construction industry. Around twenty roadmaps are scheduled to be implemented by 2014. I hope they will not be only action plans nicely presented on paper and in digital form but tangible roadmaps that will provide the foundation for the transformation [of our economy]. I believe that this work is our shared responsibility and that it is essential for Russia. We should think about the best ways to incorporate these roadmaps in the work of the Advisory Council.
Russia is now a full member of the World Trade Organisation. Frankly, this thought is quite inspiring to me. We had to spend far too much energy on acceding to the WTO. Our efforts, including those of each participant in this process, were disproportionately large. But now Russia is a full member of the WTO; its standards and rules apply to us as well. We are pleased with this fact despite the many difficulties that newly accepted member countries always face. But it’s better late than never.
Next in line is our accession to the OECD (Organisation for Economic Cooperation and Development). The point of becoming a member of such a prestigious organisation is not just to be able to mark it off the list. It will be a signal to investors from both Russia and abroad. I think that business climate is a mixture of reasonable, objective things and also irrational things such as these signals. This is especially true for Russia. Our state intentions and memberships in international organisations might not have a direct influence, but I have no doubt they affect the business climate. We are interested in making systemic changes and will, of course, further update the law in terms of regulating capital investment, financial markets, corporate management (the new version of the Civil Code, which contains a number of ‘stories’ in this respect, is now under development), conservation and, of course, anti-corruption measures. These are all conditions of OECD membership, but, most importantly, this is also what we need.
There is another important feature typical off Russia that you are well aware of. Russia is not just the largest country in the world. For obvious reasons, Russia, like any other large country, has quite specific conditions for living and, therefore, for doing business. Apparently, investors are usually attracted to more comfortable regions, including those with well-established and advanced infrastructure. It’s understandable. I remember when I was still in business. In the 1990s, foreign businessmen would only come to Moscow and St Petersburg. Other cities did not exist for them and I had to explain to them that they could have looked further. They would ask me simple questions like “Are there adequate hotels?” “Are there airports?” “What about banks?” It was hard to answer those questions. The situation is different now, but the gap is still wide, and some places have good prospects but quite low investment profiles. I understand that this issue is not for investors, both Russian and foreign, but for us to resolve. The regions must work hard to become more attractive. We have drafted recommendations for regional executive bodies on how to improve the business climate. We will test the scheme in 13 regions and then promote it in all others. The personal motivation of regional leaders – legal motivation, of course – is vital. Their success must be evaluated based on improvements in the investment climate, and key performance indicators or KPI must be determined based on the opinions of businessmen. I hope it will help. By the way, these KPI indicators mostly match the indicators of the Doing Business rating as well as priority areas of the council.
I should stop here to give you a break. Mr Turley (James Turley, Ernst&Young Global Chairman and Chief Executive Officer, co-chairman of the Foreign Investment Advisory Council), the floor is yours.
James Turley (via interpreter): Mr. Prime Minister, thank you for saying this. I am very pleased to greet you in your capacity as chairman of this council. We exchanged views... We met in Davos a few years ago and discussed some of the issues related to foreign investment. You assured us that you were going to improve the investment climate, and progress has been made. We thank you for that. As a coordinator of FEACO (European Federation of Management Consultancies Associations) and FIAC (Foreign Investment Advisory Council), I would like to point out several issues that FIAC members have been working on in recent years in collaboration with governments. We have worked on many major issues that you have mentioned and smaller issues as well, such as regulations and reducing administrative barriers. Investors spoke about the need to reduce the number of technical regulations and administrative barriers. The new legislation is designed to resolve licensing issues. The results are striking: licensing requirements have been reduced by 94%. In addition, other governmental draft executive orders have been put together to regulate the construction industry and energy issues. We actively participated in the working group to assess the legal framework in this area. In addition, we provided our comments on the customs reform (drafting a roadmap to improve customs operations). We have made substantial progress in all areas.
The second set of issues has to do with financial institutions and securities markets. We did a lot of work within the working group. We drafted comments that were incorporated into the new legislation, the legal status of the central depository and its functions. We also worked on developing a concept for a formal payment system. We provided our comments to the Ministry of Finance on the draft law on amending Article 6 on insurance. This law helped increase foreign investment amounts from 25% to 50%. Again, I believe that the progress has been quite substantial.
The third technical area that we are dealing with is the legal system and policy and energy processes. The working group is concentrating on improving the business climate for us. We are drafting a roadmap that has been submitted to the Government and is in the final stages of approval. We are grateful for that and are also working to improve the investment climate in Russia. Yesterday we spoke ... We have just released the 2012 Investment Climate report which assesses improvements in this area in Russia. Seventy percent of respondents said that Russia is moving in the right direction (compared with 45% last year). Countries investing in Russia today show high levels of satisfaction. Now we can see that going from 45% to 70% is significant progress. Investors believe that Russia is becoming more globally integrated. WTO membership is also a key contributing factor.
We are aware of the huge effort on your part that has gone into achieving this, and this work needs to be carried on by FIAC members as a group and individually. Of course, there is always room for improvement. Bureaucracy, infrastructure and corruption remain major barriers. We know that your Government is working on these issues in a balanced manner. We can see that progress is being made in this area and in Russia’s investment portfolio and all FIAC members are committed to working with you to ensure the continuation of this progress.
Before I conclude, I would like to thank you for your contribution to this effort. A very important aspect of FIAC is collectivity: the ability to speak openly, honestly and in confidence, discuss the issues where we are helping each other and continue to progress and turn Russia into an attractive investment destination not only for foreign investors but for domestic entrepreneurs as well. Your leadership in this area is very important. Thank you.
We have a number of thoughts that we would like to share with you. Perhaps, you will also be able to respond to them and take them on board. We will speak about specific things. Perhaps, P&G can begin by talking about customs legislation.
Robert McDonald, CEO of Procter&Gamble (via interpreter): Mr Prime Minister, ladies and gentlemen, we will talk about customs legislation. Russia is a key market for Procter & Gamble. It’s a country with great opportunities for growth, a country with a rich culture and great people who deserve access to a wider and more varied selection of consumer goods to meet their everyday needs. Procter & Gamble has been among the key investors in Russia since it came to the country in 1991. Our company has three plants here and plans to expand, and the total amount we have invested into Russia so far is over $400 million.
As demand grows, we are seeking to establish the best supply system possible. Efficient logistics can be used to establish reliable control over costs, which will allow us to achieve the best value of our products. In this regard, I would like to congratulate the Russian Government on the success of the APEC Leaders’ Week in Vladivostok last month. Important steps in liberalising regional trade and investment and developing efficient supply chains have been made under Russia’s chairmanship of APEC. Procter & Gamble is proud to have been able to contribute to the success of APEC through participation in its Business Advisory Council.
The vastness of Russia, the largest country in the world, is the main reason behind the key importance of reliable and seamless supply chains both for Russian companies and foreign investors who are focused on success. Efficient logistics means more opportunities for consumers. Procter & Gamble believes that sustained growth in Russia in the long run directly depends on a well-functioning import-export system, developed infrastructure and efficient supply chains.
I would like to focus on three issues that we believe are critical to improving the reliability of supply chains and reducing associated costs. We share FIAC’s recommendations on how to address them. The first issue relates to the scope of customs regulations. We fully support the efforts undertaken by Russia to simplify and improve the regulatory framework with regard to the import and export of goods, raw materials and equipment. This is an important part of our work as the coordinator of the FIAC working group on customs regulations.
We are pleased that our cooperation with the authorities is bringing about positive changes in this area. I would like to take this opportunity to thank our key partners, senior officials at the Federal Customs Service and the Ministry of Economic Development, for their work.
An important project in this area was the development of a roadmap for improving customs regulations, as well as the adoption of key performance indicators by the Federal Customs Service. We really appreciate the potential of this businesslike approach to the modernisation of customs procedures. However, you'll agree that the specific amendments that have been adopted, designed to improve the existing legal and regulatory framework and achieve good results, have to be implemented. To resolve this issue, we propose establishing a joint working group, which will consist of representatives from the Federal Customs Service, the Ministry of Economic Development and investors from the working group on customs regulation, which will work on the implementation of this roadmap. Second, in order to improve the quality of the supply of goods and reduce the time needed to deliver such supplies, we should harness the potential offered by the latest developments in smart technology. According to our information, the Government is studying the possibility of streamlining supply chains through the use of modern technology, including satellite navigation systems. FIAC investors advocate the use of modern technology, but these solutions need to blend in seamlessly with the global logistics system. We must take into account the interests of logistics companies and manufacturers. FIAC investors would like to cooperate closely in this area.
The third issue is about road transport. Like in all other countries, road transport costs on the Russian market are determined by a range of overheads, the amount of which depends on the level of development and the quality of the roads, as well as tax rates and complex regulations involved in the road haulage industry.
FIAC experts conducted a comparative analysis of road transport costs in the European Union and Russia. Currently, the costs per kilometre are lower in Russia, but if we remove drivers’ salaries from the calculations, we’ll see that other costs in this area in Russia are comparable with the related costs in the EU or are even higher. Fuel costs, including excise duties, are about the same. In general, the people involved in the road transport market in Russia pay 1.5 times more taxes compared to the EU, and the physical wear-and-tear figures are three times higher.
In addition, we believe that Russia could do a lot to simplify the existing road transport regulations, which are often overly complicated and occasionally unpredictable. For example, we would like to point out the use of local transport tax and seasonal traffic restrictions at both the federal and regional levels, as well as the existence of a compensation fee for damage to local roads during the period of seasonal restrictions. The volume of paperwork required for each cargo, such as numerous bills of lading, invoices and licenses could also be reduced.
In connection with the intention of the Russian Government to improve the efficiency of the supply chain in order to boost Russia’s competitiveness, FIAC investors suggest developing a roadmap and key performance indicators for the road transport market based on the positive results and experiences obtained in the area of customs regulations. In turn, we propose expanding the range of issues addressed by the FIAC working group on customs regulation to include logistical problems and renaming the group into a working group on customs regulation and logistics. We are ready to support this group with our knowledge and resources, which is important for the Russian economy and the success of our business. We believe that by working together we can change the lives of the Russian people. Together, we can change their lives for the better in both the short and the long term. Thank you, Mr. Chairman.
Remark (via interpreter): Thank you. Now I would like to hear a report by the Chairman of the Board of Nestle Peter Brabeck-Letmathe.
Peter Brabeck-Letmathe (Chairman of the Board of Nestle) (via interpreter): Mr Prime Minister, ladies and gentlemen,
I have the honour of speaking today on behalf of two working groups of Russia’s Foreign Investment Advisory Council – not only for the trade and consumer sector but also at the request of Ms Indra Nooyi, PepsiCo CEO, who cannot attend this meeting for emergency reasons. She asked me to give a short overview of the activities of the working group for technical regulations and the elimination of administrative barriers, and to share her ideas with you.
First, I would like to thank you for convening this meeting. We enjoy visiting Moscow and are glad to see that Russia and its Government remain open to the problems of FIAC-affiliated transnational companies that have been successfully doing business in Russia for many years. At the same time, in light of Russia’s ever closer economic integration with Belarus and Kazakhstan, and other CIS member states’ eagerness to join the new organisation, we would very much appreciate the Russian Government expanding to the Customs Union the available investment-oriented arrangement for consultations with the business community on legal matters. The group for the trade and consumer sector and the group for technical regulations and the elimination of administrative barriers have 14 and 26 corporate members, respectively. Due to the wide range of industries represented by the member companies, our working groups’ agenda includes issues that are important for many Russian economic sectors.
On behalf of the two working groups, I would like to express my deepest gratitude to our Government coordinators – First Deputy Prime Minister Igor Shuvalov, Minister of Economic Development Andrei Belousov, his deputy Sergei Belyakov, and their staff – for effectively promoting the issues on today’s agenda.
Throughout last year, the group for technical regulations and the elimination of administrative barriers worked together with executive bodies on such essential projects as developing the technical regulation system, reducing administrative barriers in the construction industry, and reforming labour laws. At the same time, the group for the trade and consumer sector collaborated with executive authorities to modernise veterinary and phytosanitary monitoring, develop technical regulation at the national and supranational levels, and regulate trade.
One issue demanded both groups’ efforts. That was the legislation on the procession of packaging waste and the technical regulation of packaging safety. Industrial manufacturing always involves the production and exports of packaging by the millions of tonnes or hundreds of million dollars. That is why the technical regulation of safe packaging and streamlining the laws on processing production and consumption waste is becoming even more prominent.
On the whole, both groups approve the Customs Union’s Technical Regulations on safe packaging, endorsed on July 1. However, this document demands certain improvements from the point of commodity manufacturers and importers, irrespective of industry, to prevent any chance of redundant and unauthorised barriers to business. For instance, the Regulations do not explicitly define their objects, which might lead to misinterpretations or overly broad interpretations by regional branches of the Federal Customs Service of the list of products liable to such monitoring. In particular, this concerns tape, labels and rolled paper not intended for the immediate packaging of other goods but to be used in the subsequent manufacturing of packaging proper.
We are sure that amendments providing a detailed list of objects of technical regulation that specifies the codes of the list of commodities involved in the Customs Union’s foreign economic activities will rule out any misinterpretation of the relevant clauses of the Regulations. In this regard, we are glad to see that Russia has already drawn up relevant amendments, which the European Economic Commission will analyse later this month alongside with an amendment that confirms certification of state commodity registration, which acts as the mandatory compliance assessment document. These are two important steps.
Another, even more important matter is the absence of a transparent arrangement for consultation between the Economic Commission and the business community on the interpretation of clauses in the Customs Union Technical Regulations. The descriptions given by the individual Customs Union members may vary greatly. Where the Customs Union Technical Regulations on safe packaging are concerned, we mean the vague procedure for small-size commodity identification, number blanks to designate packaging materials, etc. Such clauses can be easily misinterpreted and lead to the destruction of packaging due to its non-conformity to the relevant Customs Union Technical Regulations. Such misinterpretation of the regulations could result in millions of damage. So we think that all manufacturers, importers and Customs Union member state authorities will greet the settlement of this pivotal issue, which is all the more topical since several more Customs Union technical regulations will be endorsed next year, and the Eurasian Economic Commission also will be unable to give them official explanations.
There is yet another problem related to packaging. That is Russia’s new draft law on industrial and consumer waste. We think it should be discussed from various points of view, including the business community’s, before it’s endorsed to avoid excessive financial drag. This vital issue has been on our agenda for several years because all FIAC members attach a lot of importance to environmental protection, including the recycling of packaging. They have always supported industries’ voluntary efforts to collect and process this waste.
The first bill on amending the law on industrial and consumer waste included clauses on special corporate taxes, and did not provide any alternatives for companies. We were somewhat wary about it because the amendment could lead to an unfounded and disproportionate financial load on the market without achieving its goal – the modernisation of garbage processing.
I am happy to report that long and productive cooperation between FIAC and the relevant ministries and agencies – the Federation Council, the State Duma and the Ministry of Economic Development – in assessing regulation and on other matters has resulted in a thoroughly amended bill that includes foreign investors’ proposals. It gives production-based businesses a choice between this tax and independent waste processing. Indicatively, the text has been brought into harmony with European Union laws on the standards for specific kinds of waste. In light of this progress, we dare ask the Russian Government to go on implementing these optimum practices because the bill is still under consideration and a number of specifying Government decrees will be necessary after it comes into force.
Best practices are also exemplified by a reduction in administrative barriers in foodstuffs regulation, which has shifted from the old double monitoring to the convenient one-commodity-one-permit system. We also appeal to the Government to continue implementing this system, especially in veterinary monitoring. We know there is an intention to expand the list of processed foodstuffs requiring veterinary certification for distribution within the domestic market. As distributors assessed the regulatory effect of this prospective measure, they concluded that it would result in yet another barrier to commodity distribution, so we appeal to the Government not to endorse it.
In conclusion, I would like to stress the major positive impact of the Eurasian Economic Commission. We have been aware of such an effect since it was established, and we hope the dialogue between it and the business community will continue to develop.
We are sure that the Agency for Strategic Initiatives and the recently established Open Government will make promising platforms for a future dialogue between the business community and the Russian authorities. Thank you very much.
Dmitry Medvedev: To make this a well-rounded dialogue, I propose that we listen to several more addresses before I make my comments. The government of any country is a collective body, so I think the ministers here should also answer the questions that will be asked – or they will die of boredom. Then, we will elaborate on our final stance. Agreed? Okay.
Remark (via interpreter): Thank you. Now let’s move onto Mr Richard Burrows (Chairman of the Board of BAT). He will speak about reducing administrative barriers. Thank you.
Richard Burrows (via interpreter): Thank you, Mr Prime Minister. We support your efforts to improve the investment climate in this country. You have been very successful in this. However, Russia still needs higher World Bank business ratings. One aspect that can play a significant role in improving the investment environment is the reduction of the administrative barriers that investors have to deal with when they design, build and open industrial factories. Our working group has put together several proposals for achieving this goal.
First is the streamlining of the procedure for getting the preliminary permission documents for construction. We think that simplifying the procedure here would be a great step forward. The Russian Government’s recent efforts to improve the laws on the construction industry and streamline paperwork have been very effective. However, the experience of certain FIAC-affiliated companies shows that a problem arises even at the permission stage, long before the design documents are even considered. This is because the acting legislation allows for a lot of interpretation with regard to the set of preliminary permission documents needed. This means the civil servants considering the documents can demand a practically unlimited number of papers on the basis of various regulatory acts. The FIAC expert team recommends creating a unified register of the acts that planning documents need to comply with. This way, only these papers and no others can be requested. If our proposal is taken on board, the whole process will become more transparent, much simpler and will take much less time.
Our second recommendation concerns the improvement of sanitary standards and regulations for industrial manufacturers. There are a vast number of these rules and some of them are desperately outdated. The demands they make on industrial construction are formidable obstacles to the construction industry. We suggest establishing an interdepartmental team of experts that will work with the business community to analyse the current sanitary standards and regulations. The expert team will approve the rules it finds relevant, and they will be included in the unified register I just mentioned.
Our third proposal concerns the streamlining of the approval procedure for design documents. Our working group proposes to change the approach to this procedure. As things are now, the investor needs not only confirmation of compliance with construction safety rules but also proof of the current need to build a project on a particular site. All this complicates the procedure a great deal. We advise that a corridor for possible waste be given preliminary approval at the point when all the information on the construction is being considered. It should also include the buffer zones of planned industrial projects. As a result, the investor will be able to choose the site best suited to his enterprise. If it already complies with the standards set before – for instance, pollution limits and categories of waste – the investor will need only an approval of his construction blueprints.
Mr Prime Minister, we think that the measures we are discussing will help foreign investors with the long-term planning of their businesses. I am sure that Russia’s economic and human potential will lead to the country’s further development and will eventually make it one of the world’s leading economies. Thank you, Mr Prime Minister.
Remark (via interpreter): Thank you. Now we will hear about infrastructural ideas from the representatives from Siemens.
Peter Loescher (Siemens President and Chairman of the Board) (via interpreter): Mr Prime Minister, members of the Russian Government, colleagues,
I would like to comment on Russian infrastructure and suggest how the Government could support hi-tech industries. Of course, this is greatly connected with the market and investment, but I think the Government can offer direct support in certain instances. Here are several examples. The first concerns customs. Russia is getting an investment programme underway worth 1 billion euros, which I mentioned at a FIAC meeting a year ago. We are working on a project to manufacture SF gas insulated packaged switchgear in Voronezh. When the manufacturing began, we had problems with necessary components. When we imported them, we had to pay customs duties amounting to 25% of their cost. Customs laws should be amended to exempt components necessary to establish local manufacturing plants for the first five years from the initial investment. This kind of decision would immediately benefit local manufacturers and improve the quality of their products.
As a result, it will contribute to the implementation of Roadmap No 4, which has to do with administration. Second, contracts with manufacturers within the framework of projects to organise national production might come as a major incentive for investors, who would promptly get involved in the work. Our cooperation with Russian Railways shows that a guaranteed contract inflow intensifies production development. Such motivation can be used by the Russian Government to great effect, and I assure you that we are ready to organise local production and launch innovations if guaranteed contracts are available with a coordinated threshold amount of high-tech products from our portfolio.
Third is the implementation of innovation R&D. Government resolutions could open up the market to investors in localising innovation technology in new spheres. Let me cite an example from wind power engineering. Siemens and its partners – RusHydro and Russian Technologies – announced two years ago that they were ready to launch the local manufacturing of state-of-the-art windmill electric generation units, including pillars, generators and blades. All this is part of the high-tech field. It would be possible now, as in the past, only if the Government sets special tariffs to justify wind power generation economically. I mention all these matters because, based on our experience, we can see the overall impact of foreign investment on the local manufacture of high-tech products. We are eager to launch such manufacture, and the transfer of technology to Russia is one of the positive influences [of investment].
I would pay even greater attention to other aspects, for instance, increased competition with the toughening of market demands for technology. Here is one practical example: about a hundred suppliers are required in order to launch the production of electric locomotives or suburban trains at Uralskiye Lokomotivy Co near Yekaterinburg. These suppliers will be sought after in the domestic market, taking into account the required standards and upgrading their products. Our solution involves the encouragement of transnational suppliers to follow Siemens and organise production in Russia, or to independently launch the local manufacture of components. As we arrange the manufacture of sophisticated technical products at the local level, we enhance the added value of national businesses, and many well-trained specialists appear in the local labour market. Moreover, locally organised production promotes domestic services and R&D.
We also guarantee the progress of research and development in collaboration with Russian partners and on the basis of our own developments. Let us take as an example the construction of turnpike truck roads – a system in which the pooled technologies of Siemens and Russia’s GLONASS promise a tremendous effect – one more step on Russia’s road to an innovation infrastructure and economy.
Allow me to return to the effective energy use. In 2010, you, Mr Prime Minister, and Chancellor Angela Merkel addressed Siemens and BASF for analyses of energy efficiency in Yekaterinburg. Our analysis revealed the opportunity to save 44% to 79% of energy depending on the use of relevant technology. As we were discussing the idea with Russia’s Ministry of Economic Development, it occurred to us that FIAC should draw up a convincing report on the project. Many FIAC-affiliated companies can offer tested technology, know-how and experience to orient the Russian federal programme of energy efficiency. We might apply the comprehensive attitude to energy efficiency in one of the Russian regions. The business model will be demonstrated in practice, including efficient power generation, transmission, distribution and consumption, all of which require insulation materials, automation, etc. Later, other Russian regions are welcome to use it. The pattern would exemplify foreign investors’ partnership with the Russian Government in the modernisation of the Russian economy and infrastructure. Thank you.
Remark: Now we have a few more brief speeches. I give the floor to Sir Suma Chakrabarti, President of the European Bank for Reconstruction and Development.
Sir Suma Chakrabarti, President of the European Bank for Reconstruction and Development (via interpreter): Thank you, Jim. Thank you, Mr Prime Minister. This is the first time that I am attending a meeting of the Foreign Investment Advisory Council. This is my second time in Moscow over the past three months. Moscow is very important for our bank. I have been working with Russia for 20 years in various roles, and I am feeling more and more optimistic about the country’s potential. I would like to say a few words about EBRD’s cooperation with Russia and about the investment climate because this will bring me to the subject of the banking sector and the financial markets.
We have been investing actively in Russia since 1991. We have launched several hundred projects and we have issued shares worth several billion euros. Last year, our bank invested about 2.9 billion euros in Russia, an all-time high. Since early 2012, we have already invested over two billion euros, and we are feeling quite optimistic about investing in Russia. We have drafted a three-year strategy for our bank’s Russian operations. We focus on various aspects, including economic diversification, economic modernisation, corporate governance, energy-saving technologies, strengthening the private sector, investment in public-private partnership and support for transparent and competitive privatisation.
Apart from Moscow and St Petersburg, we cooperate with other Russian regions, and we receive assistance from the Russian Government. In this context, we pay tremendous attention to improving the investment climate. We believe that this is the main priority. We hail Russia’s striving to improve its positions in the Ease of Doing Business index. We also implement programmes in over 37 regions, and we cooperate with more than 4,000 firms, the World Bank and the Higher School of Economics. Preliminary results show that corruption, access to skilled human resources and financing are the main factors hampering business operations. It was also revealed that the regions differ greatly in terms of their business climate. Consequently, effective federal reforms and regulation are needed to be introduced. Political reforms alone are not enough. And the regions can learn a lot from each other. We believe that inter-regional exchanges of experience and of the best inventions should be simplified. I would like to mention several examples. The personnel-training programme has been improved in Tatarstan. There are also plans to introduce an electronic Government in Russia. The Federal Government should encourage competition between the regions in order to create a better regional environment. We also believe that the federal Government should focus on implementing available provisions and regulations at regional level. The regions should also be covered by road maps, which would include comparative regional parameters for assessing the success of the business environment in various regions. We would also praise regional involvement in support of these efforts.
As for the activities of the FIAC, the Working Group on Financial Markets and the Banking Sector, the main aim of the Working Group is to strengthen and expand the role of Moscow as an international financial centre. There are many issues involved. Regulation and the market structure have to be improved. The current discussions are focused on how to attract the private sector. The Working Group cooperates directly with the banking sector, and I would like to dwell on two particular issues.
Weak legislative support for issues regarding pledges and collateral, including legislation on pledges and other forms of collateral, is a major obstacle for funding.
Some issues have yet to be resolved. For instance, members of the Working Group believe that creditors face very many uncertainties, and that there is no adequate protection for bank deposit and bank account ownership rights.
The FIAC and the EBRD have drafted a package of proposed amendments and documents concerning the reform in conjunction with the Ministry of Economic Development. And this issue has entered a very important stage. Although the State Duma is currently examining the final version of amendments to Chapter 23 of the Civil Code, even this version does not contain all the required aspects. Members of the Working Group can share some details on these aspects and on some of the amendments which they would like to introduce.
The second issue deals with the application and enforcement of the United States Foreign Account Tax Compliance Act (FATCA), which was passed in 2010. According to FATCA, Russian financial organisations are required to sign special agreements with the Internal Revenue Service (IRS) and to inform the US side about accounts being opened by US taxpayers in Russian financial organisations. The Ministry of Finance is assessing the possibility of signing an agreement of this kind with the IRS. Ministerial officials say that the signing of agreements between banks and the IRS and the provision of information considered to be confidential bank information would be seen as a violation of Russian legislation. Members of the Working Group are asking the Russian Government, the Ministry of Finance and other agencies to encourage the signing of these agreements.
We continue to support the Russian Government in its efforts to improve the business climate and to develop a more market-oriented Russian economy. And we wish Russia and all of its regions prosperity. Thank you.
Remark: Klaus (addressing Klaus Kleinfeld), perhaps you can talk a little about the investment climate?
Klaus Kleinfeld (Chairman of Alcoa): I would like to thank you first of all. Good morning and good afternoon. I have been asked to describe the findings of a new study on Russia’s investment climate that was completed this year. Why did we think about this? It is because one of the Council’s objectives is to improve the business climate and to measure business parameters in Russia.
I would like to give you four opinions, which are very indicative. I don’t think they will surprise you, but I am sure you will be interested. So the first one: why is Russia becoming an attractive consumer market? Eighty-two percent of investors, including potential investors, believe that consumer market growth is a key factor in investment attractiveness. Forty percent believe this sector is the driving force for further investment.
The first study was made in 2007 and when I looked up its results as I was preparing for this meeting I was astonished because the statistics clearly showed that the GDP in 1998 was at an all-time low but that it has grown to 148% since then. In terms of per capita income, the 2000s saw a growth of 108%. An Ernst & Young study says 80% of families will belong to the middle class by 2015. A great many families already have an income of over $50,000. The level of unemployment has been the lowest in 30 years – 5.4% – and I think it is a very important comparative indicator for many places. It is a tremendous driving force, and, I think, a benefit for many, especially for the auto industry. It will be Russia’s second largest market for the vehicle industry.
Of course, every investor has apprehensions, which is not surprising, but the apprehensions remain strong here. Seventy-five percent of investors say they cannot cope with bureaucracy, 64% say they have problems with corruption, and 37% say they don’t like the infrastructure. These are figures that do not satisfy us. I would say there are great opportunities here.
These figures are almost equal to those of 2007 and they correspond to other research, for instance, the research undertaken by Ernst&Young. Jim, I believe that your research is the best.
Remark: Thank you!
Klaus Kleinfeld: The transparency rate for last year is 64 percent; investors have been expressing their dissatisfaction with the transparency of the system which impacts the future of economy. I would like to tell you about Transparency International’s opinion on this. They also agree with this research. If it were not for the Foreign Investment Advisory Council, we would not have achieved the success that we have.
As for the new ombudsman’s institute (I am very glad to see Igor Shuvalov here); this institute has shown fantastic results. Boris Titov, as you know, has done a great deal of work.
It is always very good to compare the results with the reality and I think that it is the infrastructure which is our main problem. Though the good news is that we have a very good federal transport authority and we hope that restrictions concerning freight motor transport will be scrapped. I believe that now we will increase the number of trucks to 70% because there is a regulation limiting the load-carrying capacity of cargo transport. That was my second point. This aspect still evokes concerns and I think that we should work more on it.
The third point is how Russia has integrated with the global economy. These results are absolutely striking – 35% believe that Russia is on the right path and 36% deem the accession to the WTO very helpful. These results are outstanding and I think that they offer great hope and they also are in line with everything we saw before. As for the accession to the Organisation for Economic Cooperation and Development, I think that the sooner we begin to work on all of these areas the better for all of us.
The reform of visa legislation is very important in this respect. Modernisation should be continued, privatisation encouraged, and I totally agree with you, Mr Prime Minister, on what you said about the privatisation of Sberbank. This is a very important move. I believe that the privatisation of many companies will be a very good move and will bring about a long-awaited breakthrough in technologies and management culture and will raise the level of Russia’s economy.
And my final point. Americans usually ask whether, if given the chance, you would invest in Russia again. The poll asked this question and 75% of respondents said “yes”. This is a big improvement in comparison with the previous poll, where only 50% of respondents said “yes” in answer to this. The question is whether people really make the right investments. Over the course of the next 5 years, General Motors will invest more than 1 billion dollars, Pepsi will invest lots of money, and many other companies will continue investing their money into Russia. And this is the best indicator that we are on the right path and that we should continue our work in this area. I believe our forum is very beneficial and I am sure that its success would have been impossible without our joint efforts and above all, the help and openness of the administration. I am sure that the statistics will continue to grow. Thank you.
James Turley (via interpreter): Would you like to comment now, to answer this?
Dmitry Medvedev: Colleagues, I will make a few comments now and then I will ask my colleagues from the Government to comment on some of the practical proposals that have been made here.
We all agree that there are many problems with administrative obstacles, and the roadmaps we have approved are designed to deal with these issues. We don’t view these roadmaps, in particular on customs, which we have spoken about (the head of the Customs Service is here too), as the last word or a dogma, but as a map that can be changed if we see that some project has taken the wrong turn or that other projects are simply marking time.
Just to remind you, we have discussed these roadmaps with the Russian business community which pointed out the things they didn’t like and the proposals they didn’t consider the best or most consistent approach. We weren’t offended and said we’d make the necessary adjustments. I am asking you to do the same now.
Of course, we will continue working on the legislation in every area that has been mentioned here, and I am inviting everyone to contribute.
As for product distribution, transport regulation, tariffs and some seasonal limitations, I’d like you to address these issues. The same goes for a number of special issues that have been raised here today, primarily technical regulation. I agree that the technical regulations should be worded as clearly as possible, but you must agree that they do not consist of practical solutions but only standards that are designed for regular application. One thing is clear: we are only taking the first steps in organising customs regulations for the Customs Union. We are standardising approaches to issues, which can also create problems; we will definitely take this into account.
As for the draft law on industrial and consumer waste, it was good that it was cited as an example of cooperation between the Foreign Investment Advisory Council and business in general, on the one hand, and the Government and Parliament, on the other hand. I believe we should use this approach in all other areas. I hope that the above draft law will ultimately have the best possible wording. As for veterinary control, we will certainly continue working on that as well.
A few words about the general approach to working on permits: I absolutely agree with what has been said on this issue. Of course, the list of necessary documents will be exhaustive and we should adopt a principle whereby officials may not request documents that are not on that list. In fact, we have been trying to do this for a long time, but, unfortunately, many federal and regional agencies act differently; they demand additional documents and letters of verification. We need to eliminate this.
As for the sanitary standards and rules and the joint register, we can consider ways to streamline our joint work. Regarding the coordination of project documents, I would like my colleagues to take over this issue. I agree that we have done quite a few positive things in the sphere of joint innovation projects over the past years. Someone cited the project of efficient electricity consumption in Yekaterinburg, something we discussed with Federal Chancellor Angela Merkel. It is a truly positive subject. I believe that such a statesmanlike approach should be used in other regions too. We will express our attitude to the regional governments and also expect our foreign partners to do likewise.
I am glad that we are strengthening cooperation with the IBRD, because it was in limbo for a long time. I remember going to the IBRD in 1992 or 1993 to ask for a loan which we were eventually denied. But it was at the very beginning of our relations. It was a loan negotiated by St Petersburg authorities and a group of investors for the construction of a new airport. The airport is being built, although without the IBRD contribution, as far as I know, but I still think that we should work towards this end. I am glad that there has been positive growth.
Another issue concerned the Moscow financial centre; this is an important issue. As president, I ordered the establishment of a commission on this project to which we invited the most important investors, bankers, and those who work in infrastructure development. I will hold a special meeting on the Moscow financial centre soon, because I believe that this project is of crucial importance for our future development.
We are ready to hear and carefully consider your proposals about specific changes to the Russian legislation, such as the law on bank deposits and settlement credit, as well as the proposed changes to the Civil Code. With regard to the Civil Law, I am also confident that, since we have our own tradition, we must always try to maintain a balance between new elements and the basic regulation of economic relations that underlies the Russian system of civil commercial law.
You have mentioned the Foreign Account Tax Compliance Act, which requires Russian banks to sign special agreements with the tax authorities on taxpayers’ reports. We are considering what we could do about this, and this does not only concern Russia. I must admit that some of the proposals you made sound very unusual and unwieldy, so we are continuing to work on this. We will hold consultations with our BRICS partners, because this issue applies to them too. We’ll decide then, and I am not ruling out a decision to green-light those agreements after considering all the pros and cons.
As for the highly interesting study that Mr Kleinfeld presented, I actually agree that some of his figures are quite encouraging and favourable. Yet, this is no reason to relax. I also came across some alarming points as I looked it through, something I didn’t quite see before. It is very important that you have analysed the situation so thoroughly.
For example, fewer investors began viewing Russia as a large consumer market after 2007. This could be attributed to the effects of the financial crisis and the general depression. Yet, this is cause to stop and think. Also, I wasn’t overly pleased to learn that fewer investors now see Russia as a stable economy with a steadily growing GDP. I do not think this is quite justified. Who can boast stable growth if not Russia? Well, you could consider China and India of course, but from the macroeconomic perspective, Russia’s performance has been very good. Russia has other problems of course, and the investment climate is one of them, although it is indeed unusual how these two things combine – I mean good macroeconomic indicators and a mediocre investment climate. As I said at the beginning, there is more to the investment climate than figures and indicators; there are certain subconscious beliefs as well. This is something Russia needs to improve, so we greatly appreciate your presentation, thank you.
Visas are a very important tool in business relations. We have made progress in this area in the past few years, especially with the EU, and with other countries, including the United States. However, it is not yet good enough. I would ask the business community to help up develop these relations – visa relations – because we think that we have already done all that we can in terms of improving the Russian legislation. We have adopted and signed readmission agreements with nearly all the EU countries and have made significant progress toward creating a roadmap. However, there is a group of countries in Europe that still block free communication. We believe this is an unfair and shortsighted policy. We count on the business community’s support to promote the issue.
The visa regime between Russia and the United States is a different case. Although there has been some progress there too, it is still not as obvious as we would have wanted it to be.
I would like to ask my colleagues to make their comments too, for it to be less dull for them…
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