Russian Investment review, №1, 2003, spring

What have been Russia's main achieve-ments over the last year?

This has been a good year in general: GDP has been rising fast, the budget was in surplus again, gold and hard currency reserves passed the record-breaking $60 billion mark in May (putting Russia among the top 15 countries in the world in terms of reserves), and Russia enjoyed falling capital flight and sovereign debts.

At the start of 2002, President Putin began a drive to move Russia away from its addiction to raw material production and towards an innovative economy taking advantage of Russia's scientific and technical strengths.

A clear strategic plan for the economy's development is essential if the best use of Russia's natural advantages is to be realised. A plan has been worked out that fits with Russia's potential and it is being realised.

For instance, last year, the Russian Ministry for Industry, Science and Technology held a tender and chose projects designed to develop seven key directions. These projects, which should produce a five-fold return on invested capital over a three-year period, were awarded the status "nationally important projects".

In its strategic review, Brunswick UBS Warburg says that Russia should play to its comparative advantage - the exploitation of natural resources. Is this the best way forward?

I disagree, as concentrating all efforts on developing only natural resources would make Russia the slave to the vagaries of the international commodity markets.

Russia's dependence on these markets has already been growing steadily over recent years, despite the best efforts of the government to wean the economy off revenues generated by raw material production. According to official estimates, exports of Russia's high tech products have fallen by half over the last decade. In response, the government has turned its full attention to supporting manufacturing and boosting other exports. The more advanced the products are, the lower the taxes- this is the basic premise of proposed reforms.

Which reforms are the most urgently needed in Russia?

Top of the list has to be the need to diversify the economy, especially by strengthening business' ability to innovate. Then come issues like increasing transparency, tax reform and restructuring of natural monopolies.

Also high on the list is the need to reform the government itself. There are high administrative barriers to new business, which hamper the development of small and medium-sized enterprises, whose share in the Russian economy is still minuscule: about 10 to 12 percent.

As a part of administrative reforms, we need a set of effective anti-corruption measures. Large-scale graft amongst state authorities is one of the main barriers hampering the flow of capital into the country. Finally, there are the problems of housing and paying for public services which need urgent resolution. There was yet another heating crisis last winter, which only highlighted the inefficiencies in the system. The government drew up a draft reform package for housing and communal services at the end of last year. However, Prime Minister Kasyanov announced recently that the draft should be revised. The situation calls for action.

Both the rate of Russia's integration into the world community and the scale of foreign investment largely depend on the country's image. Do you think that Russia's image is undergoing an evolution and, if you do, in what direction?

Certainly, the country's image is improving. Here are some important trends. Firstly, our fellow countrymen visiting foreign countries are no longer embarrassed about their native country. Until recently Russians abroad would be evasive about their nationality. At the same time the opposition leaders who were vocally anti-Russian while abroad have moderated their rhetoric. Finally business has normalised and the captains of industry are no longer at the centre of never-ending scandal. All these factors have had a positive impact on the country's reputation.

Less obviously the state authorities have become more transparent and this is another plus for the state's image. For instance, not long ago Mikhail Kasyanov signed a decree on information transparency. From the middle of May, state agencies were supposed to publish the details of all their commercial contracts, including information on the makeup of tender commissions for acquisitions. Furthermore, Russia has begun to re-establish its place within the global media industry. According to Media Minister Mikhail Lesin, the development of foreign broadcasting is becoming a priority again. However, it is too early to say Russia has launched a successful or comprehensive campaign to change the rest of the world's perception of the country.

A country, like a corporation, needs to position its image in the minds of the general public and global community leaders. In this regard Russia still needs a state image management strategy. One more important issue is that the business reputation of a country is directly dependent on the reputation of a country's businesses. The number of well-run companies that meet international standards of financial transparency is increasing steadily.

Our business leaders increasingly take the Russian success story overseas and sell it in international forums that provide good opportunities for information exchange. RBC organizes these forums every year, gathering Russian and Western businessmen along with influential government officials together in European capitals.

The investment climate continues to improve in Russia, and the country's sovereign ratings are rising. What are Russia's chances of receiving an investment rating?

The country's ratings are now back to the same level as in 1996, which sounds like a paradox. The state of the economy in today's Russia is cardinally different to that seven years ago. Russia's macroeconomic fundamentals today are the strongest they have been for three decades, yet the ratings are the same as when the country was still reeling from the after effects of the collapse of the Soviet Union.

The difference is that in the wake of the endless string of corporate scandals of the 1990s, the ratings agencies are much harder on Russia than they would otherwise have been. Given Russia's recent history of devaluation and default this is understandable. And the incomplete state of structural reform and the continued dependence on oil exports gives real grounds for a lower rating.

However, all these problems are diminishing. Russia's reputation in the minds of investors is undergoing a rapid re-evaluation as investments start to perform, and perform well. And economic reform is progressing while the government continues to lay out ambitious and upbeat goals. However, Russia is unlikely to be awarded an investment grade rating before the presidential elections are held in March 2004.

An upgrade from the current speculative level grades to the investment level will bring a substantial increase in the demand for financial instruments such as Russian stocks and bonds. However, I would not say that an upgrade to investment level is the decisive factor that will determine Russia's future. Investors don't pay that much attention to the rating agencies, which failed to foresee a collapse of either the Asian countries in 1997, nor Russia in 1998, or even some of the leading American corporations last year.

Nevertheless, it is not by chance that the theme at this year's Davos Forum was "rebuilding trust." The crisis in the world economy is largely a crisis of trust, which was bound to affect Russia. An investment grade rating will not by itself restore this trust in Russia.

More important for rebuilding this trust is to stabilize the tax system, to guarantee ownership rights, and to introduce equitable rules of the game for all market participants. If this is done then we can hope for a long-awaited investment boom.

Has Russia started to attract foreign investments?

Just look at the figures. According to the State Statistics Committee, foreign investment was $20 billion last year, or 38.7 percent more than in the previous year. Investors are showing more interest in Russian companies and their ratings have been rising. As I mentioned, the number of companies using Western financial accounting standards is rising and these companies have had a substantial and beneficial influence on the investment climate.

RBC was the first Russian company to make an initial public offering (IPO) on the domestic market. RBC's appearance on the exchange has been more than successful. How do you see the Russian stock market and will there be a wave of IPOs in Russia?

Obviously the Russian stock market is still growing, although not as fast as before. Its results are impressive, especially when you consider that the bourses of the rest of the world have been falling for the last three years.

Despite that, I still believe that in general, Russian securities are still massively undervalued. According to a survey from Merrill Lynch in February, over a third of all managers think the same. The domestic market can and should become a source of financing for successful Russian companies and an efficient instrument for their development, and the example of RBC proves it.

The number of IPOs fell sharply last year in most countries of the world thanks to the global economic pall. Russia seems to be the only country in the world where the number of companies planning an IPO is growing and several companies have plans to float on the market within the next year-and-a-half. For example, the Amtel Group (a large CIS tyre manufacturer) has recently announced its intention to consolidate its assets and to found a holding company. Some of its shares will be offered on the Russian stock market as soon as this year. The Euroset cellular communication dealer plans to not just offer its shares on the RTS exchange but also on a Western exchange. These are the latest examples, but there are others.

However, I do not think that there will be a "wave" of Russian IPOs in the near future. But dynamic companies, whose business is open and transparent, have good prospects on the domestic market.

RBC was the only Russian business to be included in Deloitte Touche's "2002 European Technology Fast 500" rating list and has grown 700 percent over the last three years. Can you keep it up?

To be successful you need to be able to forecast the changes in the market with a reasonable amount of accuracy. This is particularly true for the hi-tech sector. RBC has been trying not to follow the trends but to set these trends.

But more importantly RBC has successfully married two kinds of business: IT and media. Thanks to this synergy, RBC has been able to sell its products to a broader client base, while the sales costs are lower than those of our competitors. Our independent directors have ensured we maintained the highest possible transparency and improved our corporate governance. But our most valuable resource is our intellectual capital: 95 percent of our employees have university degrees, and over a half of the top managers have Master's or Doctor's degrees.

What are your plans for the future?

It is a long list. The biggest project we are planning is in preparation now: the first Russian business TV channel, RBC TV, which will be similar to CNBC, in terms of concept and format. The channel will be on the air 24 hours a day (including 18 hours of live programmes a day). Market research shows that there is a demand for this sort of channel, both amongst those who want to receive up-to-date business information, and amongst advertisers. Work on launching the channel has entered its final stage.