Institutional Reforms Key to Better Business Climate During Putin’s Reign

President Vladimir Putin who is returning to the Kremlin after four years as Prime Minister, will need to drive institutional reforms and burnish Russia’s reputation as an investment destination, to modernize the Russian economy, analysts polled by RIA Novosti said on Tuesday.

“The investment climate in the country is affected by excessive state regulation of economic activity, corruption and insufficient ownership protection (considering the increased number of corporate raids). These problems need to be solved and the way they are solved will determine whether Russia will be able to improve its business climate and attract investors,” Uralsib analyst Alexei Devyatov said.

Heavily reliant on raw material exports, primarily oil and gas, Russia has been pushing economic diversification for two decades, trying to promote more complex production and greater value adding.

The strategy has been heavily reliant on attracting private, particularly foreign investment, with the government looking to reduce the size of its presence in the economy, to develop new plants, logistics chains, and RD capacity. The volumes of capital required to overhaul and modernise production are too great to be left to the state.

“Otherwise, we’ll continue witness capital leave the country on a large scale,” Devyatov said.

Central Bank First Deputy Chairman Alexei Ulyukayev has said foreign investors may resume investing in Russia after the March presidential elections are over, as they refocus on post election developments and look to clear economic policy signals from the government. Net private capital outflow from Russia hit $42 billion from January-April 2012.

On the first day of his six-year presidency, Putin signed a number of decrees setting out his long-term economic and social goals, and ordering the government to boost investment, improve the country’s business climate, reduce the state’s role in the economy and ease reliance on energy exports.

Putin, who has spoken on many occasions against corruption during his previous terms as President and as Prime Minister, has also set the ambitious goal for Russia to climb from the 120th place it currently occupies in the World Bank’s Doing Business index to 50th place in 2015 and the 20th place in 2018.

“Everyone will closely watch the developments (in Russia) in the next few months to see progress in reform implementation. If these reforms really advance and the situation improves seriously, we’ll see an inflow of investment. If everything remains as it is, economic growth will be low and capital flight will continue, proceeding from the dynamics registered in the first four months of the year,” the analyst said.

At the same time, Investcafe analyst Anton Safonov said Putin’s reign in the next six years guaranteed Russia’s stable economic development, which was important for foreign investors to take investment decisions.

“Now it has become obvious (after the May 2012 presidential elections) that at least in the next six, and maybe 12 years, nothing will change in the global sense of the word (in Russia) and so political risks are down and this factor will facilitate an inflow of foreign investment, both direct and portfolio funds,” he said.

Natalia Suseyeva, a Renaissance Group economist, said privatization was a key to improve Russia’s image in the eyes of foreign investors.

On Monday, Prime Minister Dmitry Medvedev told the first meeting of his newly appointed Cabinet that Russia would accelerate the schedule of state property sell-offs to domestic and foreign investors, in a move likely to demonstrate the openness of the Russian economy and steer it towards better and more efficient management.

The reappointment of Igor Shuvalov as first deputy prime minister in the new Cabinet to take overall charge of economic policy was also a positive signal for foreign investors. Goldman Sachs global investment banking and securities firm told RIA Novosti.

“We believe Shuvalov’s appointment as First Deputy PM is a positive signal. As a major investor in Russia, we have always found our interaction with Shuvalov to be positive and constructive, and his continued role in the new government should be good news for foreign investors in the market, and for Russia as a whole,”  Michael Sherwood, Vice Chairman and Co-Chief Executive Officer of Goldman Sachs International, said.

Goldman Sachs also said that the selection of the new ministers in the new government was the most liberal and reform minded cabinet Russia has had in the recent past.

“Hence, while we think investors will largely welcome the appointments, they will now focus on the question to which extent this generally liberal cabinet will be able to move reforms forward… Ultimately most investors will be looking to the momentum behind those reforms to evaluate if there has been a shift in policy with the new cabinet,” Clemens Grafe, Chief Economist, Goldman Sachs in Russia / CIS, said.


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