‘We don’t divide investors into foreign and domestic any longer, because their interests coincide," Russia’s Prime Minister Mikhail Kasyanov said in his opening speech to the 14th meeting of the Consultative Council on Foreign Investments, held in the President-Hotel last month.

The Consultative Council on Foreign Investments is a deliberative organ. Twice a year it convenes for a meeting and its decision are presented as recommendations to the government. In other words, foreign investors tell the Russian government what should be done to attract foreign investments to Russia and the government, in return, explains why this has not been done yet and promises to do it as soon as possible.

According to the statute, the meeting was presided over by Russian Prime Minister Mikhail Kasyanov, on the Russian side, and President of the European Bank for Reconstruction and Development Jean Lemierre represented foreign investors.

For the first time, the council’s meeting was attended by Russian investors, namely Mikhail Fridman, Mikhail Khodorkovsky, Kakha Benukidze and Chairman of the Russian Union of Industrialists and Businessmen Arkady Volsky, who wholeheartedly supported the new turn in the government’s policy toward attracting investments.

Noting that positive changes continue in the Russian economy, the head of the government called them "encouraging," and added that the "government continues to strengthen its fiscal positions," which is clearly visible from the results of the first quarter of this year.

At the same time, Kasyanov pointed out that it is "too early to speak about stabilization of the country’s economic development." As the government’s press-service explained, he meant that the economy still lacks a properly developed legal basis, structural reforms in the economy have not been brought to completion and an orientation toward the raw-material-producing industries still dominates, while the processing industries remain poorly competitive.

Kasyanov reported that the government has drafted a number of legal acts that will modify foreign currency, customs, land ownership and anti-monopoly regulations as well as labor relations. The draft laws are intended to promote further reform of the taxation system, structural reforms in the economy, reorganization of the pension system, improvement of the legal basis surrounding labor relations and reform of the judicial system. "The State Duma’s adoption of the package of draft laws," Kasyanov stressed, "will mean stabilization of the rules of the game on the Russian market."

Kasyanov also noted that Russia’s joining the World Trade Organization will promote stabilization of the investing situation. "It will have a composite effect on the course of reforms in Russia in general," he stressed.

As regards the problems of taxing projects operating under production-sharing agreements, the government plans to submit a coordinated draft law to the State Duma before it leaves on summer vacation, and a Tax Code section on taxing production-sharing businesses will be adopted before the end of this fall.

Besides, Kasyanov stressed, it is necessary to complete the transition to international accounting standards. There are 17 regulations currently in effect on the application of international accounting principles. Five more will be enacted during this year and another five are planned for adoption in the next year.

Another negative moment, according to Kasyanov, is the absence of notable progress in the banking sector. Measures should be taken to promote transparency and consolidation in the banking sector. Intelligently done projects, professional specialists and growth of foreign investments can work miracles.

In the government’s prognoses of the country’s social and economic development for the year 2001 direct foreign investments in the Russian economy are anticipated to exceed $5.5 billion. This appears to be a sizable increase compared to the year 2000 figure, which, according to estimates made by the Ministry of Economic Development, equaled $4.2-4.5 billion.

According to data available to the State Statistics Committee, the average age of industrial equipment was in excess of 16 years as of late 1998 and the depreciation rate of basic industrial facilities and equipment was nearly 53 percent. As things stand, Russia needs approximately $20-25 billion worth of direct investments a year, while the market’s investment capacity and overall investment need are by more than an order of magnitude higher.

But certain representatives of big business have a different approach to the problem and ways to resolve it. "The issue of foreign investments is somewhat exaggerated by domestic media because many different interests are involved," analyst from the Nikoil investment-banking group Andrei Abramov said. "Worse than it lacks investments, Russia lacks properly prepared projects and skilled personnel. Only after these problems are resolved will it be possible to expect a sizable economic growth throughout the whole country."

How to promote Russia’s attractiveness for investment?

Supervising researcher at the Higher School of Economics Prof. Yevgeny Yasin said his hopes for economic growth in Russia lie with responsible and experienced businesspeople who are capable of handling specific tasks. At the same time, government’s assistance is essential. So far, according to Yasin, we have been accumulating negative experience, i.e., what not to do about the problem. The "Law on Investments" that was adopted in 1999 has worked with zero effect, because it left a number of loopholes, and such complicated problems cannot be resolved by just one law.

Measures that can help improve the investment climate in the country have long since been voiced and heard, including by the government members. Key issues are taxation system improvement, ensuring legal protection of shareholder’s rights, de-bureaucratization of the economy and improvement of corporate management.

Analysts from Ernst & Young say that Russia’s taxation system is demonstrating a truly impressive development. First, the business community has acquired a Tax Code based on principles that match the highest international standards. Secondly, the taxation system is undergoing liberalization at a truly revolutionary tempo. This particularly applies to the taxation of individuals: 13 percent income tax regardless of income is something that would arouse envy in the citizens of world’s developed countries. Probably, by making this decision the government only wanted to root out the bad habit of tax evasion. The rate will probably be increased in the next 3-4 years, but hardly any time sooner.

Another remarkable feature of the new Tax Code is the introduction of several important procedures and principles accepted for international practice, including the issue of transfer pricing and taxing companies controlled by foreign capital. In general, the code sets landmarks for entrepreneurship and encourages a serious approach to the issue of taxation.

At the same time, the new Tax Code does not deserve to be idealized. Its extremely complicated amortization mechanism cannot be justified even from the financial viewpoint. What is worse, it orders taxing deals on signing, not on fulfillment. Although this is in line with international practice, Russia is not ready for that at the moment. But by and large, the new Tax Code is an integral and balanced document.

Head of the Investment Policy Department of the Ministry of Economic Development Sergei Bayov considers that "to stimulate investments it is necessary, in the first place, to provide legal protection for shareholder’s rights. For this purpose, a federal law "On Affiliated Entities" is being discussed. The law will determine shareholders’ leverage of the company’s management."

Another factor hampering investments is the excessively complicated procedure for coordinating project documentation and obtaining permission for the realization of investment projects.

In an effort to overcome these drawbacks, amendments and appendices have been elaborated to the Federal Law on Investment Activity in the Russian Federation. These amendments and appendices simplify procedures for coordinating project documentation and obtaining permissions for the realization of investment projects and introduce the "single reference point" system, i.e., define an executive organ in charge of state expertise in investment projects and authorized to issue permission for their realization. The introduction of the single reference point system will not only increase Russia’s attractiveness for investment but will also encourage domestic investors.

The next problem is corporate management. In order to ensure effective use of capital and protect the rights of shareholders and investors it is necessary to improve the system of corporate management. There are reasons to say that some progress has been achieved in this direction but some questions still need to be resolved.

First, it is necessary to resolve the problem of minority shareholders’ rights, then to set up a legal procedure for regulating disputes between shareholders and, finally, to define a system for information disclosure.

It has long since become necessary to update the mechanisms of property redivision in favor of the market’s strongest participants and to exclude the possibility of situations where owners of relatively stable enterprises are deprived of their property. Such cases often occur due to poor quality of management. According to Sergei Bayov, it is precisely the poor quality of management that prevents investments from flowing into industry and agriculture. In general, the problem of poor quality of corporate management should be resolved with the help of legal mechanisms.

Mikhail Kasyanov said that he is firmly convinced that Russia will be able to overcome the "Year 2003 problem," i.e., will be able to service its foreign debts in the full volume.

In 2001, the European Bank for Reconstruction and Development will invest $700 million in the Russian economy.

(The author is a freelance journalist. He contributed this article to Investing in Russia.)