Deep insight into what American big business think about Russia
This post first appeared on Russia Insider
Alexis Rodzianko has been the President of the American Chamber of Commerce since 2013. Previously he held CEO positions in the Russia operations of various large global banks. A profile of him in the Moscow Times can be seen here. This is a translation from an interview given in Russian to Banki, a website dedicated to the Russian banking sector
The deterioration of the geopolitical situation around Russia has had a negative impact on the economy and the state of business.
The President of the American Chamber of Commerce in Russia Alex Rodzianko talks about how the investment climate in Russia has changed in this regard and how Russian and American businessmen look for ways to circumvent the sanctions.
Q- Alexei Olegovich, I would like to know your opinion how the attitude to our country has changed on the world economic scene in America and other countries during the time that you work in Russia?
A- The short answer is the attitude changed together with the price of oil. Although, of course, it is an oversimplification. Twenty or more years ago, the price of oil was very low, and it was one of the factors that led to the collapse of the Soviet Union, the end of the communist regime. But this was just one of the factors, not the key, because the country's economy deteriorated for a long time before that. People saw and felt it.
Then 1991 came, I remember very well this time. Then I worked in New York, and just looked at the developing markets, especially those, where there were problems with the foreign debt and restructuring. Russia just fell into this category, as the country had to pay the old Soviet debts, then there was a restructuring, then the secondary restructuring ... I remember very well as that time I met with officials of the World Bank. Their opinion and the opinion of others in Washington was that Russia could fall into strange pieces. What would follow it - it was terrible even to think about it. Therefore, the attitude to Russia was as to a country that needs help in every way to prevent the further degradation to avoid chaos. And it was, as I understand it, almost the only main goal and concern. It was a constructive attitude, they tried to help as best they could. In general, the 1990s passed in this way. A lot was done to establish some basic institutions. In particular, the MICEX is the work of the US Federal Reserve with the Russian side.
Then there was an agreement on nuclear weapons, although it was partly a factor of self-preservation of the West that it was all concentrated in one place and there was no spread in any case. During these years, the oil price was also very low. However, the result of all the work still was the crisis of 1998, when the policy of the International Monetary Fund and the Russian Government actually couldn’t be supported because money just didn’t arrive. This was the first big devaluation, another default, the change of power.
Vladimir Putin came to power and brought his luck. The market went up, the price of oil rose. And of course, I must say, his administrative abilities, capabilities and political will were very important in that he stabilized the country. He collected it. But during the 2000s Russia was still supported by the rising price of oil, along with the further development of the institutions that were created in the 1990s. It was in the 1990s, when many large companies - members of the American Chamber of Commerce came to Russia. Their presence here objectively greatly helped to improve the quality of life, the creation of a competitive environment, in which Russian firms had to compete with the world level, and not to clear off, they say, with what they already had. Then there was an understanding: you have to sell something that people are willing to buy. From my perspective, this was a great achievement. But from that moment the relations with the United States became to deteriorate a little.
Q- In your opinion, what led to the deterioration of the relations between the two countries, between Russia and the West in general?
A- There are different opinions, and I'm not a political scientist. But I can say that the business relationships didn’t become worse, on the contrary, they became better. Ask a businessman, what the most important thing for him and he will tell you: stability. This is exactly what Vladimir Putin brought to the Russian economy, the business environment: stable rules, clear rules, the opportunity to earn. All of these features came under Putin and continue to be now.
The political relations began to deteriorate when NATO became to move closer to Russia. The reason, as the mass media write, was the fact that Russia had stood on its own two feet, became more independent, and nobody expected this from it.
Q- That is, the States acted as parents with a grown-up favourite child, who they don’t want to let go from the "nest"?
A- Russia with its thousand years of history can hardly be called a child. I would say that the wounded soldier recovering.
Q- Good. How did the history with the Crimea influence the attitude to Russia? How did it affect the relations of the Russian and American business? How did the whole idea of Russia as a country for investment change?
A- Russia raised the degree of tension with the history with the Crimea, thereby indirectly stoked a political solution on the adoption of the sanctions.
The sanctions are bad for business. All restrictions that are not aimed at making it easier for the business, are bad for the business and business understands this. But it understands that it has to be a law-abiding, and sometimes it's very hard, because the parties offer conflicting rules. The business tries to find a "quiet passage" between these terms, which is not so easy.
But if you listen to each of the parties, the United States says that it all started from the Crimea. Russia - that it all started in February 2014 from a coup in the Ukraine. Where is the truth? I don’t know, probably somewhere in the middle. Is this needed? Business doesn’t need it!
Q- It is understood that it is not needed. What kind of statements, requests are often heard from businesses in connection with the sanctions and the deterioration of the political relations?
A- What kind? Looking for a way to solve them! The business can’t act as a diplomat and is not going to, so more and more often the call to find a more cost-neutral way of resolving the issue is heard in the requests.
Businesses needs to be able to work as before. Everyone understands that the Russian economy is cyclical, it is strongly tied to the raw material income or lack of it, to commodity prices. Everyone understands that this is not a reason to leave the market, this is the reason to adjust the plans to the capabilities of the economy. The Russian economy is large, the market is big, there are a lot of natural resources, human potential is high, even though the "brain drain", of which everyone speaks. At the Sochi Investment Forum it was announced that almost a million Russians have two passports or residence permit in another country ...
Q- The Deputy Prime Minister, Olga Golodets talked about this.
A- Yes, a million Russians, and they are not the poorest Russians. This is a very important segment of the population. Why is this? Partly, because of the high tension. Partly, because people are different and set different goals in life. But the human potential is still huge, and it is replenished. In particular, that’s why I don’t feel that tomorrow or the day after there will be nothing. It is and it will be, it is a really great potential.
Q- So, business is aware that, in spite of all the negative and cyclical nature of the Russian economy, it can continue to invest money in Russia, that it can and should continue to work?
A- Yes, this is particularly well understood by companies that have been here for many years, from 10 to 20. There are American companies in Russia that operate from the time of the Soviet Union, and began even earlier. For example, last year I was on the 101st anniversary of Caterpillar presence on the Russian market – they came in 1913, worked under the royal power, then under the Soviet regime, and today they continue to work. Some companies take root in the 1990s, and there are many of these companies, they see and understand how to continue to work here.
But those that prepared to enter the Russian market in 2012-2013 take a break today. This delay is related to two factors. The first one is the political situation. There are some signals from Washington that it is better not to go to Russia, it is better not to invest. The second factor is, in fact, the slowdown in economic growth. And it is not clear how to get out of the recession. We shouldn’t forget about the sanctions regime: it is not clear when and how it will be softened.
Q- Are there companies now that look at Russia, but also take a break?
A- Of course, there are.
Q- Of what industries, segments?
A- It's quite a broad list of segments. I want to note that now there is more and more talk about the localization program. It is a term that became very popular in recent years, but in fact, these efforts were started rather a long time ago - 10-15 years ago. For example, the auto industry: now Russia assembles more cars than at the peak of the Soviet Union. And these cars are assembled largely in partnership or with the participation of foreign companies, global players: Chevrolet Niva, Hyundai, Renault, Ford, BMW, Audi, Volkswagen, Toyota. All they assemble cars in Russia, and all have a plan for the localization of the business. This means that the percentage, the share of Russian suppliers of components and materials gradually grows.
There is a recent example: just less than a month ago there was a meeting with a company, producing polymers that are included in the paint for the automotive industry and for construction. This company bought a factory and decided to expand the production, to create a laboratory for the production of those products that are necessary on this market. This is one example, and there I can name a few of such examples.
Q- What industry, segment of the Russian economy is now the most interesting for foreign companies, particularly US ones?
A- The most interesting sector in Russia was, is and probably will be "oil and gas". Russia is the largest producer of crude oil in the world and owner of the largest unexplored potential new fields in the world. Therefore, large, global energy companies very successfully and actively cooperated and cooperate with Russian companies and the Russian Government. I think it will continue. Now they realize that their business is cyclical and that these low oil prices won’t remain forever, but now it is a very good time to invest, to look at new fields, to buy them, to take a share in the same Russian companies for the partnership. All of this is now much cheaper and more interesting due to the fall of the ruble and reduction of the oil prices. But at the moment, they are held back by the politics, and in some cases a specific ban on investments (on the shelf, for example), and in some cases simply some political pressure.
Q- Does this apply to all sectors of the Russian economy?
A- No, it doesn’t affect all sectors. Directors of companies, members of the House, who are responsible for the business in Russia in their companies often say to me that it is very difficult to communicate with their superiors these days, with Boards in Europe, in the United States. They have to prove more, to explain, more questions to the leaders in the field appeared, more caution.
But there is no such thing that Russia is not interesting. Quite the contrary - too interesting, too many questions are asked.
Q- And the banking sector, in your opinion, at what point it is in the list of the most interesting industries in terms of direct and portfolio investments?
A- Let's start with the major US investment banks. All of them are members of our Chamber. All of them are now frozen in their main business in relation to Russia. That is the leading issuers on the Russian side are severely limited in the access to financial markets. Because of this, it is very difficult for investors of the second, third tier to enter the market. In fact, these sanctions are probably the most powerful in relation to their effect on the Russian economy. The limitation of the Russian players in the access to capital markets, from the point of view of the banks - members of the American Chamber of Commerce, taking into account the large size of their business in Russia, has led to the fact that mot of the business is simply idle.
If you look at banks in Russia, the banking system as a whole is, if you like, a magnet for investments. It was also promoted by the stripping the sector from unscrupulous players. However, it is unclear how the process of rehabilitation of the banking system is passed. I agree with the chairman of the Central Bank, who stated that the problem is controlled. But in fact, almost nobody invests in the banking sector of Russia now, when in general Russia is poorly invested, and even more players go from there. This suggests that caution is not only among foreign investors. And the banking and financial sector, as we know, are the reflection of the economic situation. Now it is not very clear and not very strong. Now there is a downturn, and all ask, whether we have reached the bottom, whether there will be a second floor.
Q- What do you think, have we reached the bottom?
A- We consider ourselves a kind of the reflection of economic situation in Russia. Therefore I can say that we are afraid that next year will be more difficult than this one.
Q- Do you think our forecast of the Ministry of Economic Development on the growth of the Russian economy by 0.7% next year is too optimistic?
A- For a while, we don’t particularly feel the prerequisites for the growth, but at the same time, the worst fears that the companies had at the end of last year, weren’t realized. That is, people in respect of their worst performances, appeared in less severe conditions than they expected.
Q- What kind of the concerns did they have, with what were they connected with in the first place?
A- Fears that the market will collapse, that sales won’t happen, possibilities to conduct the business will be less and less, that the conflict will develop further. There were fears about the decline of the oil prices to $20 per barrel, about the further weakening of the ruble. There were even talks is the ruble would weaken so much that the ruble to the dollar be 100 rubles. The reality turned out to be better than these worst-case scenarios.
Q- That is still our struggle of the past few years that he quality of the investment climate gave some fruit, even though the sanctions?
A- If you look at the ratings of Russia in terms of its competitiveness, the quality of the investment climate, they have grown in recent years. Mainly, the improved ratings, I think, were caused by the devaluation of the ruble. Russian products, the Russian workforce, the Russian potential, the production unit in Russia became cheaper. In this indicator, Russia now even competes with China and India.
On the other hand, it is worth paying attention to qualitative factors. There was a number of laws, aimed ostensibly at the security of the country, that is completely contrary to the interests of the business, including, for example, the law of undesirable organizations. The law is written broadly, there are no restrictions on the type of the organization, in the first place. Secondly, there is no process - the organization may be considered undesirable solely on the basis of a conclusion of an authorized official. And there is no one to complain to, and everybody is under attack. It is a question, hanging over the investment climate in Russia. How can we ensure the right of ownership, when at any moment you can be declared an undesirable organization? We understand that the law is not aimed everybody. But lawyers, who read the law, well aware that it can be used as they wish. This is one example. The second example: the Government's claims about the non-increase of the fiscal burden on the business that are contrary to the facts. It's a constant moving target, because, on the one hand, there were such assurances from top government officials that there wouldn’t be any additional load. But at the same time, the Government needs money for the budget. It’s not entirely clear how to reconcile these two things, so there are new ideas constantly appear, who and how to penalize, on who and how to impose taxes. All of this is contrary to the assurance that "in difficult times, we don’t want to push business too hard".
You can’t leave without mentioning the law on personal data. Our opinion is that this law removes Russia from the possibility of occupying a leading position in the most fast growing segment of the world economy - information technology. Because of that regulation jurisdiction, Russia becomes more difficult to do business. What effects will be on the investment climate, we will see in due course.
Q- You said that, according to the American Chamber of Commerce, next year will be worse than the present one. Could you specify, to give any predictions?
A- You know, for a while you can listen to various people on the topic of the oil price and to hear very different forecasts. Someone predicts that it may fall below the current level, someone says that it will inevitably rise much higher. What does this mean? This means that volatility will remain high. And the ruble and oil prices change correlated over the past year. In this regard, the question arises: whether the Russian competitiveness will disappear in the case of the increase in the price of oil as quickly as it came? Or there is some a kind of policy in relation to the ruble, which will preserve the competitiveness of the country? I recently asked this question on our Investment Conference (15th Investment Conference of the American Chamber of Commerce in Russia), but didn’t get a direct answer. And during the Sochi Investment Forum, the Finance Minister, Anton Siluanov said that the excessive strengthening of the ruble in the first part of the 2000s was a mistake. This inevitably leads to an increase in costs, because the income still grows faster than expenses, and all imported things are cheap. So why to limit yourself? Some excess fat is formed, which it is very difficult to lose then. Here a very big question is for me, a question for the business: competitiveness is something that depends on the price of oil or is it something that is a part of the country’s policy? I think time will tell what the answer is.
Q- In this regard, some experts talk more and more about the separation of the financial sector from the real economy. Do you agree with this position?
A- I, as a native of the financial sector,have never separated the financial sector and the real sector, they are very much interrelated. Another question, and not business to answer for it, but the state, is: what is the strategy for the development of the national economy? Whether we live in a big way, if today the oil price is high, and to live half-starving - if today the price drops? Or there are some tools for leveling the economic situation, for its diversification?
Yes, in recent years, they increasingly began to talk about the diversification. But the diversification of the economy is not enough, and the investment climate in the country is not good enough just Russia's own capital would remain here. I think people are still afraid of their confiscation history.
Q- Next week the large forum "Russia is calling", organized by VTB Capital, will take place. This area is traditionally intended to send any message to potential and existing investors, to foster the business relationships. What do you think, what will be the role of this forum? What will the messages be? What do you expect from the leading state officials?
A- It is important that the forum is attended by President Vladimir Putin. In my opinion, his performance there is a highlight of the program. The head of state traditionally speaks about the investment attractiveness of the country, voices his thoughts on the subject. From year to year, it is very interesting to listen to him, because he gives an estimate, the message: if there is a complete stability, whether there are ideas of change in the country.
I saw today data of one of the polls: Russian citizens are most concerned, in descending order, the issues of wages, exchange rate and economic development. Only somewhere below are Russian international affairs. Therefore, I believe that the best response to the sanctions is to improve the investment climate in Russia. That is you need to do everything it would be more interesting and easier to invest here. You can meet the restrictions with limitations, but you can also do so that the economy will pass such improvements, such transformations, after which no money will be kept from being invested here. Many people in the Russian elite, incidentally, talk about it, including government officials. The site of the VTB Capital’s forum is just a field for such discussions: how to respond to the sanctions, how to improve the investment climate.
Q- Over time, does this event become more recognized in the world economic community?
A- It has always been interesting for those who looks at Russia: for bankers, investors and businessmen, this is a very important event that sheds light on what is happening in Russia today, its future, the movement of economic policy. Therefore it is very important to be there and we hope to hear something good.
This post first appeared on Russia Insider
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