Sunday, June 10, 2007

Russia cements its status as an economic powerhouse

The St. Petersburg International Forum came to a close today with a bang. Initial reports, as summarized by the Russian Economic Development and Trade minister German Gref, give a $13.5 billion figure to the amount of investment and intent deals signed at the forum, overshooting the initial estimate by four times. The simple overview of the attendees confirms the forum's success: 8,966 delegates from 65 countries, 54 official foreign delegations, nine presidents, four premiers, 44 ministers, 40 ambassadors, and coverage by 1,400 journalists.

The overall mood was all but negative, as was expected by some and as was attempted to be made by UK prime-minister Blair when he said last week that "unless there were shared values people in Europe will want to minimise the business they do with Russia”. It is rather a paradox that the Russian authorities several months ago did a lot to refocus attention from the usually bigger London Economic Forum for Russian companies to the St. Petersburg forum. Apparently their initiatives were successful. As CNN reports via Reuters:

"Putin gave a very reassuring speech about Russia's economic development going forward and underlined that Russia was open for investment outside a few strategic sectors of the economy," one of the CEOs told Reuters.

The forum saw attendance by CEOs of Deutsche Bank, BP, Royal Dutch Shell, Nestlé, Chevron, Siemens and Coca-Cola, all eager to do even more business in Russia. Russia's recent policy of revising energy deals singed in the 1990s, despite wide-scale concerns in the West did little to discourage investment. The Financial Times reported of the Royal Dutch Shell CEO, whose company was forced to sell a controlling stake in the $22 billion Sakhalin-2 energy project last year to Gazprom, as having stood up and personally thanked Putin for such a "satisfactory deal", and for taking action to "get the project to go forward".

Shell's colleague at BP probably viewed such unilateral applause with a great degree of sorrow, as his subsidiary company TNK-BP is facing a possible (and many say very likely) license suspension from the massive Kovykta gas field in Eastern Siberia. With Russia accounting for a quarter of BP's production, its newly appointed CEO Tony Hayward is forced to make very optimistic forward-looking statements on his business in Russia. BP has already pocketed close to $7 billion in dividends from the Russian joint venture and is very fearful of losing out on its positions. Meanwhile the only savior of BP will be, as many have predicted, the Russian monopoly Gazprom, whose deputy chief confirmed ongoing talks to sell a part of TNK-BP to Gazprom. Such a sale would "legitimize" BP's operations in the eyes of the Russian authorities.

Vladimir Putin was again a headline maker by proposing to overhaul existing economic institutions to reflect the ever-greater role of emerging market economies. Mr. Putin proposed to create a new financial architecture, presumably a substitute for the WTO, which has in his words become "archaic, undemocratic, and unwieldy". The Russian president criticized the WTO for helping to sustain protectionist barriers against developing economies, and for being unable for six years to come to an agreement in the Doha round of global trade talks, where again developed and rich economies are still unable to come to terms with poorer countries over eliminating barriers to farm trade. To this day, Russia is the biggest economy outside the WTO. Its southern neighbor Georgia is preventing Russia's entry into the organization largely for political reasons.

Summing up the Economic Forum, CNBC's Global energy expert Daniel Yergin noted the tremendous achievements by Vladimir Putin's administration at fueling the economic boom. In the past seven years the Russian economy quintupled, which many optimists in 2000 thought to be impossible. Today 25-30% of the population are in the so-called "consumer class", which amounts to a lot spending power. As an example, last year 1 million cars were sold in India, whereas Russia saw similar sales in the range of 2 million. Outside of the government-defined strategic sectors, foreign businesses are having little problems from government intervention as long as all laws are followed. Mr. Yergin also noted that Russia has learned a lot from its mistakes of 1998, and has summed up $600 billion worth of currency reserves and stabilization fund money which would be able to sustain Russia for two-three years in the case of a downturn. CNBC' expert noted that:

The Russians worked hard to separate the political disagreements and political issues from the business of economics. The perspective was was summed up by one of the senior people in a meeting with non-Russian CEOs. "Come to Russia with your capital, your money, your technology," he said. ""We're delighted to see you here." This time -- in contrast to earlier years -- he was talking to a very interested and receptive audience. Perhaps the mood was captured by another senior figure when he, as almost an afterthought, told the same audience, "We're very business-oriented nowadays." There was a hint that perhaps he himself was even a little surprised to find himself in that position.


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