Investors Reassured Over Key Sectors

MTU.S. Ambassador William Burns walking behind Viktor Vekselberg at Wednesday's AmCham event in Moscow.
A senior government economic official on Wednesday urged foreign investors not to fear new legislation that limits foreign investment in the country's most strategic, and lucrative, sectors and asked them to give it time to work.

The bill, passed by the State Duma earlier this month, aims to ensure majority state control over 42 strategic sectors, including energy, aerospace and telecommunications.

"Don't be scared of this law, but approach it with the belief" that it will one day run smoothly, Deputy Economic Development and Trade Minister Stanislav Voskresensky told a investor conference hosted by the American Chamber of Commerce in Russia. "I don't think it will work efficiently from the first day. We need time."

In addition to codifying the rules for foreign investment, the bill also aims to cut down on official corruption, Voskresensky said, by enshrining the investment process in clear legislation. Yet he went on to say that the bill should not be considered too literally.

"The law names 42 formal sectors, but really it includes just five to seven, namely those related to the military-industrial complex," he said.

Voskresensky failed to elaborate, but AmCham president Andrew Somers said after the conference that five sectors were key — military, energy, metals, telecommunications and aerospace.

Somers praised the bill, which now just has to be signed by President Vladimir Putin to become law, as "a positive step," but added, "In Russia — in all countries, but especially Russia — it's all about implementation."

Voskresensky, 31, a former economic adviser to Putin who was appointed a deputy minister in February, said the law would cut down on corruption.

"We want clear rules of investment so that investors do not need informal relations with state officials," he said.

"All big foreign investors here carry out a roadshow, but not in front of foreign investors — in front of state officials," he said.

President-elect Dmitry Medvedev has named fighting corruption a key task.

Yet an anti-corruption drive promoted by Prime Minister Viktor Zubkov last fall has produced few results aside from the detention of Deputy Finance Minister Sergei Storchak, who is accused of embezzling state funds in what colleagues and analysts say is a politically motivated campaign.

Conference participants on Wednesday consistently singled out corruption at all levels, as well as a shrinking qualified labor force, as the biggest impediments to doing business in the country.

Billionaire Viktor Vekselberg, who is battling pressure to sell his stake in oil firm TNK-BP, sat quietly as Voskresensky extolled the virtues of the strategic sectors legislation, which aims to bring transparency to the investment climate.

In the last month, TNK-BP, half-owned by British oil major BP and half by billionaires Vekselberg, Len Blavatnik and Alfa Group's Mikhail Fridman and German Khan, has seen its head office raided, an employee arrested and its main oil field investigated by state environmental authorities amid market speculation that a state-controlled firm hopes to buy into the company.

On Wednesday, TNK-BP said it was facing new back tax claims, and Gazprom said it was growing impatient with drawn-out negotiations with the British-Russian firm over Kovykta, a huge prospective gas field in eastern Siberia. (See Stories, Page 5)

Sidestepping the issue of TNK-BP's troubles, Vekselberg told the conference that he "remained an optimist" about Russia's ability to recover from the stagnating oil production that hit the industry this year.

Yet he warned that extraction tax cuts proposed by the Finance Ministry last month would have to be drastically increased to ensure a growth in future production. The ministry has proposed raising the taxation exemption bar to $15 per barrel, from the current $9.

"We are moving into an area that is difficult to reach and underdeveloped — offshore, eastern Siberia and Sakhalin," he said. "I think Russia still has a lot of potential."

LUKoil vice president Leonid Fedun warned earlier this month that he believed Russian oil production had peaked and would never recover in his lifetime, yet he appeared to be referring to western Siberia, a region tapped in the Soviet-era whose fields are reaching the end of their natural life span.

"The government will have to take a stronger decision of support for the oil and gas sector," Vekselberg said, referring to the planned tax cuts, which the Finance Ministry estimates will save energy firms 100 billion rubles ($4.2 billion) per year.

Vekselberg said the savings would amount to just 10 percent of TNK-BP's capital expenditures — not enough to encourage production at new fields.

Yet he said he believed the energy sector would continue to drive Russia's economy in the medium term.

Voskresensky, meanwhile, sounded an upbeat note on Russian business, saying "there are 1,000 companies in Russia who would have a $1 billion valuation if they held an IPO today."

As the global credit crisis continues to bite, no Russian companies have carried out initial public offerings this year, following a flurry of activity last year. Most speakers at the conference mentioned the crisis only in passing, however.

"Russia so far — so far — is standing on the periphery of the global financial crisis," said Vekselberg, one of the country's most visible and richest investors with a fortune of $11.2 billion, according to Forbes. "The problems we will face are still ahead of us," he warned.