Turning Russia Into a Global Citizen

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The government is sitting on a giant pile of cash that it plans to invest in foreign assets. It began to flex its economic muscle this week, when the prime minister of Iceland announced that Russia may lend it 4 billion euros ($5.4 billion) to shore up its teetering financial system. Who would have thought that, given the chaotic Russia of the 1990s, a mere 10 years later it would be in the position to bail out a developed country and NATO member? Even more surprising is the fact that this helping hand for Iceland comes at a time when the domestic stock market is in a free fall and trading on the Moscow stock exchange is routinely halted.

The Kremlin thinks that now is the time to buy assets cheaply, using the current financial crisis to emerge as a powerful global economic player. As Prime Minister Vladimir Putin remarked at a recent meeting with the CEO of state-owned bank VTB, "Perhaps we should buy something [abroad]? Something that is up for grabs?" According to Arkady Dvorkovich, an economic aide to President Dmitry Medvedev, the government will support -- both diplomatically and financially -- the expansion of Russian companies abroad.

Following the Russian-Georgian war, the West is scared that the Kremlin will use its cash not just for economic purposes, but as an aggressive foreign policy tool as well. Should the West really consider blocking Russian investments abroad as a way to influence Russia?

Trying to erect an Iron Curtain around Russian funds and businesses will prove counterproductive. Indeed, a large-scale "invasion" of Russian business would be a positive development, because it would foster economic interdependence. This is true even if the economic expansion is led by state-owned companies and by Russian wealth funds. By investing in U.S. and European assets, Russia's government and business elites are buying a stake in the global economy. This should bring better mutual understanding and a more rational and accountable foreign policy.

Paradoxically, despite recent hits to the country's stock market, Russia remains awash in cash. The government just rolled out a $130 billion bailout plan for the country's ailing banking system. As a percentage of gross domestic product, this would be equivalent to about $1.3 trillion in the United States -- almost double the plan designed by U.S. Treasury Secretary Henry Paulson. Yet, even this package has not significantly eaten into Russia's wealth funds and the world's third-largest currency reserves.

The government's Reserve Fund, created to cushion the economy from a fall in oil prices, stands at $140 billion, and the National Welfare Fund, intended to invest in high-return vehicles, holds another $30 billion. Although the National Welfare Fund is not officially a "sovereign wealth fund," it is already among the 10 largest such funds, rivaling the Brunei Investment Agency.

The Reserve Fund and the National Welfare Fund combined rival Singapore's Temasek Holdings, currently sixth in the world, and lag just behind the China Investment Corporation. By design, this money is intended to be invested outside Russia. As today's financial crisis has made many Western assets cheap, they are now within reach of the country's government and leading companies.

Russian private and state-owned companies have already invested abroad extensively, often buying stakes in large foreign companies. Overall, the top 25 Russian companies hold $59 billion in foreign assets and are the third-largest investors in emerging economies, following Hong Kong and Brazil. Even though the financial crisis has wiped out the Russian stock market, some of the best-run companies have endured a softer blow than their Western counterparts and will therefore be shopping in the global market next year.

Russian corporations' foreign investments have already generated a heated debate in both the United States and Europe -- even when investment was made by a private company. The largest controversy surrounded a merger that Russian steel giant Severstal sought with Luxemburg-based Arcelor. Severstal was rejected in favor of Mittal Steel, with some commentators claiming that the decision was made on political grounds. But no investment by a private Russian company has, so far, been vetoed by Western governments.

Yet hostility toward investment by Russia's government (and government-linked companies) has been almost universal until recently. U.S. and European policymakers do not believe that foreign governments -- and their sovereign wealth funds -- invest solely on business grounds.

But the financial crisis is making the West happy to find friends with cash. During his visit to Russia in June, Paulson emphasized that the United States is interested in welcoming Russian investment, including investment by the country's wealth funds.

But Moscow still needs to set up a transparent and accountable structure to manage its sovereign wealth. Doing so will also help to convince other countries that the government's agenda is economic, not political.

Russia may be advancing that goal by taking initial steps toward improving corporate governance in state-owned companies. In an unprecedented move, the government replaced a large number of bureaucrats on the boards of these companies with independent directors, including a couple of foreigners. While it is unlikely that Russian sovereign wealth funds and state-owned companies will change overnight, they will certainly become more transparent and efficient in the near future.

Russia's foreign investment helps the country become a global citizen. Consider Russia's elites, who buy houses in London, ski in the Alps and educate their children in Switzerland. They have too much to lose from a worsening political climate between Russia and the West. It is time to make the country's big business -- and its government -- stakeholders in the world economy.



Sergei Guriyev is rector of the New Economic School in Moscow. Aleh Tsyvinski is a professor of economics at Yale University. © Project Syndicate