Survey: Foreigners Bullish on Russia

"Nothing [in Russia] has been as bad as it has been portrayed in the Western media," Daniel Thorniley told a group of executives from more than 100 Western companies at a seminar Tuesday.

As senior vice president of and top consultant on Russia for the influential Economist Intelligence Unit, Thorniley, who holds a doctorate in Soviet political economy from Oxford, is in a position to know.

Armed with an arsenal of statistics from a recent EIU survey of 75 major multinationals operating on the local market, Thorniley went on the warpath to debunk the myths about Russia that Western companies, who have never done business here, believe.

Take China, the benchmark of emerging markets, for example, he said. While Russia's economy is clipping along at a respectable pace and promising generous returns, most Western companies still perceive China as a much more attractive investment.

But Western investors in China have an average annual return of 3 percent, while the average return in Russia before the crisis was 5 percent to 45 percent.

According to the EIU survey:

  • No company in the survey believes that political risk is worsening. Some 82 percent feel it is improving and the remainder see no change;

  • Two thirds feel the tax environment is getting better;

  • Half judge Russia as a favorable opportunity;

  • The majority rate the issue of crime and corruption as manageable or better;

  • More than 60 percent are currently operating at pre-crisis levels;

  • More than 80 percent reported making a profit last year;

  • More than half expect sales in 2001 to grow between 10 percent and 25 percent;

  • More than a quarter expect sales in 2001 to grow between 25 percent and 50 percent;

  • More than 70 percent hired new personnel last year and plan to continue hiring in 2001.

    "Yet most investors still see China as more interesting," he said, adding that the main challenge for regional managers is "selling" Russia to senior executives who don't understand investment opportunities in the country.

    China may be foreign investors' flavor of the year because of its recent acceptance into the World Trade Organization, said Thorniley.

    Yegor Gaidar, a former prime minister and the head of the Institute for the Economy in Transition, said accession to WTO is a feasible task that will require a major overhaul of the legal system.

    "If we want to have a solid legal system, we need to at least double the real salaries of our judges," he said during a workshop on legal issues that continue to dog foreign businesses.

    "Why does Moscow Mayor Yury Luzhkov never lose a case in Moscow court?" asked Sergei Marinich, a partner at international law firm Salans Hertzfeld & Heilbronn.

    Marinich said the rhetorical question was meant to illustrate the high level of corruption in Russia's courts.

    Foreign executives who attended the EIU seminar reiterated the usual laundry list of complaints, including capital flight, the lack of corporate transparency, the slow adoption of international accounting standards and the high level of crime and corruption.

    The languishing banking sector climbed to the top of the list.

    While foreign industrial investors view a movement from barter to cash dealing as positive, businesses are still suffering from not having a viable banking sector, said Shiv Vikram Khemka, director of the Sun Group, which owns one of the country's largest breweries, Sun Interbrew.

    Deputy Economic Development and Trade Minister Arkady Dvorkin repeated the official line that banking sector reform is one of the government's highest priorities.

    Many of the world's economies are expected to slow this year, led by the United States, whose growth is forecast to plunge to 1.4 percent from 5 percent in 2001, according to the EIU.

    But, Thorniley said, Russia's economy should sustain robust growth if oil prices remain above $20 a barrel. This would allow foreign investors to capitalize on healthy consumer spending and smile all the way to the bank, as long as they can manage several country-specific risks.