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. Last Updated: 07/27/2016

Hope for a Turnaround




As attorneys advising clients on trade and investments in Russia, we are often asked extralegal questions touching upon risk analysis and political prognostication. Journalists, political scientists and economists who follow developments in Russia seldom face serious professional repercussions for having been wrong. Most lawyers do not enjoy this luxury f they are required to give practical advice to business people looking to make a profit (or at least minimize losses). Clients and dinner guests inevitably pose the question "when will Russia be a safe and reliable place to do business?" We wish we knew the answer, but remain optimistic concerning Russia's future, which is unlikely to be as bad as most fear, although not as good as many hope.


The lack of political leadership in Russia today is the country's overriding challenge. President Boris Yeltsin's erratic behavior precludes the adoption of consistent policies throughout the country. Former Prime Minister Yevgeny Primakov's greatest success was that there were no major disasters on his watch. Primakov, in a sense, functioned like a foreign minister in his own country. He dealt with regional leaders as he would have dealt with the heads of foreign states. He favored incrementalism over major policy initiatives. He also took the Constitution seriously and tried to build coalitions with the various factions within the State Duma, the lower house of parliament.


Still, much of what takes place in Moscow has limited impact on the provinces. Russian political subdivisions follow their own rules. The authority wielded by the heads of these subdivisions is largely unchecked, and regional officials and judges are often arbitrary and corrupt in their dependence upon local political leaders, organized crime bosses and the management of major enterprises. Changes here are unlikely to occur until the bureaucracy and the judiciary are paid reasonable salaries and Moscow chooses a new political leadership.


From an economic perspective, Russia is currently viewed by many as an exporter of cheap raw materials, a "dumper" of steel and chemicals, and a market for low-quality, foreign-produced consumer goods. The ruble's fall has created new opportunities for domestic producers and companies willing to take the risk of making direct foreign investment.


For example, Ford Motors, Renault, Scania, South African Breweries, Adidas, Danone, and Nestle are expanding or plan to expand their activities in Russia. Seeing the ruble's low value as providing real opportunities, they have chosen to approach the market from a long-term perspective. Similarly, some Russian companies such as Stervastal, Uralmash, Surgutneftegaz and the Mai Company are performing well even after (and partially as a result of) the August 1998 downturn.


We believe that Russia needs to increase its accessibility to foreign banks (the population has, to a great extent, lost faith in Russian banks after last summer's financial crisis in which many lost their savings). This can be accomplished by replacing discriminatory restrictions on Russian banks, such as limitations on market share and the types of clients they may serve, with 100 percent foreign investment and branches of foreign banks. Unfortunately, the Federation Council's recent approval of additional restrictions on foreign-owned insurance companies is not a good omen for this scenario. If signed by Yeltsin, proposed amendments to the law on insurance would establish a 15 percent ceiling on foreign ownership of Russian insurance companies and ban those foreign companies from engaging in insurance operations on Russian territory that were involved for less than two years in an insurance company established in Russia or less than 25 years in their own country.


At the same time, Russia should give up on the idea of joining the World Trade Organization and adopt a policy of import substitution with the goal of reviving its domestic industrial production (at the "expense" of its domestic market). Back in Soviet times, there were domestic producers of Russian consumer items such as computers, televisions and stereos. While these products were not competitive with those produced in Asia or the West, they were not universally of low quality. The enterprises that manufactured them could be reconstituted with new, inspired management and investment. With this in mind, Russia should raise tariff barriers on finished consumer products while lowering duties on kits and spare parts to encourage domestic assembly and processing of consumer and other products. Such a policy would encourage technology transfer and would also have the effect of educating Russian management in modern production and marketing techniques.


In the event that Russian industrial enterprises be made profitable and forced to pay their fair share of taxes, the state might have enough revenue to finance the country's faltering infrastructure and public health system. If the population sees the state providing real services, tax collection should improve. But such tax collections should be targeted largely at improving the conditions in the country for the people, instead of just repaying foreign bankers who were reckless in advancing loans to non-credit worthy borrowers or failed to have in place systems to monitor the use of loaned funds.


A politically stable Russia could be a prosperous country in the mid-term. The country is scheduled for new parliamentary elections in December 1999 and a new presidential election in June 2000. If the new leadership learns to work together, there would be justification for hope. While Russia has significant social, health-related and demographic problems, it remains a country with tremendous natural and human resources. Consequently, if the country's elites would only recognize their shared fate, the optimism of late 1991 could be recaptured.


Ethan S. Burger is the senior international counsel for the international law firm of Russin & Vecchi. Anton Lyapin is an associate at the firm's Moscow office. They contributed this comment to The Moscow Times.