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. Last Updated: 07/27/2016

State Officials See End of Easy Money

UBSAl Breach
The spectacular investment returns of the past few years are unlikely to be repeated, and future growth will depend on investing heavily in industry and infrastructure and on overcoming government greed and corruption, the country's top economic officials said Wednesday.

Economic Development and Trade Minister German Gref told an investor conference Wednesday that the country had a deep "hunger" for investment. But the government will keep resisting the temptation to put budget surpluses into economic development as it needs to save oil revenues for the future and avoid stoking inflation, officials said.

Kremlin adviser Arkady Dvorkovich highlighted the country's shortage of skilled workers, while Central Bank deputy chairman Alexei Ulyukayev decried the dependence on petrodollars that he said put the country's economic wellbeing at risk.

While the country has benefited from high levels of economic growth and stock market returns of more than 50 percent per year, the current job of the government is to ensure macroeconomic stability, conference speakers said.

Future economic growth will depend on the government being committed to improving the woefully inadequate judicial system and staunching endemic government corruption and competition for resources, they said.

"Our stock market rally was a necessary precursor to investment growth," said Al Breach, chief economist at UBS, which organized the investor conference.

Breach said the eye-catching stock market returns had all but eliminated capital flight. The money attracted to Russia has nothing to do with oil but has nevertheless fueled gross domestic product growth of 7.4 percent, he said.

"Russia and Moscow are going to turn into one big building site," he said.

Assuming that oil prices stay above $30 per barrel and that there are no harmful political changes, Russia can expect GDP growth of about 7 percent over the next few years, Breach said. The stock market is still undervalued by 25 percent to 30 percent because stocks are not yet "pricing in what commodity prices imply," he said. He forecast that the RTS would hit 1,700 by the end of the year and 1,900 by next September -- 22 percent above its close Wednesday at 1,556.

Breach said he expected Russian firms to raise some $30 billion in IPOs and other additional stock offerings this year.

Oleg Vyugin, head of the Federal Financial Markets Service, said he was working to make sure that companies going public would list in Russia as well as abroad, and he said he expected three or four of these dual listings in the fall.

Equity gains have led investment growth in recent years, but future growth will come from the fledgling debt markets -- mortgages, bonds, borrowing, leasing and other forms of long-term finance, Breach said.

Although the theme of the conference was "Russia: Energizing the World," Breach and Gref took pains to point out that much of Russia's recent economic growth -- and even more of its future growth -- had little to do with high world energy prices, since oil exports are taxed heavily, with much of the revenues flowing into foreign reserves.

Deputy Finance Minister Sergei Shatalov said oil and gas exports "provided a very positive contribution" to the economy, but Gref said economic growth "has started to be driven by other factors and other sectors."

Some industries, such as electrical power generation and transmission, are already suffering from lack of investment, and Gref said investment in electricity needed to double in 2007 and triple in 2008 from current levels.

One way the government funnels investments is through the State Investment Fund, which is spending 160 billion rubles ($6 billion) to help finance seven projects worth 360 billion rubles ($13.4 billion), ranging from highways around St. Petersburg to industrial development in the Krasnoyarsk region. These projects alone will add an estimated 1 percent to GDP in the next 10 years, Gref said.

None of the big investment projects will succeed in the long run without improvements to the way land and other resources are allocated, fundamental judicial reform and a reduction of corruption and greed among government officials.

"Only one out of four court decisions is implemented, and therefore it's difficult to talk about the efficiency of the judicial system," Gref said. Many courts are run like a "family business," with assets flowing to a judge's spouse or other relatives. "We would like to videotape all court proceedings and keep an archive of them," he said.

Dvorkovich spoke just as bluntly about corruption.

"Government bureaucrats are often not very interested in letting other companies enter the market," he said.

Corruption is often viewed as a "systemic element" of a particular business or sector, leading some businessmen to wonder how their sectors could survive in its absence, he said.

"That fear is not justified," Dvorkovich said, adding that everyone should learn to fear the rule of law.

Dvorkovich was resolutely upbeat about the economy and its ability to attract investment, however. "Our failures come from the inability to believe in what we do," he said. "I believe in the ability of the Russian economy."

Dvorkovich said that as companies become more transparent, investment levels will rise. After all, attracting loans or equity investors requires several years of financial results, including tax payments, he said.

"The vast majority of companies don't yet have that three-year tax history," Dvorkovich said.

Even the demise of Yukos -- the biggest investing disaster to hit the country in recent years -- has actually improved at least one aspect of the investment climate.

"People are paying their taxes," Breach said.