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. Last Updated: 07/27/2016

Putin Says Business Must Diversify

Itar-TassSistema CEO Vladimir Yevtushenkov, left, Vneshtorgbank chairman Vladimir Dmitriyev and RusAl CEO Oleg Deripaska attending Tuesday's meeting.
President Vladimir Putin on Tuesday urged big businesses to diversify away from oil and gas and focus more on value-added products, and he pledged to help Russian firms expand into foreign markets.

"The time has come to expand the participation of our enterprises in international cooperation and the realization of serious commercial initiatives abroad," Putin told an audience of business leaders and state officials seated at a large round table in the Kremlin's ornate blue-and-white Yekaterininsky Hall.

Listening attentively to Putin's message were 24 of the country's leading businessmen, including Oleg Deripaska, Viktor Vekselberg, Vladimir Potanin and Mikhail Fridman -- a veritable Forbes list of oligarchs rarely on public display in one room.

Putin's meeting with the Russian Union of Industrialists and Entrepreneurs, or RSPP, came a day ahead of the group's 15th-anniversary celebration, to be commemorated with a high-profile conference.

Flanked by top Kremlin strategist Vladislav Surkov, Putin said the economy was too reliant on exports of raw materials, adding that it was in companies' best interests to diversify in order to lessen their dependence on commodity price swings.

"Russia is the world's largest gas producer and may well establish the leading position in oil this year, too. I just don't know whether we need that," Putin said.

Raw materials account for an ever-increasing share of Russia's exports, rising to 85 percent in 2005 from 80 percent in 2000, Putin told the meeting. Russia is the world's largest gas producer and second-largest oil producer and relies on energy sales for two-thirds of export revenues.

"This tendency should worry the business community as seriously as it does the state," Putin said. "And it goes without saying that the diversification of the Russian industry is becoming one of our main and common economic priorities.

"We should learn not only to export profitably crude oil, gas, ores and timber -- we need to process these natural resources within the country and export valuable, high-tech products," Putin said. He said more processing enterprises should be established in the petrochemicals, timber, coal and mining industries, adding that businesses should help the government develop the infrastructure. To help the companies do that, he said, the government has established an investment fund and a venture fund aimed at fostering technology projects. Yet, those instruments were "underutilized and used ineffectively," Putin said.

Putin told the business leaders they could count on the authorities' support in expanding their businesses abroad if those efforts would benefit the Russian people and the national economy.

Business leaders discussing the need for diversification with President Vladimir Putin in the Kremlin on Tuesday.
But he urged his audience to avoid words such as "conquer" or "expansion" when they spoke of getting access to foreign markets.

Foreign companies were "already scared enough, it's not clear of what, though," he said, adding there was "a very politicized environment" around Russian companies going global.

Russian companies' expansion abroad has prompted fears in the West that the Kremlin is using heavy-handed tactics in pursuing its foreign policy objectives.

The attempt by state-owned Vneshtorgbank to gain a seat on the board of European aerospace and defense firm EADS last fall was rebuffed by European governments. In what some saw as the Kremlin's response, Gazprom announced shortly afterward that it was rejecting foreign bids for stakes in the giant Shtokman gas project.

Putin was responding to complaints by the businessmen that they often faced barriers in foreign markets.

"We really are encountering strict protectionist measures," Vekselberg said of his company's efforts to work outside the country, singling out the U.S. aviation industry as an example.

Evraz executive Alexander Abramov largely agreed with Vekselberg, saying that, as of last October, Russian companies faced 38 barriers in 18 countries.

Only after Evraz teamed up with Oregon Steel had it managed to acquire cutting-edge Japanese technology to harden rails, Abramov said. "We couldn't buy it directly for several years," Abramov said.

Six executives took their turn to speak about the theme of diversification, and Putin listened attentively and often asked the speakers to clarify points.

On other measures of state support, the businessmen asked Putin whether export duties on finished goods could be reduced and import duties, especially on equipment not made in the country, abolished.

In a lengthy report, Vekselberg said the tax burden should also be reduced, adding that customs tariffs and value-added tax took $250 million in a $1 billion project one of his companies was pursuing.

He added that state support was needed to conduct what he called "a global rebranding" of the Russian economy and revive trust in the "Made in Russia" trademark.

The business magnates dutifully listened but few among them took notes. Fridman at one point started doodling in his notebook, while Deripaska often rested his face on his hands while he listened to Putin and the other speakers.

Putin said that while the state was doing its best to create a good investment climate, he hoped that businesses "appreciated the benefit of strict adherence to the rules and tax discipline laid down."

On Monday, ex-Yukos chief Mikhail Khodorkovsky was indicted on fresh charges of multibillion-dollar money laundering and embezzlement. After Khodorkovsky's arrest in October 2003, the RSPP has gone from calling the shots to following the agenda set by the Kremlin, which has increasingly been less tolerant of the oligarchs' freewheeling initiatives.

Chris Weafer, chief strategist at Alfa Bank, said Putin's three main messages to big business were: "Don't worry about the strategic industries, as the state has those covered; concentrate on adding value in the other sectors of the economy; and look outward and expand internationally." During Putin's time in office, the government has been laboriously preparing this transition from a raw materials economy to a diversified one that can fulfill its potential and be less vulnerable to commodity price shocks, Weafer said. "Putin wants to see the new administration in March 2008 hit the deck running," he said.

Some analysts said the worst thing for diversification was too much government involvement -- not too little, as the businessmen were asking for Tuesday.

"The best thing to do is just back off and let business handle business," said James Beadle, head of research at Pilgrim Asset Management. "Everywhere you look, business is being run by the state.

"But that is unlikely to change, because [oligarchs] are not going to question the government's inflexibility," Beadle said.

Staff Writer Simon Shuster contributed to this report.