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. Last Updated: 07/27/2016

Officials Battle Graft and Math Puzzles

Itar-TassAndrosov and Gref talking after a meeting in St. Petersburg on March 21.
Economic Development and Trade Minister German Gref cast a puzzled look over a set of mathematical formulas showing the expected returns on an investment project about to receive billions of dollars of state money.

"For the third time today I understand that I do not understand you," Gref snapped at his deputy, Kirill Androsov, at a meeting of officials overseeing the disbursement of the country's oil wealth for infrastructure projects.

Their meeting was held in public, in an attempt to boost transparency on the public investment decisions that should improve the daily lives of ordinary Russians and build infrastructure fit for a modern economy.

Besides battling widespread allegations of corruption, the officials are taking on the math of investment theory.

The government plans to plow $12 billion into an investment fund over the next three years, introducing the concept of public-private partnerships under which outside investors must at least match state commitments.

Figuring out the net present value or internal rate of return of a project may prove to be a headache for Gref and other state officials on the investment fund's supervisory panel, including the finance and transport ministers.

But for a new generation of officials, such as Gref's deputy Androsov, 34, a bespectacled graduate of Chicago University Business School, it is the future.

"This is the economic theory," Androsov tried to explain in response to Gref's complaint, adding hopefully: "UBS was an adviser on this project."

Investors, ranging from state firms to startups, are seeking advice from international investment banks to give their projects more clout in the eyes of officials like Androsov, who oversees the initial selection.

"Transparency and foreign advisers should reduce the risk of corruption, but in Russia one should always take this risk into account," said Peter Westin, an economist at MDM Bank.

State investment has so far been a major source of corruption, with President Vladimir Putin's economic adviser Arkady Dvorkovich, another U.S.-educated official, estimating average kickbacks at 30 percent of public contracts.

The $12 billion for investment is a fraction of the government's $108 billion stabilization fund, which has gathered windfall oil revenues since 2004 and is designed to insure against a possible oil market crash.

Corruption is one reason why the government prefers to keep its oil wealth under lock and key, rather than spend it. But fiscal prudence is hard to sell in a country where roads are bad, power cuts are common and monthly pensions average $80.

Helped by high prices for oil, the economy is booming and capital investment is growing at an annual rate of 20 percent.

Few private investors want to upgrade infrastructure that has crumbled since the 1991 collapse of the Soviet Union, however.

The condition of the country's roads has historically been an obstacle to development: There is still not a single paved road linking European Russia with the Far East.

"As long as the projects focus on infrastructure, they are likely to be a success," Westin said, noting that private investment in roads without government help does not work.

The fund took about 50 applications from private investors last year and has so far approved 12 projects worth a combined $50 billion. Most are new roads.

One of the projects already approved, a 14-kilometer highway heading west from Moscow, will provide easier access to a fashionable suburban area favored by officials and Russia's new wealthy elite.

At a recent committee meeting, three projects -- a sewage system in southern Russia, a sea port terminal and a railroad in a remote far eastern region worth a combined $4 billion -- were bidding for over $2 billion of state funds.

Private investor Igor Rusu told the panel about the future benefits of the terminal near St. Petersburg, which should make it easier for Russia to import new foreign cars, bypassing Finland and the Baltic states.

Rusu, director of Ust-Luga, which will build and operate the terminal, produced a draft showing where the land and infrastructure remain state property, while the mooring berths would go to the investor.

"If I were investing my own money, I wish I could swap seats with you," said Gref, a graduate of a law school from a little-known university in Siberia.

Gref asked whether a long-term lease was acceptable instead.

"Otherwise it looks as if we built a road to a toll gate, someone else has paved the last meter and gets the right to collect the fee," Gref said before reporters were ushered out of the room.

Behind closed doors, all three applications won the panel's approval.