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. Last Updated: 07/27/2016

Investors Back Call For Eased State Role

MTShuvalov gesturing Sunday as he speaks at the forum in St. Petersburg.
Foreign investors reacted with cautious optimism on Monday after top officials called for loosening the state's grip on the economy at the St. Petersburg International Economic Forum over the weekend.

At the forum, First Deputy Prime Minister Igor Shuvalov said the government should "limit the injurious meddling of the state in the economy," while presidential adviser Arkady Dvorkovich called for lower taxes — statements applauded by investors and economists.

"They said a lot of what we wanted to hear," said Rory MacFarquhar, chief economist and a managing director at Goldman Sachs who attended the forum. "There was no question about that."

But the dispute over TNK-BP continued to cloud the investment climate, prompting some experts to speak of mixed signals as President Dmitry Medvedev reiterated his call for bureaucrats to leave business alone in a meeting Monday with Natural Resources Minister Yury Trutnev.

Meanwhile, in another move that suggested the state might be retreating from the economy, Gazprom abandoned a deal to create a new, state-dominated electricity giant that analysts said had threatened reform of the power sector. (Story, Page 5.)

In a keynote speech at the St. Petersburg forum on Sunday, Shuvalov called for reducing the number of government officials who serve on the boards of directors of state-controlled companies and replacing them with independent directors.

"We must replace bureaucrats with professionals and create boards of directors at state-controlled corporations that function by the rules of private companies," said Shuvalov, a key member of the government's economic team.

The proposal — which reiterates a call that Medvedev made in February — would improve the efficiency of Russia's natural resources sector, which is dominated by state-controlled companies, said Roland Nash, chief strategist at Renaissance Capital.

"Having an independent member on the board is a counterweight to state interference in a very large part of the economy," Nash said.

Medvedev's original call for more independent directors was "an implicit criticism of the way things were done under Putin," said Marshall Goldman, a senior scholar at Harvard University's Davis Center who has studied the issue.

"This will hurt the inside dealings and enrichment that the siloviki were able to enjoy, [which was] not much different from the way the original echelon of oligarchs operated and enriched themselves," Marshall said in e-mailed comments.

In his speech, Shuvalov also said the government was planning to cut the number of companies listed as "strategic" and therefore off-limits to private investors.

Citing a source in the White House, Kommersant reported Monday that one of the strategic companies to be opened to investors was Svyazinvest, the fixed-line operator whose possible privatization has been discussed for more than a decade.

"That would certainly be a company that the market would be very interested in," Nash said, referring to Svyazinvest.

Dvorkovich, the Kremlin's top economic adviser, told Reuters on Sunday that the government was drafting new tax-break proposals worth 200 billion rubles, or $8.3 billion, for oil companies.

The proposed tax breaks, which would take effect starting in 2010, would come on top of a previous tax-break proposal announced last month, and they are designed to stimulate new exploration.

"This is undoubtedly very important for the market," said Yaroslav Lissovolik, chief economist for Deutsche Bank Russia. "The signal to investors is that they will see a further reduction to the oil sector's tax burden on top of the measures that the government has already taken."

Dvorkovich told reporters on Saturday that the government was considering reducing the value-added tax from 18 percent to 12 or 13 percent starting in 2010.

MacFarquhar described the St. Petersburg forum as a glimpse of what economic policy might be like under Russia's new configuration of power, with Medvedev in the Kremlin and Prime Minister Vladimir Putin, his still-powerful predecessor, in the White House. Notably, Putin did not attend the forum.

"This was a coming-out party for a number of officials who have been relatively inconspicuous," MacFarquhar said, citing the media coverage given to Shuvalov, Dvorkovich and Economic Development Minister Elvira Nabiullina.

"This is a new generation … and they were very unequivocal about what their vision of Russia was," he added.

Investors welcomed the idea of reducing state interference in the economy, even as they said they would adopt a wait-and-see approach.

"It is one of the most important changes that Russia needs to make," said James Beadle, portfolio manager for Pilgrim Asset Investment, which has $200 million in assets under management. "But it will face so much bureaucratic and political obstruction that it remains to be seen whether even someone of Putin's power can push it through."

Some developments on Monday suggested that the state might indeed be backing away from the economy.

In a move that was praised by advocates of power-sector reform, Gazprom canceled a long-awaited joint venture to pool coal and power assets with SUEK, a merger that would have created an electricity giant valued at $15 billion to $16 billion.

In Medvedev's meeting with Trutnev, the natural resources minister, the president told him that inspections of industrial sites should focus on real safety issues and not be mere shakedowns for bribes.

Many inspections now are "not in the interest of the state but in the interest of individual bureaucrats who cling to the government machine," Medvedev said, Interfax reported.

Trutnev replied that he would implement reforms "to minimize state participation in the economy, applying it in only the most important and dangerous situations."

At the same time, an apparent case of state interference in the economy seemed to contradict officials' promises as Moscow prosecutors met with a representative of TNK-BP chief Robert Dudley, who has been publicly sparring with the Russian billionaire co-owners of the joint venture.

Investors were watching the dispute closely and hoping for a fair resolution in which the state would act as a fair arbiter, said Andrew Somers, head of the American Chamber of Commerce in Russia.

"If this situation is not resolved in an apparently fair way," Somers said, "this is going to be a tremendously negative signal in the investment climate."