Reflection On Russia
March 1 1997 by JP Donlon
Despite five years of capitalism, many corporate leaders remain wary of investing in Russia. According to the European Bank for Reconstruction and Development, Russia gleaned just $3.1 billion of foreign direct investment (FDI) between 1989 and 1995. Approximately $2 billion more has been invested since-roughly half the FDI of the Czech Republic and one-third of what Hungary attracts.
“The seemingly obvious explanation for foreign investors’ hesitancy,” wrote the Financial Times recently, “is that Russia is still too unstable a place to do business, teetering on the brink of political turmoil and economic crisis .” Among the many concerns cited were:
- A confiscatory tax regime-more than 150 taxes are applied with particular vigor to foreign investors.
- Difficulty enforcing commercial contracts and property rights in the courts.
- Crime and corruption.
- Hostile local Soviet-era bureaucrats, whose poor understanding of markets derails deals made at the federal level.
Six years ago Chief Executive held its first roundtable in Moscow. Two years later, we returned to Moscow for another roundtable, with a side-trip visit with St. Petersburg‘s celebrated mayor, Anatoly Sobchak. Attending our first Moscow event in 1991 was Irina Kibina, who then worked at a construction cooperative in Novgorod, a medium-sized city not far from St. Petersburg. Since CE’s first encounter with Kibina, the transformation of her career has mirrored the rapid changes in Russia itself. After successfully launching a modest commodities trading firm, she moved into local television programming, and was recently elected to Novgorod‘s city council as vice chairman of economic development. Recently, Kibina and Novgorod mayor Alexander Korsunov visited the U.S. and called on CE in New York. Despite his own Communist Party pedigree, Korsunov eagerly promoted his region’s access to markets and transport facilities, and offered testimonials from European and Asian investors such as Cadbury, Stimorol, Raute Chomon Wood, and Holzindustrie Preding. Moscow may be riddled with crime corruption, but Korsunov and Kibina pitch their town as virtually Milwaukee-like in its commitment to business partnership and economic growth. Grown attuned to Western business practices, Korsunov is at ease with the concept of tax incentives and noted that of Russian urban areas, Novgorod has the second highest per capita FDI after Moscow. But Korsunov and Kibina didn’t just come stateside to hustle for the hometown. Recognizing that they will have to undertake many internal changes, the two sought advice on how to reform the region’s legal and economic structure, such as bankruptcy and recovery law, to help attract FDI.
Writing in the Wall Street Journal, Alexander Lebed, Russia‘s former security chief and founder of the People’s Republican Party, remarked that his country suffers under an unprecedented monopoly of power, money, and natural resources. “We have many problems,” Korsunov says, “but we have learned that we cannot rely solely on our national leaders to resolve them. We feel we must take control of our future.”