Persuading Russia's Bullies To Play Fair

The country's securities czar discusses his plans for real reform

Igor Kostikov has one of Russia's most challenging jobs. As chairman of the Federal Securities Commission, he's in charge of cleaning up Russia's notoriously wild markets. Since being appointed by President Vladimir V. Putin in February, Kostikov has protected minority shareholders from the maneuverings of some of Russia's most powerful companies, including Norilsk Nickel and Unified Energy System. In a few weeks, he will propose an ambitious overhaul of Russia's oppressive taxes on securities. On Oct. 6, he sat down in Washington, D.C., with BUSINESS WEEK European Edition Editor Patricia Kranz.

Q: What is your primary goal?

A: The corporate governance issue today is the most important issue for the economic development of the country. We need investments in order to grow. Until we solve it, we won't see Russian or international investments.

Q: Why should foreign investors consider putting their money into Russia?

A: Political confidence is in place. The economy is growing. But we don't see growth in investment because of this single issue--corporate governance. That single issue is too big.

Q: What are you doing about it?

A: We are working on a corporate governance code. But we need to make business part of the process. Otherwise, it would be completely alien to them. They would say it wouldn't work in Russia. That's rubbish. It will work in Russia. Society is ready--not like three to four years ago.

Q: What has changed?

A: Big corporations see that they have to change their attitudes toward shareholders. Yes, there's a long way to go, but they understand it's the way for them to develop. In medium and small companies, the culture is not there yet. They talk about corporate management, not corporate governance.

In Russia generally, the attitude has changed. All the defaults, bank failures, asset-stripping is widely known. It's part of our history. People think these were very bad things, but it was experience as well. Now, everyone wants to go forward and build society. I'm not a rosy optimist. I understand it's not an easy task, but we will learn.

Q: Isn't enforcement a problem?

A: We're building relationships with the tax police, which will give us more enforcement power. And we would like to educate judges.

Q: What advice do you have for investors?

A: They should exercise judgment. Not all [Russian] corporations are bad. There are a number of good companies. But you have to work with people who know Russia.

We're getting to the stage where people aren't afraid to touch Russian assets. We're becoming more and more transparent: 85% of Russian companies report on time and in full. But they use Russian accounting. We are working with the Ministry of Finance to translate Russian accounting to international accounting. Now, large companies keep two sets of books. I propose to let them choose one set or the other. Soon, companies will choose in favor of international accounting practices.

Q: What tax changes do you seek?

A: We want investors to be taxed on net profits. [Under current law, investors cannot offset profits with losses]. This will increase foreign investment and encourage Russians to repatriate offshore investments. The government will send the draft law to the Duma in November.

Q: Do you have political support for your reform efforts?

A: We have a constructive relationship with the government, the ministries, the Duma, and the Central Bank. We can work with each other. That hasn't always been the case.

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