St. Pete Economic Forum: Image Control

As European and U.S. concerns about Russia's political scene affect business abroad, Russian executives try to counter

The St. Petersburg International Economic Forum, aimed at combating prejudice against Russian businesses, trumpeted financial successes but was marred by concerns about the country's political climate.

During the forum Russian President Vladimir Putin confidently played the role of host and the leader of a global energy giant. The event, which ended on 10 June, set an attendance record in its 11th year and investors from around the world inked billions of dollars in deals.

But the aftershocks of the G8 summit in Heiligendamm, Germany, where the Russian president arrived as the head of what U.S. President George Bush called "a derailed democracy," could still be felt in Putin's home town.

Russian executives complained at the forum that political pressures are damaging the nation's business links in the European Union and United States, affecting their business abroad, and generally stifling their international development.


Viktor Vekselberg, chief executive of the Renova Group, said Russian businessmen are suffering from how their counterparts in Europe and the America view the Russian political scene. He cited the failure of the steel and mining company Severstal to close a deal with the global steel giant ArcelorMittal in 2006 as a compelling recent example of a decision based on what he alleged was political bias. If the merger had gone ahead it would have made the Russian company a global giant and world's largest steel producer.

"I am not even talking about Gazprom, which faces a red light wherever it goes," Vekselberg said. "It is a vicious combination of politics and bureaucracy."

The Russian energy conglomerate Gazprom is actively seeking international expansion and a greater access to the European market. The company has been considering a takeover of the British company Centrica, the owner of British Gas, and the United Kingdom's largest gas distributor.

When Gazprom first voiced its interest in the company in 2006, British and other EU politicians sounded the alarm about a possible takeover. They felt it would give Russia, which is already gaining political clout out of the growing EU dependence on its oil and gas, an additional means of applying political pressure.

Vekselberg recalled his own experience of what he called a prejudiced reception from overseas business interests.

"When Renova bought a stake in the Swiss engineering giant Sulzer, the local media reacted with an avalanche of angry articles, which all related to Russian politics rather than my company," Vekselberg said. "There then followed a string of audits and financial assessments of us. Such treatment affects the international reputation of the company because everyone starts to think there must be something wrong with us."


Vekselberg's concerns were echoed by Andrei Illarionov, Putin's rebellious former economic advisor. Illarionov, instead of going to the prestigious forum, chose to attend a dissenters' march in St. Petersburg on 9 June. There he warned that Russia's economic successes are bound to be short-lived if the country fails to follow up its economic successes with coherent political reform aimed at developing its fledgling democracy.

The political protest rally attracted about 2,000 activists, compared with about three times as many people who registered to take part in the economic forum.

But in Illarionov's opinion, the march was more significant than the business gathering.

"During his first years in power President Putin did a series of healthy moves for the Russian economy but failed to back them up with a political foundation," Illarionov said.

"Trust in a country is not built at forums," he said. "And, no matter how often you hold such business gatherings, trust is effectively ruined by things like the destruction of Yukos and by the state using its laws like a club against its political opponents."

Takeovers of foreign businesses by the Russians are often seen as lawless invasions.

According to new research, carried out in April by the market research agency YouGov in Britain and the polling agency Russian Axis, 49 percent of Britons think that Russian investment in their country is "a bad thing."

Every third participant of the survey said that Russian business culture was different from that in Britain, and that Russian owners of British companies could damage public trust in business.

Music to their ears: A string quartet performs at the St. Petersburg International Economic Forum, where executives inked billions of dollars in deals.

Fifty-nine percent of those polled accused the Russians of "lawlessness." Sixty-two percent of respondents saw the Russians as "arrogant" and 47 percent branded them as "unreliable."

In June, the Foreign Office in London issued a statement cautioning British businessmen not to underestimate the risks of investing in Russia. Meanwhile, British Prime Minister Tony Blair hinted in the wake of the G8 meeting in Germany that Europe might start cutting business ties with Russia if Putin abandons "shared values."

Although Russia tries to present itself to investors as "a European country with Asian profits," potential investors insist that few can live with the scale of risk that exists in Russia, or adjust to the country's fluctuating political and economic policies.

llarionov said Russia's frequently amended laws and fluid investment policies irk foreign investors, harm the country's reputation as a business partner, and deter many abroad who would otherwise be tempted to invest. Two recent cases likely to have had just such an effect relate to the British-based BP and the Netherlands-based Royal Dutch Shell.

Speaking at the forum, Russia's First Deputy Prime Minister Sergei Ivanov said the Russian-British joint venture TNK-BP would likely to lose its opportunity to develop a gas field – worth $2 billion – in Kovykta in East Siberia purportedly because of licensing violations. BP bought a stake in the company in 2003.

And last year Royal Dutch Shell lost control of the Sakhalin-2 project in Russia's Far East after the company failed to obtain the required environmental certificates from the Russian authorities. The majority stake in the project was then acquired by Gazprom.

Both cases are widely seen as being part of a Kremlin attempt to secure tighter control over the country's vast energy resources.

However, at the St. Petersburg forum, a succession of top foreign participants said they would strive to dispel persisting stereotypes which portray Russia as an unstable and investor-unfriendly place.

Russia's image – variously described as "tainted", "distorted," and "unfair" – made headlines in a number of speeches. And the speakers, often leading international businessmen and politicians, sounded almost apologetic.


James Wolfensohn, former World Bank president, said that the forum gave "a refreshing sense of openness" and blamed foreigners for having a biased attitude toward Russia. The former German chancellor, Gerhard Schroeder, said that Russia "is no longer the weak negotiating partner the West used to see back in 1990s."

"Today Russia is self-confident both in economic and political terms. This, however, is a good, not a bad thing for Europe," said Schroeder, who became chairman of the shareholder committee of Nord Stream after leaving office. Nord Stream is a Russian-German pipeline subsidiary of Gazprom.

But Leif Pagrotsky, a Swedish parliamentarian and former minister for industry and trade, articulated the concerns of foreigners by noting that "developing countries are not always able to handle their new strengths and powers."

"A new power must build trust in its neighbors, rather than fear and worries," Pagrotsky said at the forum.

The Russian hosts sought to assure their guests that political stability and a bright future lay ahead for Russia. The most optimistic forecast was voiced by Ivanov, seen as a possible successor to Putin, who said that Russia would be one of the world's five leading economies by 2020.

"Its civil society will have a greater impact on government policies, and the size of its middle class, which will have a standard of living comparable to its counterparts in the West, will grow to 50 percent of the population," Ivanov said.

Finance Minister Alexei Kudrin projected that inflation would soon decrease from the present 8 percent to 3 percent, thus making long-term investment projects financially feasible.

Daniel Thorniley, senior vice president of the Economist Group – publisher of the influential Economist magazine – delivered an image-rich and most complimentary view on the future of the Russian economy, calling it one of the world's best kept secrets. But he also acknowledged that a negative image has become widespread.

"If you do business in Russia, you will lose all your money because your Russian partner will steal it from you, and you will die, because he will kill you in your hotel bedroom: this is the CNN and Wall Street Journal view of how business in Russia is done, and it is 95 percent rubbish," Thorniley told the forum.


This year's forum set records in terms of both the major business deals inked during the event and in the numbers of foreign business leaders it attracted. Investment and other agreements signed at the forum are said to be worth more than $13 billion, against an expected figure of $3.5 billion, and the event attracted 6,000 participants, including over 100 chief executives from some of the world's wealthiest corporations.

It marked a turning point for Russia. To call this Russia's Davos – the annual Swiss gathering of world leaders and business moguls – is no longer an exaggeration.

In April, Putin signaled to the Russian business elite that holding business forums abroad is not a good idea. And many who were planning to attend the annual Russian Economic Forum held in London in April got the message and made a last-minute decision to stay at home.

The St. Petersburg event proved that foreign business people are content to go along with the new rules. But despite that, the shadow of political events in Russia loomed larger than it has done in recent years.

"Yes, foreign investment may flow into Russia but respect will not arrive and investors will not stay," said Illarionov, Putin's former economic advisor. "What Russia needs is a long-term partnership, but what it will get is a smash-and-grab raid, quick rip-off deals, and it will earn as little trust as Zimbabwe or Libya. Those countries can hold as many forums as they like but, unless they build democracy at home and demonstrate a commitment to it, investors will not make long-term decisions."

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