Russia Blows Hot and Cold on Foreign Business

On a non-political tack, matters were beginning to develop very well for the City of London to assist Moscow in its efforts to create an International Financial Centre (IFC) there. Indeed, as the year has progressed, that stands out as an excellent example of cooperation between the two cities. Using its centuries-long experience, the City has offered advice and answered the Russians’ questions; and the Russians have paid attention and even introduced legislation where necessary to ease the process along.

A key reason why the IFC process is proceeding in such a promising fashion is the level of those involved on both sides. Russians are very conscious of status. So the fact that Alexander Voloshin, the man designated by the then Russian President, Dmitry Medvedev, to head up the Russian team has attended all of the meetings on the IFC in Moscow and London sends out a clear signal that this is important to the Kremlin; and people will follow up.

On the UK side, the team from the City of London is led by the Lord Mayor. Wisely, as Lord Mayor-elect last year, Alderman David Wootton travelled with his predecessor to Moscow for the inaugural meeting of the IFC committee. This year, Lord Mayor Wootton led the process at the Moscow meeting, and was accompanied by the present Lord Mayor-elect, Roger Gifford. That provides a very useful thread of continuity.

In other fields, as Russia gears up to be the sporting capital of the world in the next few years, British companies are well placed to help the process along. Yes, Brazil may have the next football World Cup and summer Olympic Games, but Russia has not only the next Winter Olympics and the World Cup in 2018, but the World Student Games in Kazan in 2013; the Rugby Sevens World Cup in Moscow also next year; and a number of other international sporting events coming up.

Companies such as Arup, JSP, Mace, Populous, Tensar and others are not only already carrying out successful business in Russia, but are well placed to increase that business. What’s more, with London this summer staging the most sustainable Olympic Games ever the Russians are aware that there are huge lessons to be learnt from that experience.

There have been encouraging signs, too, from Russian companies and administrative regions wanting to do business with UK companies. The Russo-British Chamber of Commerce (RBCC) has helped host delegations from diverse regions across Russia’s vast land mass, showing that where there’s a will even a six-hour flight from Moscow is not a barrier.

Last September a sizeable delegation came to London from Yakutia in Eastern Siberia. If you look on a map you’ll see that Yakutia covers a territory the size of Western Europe; or, as they told me when I visited last year when their visit was being planned, “the size of India; but with a population one-thousandth that of India!” Tensar is one British company already working in Yakutia. British companies do business in China, so why not Siberia or the Russian Far East?

In fact, one of the most successful UK companies in Russia, Petropavlovsk, has its main interests mining for gold even further east than Yakutia, in the Amur Region, on the border with China beyond Mongolia. As well as bringing significant employment to this sparsely-populated region, Petropavlovsk is also building a much-needed bridge to China across the Amur River.

Among other delegations coming to London was a small business (SME) group from the Sverdlovsk Region in the Urals, the territory through which the border runs between Europe and Asia. This was particularly encouraging. Small – even tiny – businesses, looking to create links with British SMEs. Around 90% of UK businesses qualify as SMEs (small, up to 50 employees; medium, up to 250); it is something we do rather well, yet Russia is still struggling to get to grips with.

Large and medium businesses were represented by the delegation from Ulyanovsk Region, where the aviation and automotive industries are particularly strong. They visited London in March, and established some valuable contacts.

Add to these a group from St Petersburg, led by the Deputy Governor, looking to cooperate on issues of waste management, and it can be seen that contact between the UK and the Russian regions is looking good.

However – and so often dealing with Russia, it seems, there is a “’however’ paragraph – these positive developments cannot hide that all has not been totally rosy in the past year. The single biggest complicating factor was the Russian Presidential Election, held in March. It was not the result that was the issue; it was the fact that the election was taking place.

Russia is still very strongly a pyramidical society. So as early as last autumn the approaching election gave many people in business and politics the jitters. Many were too concerned about whether their careers would survive a change in leadership so avoided making decisions. Many decided that their money would be best kept outside the country, and capital flight from Russia increased dramatically in late 2011 and early 2012.

After the election and the subsequent inauguration of Vladimir Putin as President for the next six years there was a shake-down in federal and regional government. RBCC alone lost three prominent speakers from our Business Forum in London in late May because they were no longer in their posts!

Unfortunately, too, the Parliamentary election in December and the Presidential election have brought with them some worrying signs for international relations, including business relations. Just after his inauguration, President Putin turned down an invitation to join the other leaders of the Group of Eight leading industrialised nations, the G8, at their Summit in Camp David, USA.

In reality, this was due to unsettled business between Russia and the USA over medium-range missiles in Europe; but even though many people understood this, Mr Putin added fuel to the speculation which was rife by giving an illogical explanation. He said that he had to stay at home to work on his new government. But in a system such as Russia’s where there is a President and a government led by a Prime Minister, it is the Prime Minister, not the President, who decides on the composition of the government. Yet it was the Russian Prime Minister, Dmitry Medvedev, who attended the G8 Summit.

In recent weeks, the Russian parliament, the State Duma, has given further cause for concern, by passing (by an overwhelming majority) the Law on Non-Governmental Organisations (NGOs). This states that any NGO which receives any funding from abroad must be classed as, “a foreign agent”. Political sensitivities in Soviet times gave Russians an acute sense of the meaning of language; and so any Russian hearing those words will understand that “foreign agent” equals “spy”. This may refer to NGOs; but it won’t encourage foreign businesses.

There is more encouragement, though, from another act passed recently by the Duma, the ratification of Russia’s membership of the World Trade Organisation (WTO). It has taken 18 years since discussions first started, and some Russians still see this as a threat to Russian business. They see Russia being flooded by cheap foreign imports and want their own goods protected, something expressly forbidden by WTO rules.

In fact, more forward-thinking Russians understand that WTO membership gives Russian companies the opportunity to take advantage of foreign markets to sell their own goods. True, Russia is a huge country; but there’s a big world out there and it’s up to Russian companies to show that they can compete. So in an atmosphere which has blown hot and cold for the past year, WTO membership may just be the key to an improvement in the business climate all round.