…WHILE INVESTORS IN RUSSIA ARE URGED TO LOOK TO THE LONG TERM.

Overall, however, the conference was remarkably free of controversy. If Russia is indeed in the grip of "Mafia capitalism," it did not show up in the calm and balanced discussions of project financing and investment guarantees.

Last year, the symposium made headlines with a keynote speech from the U.S. deputy secretary of the treasury, Larry Summers, in which Summers harshly criticized the slow pace of structural reform in Russia. This year, the complaints by U.S. officials sounded all too familiar. Russians do not need outsiders to tell them that the federal government needs to collect more taxes and to eliminate the "culture of non-payment." These points were covered for example in the rather anodyne presentation to the symposium by the head of the Russian delegation, Deputy Prime Minister Urinson.

Marcelo Selowsky, chief economist for Europe and Central Asia at the World Bank, criticized the government’s reliance on sequestration as a way of keeping down the fiscal deficit — but Selowsky did not say how the government could have behaved differently, given that the State Duma refused to pass a more realistic budget. Still, Selowsky noted that, in response to the relaunching of reform in May, 1997, the World Bank had upped its commitments to Russia from $6.5 billion to $10 billion. Jorge Ruarte from the IMF said that the release to Russia of the delayed $700 million loan tranche (see following item) was not a result of political pressure but was a response to concrete steps by the Russian government, such as a presidential decree banning the payment of taxes using offsets of government debts. Ruarte said that many "difficult decisions and political battles" lie ahead if economic growth is to resume, but cautiously concluded that "up to this point the optimists have been more right than the pessimists."

Most of the Russians came to the conference with concrete proposals for direct investment in development projects. U.S. bankers and advisers said there are good opportunities in Russia, but investors must be prepared to stay in for the long haul and build up a permanent presence, selling to the Russian mass market and sourcing from Russian suppliers. The success story that was repeatedly invoked was that of McDonald’s, which invested $50 million in developing Russian suppliers and a network of outlets. Ronald Freeman, from Salomon Smith Barney, noted that Westerners who bought existing Russian firms hoping for a quick turnaround and resale at a profit have often failed.

Eugene Lawson, the president of the U.S.-Russia Business Council, observed that, to date, direct foreign investment (FDI) in Russia has been "absurdly low," amounting to only $7-8 billion. However, Martin Cannon, from the consulting firm A.T. Kearney, noted that FDI in Russia is at roughly the same level as was FDI in China, India, and Brazil in the first six years after their economic liberalization programs were launched. Hence a take-off can be expected over the next 5-10 years as serious projects come on stream in Russia. Cannon reported a survey of the top Fortune 100 companies, which found that 22 of them were fully committed to projects in Russia, another 51 were interested but waiting, and only 27 were firmly absent. Cannon noted that Russia has a distinct business culture that takes time and effort to understand, and that these are problems which will not be fixed by politicians anytime soon. Learning each other’s ways is not cheap for Russians either. Khodorkovsky proudly reported that Yukos accounts are now audited by Price Waterhouse, but noted that a Western audit is ten times more expensive than a Russian audit (costing $500,000 versus $50,000).

Several U.S. speakers expressed optimism about the emergence of a market in land thanks to Yeltsin’s December decree on land ownership, something which will provide greater security to foreign investors. However, Ilya Uzhanov, the chairman of the Federal Land Property Committee, noted that the Russian land market remains highly segmented, and that the legislative and administrative basis for land registration and valuation is only slowly being erected. The December "round table" on land between Yeltsin and Duma leaders agreed to come up with a new presidential program and legislative proposals in three months.

The energy sector has been the main target of foreign investors to date, but, as explained by Craig Kennedy from Morgan Stanley, the overwhelming majority of the funds committed have been in the form of secured credits or loans to joint ventures by strategic investors. Direct purchase of equity accounts for less than $1 billion of the $15 billion spent or promised by Western investors in Russia’s oil and gas industry. Although Russia’s energy managers have been on a steep "learning curve" that has brought them to realize that they need Western funds, they are not yet ready to contemplate the sort of loss of control which is involved in the sale of equity stakes. Thus we will not see the McDonalds model of building a new business from scratch in the Russian petroleum industry.

IMF Vote of Confidence.