Foreign investors will descend on Moscow tomorrow for a three-day conference with one question on their minds: is it safe? Nobody doubts the attractions of Russia as a business destination. With energy prices rising again and the economy growing strongly after the dip caused by the financial crisis, the conference will hear plenty of positive news.
Investors - banks, private equity and hedge funds, and global financiers - have been aware for many years of the country's enormous potential. Its huge natural resources, the underdeveloped consumer market and the beckoning infrastructure projects have been luring foreign investors since the fall of the Soviet regime 20 years ago. But in many cases, those who rushed into post-communist Russia emerged with their fingers badly burned, frustrated and out-of-pocket, stymied by the seemingly immutable defects of Russian business culture: endemic corruption, bureaucratic inefficiency, legal confusion and government caprice.
Russia was recently placed 146th out of 180 in a list of countries drawn up by Transparency International in a ranking of freedom from corruption. The investors gathering tomorrow for the conference, under the auspices of the Russian bank VTB Capital, will be able to put their doubts and concerns to Vladimir Putin, the prime minister, who is still regarded as the most powerful man in the country. He is opening the conference, entitled Russia Calling, in a sign of how much the government wants foreign investment.
The problem is that Russia has called before, but those who answered, from across the business spectrum, did not get the investor-friendly reaction they expected. Take IKEA, for example. The Swedish furniture giant saw enormous opportunities in Russia as a whole generation sought to replace the stuffy furnishings of the Soviet era with modern Scandinavian design. IKEA was right. Russian consumers did want its kind of lifestyle furniture, but the authorities, from city, to local to regional level, also wanted their piece of the action. When IKEA declared it was not going to pay bribes to facilitate the store-planning process, or utility connections, or transport links, it faced sudden "unforeseen problems". Access roads were closed, car parks declared unsafe, electricity failed.
Or take BP. In 2003, the British oil giant signed a joint-venture deal with the Russian energy company TNK, an arrangement BP hoped would gain it access to the enormous energy reserves of Asiatic Russia. Instead, it found itself embroiled for years in a battle with Russian investors for control of the company, with its headquarters raided and its executives harassed. Many millions of dollars have been spent on legal actions in London to resolve the issue, and help has been sought from Mr Putin, but despite a temporary truce, the confrontation looks set to rumble on for years.
The international accounting firm PricewaterhouseCoopers (PwC) finds itself in the middle of one of the most dangerous situations of all, caught between the Kremlin and the oligarchs, the powerful rulers of Russian business. Again, the western firm saw a unique opportunity: big Russian companies had to come up to international accounting standards quickly and were willing to pay the best in the West for auditing, consulting and other services.
When in the 1990s PwC landed the oil giant Yukos as a client, it must have thought that would open the door to a huge business flow from Russian corporations. But fast-forward a few years: the head of Yukos, Mikhail Khodorkovsky, is in jail on theft charges and PwC finds itself caught in the battle between him and the authorities. PwC eventually withdrew 10 years of audits from Yukos, allegedly under Kremlin pressure.
In Russia, everything comes back to the Kremlin. One western entrepreneur who regularly does business there and who asked not to be named said: "The local governors and mayors are the main source of obstruction to anybody trying to do business there, but they can only get up to their tricks because Moscow allows it. Putin and [Dmitry] Medvedev [the Russian president] have the power to bring them under control. We've seen that, but it appears they don't want to. The whole system is built on graft and corruption."
On the eve of the VTB conference, there was a sign that the Kremlin was willing to act against the regional power brokers whom many blame for the defects of Russian business culture. The long-standing mayor of Moscow, Dmitry Luzhkov, was dismissed last week by Mr Medvedev after a simmering row between the two men, ostensibly over the construction of a road between Moscow and St Petersburg, but actually, many observers believe, a power grab in Russia's richest and most important city.
Mr Luzhkov and his wife, Yelena Baturina, the richest woman in Russia, had a reputation as, allegedly, participants in the process by which western investors had to make tribute for being allowed to do business in Moscow, by granting the Luzhkovs equity participation or lucrative contracts. So maybe his removal is a positive thing for western investors. Andrew Wordsworth, a partner in GPW, a business intelligence company specialising in emerging markets, is not so sure. "Many western investors will now find that their powerful local partner and shareholder, who they relied on for protection and patronage, has disappeared," he says. "It just adds more to the uncertainty."
Mr Wordsworth sees the attractions of Russia but has a word of advice for potential investors: "Russia is a great place to invest, but you've got to work within its own rules."
fkane@thenational.ae
Deals underline growing Russian-UAE relations
- The challenges of doing business in Russia have not deterred UAE investors and entrepreneurs from a recent spurt of activity between the two countries. High-level trade missions have been accompanied by deals in the energy, property and infrastructure sectors, with the promise of more.
- At a conference in the Russian Black Sea port of Sochi last month, the Dubai-based property developer Damac announced plans to invest US$300 million (Dh1.1 billion) in the region, including in development of facilities for the 2014 Winter Olympics.
- "We are always interested in investing in the Commonwealth of Independent States countries, and this joint venture presented us with an opportunity to enter into a market with strong potential and a strong regulatory and transparency framework," said Hussain Sajwani, the chairman of Damac Properties.
- At the same time, Gulftainer, a ports group based in Sharjah, clinched a deal with the Russian state investment group Prominvest to develop logistics and transport facilities throughout the region of the former Soviet Union, with a $500m fund to acquire assets there.
- Also last month, Sheikha Lubna Al Qasimi, the Minister of Foreign Trade, led a delegation of the Russian-Emirates Business Council to meetings in Moscow, where the two sides discussed "opportunities for trade and investment co-operation … and ways of strengthening the UAE's exports to the Russian market and the increased presence of Russian products in the markets of the UAE".
- There has also been speculation that Russia might work with the UAE on advancing the Emirates's plans to develop its civil nuclear industry. Sergei Shmatko, the Russian energy minister, suggested that an agreement was likely "in the near future".
- After a dip in trade between Russia and the UAE during the financial crisis, this year is expected to bring a surge, with non-oil business reaching a record $800m by the end of the year, according to Russian officials in Abu Dhabi.
