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Competing Visions for Russia’s Economic Future Competing Visions for Russia’s Economic Future
(4 months later)
ST. PETERSBURG, Russia — A panel at an annual economic forum here was deeply divided over the direction of the Russian economy. The isolationists in the group favored relying on state banks for its financing needs. Others called for Russia to deepen its ties with China, while a different contingent said global trade and commerce remain critical. ST. PETERSBURG, Russia — A panel at an annual economic forum here was deeply divided over the direction of the Russian economy. The isolationists in the group favored relying on state banks for its financing needs. Others called for Russia to deepen its ties with China, while a different contingent said global trade and commerce remain critical.
A question projected on a wall loomed large in the debate: “What is to be done?”A question projected on a wall loomed large in the debate: “What is to be done?”
On the verge of recession, Russia stands at a critical crossroads.On the verge of recession, Russia stands at a critical crossroads.
President Vladimir V. Putin just struck a major gas deal with China, but the first profits will not flow for years. European and American financing is drying up while the crisis in Ukraine unfolds, and Russia’s own businesses and wealthy individuals are sending money abroad. With oil prices flat and the flight of capital from Russia, the International Monetary Fund projects that Russia’s economy will grow a meager 0.2 percent this year.President Vladimir V. Putin just struck a major gas deal with China, but the first profits will not flow for years. European and American financing is drying up while the crisis in Ukraine unfolds, and Russia’s own businesses and wealthy individuals are sending money abroad. With oil prices flat and the flight of capital from Russia, the International Monetary Fund projects that Russia’s economy will grow a meager 0.2 percent this year.
Most years, Russian officials use the St. Petersburg International Economic Forum, held in the country’s second largest city, to woo foreign investment, with the city’s eerily beautiful period of white nights, or around the clock sunshine, acting as a selling point for delegates. The event usually attracts the global business elite from a variety of industries: energy, finance, manufacturing, media and aerospace.Most years, Russian officials use the St. Petersburg International Economic Forum, held in the country’s second largest city, to woo foreign investment, with the city’s eerily beautiful period of white nights, or around the clock sunshine, acting as a selling point for delegates. The event usually attracts the global business elite from a variety of industries: energy, finance, manufacturing, media and aerospace.
This year is different. The Obama administration dissuaded many chief executives of American companies like PepsiCo, Alcoa and ConocoPhillips from attending. Even many German chief executives stayed home, in spite of Germany’s extensive trade ties to Russia. Olaf Koch, director of the hypermarket chain Metro, was the only major head of a German company to attend, saying he felt responsible for the well-being of Metro’s 22,000 employees in Russia.This year is different. The Obama administration dissuaded many chief executives of American companies like PepsiCo, Alcoa and ConocoPhillips from attending. Even many German chief executives stayed home, in spite of Germany’s extensive trade ties to Russia. Olaf Koch, director of the hypermarket chain Metro, was the only major head of a German company to attend, saying he felt responsible for the well-being of Metro’s 22,000 employees in Russia.
Instead, the meeting was largely dominated by officials, policy wonks and executives from Russia, as well as Chinese investors.Instead, the meeting was largely dominated by officials, policy wonks and executives from Russia, as well as Chinese investors.
Organizers put a brave light on the snubs. About 6,500 people attended, including 609 foreign and Russian chief executives, organizers said. Robert Dudley, the American head of British energy giant BP, planned to be there.Organizers put a brave light on the snubs. About 6,500 people attended, including 609 foreign and Russian chief executives, organizers said. Robert Dudley, the American head of British energy giant BP, planned to be there.
The focus at the event has shifted, too. In the past, Russia has been trumpeted as a resource-rich country with strong potential. Discussion turned on the subtleties of stimulus policies, or whether emerging markets should have more of a voice in global economic decision-making. This year, the debate centered on whether Russia even needs Western finance, hinting at the return of a heavily state-dominated economic system.The focus at the event has shifted, too. In the past, Russia has been trumpeted as a resource-rich country with strong potential. Discussion turned on the subtleties of stimulus policies, or whether emerging markets should have more of a voice in global economic decision-making. This year, the debate centered on whether Russia even needs Western finance, hinting at the return of a heavily state-dominated economic system.
In recent weeks, the investment mood in the country has improved somewhat. Signs of a de-escalation of the conflict in Ukraine mean wider sanctions are less likely. As risk of a Russian invasion faded, the yield on Russia’s benchmark 10-year government bond dropped to 8.7 percent, from a peak of 9.5 percent at the end of April.In recent weeks, the investment mood in the country has improved somewhat. Signs of a de-escalation of the conflict in Ukraine mean wider sanctions are less likely. As risk of a Russian invasion faded, the yield on Russia’s benchmark 10-year government bond dropped to 8.7 percent, from a peak of 9.5 percent at the end of April.
“The market is a little less stressed,” Ivan Tchakarov, the chief economist for Citigroup in Russia, said in a telephone interview. “The key question now is whether we will see a permanent downward shift in the economic growth.”“The market is a little less stressed,” Ivan Tchakarov, the chief economist for Citigroup in Russia, said in a telephone interview. “The key question now is whether we will see a permanent downward shift in the economic growth.”
With the markets settling down, attention has turned to the economic situation — and how to fill the investment void. Outflows rose to $50.6 billion in the first quarter, compared to $27.5 billion in the year before, according to the Russian central bank.With the markets settling down, attention has turned to the economic situation — and how to fill the investment void. Outflows rose to $50.6 billion in the first quarter, compared to $27.5 billion in the year before, according to the Russian central bank.
As Western interests lie low, Russia has been courting other deep-pocketed investors and companies. The Russia state-owned energy giant Gazprom on Wednesday agreed to sell the China National Petroleum Corporation natural gas for 30 years. China also has held talks to invest $5 billion in a Siberian electrical grid. And Chinese infrastructure companies have cut deals to build apartment blocks and retirement homes in Russia.As Western interests lie low, Russia has been courting other deep-pocketed investors and companies. The Russia state-owned energy giant Gazprom on Wednesday agreed to sell the China National Petroleum Corporation natural gas for 30 years. China also has held talks to invest $5 billion in a Siberian electrical grid. And Chinese infrastructure companies have cut deals to build apartment blocks and retirement homes in Russia.
At high levels, discussions are even emerging over a state-centered investment model and limited financial interaction with the West.At high levels, discussions are even emerging over a state-centered investment model and limited financial interaction with the West.
“Now we’re back in a situation where the wild cards in the deck are really wild,” said Bernard Sucher, a member of the board of directors of Aton, a Russian investment bank. “Russia has decided to pursue a third way, which I consider an illusion. It is a fortress mentality that believes in a largely self-sufficient Russia that believes in its own path, and it is dangerous.”“Now we’re back in a situation where the wild cards in the deck are really wild,” said Bernard Sucher, a member of the board of directors of Aton, a Russian investment bank. “Russia has decided to pursue a third way, which I consider an illusion. It is a fortress mentality that believes in a largely self-sufficient Russia that believes in its own path, and it is dangerous.”
At the forum’s public debate, Sergei Y. Glazyev — an economist best-known for advocating a go-slow approach to reforming the Soviet Union’s economy — said Russian businesses should shift from reliance on international capital markets to internal “sources of credit,” a reference to state banks or oil-windfall funds.At the forum’s public debate, Sergei Y. Glazyev — an economist best-known for advocating a go-slow approach to reforming the Soviet Union’s economy — said Russian businesses should shift from reliance on international capital markets to internal “sources of credit,” a reference to state banks or oil-windfall funds.
Vladimir I. Yakunin, the head of the state railroad and a longtime close aide to Mr. Putin, said government infrastructure investment could supplant lost private sector funding as a stimulus for the economy.Vladimir I. Yakunin, the head of the state railroad and a longtime close aide to Mr. Putin, said government infrastructure investment could supplant lost private sector funding as a stimulus for the economy.
But some attendees pushed back, saying that such restrictions could have serious repercussions for the economy.But some attendees pushed back, saying that such restrictions could have serious repercussions for the economy.
Aleksei L. Kudrin, a former minister of finance who is close to Mr. Putin, said that foreign investors played only a woefully tiny role in improving Russia’s roads, factories and buildings; as such, he said he believed that any policy to entrench this current state of affairs would be disastrous.Aleksei L. Kudrin, a former minister of finance who is close to Mr. Putin, said that foreign investors played only a woefully tiny role in improving Russia’s roads, factories and buildings; as such, he said he believed that any policy to entrench this current state of affairs would be disastrous.
 Mr. Kudrin added that mere talk of new controls on the flow of capital was putting a damper on foreign investment. If companies think they will not be able to move profits out of Russia, they will not risk investing in the first place. Russia now has one of the freest policies on capital flows of any emerging market. Mr. Kudrin added that mere talk of new controls on the flow of capital was putting a damper on foreign investment. If companies think they will not be able to move profits out of Russia, they will not risk investing in the first place. Russia now has one of the freest policies on capital flows of any emerging market.
“Suddenly, everything is unpredictable,” Mr. Kudrin said. “We are waiting for the government, or more specifically, the president,” to provide clarification on Russia’s intended policies, he said. He suggested capping budget outlays on the military and pensions to avoid raising taxes that will tamp down business activity.“Suddenly, everything is unpredictable,” Mr. Kudrin said. “We are waiting for the government, or more specifically, the president,” to provide clarification on Russia’s intended policies, he said. He suggested capping budget outlays on the military and pensions to avoid raising taxes that will tamp down business activity.
Western investors, in particular, are waiting to see what that government does.Western investors, in particular, are waiting to see what that government does.
Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said in a telephone interview that American companies operating in Russia are already deeply worried by the stronger ties with Asia. “The main concern I hear from members is that the U.S. is out ahead on sanctions, and this is harming competitiveness of U.S. companies vis-à-vis European and Asian companies,” he said.Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said in a telephone interview that American companies operating in Russia are already deeply worried by the stronger ties with Asia. “The main concern I hear from members is that the U.S. is out ahead on sanctions, and this is harming competitiveness of U.S. companies vis-à-vis European and Asian companies,” he said.
Peter Mandelson, a British Labour party politician and chairman of Global Counsel, a policy consultancy, who attended the discussion, said the government’s choice between the emerging strains in Russian economic policy — one favoring a pivot to Asia and reliance on state banks at home, the other continued integration with global finance — would have long-ranging ramifications.Peter Mandelson, a British Labour party politician and chairman of Global Counsel, a policy consultancy, who attended the discussion, said the government’s choice between the emerging strains in Russian economic policy — one favoring a pivot to Asia and reliance on state banks at home, the other continued integration with global finance — would have long-ranging ramifications.
“Russia has not only forfeited political trust, but, as seriously, and perhaps more seriously, Russia has forfeited market confidence, and Russia could be frozen out of international markets, and that could have serious consequences,” Mr. Mandelson said. The annexation of Crimea is for Russia “a self-inflicted economic wound,” he added.“Russia has not only forfeited political trust, but, as seriously, and perhaps more seriously, Russia has forfeited market confidence, and Russia could be frozen out of international markets, and that could have serious consequences,” Mr. Mandelson said. The annexation of Crimea is for Russia “a self-inflicted economic wound,” he added.
Anatoly Chubais, who oversaw the 1990s privatizations of Soviet industry, setting the stage for Russia’s economic growth of the past decade, also viewed the debate. He now heads a government-backed company investing in nanotechnology start-ups.Anatoly Chubais, who oversaw the 1990s privatizations of Soviet industry, setting the stage for Russia’s economic growth of the past decade, also viewed the debate. He now heads a government-backed company investing in nanotechnology start-ups.
The discussion of whether the Russian economy should be more or less open to the world, Mr. Chubais said glumly, reminded him of what was talked about 30 years ago in the late Soviet period.The discussion of whether the Russian economy should be more or less open to the world, Mr. Chubais said glumly, reminded him of what was talked about 30 years ago in the late Soviet period.
After the gap started closing for a decade, Russians’ standards of living, he said, were again falling behind those of residents in developed economies. “For 10 years, Russia approached the standard of living of the advanced countries; for the past three years, we are falling behind,” Mr. Chubais said.After the gap started closing for a decade, Russians’ standards of living, he said, were again falling behind those of residents in developed economies. “For 10 years, Russia approached the standard of living of the advanced countries; for the past three years, we are falling behind,” Mr. Chubais said.
Of substituting state bank investment for foreign direct investment, he said, “I am categorically opposed. This is suicide. Does anybody in Russia really believe we need more state control?”Of substituting state bank investment for foreign direct investment, he said, “I am categorically opposed. This is suicide. Does anybody in Russia really believe we need more state control?”