RBW: Spring 2012

Russia Business Watch Vol. 20 No. 1

SPRING 2012

Washington, DC

The Report of the U.S.-Russia Business Council

Russia’s APEC Year

VLADIVOSTOK 2012 PRESIDENT’S MESSAGE: p. 1 • Russia’s APEC Year

USRBC AGRIBUSINESS FORUM pp. 7-21 • Keynote Address: The Honorable E. Benjamin Nelson, United States Senate • Keynote Address: Senator Vladimir Plotnikov, RF Federation Council • Keynote Address: Michael Dwyer, U.S. Department of Agriculture

OUTLOOK: p. 4

• The UK Bribery Act of 2010: Considerations

• Closing Remarks: Mayor James Suttle, City of Omaha • Panel: Current Developments in the Russian Agribusiness Sector • Panel: Financing Agricultural Production and Trade • Panel: Transforming Russian Agribusiness

NEW USRBC MEMBERS: p. 31 ACTIVITIES: pp. 22-30

• Russia Automotive Sector Dinner and Roundtable • USRBC Luncheon with Chiedu Osakwe, World Trade Organization • USRBC Luncheon with the RF Federal Anti-Monopoly Service Delegation • APEC Debrief with Ed Verona and the National Center for APEC • USRBC Member Visit to Vladivostok

Contents

PRESIDENT’S MESSAGE p. 1

Russia’s APEC Year

OUTLOOK p. 4

Klaus Kleinfeld, Chairman of the Board Edward S. Verona, President and Chief Executive Officer

Russia Business Watch • Spring 2012

Chairmen Emeritus Robert S. Strauss E. Neville Isdell • • • • • • •

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Theodore Austell, III, The Boeing Company Stephen E. Biegun, Ford Motor Company James P. Bovenzi, General Motors Corporation Laura M. Brank, Dechert LLP Carolyn L. Brehm, Procter & Gamble Peter A. Charow, BP America Inc. James F. Collins, The U.S. Russia Foundation for Economic Advancement and the Rule of Law Jeffrey R. Costello, JPMorgan Chase Bank Andrew Cranston, KPMG Marthin De Beer, Cisco Systems, Inc. Richard N. Dean, Baker & McKenzie Neil W. Duffin, Exxon Mobil Corporation Dorothy Dwoskin, Microsoft Corporation C. Cato Ealy, International Paper Terrence J. English, Baring Vostok Capital Partners Piotr Galitzine, TMK IPSCO Toby T. Gati, Akin Gump Strauss Hauer & Feld, LLP David Gray, PwC Herman O. Gref, Sberbank of Russia Drew J. Guff, Siguler Guff & Company, LP Trevor Gunn, Medtronic, Inc. Jay M. Haft, Renova Group of Companies Greg Hill, Hess Corporation D. Jeffrey Hirschberg, Kalorama Partners, LLC Karl Johansson, Ernst & Young LLP Alexey Kim, Philip Morris Sales and Marketing Ltd. Klaus Kleinfeld, Alcoa, Inc. Sergei A. Kuznetsov, Severstal North America Ramon Laguarta, PepsiCo, Inc. William C. Lane, Caterpillar Inc. Eugene K. Lawson, Lawson International, Inc. James J. Mulva, ConocoPhillips Peter B. Necarsulmer, PBN Hill+Knowlton Strategies Thomas R. Pickering, The Eurasia Foundation Jay R. Pryor, Chevron Corporation Paul Rodzianko, Hermitage Museum Foundation Charles E. Ryan, UFG Asset Management William M. Sheedy, Visa Inc. David Simmons, Pfizer Inc. Maurice Tempelsman, Lazare Kaplan International Inc. Peter L. Thoren, Access Industries, Inc. Clyde C. Tuggle, The Coca-Cola Company Alberto Verme, Citi Mark von Pentz, Deere & Company Daniel H. Yergin, IHS Cambridge Energy Research Associates

Honorary Director: • Peter J. Pettibone, Pettibone International LLC

The UK Bribery Act of 2010: Considerations for Russia-based Companies

ACTIVITIES p. 7

USRBC Russia Agribusiness Forum

p. 8

Keynote Address: The Honorable E. Benjamin Nelson, United States Senate

p. 10

Keynote Address: Senator Vladimir Plotnikov, RF Federation Council

p. 12

Keynote Address: Michael Dwyer, U.S. Department of Agriculture

p. 14

Closing Remarks: Mayor James Suttle, City of Omaha

p. 15

Panel: Current Developments in the Russian Agribusiness Sector

p. 17

Panel: Financing Agricultural Production and Trade

p. 19

Panel: Transforming Russian Agribusiness

p. 22

Russia Automotive Sector Dinner and Roundtable

p. 24

USRBC Luncheon with Chiedu Osakwe, World Trade Organization

P. 26

USRBC Luncheon with the RF Federal Anti-Monopoly Service Delegation

p. 28

APEC Debrief with Ed Verona and the National Center for APEC

p. 29

USRBC Member Visit to Vladivostok

p. 31

New USRBC Members

USRBC STAFF Edward S. Verona President and Chief Executive Officer verona@usrbc.org / 202-739-9181 • Julia Bacon Manager of Membership Affairs and Programs bacon@usrbc.org / 202-739-9189 • Jeff Barnett Senior Director of Policy and Programs barnett@usrbc.org / 202-739-9187 • Jo Bottalico Vice President of Administration and Finance bottalico@usrbc.org / 202-739-9188 • Keith Bush Research Director bush@usrbc.org / 202-739-9186

Randi B. Levinas Executive Vice President levinas@usrbc.org / 202-739-9196 • Maryia Dauhuliova Media and Creative Product Manager dauhuliova@usrbc.org / 202-739-9184 • Svetlana Minjack Director of Communications and External Affairs sminjack@usrbc.org / 202-739-9182 • Candice Pareshnev Administrative Assistant pareshnev@usrbc.org / 202-739-9180

Russia Business Watch The report of the U.S.-Russia Business Council

1110 Vermont Avenue, NW, Suite 350, Washington, DC 20005 Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.org • www.usrbc.org/ru Novinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893 ditor: Svetlana Minjack • Assistant Editor: Jeff Barnett • Design and Production: Maryia Dauhuliova E Research Assistants: Karolina Konarzewska, Katya Osnovsky, Katie Radaeva, Valerie Russell, and Stephen Smith.

For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.

PRESIDENT’S president’sMESSAGE message

Russia’s APEC Year In 2013, it will host the G8 and G20, the two leading international economic policy coordinating bodies. This will follow on the heels of Russia’s 2012 chairmanship of the Asia-Pacific Economic Cooperation (APEC) forum.

Founded in 1989, APEC consists of 21 member countries and promotes regional economic integration, as well as other goals developed by each country in their turn as chairman. Russia became a member of APEC in 1998, but its participation until recently has been relatively low-key, perhaps the result of a re-evaluation of its role and interests in that rapidly changing area of the world. However, Russia’s APEC chairmanship is now bringing that new role into focus.

Dear Council Members and Friends:

Over the course of the next six years

Regional integration is a topic of great interest for those who see in Russia a link between two of the world’s most important markets: the European Union and China. In addition, Russia’s extensive borders with Central Asia and close proximity to Japan, the United States and Canada give it a potential advantage in establishing supply chains bridging those regions.

These links will be greatly facilitated

by Russia’s imminent accession to the World Trade Organization (WTO) and will be aided by the ability to leverage the country’s huge natural resource endowment.

The challenges of chairing APEC and of hosting the event have not gone unnoticed. Vladivostok was a closed city until 1992 and had little infrastructure

Spring 2012

As Russia further integrates into the global trading system and increases its participation in international economic organizations it is also playing host to two major geopolitical events.

Indeed, two of Russia’s greatest civil engineering achievements in the past century were the construction of the Trans-Siberian Railroad and the BaikalAmur Magistral (BAM), a railway system linking the Far East with the rest of Russian territory. These accomplishments notwithstanding, the pro-

As is the prerogative of each successive chairman of APEC, Russia has selected four topics to highlight in its agenda: regional integration, food security, supply chain integrity, and innovation. Senior Officials’ Meetings (SOMs) and other meetings will be held on these topics and more in Kazan in May/June, in St. Petersburg in June and August, in Khabarovsk in July, and in Moscow in August, culminating in the Leaders Week meetings and Heads of State Summit in Vladivostok from September 2 to 9, 2012.

Russia Business Watch

Russia will be hosting an impressive number of high profile international events. In the sporting arena, Russia will be rolling out the red carpet for the 2014 Winter Olympic Games in Sochi, the 2013 University Games in Kazan, a Formula 1 Grand Prix in Sochi in 2014, and the 2018 World Cup. Preparations for these events are already underway in several locations, transforming the physical infrastructure in several cities and regions and creating a platform for the future growth of tourism.

While the U.S. and Western Europe have tended to see Russia from an Atlantic perspective, Russia has been an Asia-Pacific country since at least the 17th century, when Russian explorers under the direction of the Tsars laid claim to large expanses of Eastern Siberia and the northeastern Pacific coast. The country’s status as a Pacific power was further enhanced in the early 18th century with its exploration and settlement of Alaska and much of the northwest Pacific coastline of North America.

These settlements reached as far south as Fort Ross (near modern-day San Francisco), which this year celebrates its bicentennial.

jection of Russia’s economic influence in the Asia-Pacific has fallen far short of its potential, especially so in comparison to its historical military heft in the region. Russia’s chairmanship of APEC may help to address this imbalance as it will draw attention to commercial opportunities in the region and hopefully serve as a catalyst for greater economic integration.

>>

1

PRESIDENT’S MESSAGE

>

to handle large numbers of foreign visitors. Concern among some Russian officials about the preparedness of the city for the APEC Summit was reportedly so great that at one point the government considered holding the meetings in St. Petersburg. This idea was quickly discarded, no doubt due to the ironic message that it could have sent to other Asia-Pacific powers of holding the APEC Summit in a European city.

need for much greater integration of the Russian Far East with the rest of the country. Some progress has been made in this area, from the expansion of the BAM into the northern reaches of Eastern Siberia to the improvement of port facilities in Vladivostok. The Sakhalin Island oil and gas projects have helped turn the region into a leading global supplier of liquefied natural gas and petroleum.

Once Russia committed to holding the summit in Vladivostok it began a crash program of building the infrastructure to accommodate the large number of visitors. I traveled there in February and visited various sites that will be integral to the success of the summit: the new airport terminal, the road and railroad terminal from the airport to downtown, the bridge to Russky Island, and the meeting facilities on Russky Island itself (see page 29-30).

However, the slow and steady migration of energetic young Russians from the region to the metropolises of European Russia is worrisome and points to the need for greater investment in social infrastructure in the Far East.

The very scale of the infrastructure development required to ensure the success of the event underscores the

We are looking forward to the APEC Summit in September with optimism and the belief that it will provide the impetus for strengthening investment and trade ties between the Russian Far East and the Asia-Pacific region. From an American perspective, we hope that it increases the awareness of the size

and potential of the Russian Far East and brings more American investment and visitors.

In that regard, nothing would better serve the trans-Pacific dimension of our bilateral relationship than a direct flight between the U.S. mainland or Alaska and the Russian Far East. It is more than unfortunate that two neighboring countries sharing such deep historical roots in Alaska do not have a direct commercial air link. Let’s hope that the APEC summit provides the needed stimulus to bring about such a connection.

With warm regards,

Edward S. Verona

n

Russia Business Watch Spring 2012

RUSSIA IS JOINING THE WTO AND WE NEED TO KEEP U.S. COMPANIES COMPETITIVE IN THE RUSSIAN MARKET IT’S TIME TO ADD YOUR VOICE TO THIS HISTORIC CAMPAIGN!

2

Please join us in our efforts to have the U.S. Congress graduate Russia from the Jackson-Vanik amendment and extend PNTR to Russia.

Sign up now to help us protect U.S. companies’ access to the Russian market!

PNTR is for US For more information, please visit us at www.usrussiatrade.org OR CALL OR EMAIL TODAY. Randi Levinas Executive Director Phone: (202) 739-9196 / Email: levinas@usrbc.org

Kellen Moriarty Program Coordinator Phone: (202) 222-0670 / Email: kmoriarty@usrussiatrade.org

The Coalition for U.S.-Russia Trade, headquartered at the USRBC, is the U.S. business community’s engine for ensuring that U.S. firms and farmers will be able to compete on equal footing in the Russian market once Russia becomes a WTO member.

USRBC’S ANNUAL MEETING 2012

It is with great pleasure that we invite you to save the date for the USRBC’s 20th Annual Meeting, to take place on October 22-23, 2012, in Atlanta, GA. The Gala Dinner will be held at the World of Coca-Cola on October 22 with the Annual Meeting taking place at the Four Seasons Hotel on October 23.

October 22-23, 2012 Atlanta, GA World of Coca-Cola and the Four Seasons Hotel

Information on registration and a reduced-rate hotel room block will be available in the coming weeks. For more information about Annual Meeting 2012 and our recent Annual Meeting in Chicago, IL, please visit

www.usrbc.org/activities/am/

3

outlook

outlook The UK Bribery Act of 2010: Considerations for Russia-based Companies

By Paul Kitson

Paul Kitson is the Director of Enterprise-wide Risk Management (EWRM) and Ethics at TNK-BP.

Imagine the following exchange: “Does your company tolerate bribery and corruption?”

And the answer from every press spokesman in the land would be, “Of course not. It’s against the law.” And they might add, “Our policy is zero-tolerance to bribery and corruption.”

“Ah. Great! So, what steps does your company take to prevent your staff paying bribes?”

Russia Business Watch

Spring 2012

“Employees know it’s against the law and that they will be fired if they get caught.”

4

Analyzing this exchange, the implicit calculation that takes place is to assess the risk of being caught and consider it as being acceptably low. The tactical response if something does come to light is to blame someone else. The simple truth is that too few companies take steps to prevent bribery taking place. It is tempting to conclude that they tacitly accept the advantage that might accrue if an employee does pay a bribe, but will do all they can to distance themselves if the employee gets caught. Companies with this approach should look at what is going on in the external world.

If one takes a look at global trends, it can be noted that anti-corruption enforcement is getting stricter and tougher in nearly every region. Fines and penalties (or rather, the out-ofcourt settlements, for few of these are

decided by courts) are running into the hundreds of millions of dollars.

Regulators and enforcers are not only collaborating, they are likewise finding ways to reach beyond their own national boundaries to bring violators to justice. If they cannot reach a violator, they will try other ways, such as going through their customer channels. The logic for this is quite simple: governments want to protect and encourage fair competition. Corruption makes goods and services more expensive and arguably prevents access to the best technology.

In addition to seeking compliance with the law, there are a multitude of reasons why companies should take newly introduced anti-corruption legislation seriously.

The UK Bribery Act of 2010 was introduced with the aim to provide a legal framework for fighting corruption both in the United Kingdom and internationally. Even if a company is not itself subject to tough anti-corruption legislation, it cannot avoid being touched by others who require compliance, such as lenders and international trading partners. There is quite a lot of evidence to conclude that companies perceived as ethical are more valuable, more attractive to providers of finance. These companies tend to survive much longer as well.

The UK Bribery Act allows for a statutory defense, provided a company has taken adequate steps to prevent

bribery taking place.

If a “rogue” employee should pay a bribe, the company can also be prosecuted for failing to prevent the bribery taking place.

However, if adequate procedures are in place, then the company has a statutory defense against the charge of failing to prevent bribery. Of course, the adequacy of the procedures has yet to be tested by the courts.

The U.S. government has also provided guidance, and you don’t have to read too far before you find the mantra “Prevent and Detect”, two words that very adequately sum up the requirements of any internal control process designed to assure compliance with law/policy. The UK Government has published some very useful guidance, which our company has found very helpful in doing our own internal assessment of exposure to risks of corruption.

Table (a) illustrates the possible components of an anti-corruption program. Under the “Prevention” column, I have deliberately placed the six principles quoted by the guidance to the UK Bribery Act. These are the adequate steps the UK Government expects to see in a process designed to prevent bribery taking place.

The scope of this article does not allow for a full and thorough discussion of each component, but there are several aspects that deserve to be highlighted.

>>

outlook

> Table (a)

Table of components of a typical anti-corruption process

Prevention

• Proportionate Procedures • Top Level Commitment

(Tone at the Top)

• Risk Assessment • Due Diligence • Communication

(including training)

• Monitoring and Review

Detection

• Encouragement for staff and

counterparties to report

violations through choice of

appropriate channels

•

Internal Control Procedures

•

Internal/External Audit

•

Investigations

Response •

Discipline Consistently applied

•

Relevant information for staff

about incidents and

consequent discipline

•

Closing process loopholes

•

Senior level supervision and

compliance reporting (e.g.

Compliance and Policies

Committee, Board Audit

Committee)

Tone at the Top

Standardized e-learning training modules can be purchased allowing access to all employees with access to a computer. They can be customized and formatted to the client’s specific needs. They provide a good base for reaching a large number of employees quite quickly. They generally have built-in tracking so that course com-

Proportionate Procedures The relevance of proportionality in the UK Act’s principle refers to the riskiness of the business and the relevant need for detailed written procedures.

For example, a small enterprise may be able to rely on verbal policies frequently voiced by the owner/manager.

As the company gets bigger, and the business model gets more complex, then the need for detailed written policies and procedures becomes greater.

Most large companies have a written ethics code with detailed procedures to support the various elements of the code. Many companies also publish their code of conduct and there are many good examples in the Russian language. The chart on page 6 illustrates the likely elements of a code of conduct and what a document structure might look like, with the code itself at the hub and the supporting procedures at the end of each spoke.

We like to think that questions of ethics are black and white, but very often the boundaries are vague and there will always be someone wanting to push the boundaries to the limits. Entertaining a client or providing notional gifts at

Spring 2012

• When a talented and high achieving specialist breaks the rules to achieve goals, the temptation is to be relaxed on discipline because of the importance of the individual to the company. “We can’t afford to lose him.” The message soon gets out that some violations are indeed tolerated and some staff may even think they have permission to

• Communication to support the tone at the top and the commitment of all managers needs to be frequent and reinforcing and heard by everybody. The best channels to communicate to staff will vary from company to company; face-to-face group meetings — team meetings, performance review meetings, “Townhalls” seem to be best. It is good to have an expert in the room, but when managers and employees answer their colleagues’ questions, that is even better. Other channels include articles in corporate magazines or posted on intranet websites, internal instructions reinforcing procedures and even video messages.

pletion can be monitored. They can also include questions that an employee has to answer, which can also be tracked. This reduces the load on face-to-face training, which can then be used to cover employees involved in more high-risk activities.

Russia Business Watch

In my view, the most important aspect of any program to counter corruption is the Tone at the Top. Unless there is consistent and continuous demonstration of support, promotion and compliance with company anti-corruption policies by owners and top managers, every other aspect of the defense is significantly weakened. Commitment has to be total; no half measures will do in this case. Senior management has to be seen to be embracing the policy of zero tolerance, otherwise the subliminal message seeps through the organization that some rules can be broken. Further, in support of a zero tolerance policy, discipline needs to be seen to be consistently applied, and employees need to know about it, no matter who the perpetrator is.

Employees understand this. With the best intentions of achieving the company’s goals, they will exploit weaknesses in applied culture, perceiving that the result — and hence the bonus — is more important than how the goal is achieved. Let’s illustrate this with a couple of examples:

violate some rules.

• An employee comes to a manager to explain a problem in fulfilling a task. The manager may reply with something like, “Can’t you see I’m busy. Go and fix it; I don’t care how!” Many will see this exchange as an invitation to go and break the rules.

>>

5

outlook

Chart: Components of a model Code of Conduct and supporting detailed procedures

Conflict of Interests

Business Gifts, Entertaining and Hosting

Breach Reporting

Insider Trading

Business Partners Corporate Standard on Business Ethics Bribery, Corruption and Money-Laundering

Charity

Government and Communities, Political Activities

Trade Sanctions

Russia Business Watch

Spring 2012

holidays can be perfectly acceptable ways to develop and express appreciation for a good working relationship.

However, there is some point at which this may cross over into an attempt to influence future decision making by the client in a non-objective manner.

Competitors become sensitive to this.

If they see you accepting lavish entertainment from one supplier, they may see this as a means to influence and offer something more lavish.

6

To control this, companies use registers to record gifts and entertainment offered, given or received above a certain level, for example $100. Processes can be put in place, such that a system will not allow an expense claim to be processed without the record on the register. Many companies also have limits above which gifts and entertainment must be pre-approved at a higher level before the exchange takes place. Such registers need to be maintained and frequently reviewed by control staff to ensure all required

Financial Integrity

registrations are made and that gifts and entertainment do not become too frequent or excessive. Typically, there should be no exchange of gifts and entertainment during negotiations.

Many countries now have legislation in place outlawing or placing limits on the value of gifts to government officials. They may also have their own registers, which are made public, allowing for transparent monitoring by the press, for example.

Organizational model The favored model for larger organizations is to have a central team of experts that sets policy, designs process, maintains registers and other IT tools, organizes certification and declarations, designs and manages training programs, organizes the reporting

and feedback from employees, and coordinates reporting of compliance.

They need to be supported by a network of experts embedded in each function and business unit, who can provide expert advice to staff and advise management on maintaining tone at the top.

However, at the same time, it must be remembered that a central team and their supporting experts cannot be accountable for the company’s ethical behavior on the whole. This accountability and responsibility lies with the shareholders and management.

In conclusion, the UK Bribery Act offers helpful guidance and can serve as a meaningful reference point for setting new standards in business ethics, compelling companies to move towards the goal of preventing corruption in the context of its own business environment. n

activities

activities USRBC Russia Agribusiness Forum December 12, 2011 • Omaha, NE

On

• Senator Alexey Chernyshov, Deputy Chairman, Russian Federation Council Committee on Agriculture, Food Policy & Fisheries

The Forum focused on the broad policy issues pertinent to the sector and concrete business challenges and opportunities related to Russia’s agribusiness sector and bilateral (and multilateral) agricultural trade. The agenda featured key experts from the public and private sectors, both Russian and U.S., as well as international institutions.

• Senator Bato-Zhargal Zhambalnimbuev, Member, Russian Federation Council Commission on Budget Issues

December 12, 2011, the USRBC held its Russia Agribusiness Forum in Omaha, NE

Speaker presentations are available on the USRBC website: www.usrbc.org/activities/calendar/event/2159

Addressed themes included:

• Current Developments in the Russian Agribusiness Sector • Financing Agricultural Production and Trade • Russia’s WTO Accession and Agribusiness

Keynote Speakers:

• Michael Dwyer, Director of Global Trade & Biofuels Analysis, Foreign Agricultural Service, U.S. Department of Agriculture.

• Michael Jung, President and Chief Executive Officer, Burlington International Group. Gary Horlick, Partner, Law Offices of Gary N. Horlick • Glenn Kolleeny, Partner, Salans LLP. Holger Krumel, Executive Vice President of Finance & Chief Financial Officer, CLAAS North America Holdings • Stephanie Murphy, Director for Agricultural Affairs, Office of Agricultural Affairs, Office of the U.S. Trade Representative • Ryan Offutt, Vice President, Business Development, RDO Equipment Company • G. Eric Raby, Vice President, Global Trade Finance and Key Accounts, AGCO Corporation. Cory Reed, Vice President, Agriculture and Turf Global Marketing, Deere & Company • Jeff Rowe, Europe Director, Pioneer Hi-Bred International, a DuPont business

• James Suttle, Mayor of Omaha, Nebraska

• Darrell Stevenson, Owner, Stevenson Sputnik LLP

Other speakers included:

• Michael Yanney, Chairman Emeritus, Burlington Capital Group. n

• Dale Rodman, Secretary of Agriculture, Kansas Department of Agriculture

Spring 2012

• Senator Vladimir Plotnikov, Deputy Chairman, Russian Federation Council Committee on Agriculture, Food Policy & Fisheries; Chairman, Association of Russian Farms and Agricultural Cooperatives

• Randy Bregman, Partner, Salans LLP

Russia Business Watch

• Senator Benjamin Nelson (D-NE), United States Senate

• Yevgeny Gromyko, Deputy Governor, Krasnodar Region.

7

new members activities

OPENING KEYNOTE ADDRESS: The Honorable E. Benjamin Nelson (D-NE) Chairman U.S. Senate Delegation to the U.S.-Russia Interparliamentary Group United States Senate

“I

want to thank you all for the opportunity to be here today, and I want to welcome not only my fellow Nebraskans, but also those from out of town — we are very happy to have you here as well.

Russia Business Watch

Spring 2012

…You know, years ago, it would have been hard to imagine a Russian agribusiness forum taking place here in the Great Plains, and I’m not talking about the Russia part. Until the middle of the 19th century, this region, which is now the breadbasket of our country, was thought of as the Great American Desert. In 1819, President Monroe sent Major Stephen Long to lead an expedition up the Platte River to the Rocky Mountains in order to map the land that is now Nebraska, Kansas, South Dakota, and Oklahoma.

Unfortunately, Long was disappointed with the arid grasslands he found….

Well, the map produced by Long’s exploration labeled the region the ‘Great American Desert,’ creating a false impression that stuck with the American people.

With advertising like that, it’s no wonder that there was no rush to settle the Great Plains.

8

However, as more and more Westwardbound pioneers passed through present-day Nebraska, they realized the notion of a barren desert was not true; they learned the land was very well-suited for farming. They set up homesteads. Times changed.

Thinking evolved. New frontiers were conquered and people prospered.

Today, almost two centuries later, 93 percent of the land in Nebraska is used for farming and ranching. Of the 50 states, we rank fourth in the annual value of our agricultural production — not bad for a desert. It’s the kind

of progress Americans from the 19th century couldn’t possibly imagine, and it’s one of the reasons the U.S.-Russia Business Council is hosting its agribusiness forum in Omaha today.

Another reason is the success that Nebraska businesses, both farm and non-farm businesses, have had exporting their products to Russia. In 2010, Nebraska companies exported more than $70 million worth of merchandise to Russia. As recently as 40 years ago, it would be hard to imagine how important exports to Russia were to become to American companies.

Forty years ago, the strategic posturing and balance of power between the United States and the Soviet Union was extremely important: there was mistrust, uneasiness and too little understanding between the world’s two superpowers.

Our governments were locked into ideological differences and unwilling to change. It stifled business and prevented international cooperation.

There were decades were virtually no trade existed between our two countries. But times changed and thinking evolved. Little more than 20 years ago, the Cold War ended and we saw transformation politically, economically and socially. People were freer to develop new business arrangements and find ways to work together.

Personally, I’ve always felt that one of the most effective ways to strengthen international relationships is through trade, because when it’s fair, everybody — on both sides — benefits. I was first elected governor in 1990 and one of my goals at the time was to take advantage of the dramatic political changes in the world and increase trade opportunities for Nebraskan

>>

"I agree that we all benefit from Russia gaining membership into the World Trade Organization, and I hope that my colleagues in the U.S. Senate will support that effort."

companies. No governor before me had led a trade mission overseas, but I thought these trade missions could be mutually beneficial for Nebraskans as well as our new trading partners.

During the eight years that I was governor, we helped to more than double international exports from Nebraska — from about $868 million to more than $2 billion. In the years since, Nebraska’s exports have continued to grow and business relationships have continued pushing new boundaries.

At the same time, the world continues to change, creating even more opportunities. When I met the first State Trade Commission of Taiwan, we couldn’t work on simultaneous trade deals with Taiwan and the People’s Republic of China because of the political tensions between the two. Today, we have resolved some of those differences and American companies are trading with both Taiwan and the People’s Republic. Similarly, the U.S. had no trade with Cuba for many years, but today we’re sending Nebraska growing beans to Cuba, and after meeting with the ambassador the week before last, I’m sure we’ll see more progress on that front in the future. I’m eagerly waiting for the day when we can legally import something wonderful from Cuba: cigars. We have to keep pushing against the doors until they open. And they will.

We face that same challenge in other parts of Europe as well as parts of Asia.

Russia’s high tariffs on a wide variety of products including agricultural machinery, chemicals, plastic products, and more create an uneven playing field for American companies….

Russia’s lax enforcement of intellectual property rights has to improve if American artisans and vendors are to be properly compensated for their creativity. I agree that we all benefit from Russia gaining membership into the World Trade Organization, and I hope that my colleagues in the U.S. Senate will support that effort. Unless these issues are resolved, they will have a continuing stress on our trade relationship.

Last year, Senator Mikhail Margelov attended meetings here in Omaha with agribusiness leaders and made a statement I agree with 100 percent. He said, ‘The best way to improve diplomatic relations between our two countries is through increased trade.’ If a trade agreement is fairly negotiated and honestly executed it will build trust between the parties and increase trade between the United States and Russia. It has already changed the relationship between our countries.

tion has paved the way for us to work together in January 2011 on the New START Treaty, which went into effect this past year. It was the most important arms control agreement in a long time. A key element of the New START Treaty includes verification measures allowing 18 on-site inspections annually in an effort to increase trust.

America will be stronger if we can continue to look under Russia’s wig, and they under ours. Trust, but verify still works. I’m hopeful that the New START Treaty will help us to continue to progress past the Cold War. Thinking must evolve. …The stakes are still high and both sides must be careful to avoid some of the overheated rhetoric that we’ve seen recently. We saw the danger of shifting backwards last week when Prime Minister Putin accused Secretary of State Clinton of instigating civil unrest in Russia. We saw President Medvedev threaten to attack the U.S. missile defenses and even threaten to abandon the New START Treaty. We’ve had comments coming from our side as well and I would suggest that both presidents, the Prime Minister and the Secretary of State would spend more time negotiating at the table and a little less time at the microphone. It’s clear we haven’t yet built the trust that we need and that the people in our countries deserve. I have a great deal of hope that we will continue to collaborate, continue to discuss and continue to negotiate. Times continue to change. Thinking continues to evolve.

Fair and balanced trade agreements will help that change move forward even more quickly.

Thank you for allowing me to be here today and to be forthright and candid as I typically am on all occasions.

Thank you very, very much.” n

Spring 2012

Commerce can connect us. It can break down political barriers. It can give us common ground. Here’s an example of how things have changed for the better. Senator Margelov is Chairman of the Foreign Affairs Committee from the Federation Council. I’m Chairman from the Senate Armed Service Committee. Together we serve on the U.S.-Russia inter-parliamentary group that meets annually. This collabora-

"I have a great deal of hope that we will continue to collaborate, continue to discuss and continue to negotiate. Times continue to change. Thinking continues to evolve. Fair and balanced trade agreements will help that change move forward even more quickly."

Russia Business Watch

Times change and thinking will continue to evolve. While the U.S. and Russia were at odds for decades, we’re actively engaged in major trade activity today. Thinking is evolving. Russia is now the United States’ 23rd-largest trading partner. It’s the 17th-largest importer of American agricultural products; vehicles, machinery, poultry and meat, and other goods are flowing back and forth between our countries, benefiting Americans and Russians every day.

But there’s still a lot of progress that we have to make. The value of goods the U.S. imports from Russia is nearly five times as much as the value of the goods we export to Russia. Mutual trade is important, but it’s important together with balanced trade.

I’m more concerned that Russia continues to place barriers in the way of international commerce, and perhaps entry into WTO and eliminating the Jackson-Vanik legislation will change that. For example, and I say this very forthrightly, Russia is taking a strict approach and putting restrictions on meat imports, but they are not based on science or safety. I say that, pointing out that they’re not the first, but hopefully they will be the last, to do that.

new members activities

>

9

new members activities Ed Verona welcomes Senator Plotnikov.

KEYNOTE ADDRESS: Senator Vladimir Plotnikov

Russia Business Watch

Spring 2012

Deputy Chairman Committee on Agriculture, Food Policy & Fisheries, Federation Council of the Russian Federation; Chairman Association of Russian Farms and Agricultural Cooperatives

10

RF

Senator Vladimir Plotnikov began his keynote address by noting that Russia and the United States enjoy a “good relationship,” and by thanking both the U.S.-Russia Business Council and the Kansas Secretary of Agriculture, Dale Rodman, for encouraging the relationship’s continuity.

The Senator’s remarks focused on the importance of developing Russia’s agriculture, the challenges associated with its development, and the efforts undertaken by the Russian government to strengthen the farming sector.

Senator Plotnikov stated that the Russian government has dedicated a great deal of attention to the advancement of Russian farming during the past few years. In fact, the government’s officials have proclaimed agricultural development as a priority for Russia, and President Medvedev has emphasized the need for technologically more competitive and effective agricultural production.

These and other production and policy goals were further highlighted in the

Food Security Doctrine that President Medvedev signed in February 2010.

Nevertheless, Russia’s farming sector continues to face obstacles.

Specifically, Russian agricultural companies have been achieving low levels of productivity as the country lingers behind the world’s developed countries with respect to technological innovation.

Additionally, these companies have limited access to markets due to insufficient

>>

new members activities Senator Plotnikov (second from left) and Ed Verona with the Russian delegation.

>

Senator Plotnikov emphasized on numerous occasions the importance of dialogue and cooperation on farming issues between the U.S. and Russia.

He said that such engagement could allow both countries to overcome obstacles often caused by political disagreements.

This collaboration is particularly important so that Russia can continue learning from

the U.S. approach toward developing its agricultural sector. To that end, Senator Plotnikov cited a few examples that demonstrate the valuable lessons already learned by the Russian side.

Among those were the significant role that family farming occupies in building a lasting farming system and Nebraskan farmers’ ability to manage and develop large amounts of arable land. He announced that the Russian government was working on a law related to financial risks and the development of insurance that takes into account the U.S. experience.

Discussing Russia’s accession to the WTO, Senator Plotnikov noted that it will create a new impulse for international cooperation.

He also urged the international community to take into consideration the need for a transitional period as part of Russia’s accession and to give Russia time to adapt to world energy tariffs, as a sudden transition would hinder its agricultural sector growth. n

Spring 2012

In order to address the aforementioned problems, the Russian government enacted the State Program on the Development of Agriculture and Regulation of Agricultural Commodities Markets, Raw Materials and Food.

The current Program applies to the years 2008-2012, but it will be extended to 2020. Senator Plotnikov said that among the 2013-

2020 Program priorities are grain and livestock production; sustainable development of rural areas; the introduction into use of unused agricultural lands; the increase of the productivity of domestic producers; and the development of cooperation and international links that would lead to the growth of large, medium and small enterprises. The State Program also offered 109 billion rubles ($3.6 billion) of financial support to small farmers. This is a step that Senator Plotnikov believes will contribute greatly to the development of Russian agriculture and create opportunities for international cooperation.

Russia Business Watch

infrastructure, monopolization of trade networks and weak development of cooperation.

The country’s agricultural territories are undergoing a slow pace of social development and the agrarian population suffers from growing unemployment levels.

Senator Plotnikov noted that Russia also lacks a clear pricing system for its agricultural products that would facilitate the growth of agricultural business. Finally, the global economic crisis and the drought of 2010 continue to hurt the country’s development of agricultural production and the balance of Russia’s exports and imports.

11

new members activities

LUNCHEON KEYNOTE ADDRESS: Michael Dwyer Director of Global Policy Analysis Foreign Agricultural Service U.S. Department of Agriculture

Factors Affecting Global Agricultural Markets Over the Next 10 Years

Mr. Dwyer began his keynote address

by stressing that agricultural producers around the world have enjoyed significant prosperity over the past few years. He also stated that the objective of his presentation was to discuss whether this agricultural growth is a short-term or a long-term phenomenon.

Russia Business Watch

Spring 2012

He indicated that the current level of agricultural prosperity in the U.S. is impressive. In fact, American producers earned a net profit of more than $100 billion in 2011. Receipts for both crops and livestock have been steadily growing over the past few years, and the net worth in net farm equity has reached a record high of $2 trillion last year. He explained that the latter achievement was caused by the high value of farmland coupled with low farm debt. Significant farm earnings have also resulted in 20-year low farm subsidies, which reached $10 billion in 2011.

12

Every year, the U.S. Department of Agriculture (USDA) produces a baseline forecast for commodity prices and farm income and trade for the following 10 years. According to the 2011 forecast, commodities denominated and internationally traded in U.S. dollars will enjoy high prices. This, in turn, means that the profits of American agriculture will remain at much higher levels than has been the case historically. Mr. Dwyer stressed that this development is important, because profitable industry attracts new investment and furthers productivity.

During his briefing, Mr. Dwyer discussed 8 factors that he believes will drive

global agriculture markets for the next 10 years. They are the rise of the middle class in developing countries; the value of the U.S. dollar; the production of biofuels worldwide; the role of trade and trade liberalization; policy errors by governments; energy prices; the development of biotechnology; and additional cropland.

Middle class in developing countries.

USDA officials believe that economic growth in emerging markets will remain buoyant for the next 10 years.

The 2009-10 recession was unusual because it occurred in the world’s wealthiest countries and bypassed emerging markets. This is noteworthy as developing countries have a vigorously growing middle class with rising consumer incomes that drive the demand for more food.

As Mr. Dwyer pointed out, the future of global agricultural demand resides particularly in the large emerging markets.

When an individual from a wealthy country receives a raise in income, he will not spend much of it on more food. In contrast, empirical evidence suggests that when an individual from a developing country, such as China, receives additional income, he will spend 20-40 percent of that increase on food. An increase in income leads to increased meat consumption and need for more feedstock such as corn, soybeans and wheat.

Today, the middle class makes up roughly 20 percent of households in emerging markets. By 2020, 36 percent of all households will be middle

class. For instance, the middle class in China consists of 125 million households. This number is expected to grow to 358 million in 10 years.

Value of the Dollar. Mr. Dwyer stated that most experts predict that the value of the dollar will continue declining in the long-term. Currently, the dollar is enjoying a period of strength due to weaknesses in the euro zone. However, commodities that are denominated in dollars have an inverse relationship to the currency. Given that the currency is expected to fall by approximately 14 percent during the next 10 years, commodity prices will be under upward pressure worldwide.

Production of Biofuels. Biofuels production will continue to grow worldwide, boosting feedstock demand.

The U.S. is close to completing its transition to corn-based ethanol and, according to the USDA, production will peak at 15 billion gallons in 2015 and remain at that level. In contrast, the European Union is merely beginning their work on a renewable energy directive. Overall, 36 countries worldwide have biofuel mandates.

This expansion of global biofuels production will add to the demand on the world’s feedstock such as grains, vegetable oils and sugar.

Byproducts from the production of biofuels constitute an important source of additional revenues. For example, corn-based ethanol is produced from corn starch, leaving one-third of the corn kernel available for the production

>>

of other commodities such as distillers dried grains.

Currently, this highprotein animal feed is the fastest growing U.S. agricultural export.

Role of Trade and Trade Liberalization.

Global agricultural trade has grown sharply over the past decade to an estimated $700 billion in 2011. This figure is up by 150 percent since 2000 and should exceed $1 trillion by 2020. Further, almost every country’s agricultural trade grew rapidly over the past five years, due largely to the Free Trade Agreements (FTAs) that are proliferating around the world, boosting trade among their signatories.

Unfortunately, the U.S. does not participate in most FTAs because Congress has been slow to approve them. As global trade will continue to increase at a rapid rate through increased trade liberalization and utilization of FTAs, the U.S. will continue to fall behind other countries.

Policy Errors. A policy error occurs when a government makes a decision, but does not take into consideration the law of unintended consequences.

An example of such an error is an export ban. In the short run, these bans increase domestic availability and lower domestic food inflation in the country that imposes them. However, it also depresses domestic prices and profits and affects domestic production. Therefore, export bans erode food security.

Mr. Dwyer warned that this positive outlook could change with the return of a global recession. He pointed out that there is growing concern regarding the situation in Europe and the travails of the euro. Economic difficulties in Europe would affect the global economy because the EU is one of the major export markets for many developing countries.

If a new recession occurs, its driving causes will be either a financial crisis in Europe or a recession in China. Although China is growing at approximately 10 percent a year, it’s real estate market seems vulnerable. With growing property values, the country is building numerous apartments. However, one-third of them are empty. Once the property bubble bursts, China could quickly fall into economic trouble.

In the case of a global recession, the growth of the middle class in emerging markets — the major driver of food

Question & Answer Session Q. According to your analysis, food prices that are not sufficiently high have an impact on biofuels policy. Would that be material in terms of commodity prices in the long term?

The USDA does not believe that biofuels advance food prices.

Too many factors that impact food prices occur simultaneously to conclude that biofuels are responsible for price increases. For instance, between 2007 and 2009, corn decreased from $8 to $3 per bushel in the U.S., although producers used more corn for biofuels during that time than before. The corn yields are going up on a regular basis, and the biofuels revolution is facilitating investment in higher yielding hybrids. Also, the increase in acreage that goes into U.S. corn production is only three percent of the world arable land base. This is not enough to have a profound impact on food prices.

Q. Currently, agricultural subsidies comprise half of the EU budget. Do you see any changes taking place in the amounts of subsidies that the EU offers to its agricultural sector?

During the past 10 to 15 years, the EU has dramatically reduced the amount of subsidies to its agricultural sector.

It would probably take a breakthrough in the Doha negotiations or budget difficulties for the EU to reduce subsidies further.

Q. How can the price of corn stay high given that countries like Russia, Ukraine, and China are producing growing amounts of corn?

High prices attract more investment, and thus increase production. The Ukraine will become the world’s third-largest exporter of corn this year. However, growing corn production is necessary worldwide in order to keep pace with the growing demand for corn coming from Asia. Otherwise, food prices will rise.

Spring 2012

Energy Prices. USDA officials believe that energy prices will remain at the current level unless there is a global recession. This is important given that agriculture is an energy-intensive industry and rising energy prices increase the cost of food production.

Also, as the prices of inputs such as diesel fuel and fertilizer grow, they reduce farmers’ profits and output and thus increase agricultural commodity and food prices in the long run.

Additional Crop Land. Almost all of the increases in production of the last few years have come through yield gains, not land additions. While global production of grains has grown 27 percent in 20 years, the amount of land used to grow grains worldwide has dropped by 1 percent. The USDA officials view South America as the single best place for new land expansion.

The Former Soviet Union also presents great potential for new acreage because of the existence of old state farms that can be brought back online.

Also, Africa has approximately 201 million hectares that can be cultivated.

However, high marketing costs, poor infrastructure and long distances from markets constitute great constraints to land cultivation there.

demand — would slow down; the value of the U.S. dollar would increase; global trade including agricultural trade would drop; and prices of all dollar-denominated commodities and, subsequently, farm income would decrease.

Russia Business Watch

Given that stock reserves are at low levels around the world, a short crop in a major producing country could encourage it to impose an export ban.

However, it is important that countries such as Russia remember that these bans can undermine their foreign investment inflows. This is because export bans undermine a country’s transparency and predictability of government policy and encourage investors to seek other investment opportunities.

Development of Biotechnology. The role of biotechnology will grow because biotechnology produces higher yields and reduces input. In fact, planted biotech acreage in both developed and developing countries is currently at 10 percent of total crop acreage and is growing faster than non-biotech acreage. However, this technology continues to face resistance worldwide. The European Union, for instance, is not convinced that biotechnology offers the right solution. This attitude, in turn, has impacted other countries’ use of it due to fear of losing their markets in Europe. The U.S., however, believes that biotechnology is not the problem, but rather a part of the solution.

new members activities

>

Q. Do you foresee the additional corn production driving down the price of corn?

No. The demand is growing as fast as the supply. This is why the USDA

13

>>

new members activities

>

believes that corn prices will remain high. The USDA believes that new land and new production will come online worldwide. It is unlikely that we will see corn prices at $2 per bushel again in the near future.

Q. What role does climate change play in the future of agricultural production?

The USDA forecasts focus on a 10-year period, and climate change analysts expect most of the negative scenarios

related to climate change to happen well beyond 10 years. In Mr. Dwyer’s opinion, the change is slow enough that genetically modified crops that are drought resistant could mitigate the downside effect of climate change. n

CLOSING REMARKS: Mayor James Suttle Mayor of Omaha

Russia Business Watch

Spring 2012

“G

14

ood afternoon and welcome to Omaha, Nebraska. For 104 days this past summer, this city and our twin city across the Missouri River, Council Bluffs, battled the historic flood of 2011. For 104 days, we found that Republicans and Democrats, Iowans and Nebraskans joined together…. We proved that bipartisanship can work when people come together for common cause and we did it. We beat the river. Now we need to do this on the world scene and that’s why you’re here and why I’m here.

I hope you have enjoyed your time in our city. I hope you enjoyed having an opportunity to talk about common interest and I hope that what you’ve discussed brings fruit for everyone.

As we learn how to trade and how to work we become a stronger brotherhood and sisterhood through the economic processes that are in place around this planet. Omaha was founded in 1854 when Abraham Lincoln stood on the bluffs and pointed a finger and said we will start the Union-Pacific railway

right there. So Omaha City, as it became known in those days, started and prospered. But it grew as a city of immigrants and many of those immigrants throughout our history came from Russia. Many of those early pioneers established great companies here in the furniture business, meatpacking, real estate, jewelry, and a host of other businesses. We continue that immigrant tradition today.

Omaha in 2011 is still a city of immigrants. Latin American immigrants are the largest segment of visitors to our city. They are seeking the American dream through jobs and a chance to educate their children; the chance to have the successes that our economy historically has produced. Now they are a part of it. But our city also has many others coming from faraway places. Omaha has the largest Sudanese population of any city in the United States — 15,000 are in our city. We are growing with families and people from Burma and Nepal and a host of other countries around the globe.

We now speak 93 different languages in

the Omaha public system. That means we have children in kindergarten and 3rd grade with English as a second language.

I think this is good; I think this is healthy.

Omaha plans to be the city of the 21st century. We must embrace all the adversities that are brought to our city. We must figure out how to blend that diversity; blend those cultures so we are a stronger trading partner around the globe. That’s my mission as mayor; that’s the legacy I hope I can leave at the end of my time in office. So thank you for being here. Thank you for sharing your thoughts, your ideas and your dreams.

Come back to Omaha early and often.

Come back in the summer…. So, thank you for being here. I hope your time was fruitful. I hope your time was enjoyable.

I hope the cuisine was enjoyable, whether you were having wine or some good vodka. Thank you for being in the city and thank you for letting me have the opportunity to close your conference.” n

new members activities

PANEL: Current Developments in the Russian Agribusiness Sector Moderator:

Randy Bregman Partner Salans LLP

Panelists:

Senator Alexey Chernyshev Deputy Chairman Committee on Agriculture, Food Policy & Fisheries, Federation Council of the Russian Federation Cory Reed Vice President Agriculture & Turf Global Marketing Services Deere & Company Dale Rodman Secretary of Agriculture Kansas State Department of Agriculture

T

he Forum’s opening panel session, moderated by Randy Bregman, focused on the recent growth of Russian agriculture as well as the significant potential for future Russian agricultural development. Each speaker discussed the strengths and weaknesses inherent in the Russian agricultural sector and how a partnership between the United States and Russia can help each country become more competitive and productive in the future.

Mr. Chernyshev emphasized the recent growth in the sector. In the first 9 months of 2011, agricultural exports increased by 5 percent over the previous year to $7 billion. The Russian government expects that domestic production in 2011 will increase by 14 percent over 2010 and total grain collection by more than by 5 million tons. The production of beef has stabilized and cattle and poultry totals are expected to reach 7.5 million tons while the milk yield is believed to have increased to more than 32 million tons.

The government has been taking modern economic measures to aid Russian farmers and spur agricultural development, particularly after the drought in 2010 decreased agricultural yields by as much as 25 percent in some cases. Nonetheless, despite the government’s help, the role of investors cannot be underestimated. According

to Mr. Chernyshev, for every ruble of state investment there are 10 rubles of investment from the private sector. Approximately $6 billion of state financing has so far been used to help modernize agricultural facilities in Russia during the last four or five years. During this period, farmers also received more than $10 billion of private investments.

There are nonetheless several challenges and drawbacks, warned Mr. Chernyshev.

For example, technology is limited, particularly technology related to physical infrastructure; access to warehouses, logistics centers and automobile transportation is currently limited and must be expanded.

Russia needs innovations and scientific development in order to continue to grow its agricultural sector.

Mr. Chernyshev also underscored the importance of encouraging the social development in farming villages, the diversification of the agrarian economy and the expansion of available agricultural employment.

Encouraging international cooperation and attracting foreign investment experience are two important trends Russia must promote in the international sphere. At this time, the volume of foreign investment in Russian

Spring 2012

With a high concentration of mineral deposits in its soil and with its vast tracts of undeveloped land, Russia has the ability to not only provide agricultural goods for its own population, but to become a significant agricultural supplier for world at large.

Mr. Cheryshnev underscored that the

incomes of 40 million people living in Russia’s rural areas are dependent on the growth and development of the agricultural sector.

Since agribusiness is the only source of employment in certain regions, agriculture is viewed as one of the priorities for the social and economic development of the country.

Russia Business Watch

Senator Alexey Chernyshev focused his remarks on the improvements in Russian agriculture over the last several years. Since there are now food shortages in more than 30 countries globally, the importance of Russia as an agricultural exporter and its capacity for agricultural production has grown. Agriculture is one of the key segments of the Russian economy, accounting for more than five percent of the Russian gross domestic product (GDP).

Clockwise from top: Randy Bregman, Senator Chernyshev, Cory Reed, Secretary Rodman.

>>

15

new members activities

>

agriculture is about $2 billion, a share that is increasing five-fold from year to year. Over 500,000 foreign companies work in the Russian agricultural industry, comprising 3 percent of the total.

For example, Deere & Company’s plant in the Orenburg Region is quite successful, highlighting that the combination of Russian potential with international skills and expertise can lead to a very productive outcome.

Mr. Chernyshev asserted that the accession of Russia to the World Trade Organization (WTO) will positively affect the development of Russian agribusiness. Graduating Russia from the Jackson-Vanik amendment is in the interests of both Russia and the United States. Mr. Chernyshev believes that this amendment only hinders the further development of the partnership between two countries and only serves to greatly limit trade.

Cory Reed, Vice President of Agriculture and Turf Marketing Service at Deere & Company, agreed with many of Mr. Chernyshev’s points, adding a U.S. business voice to the issue. John Deere has a long history in Russia: the company has been active in the country for over 100 years, since before the Russian Revolution. Deere continues to expand its reach in Russia with the renovation of its facilities and significant new investments.

Russia Business Watch

Spring 2012

According to Mr. Reed, Deere views the Russian economy as an integral component of the future world economy. Mr. Reed believes Russia can make a very significant contribution to meet the world’s growing demand for both food and forestry products.

Because of the needs of the growing population, agricultural output must be doubled by 2050 using sustainable methods of agriculture that increase output without contributing to climate change.

16

Russia has enormous potential to significantly and sustainably expand its agricultural and forestry output and thus play a much greater role in the global markets for those products.

Although it houses only two percent of the world population, Russia has over nine percent of the world’s arable land, much of which is still unused or underutilized. Moreover, the country holds over 80 percent of the world’s available fresh water and 20 percent of the world’s forested land area, which represents significant potential for development. For example, with rapid modernization a significant expansion

in grain output can be expected, with a probable doubling of Russian exports to the world market in a relatively short period of time. Utilizing the full potential of the agricultural and forestry sectors will require the continued development of the underlying infrastructure, including not only investment infrastructure but also physical infrastructure like improved roads, storage facilities, water management facilities, product processing plants and port and docking facilities. Mr. Reed asserted that Russia consequently offers enormous near- and longterm investment potential across many sectors of the economy.

Mr. Reed categorizes Deere’s experience in Russia as positive, with frustrations and challenges cropping up infrequently. Going forward, continued investment and expansion not only in the agricultural and forestry industries, but also in the manufacturing and service industries will depend heavily on the continued growth and expansion of the Russian economy and similar development in facilitating institutions i.e., the financial, legal and government sectors. Accession to the WTO will contribute to this objective. The enactment of regulations — from service regulations to agricultural standards to intellectual property protections — will greatly help firms operating in Russia by establishing the country as a significant and reliable trading partner.

A strong business case needs to be made for Congressional approval of permanent normal trade relations (PNTR) for Russia, according to Mr. Reed; expanded trade would not be the only positive outcome. A failure to extend PNTR to Russia would not only penalize U.S. exporters, but it would also invite discrimination against those companies with an established presence in the market, like Deere & Company.

Speaking for Deere, Mr. Reed urged Congress to act quickly so that companies can continue to expand and build upon the long history and ongoing relationship between the United States and Russia.

Dale Rodman, the Secretary of Agriculture for the Kansas State Department of Agriculture, continued stressing the importance of local production in the global picture of the food market and the strengths and weaknesses of the agricultural sector.

Mr. Rodman began by stating that the state of Kansas owes a lot to Russia. Launching into a history of the cooperation between Russia and the state of Kansas, Mr. Rodman traced the roots of the relationship to 1874, when over 12,000 Russian Mennonites immigrated to Kansas over the course of six years and progressively began settling on spare land in the region.

There was heavy and rapid population growth; in some cases entire villages migrated together.

The important consequence of this migration was, according to Mr. Rodman, the establishment of entirely Russian communities, some of which continue to exist today. While migration had slowed by the 1880s, Russian roots are very predominant in Kansas: over 100,000 families can trace their ancestry back to the Russian Mennonites.

The backbone of the United States’ economy rests on farmers, and the wheat these Russian migrants brought with them created an agricultural boom. The trade relationship between Kansas and Russia is storied; in 1898, USDA crop explorer Mark Carlton went to Russia to find new strains of wheat.

Today, the United States is completing the cycle by transferring knowledge about animal genetics back to Russia.

In order to keep this relationship thriving, Mr. Rodman insisted that trade barriers must be avoided as much as possible. World markets regulate themselves by determining the best place for a product to be produced or sold via the laws of supply and demand. When governments try to intervene, unintended consequences often result, said Mr. Rodman, using the example of beef protectionism in Argentina.

U.S. livestock exports to Russia are at an all-time high. The number of heifers imported by Russia from Kansas is only projected to increase. The sum value of live animal exports from Kansas totaled $5.4 million alone from January to August.

Kansas continues to nurture the trade relationship it has with Russia. Since Mr. Rodman believes that world trade is based upon eye-to-eye contact rather than contracts, the exchange of knowledge between agricultural ministers and farmers in both the United States and Russia continues through trips taken by both parties.

Mr. Rodman explained that Kansas is using small business administration to further expand trade and to solidify

>>

its commitment to the Russian agricultural sector.

Mr. Rodman likened Russia to the United States: Russia has the land and the space to develop a large-scale agricultural economy. Echoing the sentiments of both Mr. Chernyshev and Mr. Reed, Mr. Rodman said that as Russia proceeds to rebuild its agricultural sector, the country needs to assess its technological and agricultural infra-

structure. Here, Russia can learn from the American Midwest, which has state of the art food production processing distribution and transportation systems that have been honed by the market over the last 100 years.

Mr. Rodman concluded by stating that the world has a big challenge in its future, which is a moral obligation to feed its entire population. All three speakers agreed that agricultural coop-

new members activities

>

eration between the United States and Russia is vital for the development of Russian agriculture, particularly as Russia’s agricultural potential may be the key to increasing worldwide agricultural yields. However, in order to achieve these desirable results, the creation of free trade between the United States and Russia through graduation of Russia from Jackson-Vanik is absolutely essential. n

PANEL: Financing Agricultural Production and Trade Moderator:

Michael Yanney Chairman Emeritus Burlington Capital

Panelists:

Yevgeny Gromyko Deputy Governor Krasnodar Region Glenn Kolleeny Partner Salans LLP G. Eric Raby Vice President Global Trade Finance & Key Accounts AGCO Michael Jung President and Chief Executive Officer Burlington International Group

M

Total investment in the food processing industry in Krasnodar over the past 4 years stood at $1.25 billion and the volume of shipped products has increased from $3 billion in 2007 to $5.4 billion in 2010. Of the main exporters to the Krasnodar region, the United States maintains a dominant position at 62 percent of the total, followed by Germany at 24 percent.

Among U.S. exporters, John Deere possesses a significant share of exports

at 56 percent. Mr. Gromyko acknowledged John Deere’s dedication to its partnership in developing Krasnodar’s agricultural sector.

Speaking on worker productivity levels, Mr. Gromyko noted that they are higher in Krasnodar than in Russia as a whole, but are still lagging behind Western European levels. He argued that the low productivity of labor is one of the main reasons why Russian agriculture is protected.

However, these domestic protections will be phased-out with Russia’s WTO entry and the subsequent transition period will allow the country to address the productivity issues with more energy.

Mr. Gromyko also noted that Russian producers should not expand

Spring 2012

Deputy Governor of the Krasnodar Region Yevgeny Gromyko began his remarks by providing an overview of the agriculture sector in the Krasnodar region. As one of the largest agricultural regions in Russia, Krasnodar has

over 3.8 million hectares of arable land. The region produces 100 percent of the tea and subtropical cultures grown in Russia, 78 percent of rice, 55 percent of grapes, 45 percent of corn, 32 percent of sugar beets, 18 percent of sunflowers, and 16 percent of grain.

Russia Business Watch

ichael Yanney opened the panel by providing some background on developments in Russian agriculture from his own experience working in the sector. He began working in Russia when the Soviet government asked him to develop soybean fields in four different locations across the Soviet Union. Mr. Yanney described the soil in Krasnodar as the richest he has ever seen, demonstrating the potential for growing high-quality agricultural products.

From left: Glenn Kolleeny, Michael Jung, Eric Raby, Yevgeny Gromyko, and Michael Yanney.

17

>>

new members activities

>

in a thoughtless manner, emphasizing a collaborative approach between investors, Russian companies and the Russian government. Acknowledging that development of Russian agriculture will be a process, he indicated the need to harness expertise and resources from the United States and Western Europe.

Turning his focus to financing, Mr. Gromyko stated that the main forms of investment in the present day for the Krasnodar region are bank loans and leasing, internal resources, outward investment, and state subsidies. He argued that state credits to farmers must be balanced with foreign investment.

Mr. Gromyko cautioned that access to credit is a challenge at the present time, especially for 25 to 30 year credits in Europe and the United States.

Changes in legislation and state assistance, problems with economic integration, and climate are risks that should be considered, as is the low level of technological sophistication of the region’s farmers.

Russia Business Watch

Spring 2012

Mr. Gromyko noted that the use of modern technologies and scientific approaches, effective management techniques and insurance are means to minimize these risks. He stressed there were a number of federal and municipal programs supporting the sector, stating that close cooperation between the public and private sectors was critical to the development of Russian agriculture.

18

Identifying U.S. financial institutions and instruments as a potential area of collaboration, Mr. Gromyko believed their involvement would compensate for an underdeveloped domestic financial sector. He stressed the need to increase the purchasing volumes of poultry and livestock and the need for assistance from the U.S. to achieve this goal.

Michael Jung began his presentation with a description of Burlington International Group, which was formed to help clients identify unique and non-traditional financing mechanisms and help them expand into developing and emerging markets. The group is divided into two separate entities to achieve the organizational goals.

Cantera Partners focuses on leveraging soft money with foreign direct investment for agribusiness projects. The other entity, Agribusiness Management Company (AMC), is a leading global

private equity investment firm that is focused on investing in agribusiness and ancillary businesses in the emerging markets, with primary focus on the former Soviet Union, particularly Russia. AMC established a limited partnership, Agribusiness Partners International, which was a $100 million private equity fund that invested in eight agribusiness companies in Russia. At its peak, the fund employed in excess of 8,000 people and produced substantial returns for its investors.

Referring to Mr. Gromyko’s comments on the need for U.S. financial institutional involvement, Mr. Jung noted Burlington International Group’s efforts over the past few years in Russia. The company has been exploring the opportunity to put together a debt finance facility, providing loans in order to help Russian companies gain access to capital and expand their businesses.

The efforts have also included bringing in managerial expertise from the U.S. agricultural sector.

Glenn Kolleeny began by stating that Russia’s agricultural sector is arguably the most important sector in the country. He mentioned the progress made up to the present day, reflecting on a past business climate where investors were challenged to find projects capable of generating significant benefits.

Now, resources are in place to finance any sensible project in Russia and several agricultural companies have contemplated issuing initial public offerings once market conditions improve.

Mr. Kolleeny emphasized the importance of recognizing corruption as a problem, noting that it is clearly a significant issue when the Russian president publicly refers to the government’s reluctance to invest in infrastructure because 35 to 40 percent of the investment will likely be diverted to private individuals. In addition, his Russian clients have characterized the added cost of corruption as a considerable burden.

Mr. Kolleeny noted that the statesupported financing of agriculture has improved qualitatively and quantitatively through such mechanism as the Russian Agricultural Bank, the state leasing company OJSC Rosagroleasing and the Ministry of Agriculture. At $10 billion a year, the Russian Agricultural Bank’s volume of loans have been a major factor in the steady increase of the amount of land under cultivation.

In the area of leasing, Mr. Kolleeny explained that the main difference between leasing and loans in Russia is the small upfront costs involved in leasing, making it a more attractive option. He noted that Rosagroleasing’s $200 million in support per year supports the financing of roughly 8,000 pieces of agricultural equipment and that livestock leasing is a new and emerging trend in Russia.

Mr. Kolleeny stated that subsidies specifically targeting the agricultural sector have dramatically increased to roughly $3 billion to $5 billion per year. In addition to the federal subsidies, regional governments support the sector by providing market knowledge and direct subsidies. He noted that Russian companies with foreign investor participation are entitled to state agricultural subsidies given that they meet certain conditions.

Turning his attention to international financial institutions, Mr. Kolleeny argued that financing from the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) may take a considerable amount of time, but the long process is worth the effort. These institutions are not only knowledgeable about the market, but can provide low interest loans for terms of up to 15 years. Mr. Kolleeny also spoke on Export Credit Agency (ECA) financing, describing the programs as useful for financing agricultural equipment. However, an evident downside is the link to exports to a particular country. The process of ECA financing is also relatively difficult, requiring the participation of a bank in the country of financing.

Another downside is that the ECA will only finance 85 percent of the cost of equipment, leaving a certain element of risk.

G. Eric Raby opened his presentation by explaining AGCO’s approach to financing in agriculture and for agricultural equipment. He noted that financing was not just about leasing, but more about having resources available to address a wide variety of situations. In Russia, the end-users generally finance through bank loans and leasing. When the markets rise, the need for capital in the distribution channels also increases.

In lesser-developed areas, Mr. Raby highlighted the need for a variety of financing tools to address individual needs. He described the EBRD and IFC

>>

as large and cumbersome, but added that these institutions also provide low interest rates and much needed political cover on projects. Another area of focus for AGCO was wholesale financing for distribution channels in terms of capital line credit and insurance.

Regarding Russian subsidies for financing, Mr. Raby was quick to note the unpredictability of state subsidies as subsidy levels are linked to the

price of oil. When oil prices fall below $70 a barrel, the Russian government begins to decrease state subsidies.

The unpredictable nature of oil prices necessitates the development of contingency solutions in financing.

Speaking on the Russian market as a whole, Mr. Raby described it as one of the world’s most dynamic agricultural markets, noting that opportunity is tied to the size and scope of

new members activities

>

the country along with the growth in arable land. Despite the continuation of outdated methods of financing through state sources, Mr. Raby noted emerging instruments to meet customer needs for longer periods of financing at lower rates. Moving forward, he cautioned that liquidity in the market is a concern over the next year. In the long-term, Russia will be a significant player in the world market, particularly in agriculture. n

PANEL: Transforming Russian Agribusiness

From left to right: Darrell Stevenson, Gary Horlick, Senator Bato-Zhargal Zhambalnimbuev, Stephanie Murphy, Ed Verona.

Moderator:

Panelists:

Gary Horlick Partner Law Offices of Gary N. Horlick

Senator Bato-Zhargal Zhambalnimbuev Member Committee on Budget Issues, Federation Council of the Russian Federation

T

he Forum’s final panel session, “Transforming Russian Agribusiness,” looked closely at Russia’s entrance into the World Trade Organization (WTO) and its consequences for both

American and Russian businesses.

The speakers focused on a range of issues, including the implications of the newly adopted Sanitary and Phytosanitary (SPS) accords and tariff policies to the burgeoning beef industry in Russia. Mr. Verona noted the significant changes that have taken place in Russian business over the last 100 years, from collectivization to privatization. Today, Russia is at a new juncture — with WTO accession, Russian business will have greater access to markets and trade while growing demand will provide an impetus to Russian industries to become more competitive.

Spring 2012

Stephanie Murphy Director for Agricultural Affairs Office of the U.S. Trade Representative

Darrell Stevenson Owner Stevenson Sputnik LLC

Russia Business Watch

Ed Verona President and CEO U.S.-Russia Business Council

>>

19

new members activities

>

Stephanie Murphy opened the panel with a focus on the amended SPS regulations and what Russia’s entrance into the WTO means for farmers and companies. In the 700 page Working Party Report, over 90 pages alone address agricultural issues, underscoring how critical the sector is for all WTO members. The Terms of Accession are a protocol for what rules Russia must follow and what commitments the country is obligated to keep. The document focuses on the actions Russia must undertake to make sure it meets WTO commitments, specifically tariff obligations for goods and services.

Russia Business Watch

Spring 2012

Of key importance to the United States and its agricultural industry are the Sanitary and Phytosanitary accords, key measures for how a country protects the life and health of its animals, plants and people. While every country may restrict trade based on SPS concerns, any SPS measures must be based on scientifically justifiable reasons and risk assessments. Ms. Murphy noted that the issue is particularly important because the U.S. and Russia have a history of SPS discord.

In 2010, for example, Russia imposed a sanitary and phytosanitary measure that stopped the U.S. poultry trade in Russia. It took eight months of negotiations between the two countries’ politicians to reopen the market. One of the benefits of Russia being subject to the World Trade Organization’s rules-based system is that the United States is less likely to face such trade disputes, and if any arise, the committees of the WTO and the dispute settlement mechanism can expediently resolve the matter.

20

The creation of the Russia, Kazakhstan and Belarus Customs Union in 2010 necessitated a revision of the Working Party Report’s chapter on SPS, slowing Russia’s accession process. Ms. Murphy conceded that, although Russia could have acceded to the WTO earlier had it not joined the Customs Union, the current legal framework benefiting the U.S. would not have existed.

U.S. representatives worked diligently with their Russian colleagues in order to identify Russian SPS measures that were not compliant with WTO protocol and, after significant negotiation and cooperation, the Customs Union has now adopted a legal framework of SPS rules and regulations that are compliant with the WTO’s SPS protocols.

However, Ms. Murphy underscored that it is critical that the U.S. agri-

cultural community understands that, concerning SPS regulations, there will be no transition period. Russia has undertaken all of the legal instruments necessary to be able to implement the agreements on the first day of accession. This harmonization of Russian standards to international standards is critical to the American pork, beef, poultry and dairy industries. Russia’s accountability to a system of inspections that is transparent and based on international standards eliminates key obstacles that have harmed U.S. exporters and caused political problems between the two countries in the past. Whereas trade disputes used to require talks between presidents and other high-ranking political leaders, WTO accession gives the U.S. and Russia recourse to another forum in which to resolve any issues.

is of prime importance. While he does not doubt that Congress will repeal Jackson-Vanik for Russia as it is, after all, in the United States’ interests, he conceded that the process is bound to be messy and potentially frustrating. However, the repeal cannot happen without the help and input of the business community; Congress will not graduate Russia from JacksonVanik without an outpouring of support from businesses.

Since Russia also detailed how it plans to implement these policies, certainty and predictability — at times missing from the U.S.-Russia business relationship — have been created, easing the fears of U.S. exporters and farmers.

However, he cautioned against taking an idealistic attitude toward Russia’s WTO membership, noting that disputes will take place. For example, the United States has filed 11 cases against China. This does not mean that the United States and China are engaged in a trade war — quite the contrary.

Trade disputes signal that the WTO is operationally successful; disagreements are routine and are resolved smoothly. When a disagreement arises, both sides can and will resort to the WTO’s dispute resolution mechanism.

Each country wins some cases and loses others. It is to be expected that the United States and Russia will both challenge each other simply because they now have the ability to do so, and Mr. Horlick stated that it is important that businesses remember that this is a sign of a functioning system and an effective trade regime.

Notably, Ms. Murphy underscored that while Russia is doing its part to ratify WTO protocols, which must be approved by both the Duma and the Federation Council and signed by the Russian President, the United States has its own work to do regarding lifting the Jackson-Vanik Amendment.

She noted that the aforementioned laws and obligations benefitting American businesses will not be accessible to the U.S. until Congress repeals Jackson-Vanik for Russia. The WTO requires that the U.S. extend unconditional Most Favored Nation (MFN) status to all members, and while the U.S. extended normal trade relations to Russia in 1992, this status is conditioned on Russia meeting certain criteria. In order to be in line with WTO protocol, the U.S. must remove those conditions by graduating Russia from Jackson-Vanik or invoke nonapplication.

Ms. Murphy emphasized that in order for U.S. exporters, ranchers and businesses to benefit from Russia’s entrance into the World Trade Organization, they must work closely with Congress to stress the importance of graduating Russia from JacksonVanik.

Gary Horlick also addressed the consequences of the accession, noting that graduating Russia from Jackson-Vanik

While Congress establishes permanent normal trade relations with Russia, Russia itself will be focused on ratifying all the WTO protocols and formally joining the organization. Mr. Horlick underscored that Russian accession is not a political issue, but a routine process, and therefore should not pose any problems.

Lastly, Mr. Horlick emphasized that the World Trade Organization is not an obsolete organ. The need to negotiate trade issues will not go away; although there has recently been a proliferation of free trade agreements (FTA), there are certain issues that simply cannot be resolved in FTAs, e.g., agricultural subsidies.

Mr. Horlick emphasized that Russia’s WTO accession is not the end of the road, but is only the beginning.

Darrell Stevenson offered a farmer’s perspective on the topic of U.S.-Russia trade. Specifically, he concentrated on the beef industry in Russia, and how the United States could benefit from the development of the relationship between the two countries.

>>

Mr. Stevenson noted that Russia’s cattle herd is significantly smaller today than it was on the eve of the 1917 revolution nearly 100 years ago, but that the Russian government is keen to develop the industry. He noted that the high demand for genetics — cattle embryos and semen — was evident from his first trip to the country four years ago.

Fortunately, the United States has a ready supply of Angus breed genetics, which Russian farmers are most keen to acquire. Because Russia is quite similar to the United States in terms of climate and the tracts of land available for raising cattle, the success of a Russian beef industry could be a boon to the U.S. economy. However, in order to create a successful beef production industry in Russia, he emphasized that Russian farmers not only need genetic technology, but also the concurrent management systems to support a beef industry.

Mr. Stevenson noted that while demand for beef products in Russia is palpable, factors like the political and financial atmosphere and questions about the capacity of the labor force confronted the ability to create a beef industry.

Through his work with Russian businessmen, Mr. Stevenson developed a plan to build up the Russian beef industry: focus on local and regional partnerships, import live cattle herds and collaborate with Russian companies. Currently, there are not many active American producers in the Russian market because there is a lack of confidence in the Russian market.

Russia’s accession to the WTO should create a political and financial atmosphere that will make investing in the Russian beef industry more appealing.

Lastly, addressing concerns about technological insufficiency in Russia, Mr. Stevenson noted that, from the point-of-view of simple beef production, Russia already has all the technology it needs. Beef production can be low-maintenance; experienced management systems can run a successful business even without advanced technological input. As the Russian beef industry grows, advanced technology can — and likely will — become more pervasive, but it is by no means a prerequisite for the creation of a beef industry in Russia.

Senator Bato-Zhargal Zhambalnimbuev continued the discussion by noting that, although the accession process was long and fraught with issues that had the potential to divide the United States and Russia, working together on such an important topic prevailed over all else and helped negotiations proceed past any minor disagreements.

While Russia is concerned about the industrial and agricultural sectors potentially shrinking, Mr. Zhambalnimbuev said Russia is also cognizant of the positives inherent in WTO accession. For example, the Russian market will have access to higher quality goods and services, and the Russian economy can now offer the world market quality consumer goods and services at relatively low prices.

An uptick in the flow of goods may be a disadvantage to certain companies, but Mr. Zhambalnimbuev hopes

Mr. Zhambalnimbuev stressed that it is premature to discuss tariff disputes; Russia is ready to stand by and fulfill its tariff obligations and requirements in accordance with tariff policies, which have been detailed through 2019. Out of 11,000 tariff positions, Russia has obligations on 700 of them.

He noted that there will be a systematic reduction of agricultural subsidies to $4.4 billion by 2018.

The Russian government will focus on rural infrastructure development and helping agricultural producers increase output as a means of supporting agribusiness development.

According to Mr. Zhambalnimbuev, there are approximately 400 American companies currently working with Russian agricultural exporters, and the Russian Federation gladly welcomes them. The country is ready and prepared to develop these partnerships, fulfilling all the connected tariff obligations along the way.

Russian accession into the WTO allows the government to review over 100 measures in effect on the world market that are hindering Russian exports, including the Jackson-Vanik Amendment.

These types of measures are not only ineffective, but also hamper the Russian economy.

Although it is difficult to estimate the financial impact of these types of legislation, Mr. Zhambalnimbuev approximated the cost to be not one or two million, but tens of millions of dollars. Consequently, he was encouraged to hear so much support from businesses for graduating Russia from the Jackson-Vanik Amendment.

Mr. Zhambalnimbuev noted that Russia’s low level of productivity compared to Europe and the U.S. would be a challenge for companies over the near term. This is not because the Russian populace does not work well, but because technology in Russia is lagging behind that of the rest of the Western world. Both state and private investments will help Russia adopt advanced technologies that will increase productivity to a competitive level. n

Spring 2012

The biggest obstacle that American exporters face is Russian workers’ lack of experience. Mr. Stevenson noted that elemental knowledge is sometimes missing, and consequently U.S. companies must be ready and willing to provide basic training. In his experience, the learning curve is steep, fraught with early growing pains, and therefore the provision of knowledge is

Mr. Stevenson underscored that it is imperative not to forget the Russian perspective when considering the partnership; the Russian government prioritizes self-sustainability, profitability and success and is looking to move toward stronger production in the future. Given both parties’ enthusiasm about the future, cooperation has been smooth. He added that the Russian government was supportive of his efforts. He has had both federal and regional assistance in the import of cattle and in the establishment of breeding units.

that the increased competition will not only bring higher quality goods to the Russian market, but will help certain Russian industries grow and develop.

Russia Business Watch

In order to set up effective management systems, Mr. Stevenson stressed the importance of starting small.

Instead of working with large conglomerates, establishing smaller, more manageable units employing 20 to 40 local villagers per unit is ideal. Such a system would create an automatic economic stimulus for employment in villages.

critical at the beginning of the process.

Mr. Stevenson also underscored that since experience is frequently derived from failures, it may take several missteps for Russian companies to gain valuable expertise. Nonetheless, he is confident in the viability of a beef industry in Russia because the passion and determination of the population alone is enough to ensure success.

new members activities

>

21

new members activities

Russia Automotive Sector Dinner and Roundtable January 12, 2012 • Detroit, MI Moderator:

Ed Verona President and CEO U.S.-Russia Business Council

Panelists:

Ivan Bonchev Director, CIS Automotive Leader Ernst & Young

Kenneth Duckworth Principal Commercial Officer U.S. Consulate - St. Petersburg

James Bovenzi President & Managing Director General Motors Russia and CIS

Matthew Edwards Director, Office of Russia, Ukraine and Eurasia U.S. Department of Commerce

Alan Draper Vice President - Purchasing Ford Motor Company

Randolph Wright Attorney at Law Berry Moorman P.C.

E

Russia Business Watch

Spring 2012

d Verona opened the session by noting that, with Russia’s accession to the World Trade Organization this year, the automotive sector is one of the areas that shows the greatest potential for growth. From accession until 2018, Russia will implement an ambitious stimulus program for the domestic automotive sector requiring manufactures to achieve minimum volume capability and domestic content targets of approximately 70 percent. Accordingly, foreign manufacturers will have to build supply chains locally, but with the confidence that these parts and components will satisfy the quality standards of the automotive companies and at a cost that is economically viable.

22

Randolph Wright continued the brief by noting that American companies typically fall behind their European and Asian competitors in Russia, but that this is gradually changing. Yet, as new opportunities open up there, conducting business continues to be challenging.

The obstacles include the lack of the rule of law, dealing with criminal enterprises, inadequate protection of intellectual property rights, and lack of guarantee of income for doing business in Russia. He said that the legal landscape in Russia is clear, but the law enforcement process is overwhelmingly prolonged.

Ivan Bonchev began by noting that, before 2008, the Russian automotive market was growing rapidly at a rate of more than 30 percent, but contracted by 50 percent as the 2009 financial crisis unfolded. He said that during the economic recession the Russian government enacted a number of incentives to protect its domestic industry, targeting companies that were producing locally.

Given that Russia lacks a solid domestic supplier base, and thus imports most of its vehicles, this step was meant to

Matthew Edwards (center) flanked by Ivan Bonchev and Alan Draper

attract investment to strengthen Russia’s production capabilities in Russia.

Mr. Bonchev continued by saying that, although Russia is not a sizable market at this moment, it will certainly become the largest one in Europe. The current density of car ownership amounts to only 250 cars per 1,000 people, creating growth opportunities for foreign auto manufactures as well as Russian ones.

In 2011, the latter reached record-high levels of production equal to 1.7 million passenger cars.

In an effort to avoid losses upon Russia’s accession to the WTO, the country’s

manufacturers convinced their government to extend existing import duties for a few more years, and enact sevenyear phase-in for WTO commitments.

The Russian government is now working on a plan to compensate the auto sector during the mid-2018 to mid-2020 period when Russia will have to comply fully with its responsibilities as a WTO member.

Turning his attention to original equipment manufacturers (OEMs), Mr. Bonchev mentioned that, in 2005, the Russian government introduced certain investment incentives that encouraged foreign OEMs to invest in Russia. However, most

>>

of these companies’ projects lacked substance in terms of capacities and volumes. Therefore, the government raised the requirements related to volumes, localized sourcing of powertrains and transmissions and relaxed rules guiding local R&B facilities for suppliers.

Matthew Edwards explained the role that the Department of Commerce plays in supporting the business and investment activities in Russia, and provided an overview of Russia’s economic development over the last decade. He noted that analysts forecast that Russia’s economy will grow at an average of 4 percent during the next few years and that Russia’s per capita income is above that

will become more predictable and transparent and tariffs will decrease. Russia will be obligated to treat imports in a consistent manner; the country will have to adopt more transparency, better regulatory processes, and product certification; and Russia will have to improve its protection of intellectual property.

However, in order for American companies to benefit fully from these protections, the Congress must remove Russia from the provisions of the Jackson-Vanik Amendment before Russia becomes a WTO member.

Alan Draper began his brief by discussing Ford’s new cooperation with Russian car manufacturer Sollers. The 50/50

Ford Motor Co. recognizes that the Russian market holds great potential for development. The country’s GDP is approximately four percent and the unemployment rate is close to six percent. The ruble has experienced some volatility, but Mr. Draper expects it to stabilize along with energy prices over the near- to medium-term.

new members activities

>

James Bovenzi began by noting that the average age of a car on the Russian roads is over five years older than in Europe or the U.S. Furthermore, there is an emerging middle class in Russia whose members are both brand and value-conscious and prefer Western products. As the Russian government wants to diversify Russia’s economy, it welcomes initiatives that would help Russia develop its manufacturing and engineering capabilities.

According to Mr. Bovenzi, GM’s sales in the Russian market reached about 243,000 units in 2011. The company’s joint venture with AvtoVaz produced 60,000 units and will double this achievement to 120,000 units in 2015.

He noted that, if the market develops as expected and the plants execute, GM would produce approximately half a million units by 2015.

Mr. Bovenzi noted that GM found great suppliers both local and global. As of mid-2011, global players constituted about 50 percent of GM’s supply base.

Nevertheless, Russia continues to present opportunities in areas such as powertrains and safety components. Given that GM plans to invest over $1 billion during the next five years in the Russian market, GM welcomes suppliers who can make up these deficits.

Randolph Wright addresses the goup. To his right (L to R) Ivan Bonchev, Matthew Edwards, Alan Draper, James Bovenzi, and Kenneth Duckworth.

Mr. Edwards stressed that Russia’s accession to the WTO will improve the business environment in Russia. The country’s trade and regulatory policies

Ford is already working with many Russian companies such as steel giants Severstal and MMK to develop a high volume and quality production. The Ford-Sollers production in Russia will soon begin employing a significant number of Russians.

Mr. Duckworth acknowledged that companies often face challenges when trying to expand internationally. For this reason, the state of Michigan designed a program consisting of grants for Michiganbased small and medium-sized enterprises of less than 500 employees. The program is administered by Michigan’s Economic Development Corporation and offers grants of up to $25,000 for participation in events such as those organized by the Trade Mission. n

Spring 2012

Russia was an important economic partner for the U.S. throughout the past decade. Ten years ago, America’s exports to Russia were less than $2.5 billion; in 2011, they reached $7.5 billion. Furthermore, U.S. exports of passenger vehicles grew by 164 percent over that period while exports of component parts and accessories increased by 330 percent.

joint venture began in October 2011 and will result in the production of 350,000 vehicles. Aside from cars, the two companies will build an engine factory and a research and engineering center. They will also make major stamping investments and achieve a localization target of up to 60 percent. To achieve this target, both Ford and Sollers are identifying suppliers in Russia.

Russia Business Watch

of Brazil, India and China, while Russian consumers enjoy low levels of indebtedness.

Kenneth Duckworth began by discussing the U.S. automotive parts and components trade mission that his office is organizing in Russia. The goal is to expand U.S.-Russia business cooperation and to attract more U.S. companies to the country. He noted that the mission will be led by Undersecretary for International Trade Michelle O’Neil, and will tailor meetings with the Russian government to the needs of the participants.

23

new members activities

USRBC Luncheon with Chiedu Osakwe Director Accessions Division World Trade Organization January 23, 2012 Washington, DC

Mr. Chiedu Osakwe opened the discus-

Russia Business Watch

Spring 2012

sion by providing a snapshot of Russia’s World Trade Organization (WTO) package. The ministerial conference adopted the report of the Working Party on Russia’s WTO Accession by consensus on December 16, 2011. According to Mr. Osakwe, the adoption by consensus was significant and demonstrated the successful conclusion of a process that had dragged on for more than 18 years. As a whole, he described the market access commitments as substantial and meaningful and noted that there has never been a more extensive report in terms of scope, extent and commitment in the history of the WTO.

24

In terms of the benefits, Mr. Osakwe depicted Russian accession to the WTO as a “win-win-win” scenario; the global economy, Russia and the WTO are all in a position to greatly benefit from the package. For Russia, accession to the WTO provides a platform to continue the program of modernization and diversification of the Russian economy, achieve faster economic growth rates and address pervasive issues such as corruption. For the global economy, the conclusion of the accession extends the WTO’s rules-based system to the Russian economy, which comprises 2.1 percent of global trade. The share of the global economy now subject to these enforceable rules has increased from 95 percent to 97.1 percent.

Mr. Osakwe mentioned a number of mechanisms that will affect Russia’s trade rules and regulations. The package contains 1,451 paragraphs, of which 163 are legally binding — Russia has been bound to a number of commitments that are enforceable. These commitments, Mr. Osakwe argued, will serve as a restraint on Russian behavior moving forward. Additional mechanisms include the dispute settlement system and an annual trade policy review that WTO members can initiate.

Mr. Osakwe credited the critical roles played by the United States and the European Union throughout the process saying that, without this strong support, the chances of Russia acceding to the WTO this year would have been slight.

He explained that trade multilateralism is not self-perpetuating and requires leaders to drive the process. The U.S. and EU initiated and drove the end-game process in a way that reinforced the rules of the trading system while also opening important markets for goods and services.

Speaking on the specific provisions of working party report with respect to goods, Mr. Osakwe stated that Russia concluded 57 bilateral market access agreements with members, which is greater than the number on goods agreements concluded by China (and a WTO record). In the 57 bilateral market access agreements, there are a total of 90,000 tariff concessions, which the WTO secretariat consolidated and minimized into a final goods offer of 11,526 tariff concessions that was given to the entirety of the membership on an MFN basis. On average, the final legally-binding tariff ceiling for Russia will be 7.8 percent, compared to the current average of 10 percent. For agricultural products, the applied duty for 2011 of 13.2 percent will be lowered to 10.8 percent. Manufactured products will be reduced from 9.5 percent to 7.3 percent.

Speaking on the information technology agreement (ITA), Mr. Osakwe explained that there were two agreements that eliminated any ambiguity in the goods schedule. Head note number 3 states that the Russian Federation will reduce the tariff on all ITA products over a three year period from 5.4 to zero percent.

In addition, paragraph 424 refers to Russia’s commitment to ITA, as related to the head note in the goods schedule, so that when the Russian Federation becomes a WTO member, they will present a draft schedule to the ITA committee for review.

Mr. Osakwe highlighted a number of other areas as well. In wines and spirits, the average tariff reduction will be from 22.8 percent to 11.2 percent, while in beverage and tobacco the average applied tariff duty will be lowered from 21.2 to 14.9 percent. Similar reductions will occur in chemicals, automobiles, electrical machinery, wood, paper, and dairy products.

Another member concern that Mr. Osakwe mentioned related to what may happen to goods behind the borders, such as VAT, applied duty, excise duties, and the arbitrary application of internal taxes and charges. In response to these concerns, Mr. Osakwe noted the Russian Federation’s commitment that all internal charges, duties and taxes will be applied on an MFN basis, without discrimination. He characterized the commitment as strong and binding.

Turning his attention to agriculture, Mr. Osakwe highlighted three areas. First, the Russian Federation undertook a commitment to bind its export subsidies. Second, Russia is committed to gradually reducing agricultural subsidies from a total of $9 billion in 2012 to $4.4 billion in 2018. Lastly, a new section in the goods schedule was created specifically for Russia on export duties (Part V). The section fixes the export duties for 704 products for the purpose of stability and predictability of policy.

WTO members wanted to establish constraining disciplines that would limit the

>>

concentration of government support.

As a result, Russia was constrained to agree to disciplines where non-product specific support would not account for more than 30 percent of all support in order to achieve a degree of predictability in agricultural policy.

With respect to services, Russia agreed to commitments in 11 services sectors and 116 sub-sectors. In telecommunications services, Russia will eliminate the current foreign equity limitation of 49 percent after 4 years. Within the area of distribution services and, more specifically, wholesale trade, retail and franchising services, Russia will allow 100 percent foreign-owned companies to operate. In financial services, foreign banks will be permitted to open subsidiaries, though not branches. There will also not be a cap on foreign equity in banking institutions, but an overall cap will exist in foreign capital participation, which is limited to 50 percent. In the area of insurance, a commercial presence in the form of a branch will be allowed, but will come into effect nine years from the date of accession.

Speaking on an inquiry on Russia’s understanding of U.S. agricultural concerns

Directing the conversation back to Russia’s accession process, Mr. Osakwe stated that every accession report builds on the one before it, and the Russian accession report is at a qualitatively higher level than many others. In areas of difficulty, Russia incorporated transitional periods into the agreement.

Speaking directly to the automotive sector, Mr. Osakwe reiterated Russia’s commitments in the accession report. In paragraph 1090, the binding paragraph on TRIMS, Russia committed to eliminating all WTO inconsistent measures, including preferential tariffs, by July 1, 2018 and also not to conclude any new agreements with investors in any sector that contained provision contrary to the WTO agreement.

Speaking to a question on whether commitments for online intellectual property rights protections are enforceable, Mr. Osakwe said that the accession report comprehensively addresses intellectual property. The intellectual property section is broadly divided into three parts.

The first section describes the legislation

Responding to a question regarding whether Russia was committed to joining the ITA as a participant, Mr. Osakwe again referred to the accession report.

In head note 3 of the goods schedule, the Russian Federation is committed to reducing the duty rates to zero for products covered by the ITA through equal annual reductions over three years. In paragraph 324, the Russian Federation confirmed that the country’s ITA schedule will be submitted to the ITA committee for verification in order to enable the Russian Federation to join the ITA when it becomes a member.

In response to a question on how he would sell Russia’s WTO accession as an argument for repealing the Jackson-Vanik Amendment, Mr. Osakwe explained that WTO members had two overriding considerations. First, improvement and openings in market access. In trade negotiations, Mr. Osakwe argued, the results must be substantive and Russia’s WTO accession report contains a great deal of substance. He provided an example in beef, pork and poultry trade, where there are several country-specific tariff rate quotas.

The second area of consideration was the rule of law. In the framework for creating and enforcing policies, there were specific commitments undertaken in the areas of judicial recourse, the right of appeal, the right of independent review, IPR protection, competition policy, and transparency. Russia’s WTO accession process also made an important contribution in mitigating and managing bilateral relations between Russia and Georgia.

Responding to inquires on how far the WTO process lessened the tensions between Russia and Georgia, Mr. Osakwe believed the authority and value of multilateral trade cooperation was clearly demonstrated. Russia’s desire to join a rules-based institution created a platform to engage Georgia. n

Spring 2012

Lastly, Mr. Osakwe spoke on the impact of Russia’s WTO accession process on the Russian Federation’s relations with Georgia. He argued that the agreement struck between the Russian Federation and Georgia demonstrated the scope of what is possible through multilateral trade negotiation to mitigate non-trade conflicts and contribute to the larger objectives of international cooperation.

Responding to a question on whether the current accession report for Russia was final, Mr. Osakwe confirmed that the report was final, stating that the report was “in stone.” Continuing, he added that the Russian Federation had to make some very tough decisions in the areas of SPS, agriculture, TRIMS, rule of law, right of appeal, right of independent review, and judicial recourse. The WTO system is member-driven and members collectively guard the system from various perspectives. The power and authority of the WTO system is the dispute settlement mechanism and the understanding that the commitments are binding. Mr. Osakwe noted that the U.S. and EU are second to none with regard to the array of resources invested in any accession, having the most expertise on hand to properly review the accession packages.

In addition, Russia, like every other WTO member, will have to go through a trade policy review, providing an additional internal review mechanism.

protecting intellectual property rights and is contained in Annex I. The second part of the chapter deals with those international treaties to which the Russian Federation is party. The third section contains information on enforcement and is subdivided into two sections: civil and administrative procedures. In cases of infringement of intellectual property rights, the Russian Federation will punish and provide compensation in accordance with Russian laws. Overall, these commitments provide a foundation for enforcement.

Russia Business Watch

Concluding his statements on the impact of Russia’s accession’s report, Mr. Osakwe briefly listed several multilateral areas with substantive commitments: Rule of law, trade-related investment measures (TRIMs), agriculture, sanitaryphytosanitary (SPS) standards, intellectual property rights protection, and transparency. Mr. Osakwe added that Russia’s accession provides a multilateral foothold for the process of Eurasian economic integration. The countries in the Customs Union will have differing multilateral commitments and schedules on services, but the Customs Union will have one common goods schedule. While mentioning that the Eurasian Economic Commission, established in January of this year, will take over and absorb the duties and roles of the customs commission, Mr. Osakwe believed the regional steps toward economic integration and subsequent enlargement of a market with roughly 175 million people was clearly significant.

regarding SPS standards, Mr. Osakwe stated that Russia is well aware of member concerns on SPS and has made a concerted effort to address these concerns. The SPS section totals 67 pages and is the largest section in the report.

The volume, in its totality, is equivalent to the volume of several other accession packages in their totality. Russia is committed to the WTO SPS agreement and to acting on a scientific basis with regard to risk assessment issues as in Article 5.4 of the SPS agreement.

new members activities

>

25

new members activities

USRBC Luncheon with the RF Federal Anti-Monopoly Service Delegation January 30, 2012 • Washington, DC Moderator:

Matthew Murray Chairman Center for Business Ethics and Corporate Governance currently: Deputy Assistant Secretary of Commerce for Europe and Eurasia U.S. Department of Commerce

Panelists:

Timofey Nizhegorodtsev Head of Social Sphere and Trade Control Department RF Federal Anti-Monopoly Service

Mikhail Fedorenko Head of Chemical Industry and Agribusiness Control Department RF Federal Anti-Monopoly Service

O

n January 30, the USRBC hosted a special luncheon briefing with a delegation led by the Federal Antimonopoly Service of Russia. The delegation also included officials from the General Prosecutor’s office, Presidential Administration, the Ministry of the Interior and the Ministry of Health.

The group visited the United States for bilateral meetings on issues related to consumer regulation.

Russia Business Watch

Spring 2012

Timofey Nizhegorodtsev began by highlighting the main differences between the work of the Federal AntiMonopoly Service (FAS) and its foreign counterparts. He noted that, while the primary function of the FAS remains overseeing Russian competition laws, a significant part of the service’s activity is protecting the interests of commercial organizations from the unfair practices of Russian bureaucrats. Mr. Nizhegorodtsev underscored that the main goal of the FAS is not just to collect fines but also to change the rules governing the market in such a way as to make it as competitive as possible.

In order to help make that possible, he encouraged international companies to operate on the Russian market with the same degree of attentiveness to local norms that they relegate to U.S. or European law.

26

Mr. Nizhegorodtsev also called on companies to turn to the Federal AntiMonopoly Service if they are concerned with the initiation of investigative actions against them; working with the FAS will allow these companies to receive timely information about the details of their case and give them the chance to make corrections to their commercial practices in Russia. This is made possible by the “Third AntiMonopoly Package”, which allows FAS to first warn a company about the possibility of sanctions as a result of activities that violate antimonopoly laws and then, in the absence of remedies by the company, to initiate an inves-

Panelists Mikhail Fedorenko and Timofey Nizhegorodtsev (left) with moderator Matthew Murray (right). tigation. Such a two-step procedure lessens the administrative pressure on a business and affords companies time to reconsider their policies without necessarily compelling an official investigation.

Mikhail Fedorenko added that FAS conducts a significant number of investigations in connection with the unfair practices of Russian officials, who establish preferences for certain commercial organizations or obstruct new companies from entering a particular market. He urged companies to work actively with authorities, including those in FAS, as direct cooperation will give foreign companies the chance to carry out an audit of the actions of its offices in Russia and avoid unnecessary administrative and commercial risks.

As an illustration of successful international cooperation involving the FAS, Mr. Fedorenko pointed to the U.S.-Russia collaboration in the regulation of agricultural markets. Over the

last three years, Russia has adopted new legislation to regulate the relationship between agricultural producers and retail chains. For example, Federal Law No. 381-FZ “On the Basis of Government Regulation of Commercial Activities in the Russian Federation” aims to protect the interests of agricultural producers and safeguard them from unfair competition for access to trade networks. FAS is expending considerable effort to ensure that these standards are applied with respect to not only Russian manufacturers, but also international companies that operate in Russia or that are planning entry into the Russian market.

Interest in the Russian agro-industrial market from international companies is growing, and the priority for the Russian government is the formation of transparent working conditions and the delineation of clear rules for conducting business on every level, from production to distribution. In light of this, FAS is encouraging foreign companies to cooperate and exchange

>>

information about successful practices in world trade and in the development of competition policy.

Question & Answer Session When asked about the effectiveness of compliance programs, Mr.

a dishonest agent and began working with a new one, initiating a FAS investigation concerning a breach of competition law. He stressed that the company should have declared its infringement of the law and the corrupt practices of its employees or agents to a law enforcement body rather than simply

Corrupt Practices Act (FCPA) remains imperfect. He called for legislation to avoid potential FCPA manipulation, noting that it was written in general terms and was designed to meet the standards of the U.S. regulatory system; therefore, it cannot effectively influence other markets where the judicial system has procedures differing from those of the United States.

Within this framework, companies themselves must develop clear, precise policies that can be easily verified, whether the company acts in good faith or not.

new members activities

>

In answering a question about the distribution of products in the Russian automotive sector and the relationship problems between manufacturers, distributors and buyers, Mr. Nizhegorodtsev stressed that the automotive market in Russia is problematic. It is riddled with discriminatory practices that contribute to higher prices on repairs and spare parts and, overall, prevents competition between the services of authorized dealers and independent service centers. Consequently, FAS undertakes a number of investigations of antitrust laws against companies operating in the automotive sector.

Mr. Nizhegorodtsev recommended two ways to resolve such a situation. In the first option, the company reports its violations to a law enforcement agency and, during the subsequent waiting period, ceases all collaboration with the offending agent. He pointed out that if an investigation failed to confirm the abuses, the company would be obligated to resume its cooperation with the agent. In the second option, the company publically declares its suspicions and terminates its relationship with the agent in connection with the accusation of corruption. In this situation, the agent has the right to protect his reputation by going to trial.

If the offenses cannot be confirmed, the company could be required by the court to carry on a rapport with the agent.

Mr. Nizhegorodtsev stressed that the practice of carrying out the verdicts of U.S. courts for violations of the Foreign

Mr. Nizhegorodtsev reiterated that the main object of the Russian Federal Anti-Monopoly Service is not to penalize as many companies as possible, but to amend market rules in order to increase competition. In this regard, he believes public discussion about the commercial practices of large companies will have a bigger impact on the establishment of rules of fair competition on the market than any other time-consuming investigative and litigation procedure. n

Spring 2012

As a practical example, Mr. Nizhegorodtsev noted the experience of an American pharmaceutical company that nullified its contract with

break off its relationship with the concerned parties.

Russia Business Watch

Nizhegorodtsev said that while many international companies have some sort of compliance program, it usually remains “a thing in itself�: despite their complex internal structure, compliance programs do not lead to an obvious improvement in the work of companies on the market. He explained that the reason for the ineffectiveness of most compliance programs is that it is difficult to assess policies internally without receiving external feedback. The main objective of the delegation has become to convince corporate executives that, even with a thorough system of internal accountability, it is imperative to put more trust in the external evaluation of the effectiveness of compliance programs, which will give a company the chance to receive objective information about how well it is following antimonopoly laws in reality.

As a positive example of cooperation between FAS and international companies, Mr. Nizhegorodtsev highlighted the recent practice of holding open discussions of commercial policies with companies that have resulted in the reform of the business and relationships between the distributors and dealers of these companies. He stressed that this is a positive tendency because when a large company demonstrates its readiness to follow competition laws, other businesses will follow suit and seek to attain a higher level of standards.

27

new members activities

APEC Debrief with Ed Verona and the National Center for APEC February 27, 2012• Washington, DC Moderator:

Edward Verona President and CEO U.S.-Russia Business Council

Amb. Hans Klemm U.S. Senior Official for Asia-Pacific Cooperation U.S. Department of State

Robert Modarelli Executive Vice President National Center for APEC

Panelists:

Arrow Augerot Deputy Assistant USTR for APEC Affairs Office of the U.S. Trade Representative

On

February 27, the USRBC and the National Center for APEC organized a briefing on Russia’s agenda and physical infrastructure preparations as host of the 2012 Asia-Pacific Economic Cooperation’s (APEC) Annual Summit.

Robert Modarelli opened the session by explaining the role of the U.S.-APEC Business Coalition. He stated that the Coalition’s main function is to coordinate participation for U.S. business in the APEC process throughout the APEC year.

The National Center for APEC chairs the Coalition each year in partnership with organizations such as the U.S.-Russia Business Council and the U.S. Chamber of Commerce.

Russia Business Watch

Spring 2012

Ambassador Hans Klemm began his brief by noting the success that his predecessor, Ambassador Kurt Tong, achieved during the U.S. year of APEC chairmanship. He stated that conversations with both American and foreign senior officials demonstrated that the U.S. accomplished a great deal in 2011, and that he will be advancing the initiatives the U.S. launched that year.

28

Ambassador Klemm discussed Russia’s performance as this year’s APEC chairman. He admitted that because this is Russia’s first time hosting APEC meetings, the country is facing numerous administrative, logistic and policy challenges. For instance, Russia has decided that the APEC final meetings will occur in September, rather than in November as is traditional, due to the meeting’s location in Vladivostok. The time-constrains imposed by this decision may affect Russia’s ability to create a successful agenda for the APEC summit.

The resolve to host the meetings in Vladivostok presents obstacles as well due to the city’s lack of adequate accommodations to hold such a complex event.

Also, Russian senior officials have been distracted away from the APEC summit

From left: Robert Modarelli, Amb. Hans Klemm, Ed Verona, Arrow Augerot.

by various political developments.

Nevertheless, the country has already demonstrated its determination to succeed by adequately orchestrating the APEC meetings it held in St. Petersburg and Moscow. As Ambassador Klemm explained, the APEC chairmanship is an important event for Russia as it offers a great opportunity to develop the economy of the Russian Far East further and to integrate the Russian economy into the APEC region.

The United States, in turn, remains dedicated to promoting the initiatives it introduced as the APEC host in 2011.

These initiatives include trade and investment, green growth, regulatory conversions, innovation, and topics covered during the Summit on Women and the Economy. The United States is also committed to ensure that Russia succeeds as the APEC host as its success will benefit the entire APEC community.

Ambassador Klemm concluded his remarks by thanking the U.S. business community for its significant interest in

the U.S. government’s work with APEC. He added that he is committed to ensuring that this partnership continues to enhance.

Arrow Augerot began by offering a general overview of Russia’s APEC chairmanship. She praised the country for demonstrating excellent logistical capability during the first Senior Officials’ Meeting it held in February in Moscow. She said that the U.S. offered Russia an ambitious example during its host year, and it seems that Russia is trying to follow it.

Ms. Augerot also echoed some of Ambassador Klemm’s remarks by stating that the U.S. is committed to promoting the initiatives it established in 2011. Consequently, the U.S. and other APEC members have been developing a list of environmental goods and trying to reduce tariffs on them to at least 5 percent by 2015. Another priority for the U.S. is advancing its agenda on next generation trade and investment issues.

The U.S. and its APEC partners agreed to implement the existing next generation issues and will present proposals for

>>

additional ones during the second Senior Officials’ Meeting in April.

Ms. Augerot noted that the additional next generation issues that the U.S. will propose are non-discriminatory treatment for digital products, expanding the model measures on internet piracy

U.S. has also been discussing with Russia the possibility of easing travel throughout the region for business officials, government representatives and tourists.

Ambassador Klemm noted that there are also some disagreements over Russia’s initiatives that the sides are currently

priorities for 2012. They also discussed Russia’s four APEC priorities for the year and worked on issues such as identifying the process for nominating private sector members to the policy partnership on food security and expanding sectoral assignments for applying good regulatory practices. Mr. Modarelli added that ABAC will next focus on tasks that include conducting wellness studies to demonstrate the positive return on companies’ investment in wellness programs; working on trade and digital products; cooperating on cross-border data flows; and conducting studies on best practices for public/private partnerships on infrastructure investment.

new members activities

>

Mr. Modarelli concluded by noting that the National Center has been working with the National Business Center for APEC of the Russian Federation, who are the official organizers of the CEO Summit at the end of 2012. The National Center will be serving as a partner with that organization to coordinate all U.S. business participation in the CEO Summit.

Question & Answer Session

and enhancing APEC’s supply chain performance by 10 percent by 2015. She added that the U.S. would also focus on advancing regulatory convergence in sectors such as chemicals, medical products and services; self-regulation in advertising services; and capacity building to help economies meet the good regulatory practice goals that were set in 2011.

USRBC Member Visit to Vladivostok February 6-7, 2012

Edward Verona briefed USRBC and National Center for APEC members on his recent trip to Vladivostok to asses the city’s preparations for the APEC Annual Summit and to meet with the region’s leadership. He led a delegation of USRBC members that met with then-Governor Sergei Darkin as well as Deputy Governor Alexander Kostenko, Deputy Chairman of the Regional Duma Dzhambulat Tekiev, and Marina Lomakina, General Director of “Nash Dom – Primorye”. Mr. Verona noted that the city has made significant progress in its preparations for the Summit, but added that there are several areas for concern in the relatively short amount of time until September. >>

Spring 2012

Ambassador Klemm elaborated on some of the initiatives on which the U.S. and Russia have been cooperating. With respect to issues that are important to the U.S., Russia agreed to organize a meeting dedicated to women, the economy and health, with particular emphasis on maternal and child mortality. The

Mr. Modarelli ended the debrief by summarizing the APEC Business Advisory Council’s (ABAC) first meeting of the year in Hong Kong in February. He said that during the summit, ABAC members approved their work program and work

Mr. Modarelli added that the National Center will be working with the U.S. APEC Business Coalition on both meetings. In St. Petersburg, the National Center will try to organize meetings on energy, women and health. In Kazan, the Center will focus on food security and discussions with the trade ministers. However, topics of discussion will depend on the levels of interest in them among the business community representatives.

Russia Business Watch

As to Russia’s priorities within APEC for 2012, Ms. Augerot listed four of them: trade and investment, supply chain development, food security, and innovation. Many of Russia’s proposals regarding these priorities have focused on innovation. For instance, Russia wishes to establish technology platforms, develop innovation indicators and create a roadmap for high-tech investment.

discussing. For example, among the 10 proposals related to food security, the U.S. fully supports many of them, such as the plan to reduce post-harvest losses.

However, the U.S. disapproves of others, such as the proposal to create a regional APEC-wide intervention fund.

In response to a question on which meeting is more important for the business community to engage in, the St. Petersburg International Economic Forum or the APEC meeting in Kazan (both to be held only a few weeks apart), Ambassador Klemm and Ms. Augerot encouraged businesses to attend the Kazan meeting as it will include the participation of all of the APEC trade ministers.

29

new members activities

>

The development of the new airport terminal is progressing according to schedule and will be ready for the CEO and Head of State Summits in September. However, Mr. Verona noted that there will not be sufficient tarmac space for all of the private planes expected for these meetings, meaning that many aircraft will need to travel on to Khabarovsk to wait for the conclusion of the meetings. The government is currently constructing a new highway and train station in the new terminal that would connect the airport to downtown. These projects are well underway and, particularly the highway, will be ready in the near term.

Mr. Verona said that many of these challenges should be resolved in time for the summit, but he encouraged the

business community to stay informed about Vladivostok’s progress in preparations for the Annual Summit. n

One significant project whose completion is cause for concern is the Russky Island bridge that will link Vladivostok with the facilities on Russky Island, site of the APEC meetings. As of the date of Mr. Verona’s visit in early February, it was unclear whether the bridge would become operational in time for the summit. There were differing opinions among those in Vladivostok overseeing the infrastructure projects, but recent progress has created greater optimism on this point. As a contingency, the city is arranging for the use of high-speed catamarans and helicopters to shuttle participants between Vladivostok and Russky Island.

Russia Business Watch

Spring 2012

Mr. Verona noted that the construction of the Far Eastern Federal University campus — the site of the APEC Summit — was progressing impressively considering that it was built nearly from scratch over the last two years. The meeting venue is nearing completion and will be fully functional by September, if not before.

30

One issue that the business community should take note of in their briefs to senior executives is the limited accommodations for the Summit.

While the Heads of State Suites on Russky Island are spacious and of top quality, there are only seven of these. Most CEOs will be expected to use the much smaller two-room and one-room facilities that will become dormitories once the buildings are turned over to the university. The there is also a shortage of hotel options for other APEC attendees, such as those accompanying the CEOs, as it appears unlikely that the new five-star Hyatt Hotel will be completed in time. The government has commandeered all hotel rooms in the city, so lodging arrangements will have to be made through them rather than with the hotels directly.

From top: Russky Island bridge construction; the USRBC delegation meets with then Governor Darkin; newly constituted Vladivostok airport terminal.

new members

new USRBC members CHELYABINSK STATE UNIVERSITY • WWW.CSU.RU

Chelyabinsk State University was founded in 1976 and became the first Classical University in the Southern Urals in Russia. The university prepares its students in major fields of higher education and offers Bachelor’s Degrees, Specialist’s Degrees and Master’s Degrees. The university also has preuniversity schooling, post-graduate professional education and supplementary education and training.

It is divided into 13 departments and 7 research institutions, with 3 branches located in Miass, Troitsk and abroad in the Kostanay Republic of Kazakhstan. Chelyabinsk University was the only Russian university to participate in the development of the European Diploma Supplement (entitled “Development Supplement”), and in 2001 launched their first issue. In 2004, the university was awarded the status of District Educational and Methodological Center for Learning Disabilities of the Urals Federal District.

COLORADO STATE UNIVERSITY • WWW.COLOSTATE.EDU

Colorado State University is a leading research university located in Fort Collins, Colorado.

CSU’s instructional programs include centers of excellence in biomedical sciences, veterinary medicine, infectious disease research, engineering, and business. The College of Business is accredited by AACSB International. The highly ranked undergraduate and graduate programs include Bachelor of Science and Master of Science degrees as well as the Master of Business Administration degree (M.B.A.), the Master of Accountancy, and the Master of Management Practice. Consistent with the college’s theme of business with a conscience, it also offers an M.B.A. in social entrepreneurship. The college is a leader in distance and online education.

EDUCATIONAL TESTING SERVICE • WWW.ETS.ORG

Educational Testing Service (ETS) advances quality and equity in education for people worldwide by creating assessments based on rigorous research. ETS serves individuals, educational institutions and government agencies by providing customized solutions for teacher certification, English language learning, and elementary, secondary and post-secondary education, as well as conducting education research, analysis and policy studies. Furthermore, the ETS Global Institute advances the fields of testing, assessment and education through collaboration with foreign ministries of education, universities and organizations. The Institute explores and resolves complex educational measurement challenges and provides practical advice to educators, policymakers and testing professionals. Founded as a nonprofit in 1947, ETS develops, administers and scores more than 50 million tests annually — including the TOEFL® and TOEIC® tests, the GRE® tests and The Praxis Series™ assessments — in more than 180 countries worldwide.

Spring 2012

GBCHealth is a coalition of more than 200 member companies committed to investing their core competencies and resources to making a healthier world for their employees, for the communities in which they work, and for the world at large. The GBCHealth Russia office, located in Moscow, supports member companies in Russia and the Commonwealth of Independent States. By partnering with GBCHealth, companies are able to effectively increase visibility of their corporate social responsibility (CSR) programs, demonstrate results and strengthen their brand. GBCHealth coordinates the work of the National Association “Business for a Healthy Society”; conducts HEALTH@WORK presentations and workshops for companies’ employees; maintains online policy resource centers on HIV/AIDS and TB; and implements media campaigns to raise public awareness of health issues. >>

Russia Business Watch

GBC HEALTH • WWW.GBCHEALTH.ORG

31

new members

• New USRBC Members • continued >

MILLER CANFIELD PADDOCK AND STONE, PLC • WWW.MILLERCANFIELD.COM

The law firm of Miller Canfield, headquartered in Detroit, represents clients from 18 offices in 5 countries including China and Poland. Its New York office recently expanded to accommodate increased international activity. Clients include global automotive firms; multinational manufacturers; retailers and franchisors; financial institutions; public institutions including universities; and privately held companies in life sciences, medical devices, renewable energy, oil, gas, and shale. Legal services span immigration, trade regulation, corporate compliance, product safety, intellectual property protection, finance, and economic incentives. Miller Canfield is working with North American and European auto companies entering or exploring expansion into Russia.

PECK, MADIGAN, JONES & STEWART, INC. • WWW.PMJ-DC.COM Peck, Madigan, Jones & Stewart, Inc. is a full service, bipartisan government relations firm with a wealth of experience working in the Washington, D.C. political and governmental community. The firm has experience in both the House and Senate, as its lobbyists have worked in senior positions for high-ranking Democrats and Republicans. In addition, it has extensive Executive Branch experience in Republican and Democratic Administrations, as well as many years of advocacy work in the private sector.

For nearly 25 years, the firm has built a robust Democratic brand with an equally effective Republican profile and reach. Its professional lobbyists have experience as leaders and strategists for presidential, congressional and gubernatorial campaigns.

Working within the nexus of policy and politics to accomplish its client’s goals, the firm is proactive and results-oriented.

RTC INC. • WWW.RTC.COM RTC Inc. is a global team of more than 900 retail strategists, researchers, designers, engineers, manufacturing experts, logistics orchestrators, technology specialists, and program managers who help brands and retailers to activate their physical presence at retail. The company grows sales by uncovering insights and translating them into experiences, environments, categories, and displays that make the connection between products, people and retail space. RTC reduces costs by managing the complexity of large and increasingly global retail executions. The company's proprietary suite of store-ready solutions meets operational challenges all over the world.

Russia Business Watch

Spring 2012

VALLEY IRRIGATION • WWW.VALMONT.COM Valley Irrigation, a subsidiary of Valmont Industries, is the world leader in manufacturing efficient irrigation equipment for agriculture. Its mechanized irrigation equipment provides solutions toward meeting the world's increasing demand for food. Center pivot and linear move irrigation equipment provides for the precise application of water, chemicals and fertilizer that, in turn, results in improved crop yields, reduced labor costs and energy consumption, increased conservation of fresh water supplies, and reduced runoff. Today, Valley offers a wide range of products that help meet the demanding needs of precision agriculture, water conservation and labor savings. The company currently operates 7 irrigation manufacturing facilities throughout the world and has over 400 dealers worldwide.

32

WESTNEY CONSULTING GROUP, INC. • WWW.WESTNEY.COM Founded in 1978, the mission of Westney Consulting Group is to help the financial stakeholders in a major engineering and construction project understand and control their execution risk exposure. The company’s primary focus is on large projects with significant complexity and risk; the goal is to help projects move fast, cut costs and reduce risks. Westney works on a worldwide basis: clients/sectors include international and national oil companies, power generation and distribution, mining & minerals, chemicals manufacturing, project developers and investors, manufacturers of engineered equipment, and engineering & construction service providers. n

Special Room Rates for USRBC Members at Marriott Hotels in Moscow Marriott is pleased to provide members of the U.S.-Russia Business Council with favourable room rates at Marriott Moscow Royal Aurora, Marriott Moscow Grand and Marriott Moscow Tverskaya hotels.

With questions regarding this special room rates offer for members of the U.S.-Russia Business Council, please contact Marriott Moscow Cluster Reservations Department at reservation@marriott-moscow.ru or via phone +7 495 937 00 55.

MARRIOTT MOSCOW ROYAL AURORA 11 Petrovka str.

Moscow, 107031, Russia Tel.: +7 (495) 937 1000 Fax: +7 (495) 937 1001

MARRIOTT MOSCOW GRAND HOTEL 26/1 Tverskaya str.

Moscow, 125009, Russia Tel.: +7 (495) 937 0000 Fax: +7 (495) 937 0001

MARRIOTT MOSCOW TVERSKAYA HOTEL 34 1-st Tverskaya-Yamskaya str.

Moscow, 125047, Russia Tel.: +7 (495) 258 3000 Fax: +7 (495) 258 3099

© 2012 DHL Express (USA), Inc. All rights reserved. Deutsche Post DHL – The Mail & Logistics Group

DELIVER YOUR BUSINESS TO THE WORLD WITH THE INTERNATIONAL SPECIALISTS. ······· That’s the Speed of Yellow. www.dhl-usa.com