Page 1

Russia Business Watch Vol. 20 No. 2

SUMMER 2012

Washington, DC

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

Russia Joins the World Trade Organization

PRESIDENT’S MESSAGE: p. 1 • Time to Act on PNTR

ACTIVITIES: pp. 7-14

OUTLOOK: p. 4

• Ambassador Michael McFaul On U.S.-Russia Bilateral Trade and Investment

• Dinner in Honor of the BPC Innovation Working Group • Briefing With Andrey Tsyganov • Roundtable on Jackson-Vanik and PNTR with Vladimir Milov • Discussion on the Development of University-Industry Partnerships • Briefing with the Volgograd Region Business Delegation • Roundtable on Jackson-Vanik and the Magnitsky Act • Briefing with U.S. Trade Representative Ron Kirk

NEW USRBC MEMBERS: p. 26

U.S.-Russia Relations: pp. 16-17

• USRBC at the St. Petersburg International Economic Forum • Fort Ross Celebrates Its Bicentennial and Looks to the Future

Sector Update: pp. 19-24

• Toward Russia’s Energy Future • An Interview with Sergei Borisov on Small and Medium-Sized Businesses in Russia • “Smart” Management Saves Trillions For Governments


Contents

PRESIDENT’S MESSAGE p. 1

Time to Act on PNTR

OUTLOOK p. 4

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

Russia Business Watch • Summer 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 • Olivier Brandicourt Pfizer Inc. • Laura M. Brank, Dechert LLP • Randy Bregman Salans LLP • Carolyn L. Brehm, Procter & Gamble • Peter A. Charow, BP America Inc. • Guy Cogan The Monitor Group • James F. Collins, The U.S. Russia Foundation for Economic Advancement and the Rule of Law • 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 • Ralph J. Gerson Guardian Industries Corporation • 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. • Peter B. Necarsulmer, PBN Hill+Knowlton Strategies • Thomas R. Pickering, The Eurasia Foundation • Ronald J. Pollett General Electric Company • Jay R. Pryor, Chevron Corporation • Paul Rodzianko, Hermitage Museum Foundation • Charles E. Ryan, UFG Asset Management • William M. Sheedy, Visa 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

Ambassador McFaul On U.S.-Russian Bilateral Trade and Investment

ACTIVITIES p. 7

Dinner in Honor of the BPC Innovation Working Group

p. 8

Briefing With Andrey Tsyganov

p. 10

Roundtable on Jackson-Vanik and PNTR with Vladimir Milov

p. 11

Discussion on the Development of University-Industry Partnerships

p. 12

Briefing with the Volgograd Region Business Delegation

p. 13

Roundtable on Jackson-Vanik and the Magnitsky Act

p. 14

Briefing with U.S. Trade Representative Ron Kirk

U.S.-RUSSIA RELATIONS p. 16

USRBC at the St. Petersburg International Economic Forum

p. 17

Fort Ross Celebrates Its Bicentennial, and Looks to the Future

SECTOR UPDATE p. 19

Toward Russia’s Energy Future

P. 20

An Interview with Sergei Borisov

p. 24

“Smart” Management Saves Trillions For Governments

p. 26

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 Head of RF Repersentation, Moscow Office dauhuliova@usrbc.org / [7] 495-228-5896 • Svetlana Minjack Director of Communications and External Affairs sminjack@usrbc.org / 202-739-9182 • Candice Pareshnev Administrative Assistant pareshnev@usrbc.org / 202-739-9180 • Alina Ruzmetova Media/Communications Associate ruzmetova@usrbc.org / 202-739-9184

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: Alina Ruzmetova E Research Assistants: Karolina Konarzewska, Katya Osnovsky, Valerie Russell, and Jillian Tetirick. For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org. *With great appreciation for the work of Alexander Rodchenko (1891-1956), one of the founders of the constructivist style in Russia, we took the liberty to make minor modifications to his legendary poster.


PRESIDENT’S president’sMESSAGE message

Time to Act on PNTR to human ingenuity and imagination.

Dear Council Members and Friends:

O

Russia Business Watch Summer 2012

n August 6, NASA put a vehicle the size of a compact car on Mars. Curiosity, as it is called, hurtled approximately 50 million miles through space, entered the Martian atmosphere at 15,000 miles per hour and then, by means of a computercontrolled “sky crane,” gently landed on the surface. Eight years transpired between the decision to undertake the project and Curiosity’s touch-down on the red planet. Some might question the wisdom of spending public funds to explore Mars, though just about everybody marvels at the photographs streaming back from the rover and admires the technical virtuosity of the endeavor. It was a remarkable achievement that serves as a testament

Another epic achievement also took place this month. On August 22, Russia formally acceded to the World Trade Organization, becoming the 156th member of the club that serves as arbiter of international trade rules. It was the culmination of eighteen years of on-again, off-again negotiations that some doubted would ever come to fruition. Ingenuity and imagination also played their part in getting to the desired goal. While lacking the gee-whiz factor of the Mars landing, the negotiations for Russia’s WTO membership drew upon comparable resources of technical expertise, persistence and determination to overcome obstacles. The 1,000-page accession agreement is the longest ever negotiated, covering every eligible sector in painstaking detail and leaving little scope for equivocation or ambiguity.   WTO membership is not without its critics in Russia. Some industries fear the foreign competition that the opening will bring. The Communists and other left wing political groups mounted a vigorous campaign against accession, including an unsuccessful constitutional challenge. Other opposition leaders strongly supported accession. In their view, joining the WTO will spur economic growth and modernization, bolstering the reformoriented middle class and exerting pressure on the government to be more transparent and accountable. The final vote in the State Duma was no slam dunk: 238 for and 208 against. However, the result was final: Russia has joined the WTO.

This is good news for companies that have been doing — or want to do — business in Russia. It is the world’s ninth-largest economy and imports approximately $400 billion of goods and services annually. Russia’s 140 million consumers like the high-quality goods and services that American companies make or provide. The range of successful U.S. products and services in Russia is broad: commercial aircraft, automobiles and components, farm equipment, pharmaceuticals, fast-moving consumer goods, hightech equipment and financial services. U.S. exports to Russia have grown at an average annual rate of 15 percent since 2001, and the Washington-based Peterson Institute predicts that U.S. exports to Russia could double within five years as a result of WTO accession.   Unfortunately, the United States is the only country in the WTO that did not automatically extend Permanent Normal Trade Relations (PNTR) to Russia. Consequently, we will not enjoy the access to that market that our competitors from every other WTO member country will receive. Meanwhile, Russia is under no obligation to grant to us any of the concessions that it made under its accession agreement. Ironically, these were secured in large part by our own negotiators.   The cause of this situation is the persistence on our books of the Jackson-Vanik Amendment, a 1974 law that prevents us from extending PNTR to Russia. Basically, Jackson-Vanik links PNTR to Soviet-era restrictions on Jewish emigration, a total irrelevance to present-day Russia. Every year since 1992, the U.S. government has either

>>

1


PRESIDENT’S MESSAGE

Russia Business Watch Summer 2012

>

2

waived it or declared Russia to be in compliance. Until now there was no compelling reason to make the political effort to lift Jackson-Vanik. That has changed with Russia’s accession. PNTR is the top international trade priority of the business community this year; the USRBC-led Coalition for U.S.Russia Trade, which includes nearly 150 companies and trade associations, has been holding daily meetings on Capitol Hill and in the Executive Branch to make the case for lifting Jackson-Vanik and extending PNTR. In this regard, it is extremely gratifying to observe significant progress in recent weeks. Senator Max Baucus (D-MT), Chairman of the Finance Committee, became a strong advocate for PNTR following his visit to Russia earlier this year. He held a mark-up of the PNTR bill in the Committee on July 18 and won a unanimous vote with strong support from Ranking Member Orrin Hatch (RUT). House Ways and Means Committee Chairman David Camp (R-MI) held a mark-up of an identical PNTR bill in that committee on July 26 with backing from Ranking Member Sander Levin (D-MI) and eight other Committee members who signed on as original cosponsors. That bill passed on a voice vote with just one “nay.”   The business community had hoped that both bills would be brought to floor votes before the August recess, but for reasons that remain unclear that did not happen. Blame gets apportioned to all (absurdly, some to the business community!), but judging by public statements from all parties, there is bipartisan support for getting this done. A record 73 freshmen

Republican congressmen signed a letter of support for PNTR on July 13; the Administration has reiterated its support on numerous occasions; and the business community has been doggedly pressing for action. We are greatly encouraged that both House Majority leader Eric Cantor and Minority Whip Steny Hoyer have called for a PNTR vote as soon as Congress reconvenes in September, adding that they see strong support for it. Assuming an affirmative vote does occur in early September, U.S. companies will suffer only three weeks of potential disadvantage in the Russian market. It will be awkward for our delegation at the APEC Summit in Vladivostok September 2-8 (headed by Secretary of State Clinton) to represent the only country at such a disadvantage, but if we’re lucky we won’t lose out on any major deals.     Finally, what does one say to those who continue to oppose PNTR? • Those who argue that Russia’s WTO commitments are “not good enough” fail to recognize that Russia is a WTO member, like it or not. In not extending PNTR, we only hurt ourselves by denying our companies the benefit of Russia’s unilateral concessions. • Those who equate Russia PNTR with China PNTR overlook the composition of our trade with Russia: Russia exports low valueadded commodities to us while we export to them high value-added, job-creating products, such as commercial jetliners. (Members of The International Association of Machinists and Aerospace Workers should take special note of this;

their union sent a letter to Congress opposing PNTR.) • Those who argue that PNTR would be an undeserved political “gift” to Russia should look at the text of the Senate bill and the statement of Chairman Camp during the Ways & Means Committee meeting. There will be no PNTR without a bill addressing human rights issues (i.e., the Magnitsky Bill). The Russian government has made its objections to this abundantly clear. A bill which incorporates such legislation would hardly be seen by it as a gift. Just like the Curiosity landing on Mars, Russia’s WTO membership has become a reality after years of hard work. The results are worth the wait. But American businesses cannot afford to wait until a human colony is established on Mars for passage of PNTR. It’s time to move beyond this deadlock and pass PNTR so that U.S. business and jobs are not jeopardized in such an important emerging market.   With warm regards,

Edward S. Verona


RUSSIA HAS JOINED THE WTO AND WE NEED TO KEEP U.S. COMPANIES COMPETITIVE IN THE RUSSIAN MARKET IT’S NOT TOO LATE TO ADD YOUR VOICE TO THIS HISTORIC CAMPAIGN!

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 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 now that Russia is a WTO member.

USRBC’S ANNUAL MEETING 2012 October 22-24, 2012 Atlanta, GA World of Coca-Cola and Four Seasons Hotel

3 It is with great pleasure that we invite you to the USRBC’s 20th Annual Meeting, to take place on October 22-24, 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 23-24. For more information about Annual Meeting 2012 please visit www.usrbc.org/activities/am/


outlook

outlook On U.S.-Russian Bilateral Trade and Investment By Ambassador Michael McFaul Michael McFaul is Ambassador of the United States of America to the Russian Federation

Russia Business Watch

Summer 2012

Anyone

4

who has had the opportunity to travel through my home state of Montana, with its three thousand plus mountain peaks, dozens of pristine state parks and millions of acres of farms and ranches, knows that it is an absolutely incredible journey. Less well known are Montana’s fledgling ties with another part of the world that knows something about life under a big sky. The latest installment occurred when Montana rancher Darrell Stevenson partnered with Sergei Goncharov and others in Russia to launch the Stevenson Sputnik Ranch, a breeding operation to populate cattle ranches throughout Russia. Although it’s tempting to think the vast scale of Montana’s physical geography has created an affinity with this part of the world, the fact is this sort of “Sputnik moment” is repeating itself with increasing frequency in every state of the union. Last year was a record for U.S.–Russia trade, one that we’re on track to beat in 2012. May alone saw our first ever $1 billion month for U.S. exports to Russia. This is exactly the trend we wanted to see when President Obama initiated the “reset” in U.S.–Russian relations in 2009. President Obama believes that we need to nurture a multidimensional relationship with Russia, and two critical dimensions must be greater trade and investment between our two countries. Of course, private sector actors, not government officials,

ultimately will decide whether trade and investment between Russia and the United States go up or down. Nonetheless, we have a role to play as well -- creating a predictable and transparent regulatory framework in which our trade and investment relationship can prosper. Our strategic interest in stronger economic relations with the Russian economy is self-evident: the Department of Commerce estimates every $1 billion in U.S. exports creates 5,000 American jobs, and foreign direct investment into the United States accounts for some 5-6 million jobs, including 2 million manufacturing jobs. Therefore, when Presidents Putin and Obama met in Los Cabos in June, they agreed that growing the U.S.–Russia trade and investment relationship is our next imperative. Over the past several years we have had some success in building the foundation on which to do that. The United States strongly supported Russia’s bid to join the World Trade Organization (WTO), and on July 21, President Putin signed Russia’s WTO Protocol into law. Russia’s joining the world trade community will create new opportunities for U.S. business, and help level the playing field for U.S. firms in Russia. The U.S.Russian Agreement on Simplifying Visa Formalities, signed into law by President Putin at the end of July , will provide for three-year, multiple-entry business and tourist visas as standard

practice by both countries, facilitating the two-way flow of people and ideas. And a commitment to constructive engagement on the commercial relationship has been accompanied by an up-tick in U.S. business activity in Russia. Exxon-Mobil has entered into a multi-billion dollar venture with Rosneft to explore Arctic oil and gas fields. Boeing has generated $9.2 billion in sales since 2010, selling dozens of aircraft to Russian Technologies, Aeroflot, and Transaero. Cisco has pledged up to $1 billion dollars to develop manufacturing and training centers throughout Russia. Microsoft plans to invest up to $300 million dollars in Skolkovo, Russia’s research and innovation center modeled on Silicon Valley. Additionally, Coca-Cola and PepsiCo have each committed billions of dollars to investing in Russia. From retail franchises, to gas turbines, to harvesters, to cars, American firms are investing and selling successfully in one of the most potentially promising and profitable markets in the world. One prime example is the Russian auto market, which grew by nearly 15 percent in the first half of 2012 — with U.S. brands among the top sellers — and is poised to become Europe’s largest by 2015. The flow of goods and investment goes both ways. Last year alone saw a number of Russian firms investing in the United States: NGINX, an open source web server developer, opened

>>


its new San Francisco headquarters ; TMK IPSCO broke ground on a research and development center in Houston that will focus on new product design, development, testing and advanced metallurgical research; Severstal invested $550 million in Columbus, Mississippi, to expand its existing steel mill capacity; and NanoTechnology Modular Devices and Tools (NT-MDT) opened a new research unit in Tempe, Arizona. The challenge is to reduce the obstacles that prevent other firms from joining these lists. In July 2009, we established the Bilateral Presidential Commission (BPC) in part to do just that. Twentyone BPC working groups coordinate our bilateral cooperation on a wide range of issues, and two in particular are critical to the bilateral trade and investment agenda: the Business Development and Economic Relations Working Group (BDERWG) and the Innovation Working Group (IWG).

“A commitment to constructive engagement on the commercial relationship has been accompanied by an up-tick in U.S. business activity in Russia.”

We can take some satisfaction about what has been accomplished in the last three years. But the current trade and investment numbers clearly leave great potential for growth.  The United States and Russia are, respectively, the world’s largest and sixth largest economies in terms of purchasing power, yet the United States is only Russia’s 10th largest bilateral trade partner, and Russia is America’s 20th largest bilateral trading partner.  The investment picture is more modest: according to the Russian State Statistical Service (RosStat) the United States is the 11th largest holder of FDI stock in Russia. RosStat reported that from January through September 2011, the United States was the 13th largest investor in Russia, and that the United States was the 3rd largest destination for Russian FDI. Clearly we are far from reaching our potential. So what more can we in government do to clear the path for business? Here are a few action items for our agenda:

• Establish Permanent Normal Trade Relations (PNTR) with Russia. In order for WTO rules and mechanisms to apply to our bilateral trade, the United States needs to extend PNTR to Russia as soon as possible. The Obama administration is working closely with the U.S. Congress to accomplish this. Some analysts have projected that with the advantages of Russia’s WTO accession locked in, U.S. exports to Russia could more than double within five years, creating thousands of new jobs. Likewise, PNTR will make for a more predictable environment for Russian firms doing business with the United States, thereby helping to make Russia a more dynamic economic partner. • Improve the Russian Investment Climate: President Putin has indicated that he intends to address key challenges in the investment climate. He recently nominated an Ombudsman for Entrepreneurs’ Rights, and announced a goal of improving Russia’s ranking on the World Bank’s Ease of Doing Business Index from number 120 to 20. He also has indicated that he will reduce state involvement in the economy, move forward with privatization, and crack down on corruption, which shaves up to 1-2 percent off annual GDP by some estimates. If effectively implemented, these steps will help to attract more American investment and create more bilateral trading opportunities.

“We can take some satisfaction about what has been accomplished in the last three years, but the current trade and investment numbers clearly leave great potential for growth.” Second, we can leverage a number of existing and new initiatives that should lead to increased trade and investment flows. • Support Russia’s Accession to the OECD. The steps Russia is taking, and will take, as part of the accession process to the Organization for Economic Cooperation and Development will result in a more attractive, competitive economy that vastly multiplies opportunities

Summer 2012

More recently the BDERWG has sought to build on the positive momentum in 2011 two-way trade by encouraging additional trade missions. These include missions from the United States to Russia in the automotive supply and energy efficiency industries. The Working Group is also supporting visits by Russian business missions to the United States that focus on building

The Innovation Working Group (IWG) complements Russia’s efforts to diversify its economy, more fully utilize its deep pool of human capital, and create a culture of innovation. And the IWG furthers our own efforts at ensuring the United States partners with global talent, wherever it’s located, to maintain our competitive edge. The IWG includes government as well as private sector representatives focusing on three main areas of cooperation: developing regional innovation centers and clusters, examining the legal framework for innovation, and developing the commercialization chain. The group also supports the growth and development of Russia’s innovative infrastructure. Many U.S. companies, including Boeing, Cisco, Google, and Microsoft among others, have announced plans to participate in Russia’s Skolkovo innovation hub. In this challenging global economic environment, there are few more critical tasks than to encourage innovation as a driver of growth. We look forward to working with our Russian partners to identify win-win opportunities that build on the tremendous intellectual capital our two countries offer.

First, we each have issues to address in our respective capitals.

Russia Business Watch

The BDERWG has served as a channel for addressing a variety of existing and potential market access barriers. Last year, the BDERWG examined possible conflicts between the U.S. Foreign Corrupt Practices Act and efforts by Russia’s Federal Anti-monopoly Service to discourage arbitrary terminations of business relations between foreign companies and distributors in violation of Russian laws governing competition. The Group facilitated exchanges between U.S. and Russian experts on U.S. anti-dumping measures and policies, as well as on export control policy that occasionally impacts Russian and American companies’ ability to conclude sales agreements or service contracts.

business links in pharmaceuticals, medical technologies, ecotourism, and the chemical industry.

outlook

>

>>

5


outlook

>

for Russian and American firms alike. We are encouraged by the important steps Russia has already taken, including adherence to the Anti-Bribery Convention and joining the Nuclear Energy Agency. Policy adjustments needed to harmonize with OECD investment and trade standards are precisely the reforms our business community has been calling for. We welcome and support Russia’s pursuit of OECD membership as a top priority that will dramatically open trade and investment opportunities.

Russia Business Watch

Summer 2012

• Boost U.S. exports to Russia. The U.S. National Export Initiative is developing programs to assist SMEs in identifying new export opportunities, promoting U.S. government-led trade missions, and increasing the availability of credit to SMEs. Russia is a top priority in the NEI and we have mobilized our resources to help American companies take full advantage of the opportunities. A $1 billion MOU, signed by the chairmen of the U.S. Export-Import Bank and Sberbank in late June and designed to support U.S. aircraft, energy equipment and other goods and services exports, will help. The Department of Commerce has 30 commercial service professionals in Russia, making it one of the largest posts in Europe. It has also led three trade missions in three sectors identified as priorities for the Russian government (aerospace, automotive manufacturing and energy efficiency) in the last 18 months.

6

• Encourage Russian firms to invest in the United States. Select USA, an initiative established by Executive Order of the President, seeks to encourage and facilitate business investment in the United States. Russia is one of ten priority outreach markets for this program, which is designed to showcase investment opportunities in the United States, provide a single window, ombudsman-type services for international investors, and advise on policies that affect U.S. competitiveness or ability attracting foreign direct investment (FDI). We want to make it clear that we welcome and encourage Russian investment in the United States. • Pursue Discussions on a Bilateral Investment Treaty (BIT). A BIT could provide additional protections to investors in both countries. The

Ambassador Michael McFaul addresses members-only gathering at USRBC to discuss Russia’s WTO accession and the lifting of Jackson-Vanik.

United States released a revised model treaty text in April and we are continuing discussions with Russia that ultimately could lead to strengthened fundamental legal guarantees for investors. • Pursue Cooperation on Intellectual Property Issues. Both the United States and Russia recognize that IPR is vital to providing legal certainty and thus to promoting innovation and creativity, attracting hightechnology investment and fostering the jobs necessary for long-term economic growth. We will look to reinvigorate our efforts to cooperate in addressing key challenges, particularly in regard to piracy over the Internet and enforcement in general. The IPR Action Plan, which we hope to finalize and implement

soon, is an important step. Our countries must work together to address the underlying challenges that hinder trade and investment. Although the above list is just a start, the good news is that there is a commitment at the highest levels of our governments to execute these initiatives. The path forward will require us to take on very real challenges, and confront, at times, very real differences. We did this successfully in our cooperation on Russia’s WTO accession process. I have no doubt we can do it again. When I meet with U.S. business people and hear about the range of opportunities in the Russian market, I can’t help but be optimistic. We must seize this opportunity, for the potential benefits for Americans and Russians alike are too great to do otherwise. n


activities

activities U.S.-Russia Business Council Dinner in Honor of the BPC Innovation Working Group O

n March 26, the USRBC hosted a dinner in honor of the Innovation Working Group of the Bilateral Presidential Commission’s (BPC) inaugural meeting in Santa Clara, CA. The Innovation Working Group is focused on enhancing bilateral cooperation on promoting innovation in both countries. Speakers included: • Oleg Fomichev, Deputy Minister, Ministry of Economic Development • Lorraine Hariton, Special Representative, Business and Commercial Affairs, U.S. Department of State • Vladimir Vinokurov, Consul General, Consulate General of the Russian Federation in San Francisco

the Bilateral Presidential Commission have resulted in a number of cooperative breakthroughs such as the New Start Treaty and the 123 Agreement on civilian nuclear cooperation.

At the conclusion of the APEC Summit in Vladivostok, the facilities that have been constructed to host the meeting on Russky Island will house the Far Eastern Federal University, which is to become one of the leading research centers in Russia. Governor of Primorsky Krai Vladimir Miklushevsky (the former rector of the university) recently visited the United States, where he established contacts with several leading American universities such as Stanford and Berkeley. These partnerships offer a great deal of potential for cooperation between the American West Coast and the Russian Far East in education.

Last summer, the two presidents formalized the Innovation Working Group, which will focus on three areas: the legal framework, innovation centers and regional innovation clusters with a special focus on Skolkovo, and supporting the commercialization of innovation breakthroughs.

Lorraine Hariton began by saying that there are many areas where the U.S. and Russia have successfully worked together and where there is significant potential for cooperation. For example, both countries have advanced research and technology sectors that will be the source of close collaboration on innovative development. She noted that the “reset” policy and

Nevertheless, one area that the U.S. and Russia must focus on is the economic area. Although the trade relationship between the two countries has grown tremendously, last year it was worth $31 billion, which represents less than 2 percent of overall U.S. trade. Certainly, the innovation sphere offers the U.S. and Russia an opportunity to expand their economic relationship.

Ms. Hariton concluded by saying that the U.S. Department of State is looking forward to working on these areas with all of 20 of the BPC’s Working Groups, and welcomed feedback and ideas from the participants of the Innovation Working Group event. Oleg Fomichev briefly noted the U.S.USSR aerospace competition and its effect on the development of high-tech research and industry in each country. He stressed that, while competition between countries is a regular phenomenon, they must cooperate in order to achieve their greatest economic and social potential. It is clear that both the U.S. and Russia can only realize their full potential by working together. n

Summer 2012

Vladimir Vinokurov opened his remarks by noting that Russia and the U.S. are closer than many realize, as they are neighbors in the Asia-Pacific region. In 2010, President Medvedev was the first Russian Head of State to visit California. During the visit the President outlined his vision for a modern Russia, and demonstrated Russia’s commitment to modernization and innovation.

Next, the Consul General stated that the purpose of the Innovation Working Group is to find the instruments to foster innovation in both Russia and the U.S. One of the most important tools to accomplish this is the AsiaPacific Economic Cooperation organization (APEC). This year, Russia chairs the APEC Forum under the “Integrate to Grow and Innovate to Prosper” theme. This theme demonstrates the important role that innovation plays in Russia’s strategy in the Asia-Pacific region, including the promotion of cooperation between each member country’s innovation centers.

Russia Business Watch

USRBC President & CEO Ed Verona began the event by noting that the innovation agenda is an important aspect of Russia’s economic policy and will play a key role in continued diversification and modernization efforts. The Innovation Working Group promises to be an important forum through which both sides can share best practices and develop a framework for more rapid growth of innovative industries in Russia.

March 26, 2012 ● Santa Clara, CA

7


new members activities

USRBC Briefing With Andrey Tsyganov, Deputy Head of the Russian Federal Anti-Monopoly Service O

Russia Business Watch

Summer 2012

n March 29, the USRBC hosted a briefing with Andrey Tsyganov, Deputy Head of the Federal Anti-Monopoly Service (FAS) in Russia. The guest speaker discussed recent developments related to competition legislation and competition reinforcement in the Russian Federation.

8

Mr. Tsyganov began his briefing by describing Russia’s law on competition. He said that the competition authority in Russia is preoccupied chiefly with developing the competitive climate and supervising competition law in the country. In 2012, the Russian government adopted the socalled “Third Anti-Monopoly Package” designed to simplify the application of competition law and to clarify the amount of information that companies must provide to regulatory authorities. As result, some definitions — such as the extraterritoriality of implementation of competition law — have been modified, and the scope of authority in merchant control of foreign companies has been limited. The Package has also introduced a new definition of “control.” Mr. Tsyganov noted that cartels pose

March 29, 2012 ● Washington, DC

the most dangerous threat to competition law. Consequently, FAS included in the Third Anti-Monopoly Package a new definition of “cartel” to include the coordination of economic activity and concerted actions. Furthermore, FAS has created a list of prohibited horizontal agreements: price fixing, bid-rigging, sharing the market, output limitation or termination, and refusal to deal. To narrow the scope of the government’s interference in the economy, FAS has allowed agreements within one group of persons; pronounced joint activity of horizontal agreements between competing parties as admissible if they meet certain conditions outlined by competition law; called for a safe harbor designation for vertical agreements and concerted practices; and blocked exemptions issued by government in cases involving enterprise agreements. Yet another provision to Russian competition law permits the fixing of a maximum retail price in vertical agreements, if this is done in accordance with the new law. Next, Mr. Tsyganov discussed the features of the government’s anti-cartel

mission. He said that they consist of the “Leniency Program;” a special anti-cartel unit; gathering evidence that includes unexpected inspections, access to information and cooperation with enforcement authorities; criminal prosecution for cartels; and “decriminalization” of cartel responsibilities that emphasizes fines and disqualifications over imprisonment. The new law on competition also provides the antimonopoly authority with the power to issue “written alerts” to company officials if their activities violate the law. Over the last few years, FAS and its regional departments discovered a number of cartels in different sectors of the Russian economy. These sectors include the chlorine market; the coal-fired power-generating market; liquid caustic market; pharmaceuticals market; and local and regional agricultural and construction market. Mr. Tsyganov explained that there were 3,199 cases of abuse of dominance in 2011 of both a local and national dimension. In order to address them, FAS conducts economic analysis to define the relevant market correctly, to detect and proof the dominant position of companies in a given market, to

>>


classify the valuation, and to calculate harm. Additionally, FAS exercises its authority to recognize the so-called collective dominance of two or more companies on a relevant market in the Russian Federation, and to use these legal provisions of competition, in particular, in the oil industry. FAS has also created a list of aggravating and mitigating factors that addresses cases involving violations of competition law. Mr. Tsyganov then turned his attention to FAS’s warning mechanism. He explained that, according to certain new provisions to competition law, FAS has the power to request a given company to terminate its violations of anti-monopoly legislation. This applies to situations involving the imposition of unfavorable contract terms and an unjustified refusal to deal. Furthermore, he said that, according to the revised definition of monopolistically-high prices, FAS has the power to use fair price criteria to define the market price. To calculate the price, FAS can use exchange pricing in certain conditions defined by laws, retrospective analysis, the situation on relevant markets, so-called markers such as the bench-marking for export commodities, and market indicators.

the oil giant did not receive any of the penalty reductions granted to the other four companies. Since 2011, there have been no court appeals by oil companies; they have simply admitted to violating the law, and addressed the violations before the federal competition authority responded. Oil companies have paid $500 million in fines since 2008. There are at least two measures that FAS can adopt to introduce the principle of competition into the natural

In 2011, the government introduced the law on procurement transparency

According to the new rules, government officials involved in these transgressions now lose their posts instead of having to merely pay fines. There is also a special government commission on administrative reform, whose goal is to examine all the functions of governmental authorities on the federal level. Mr. Verona ended the presentation by noting that FAS’ efforts to increase transparency and improve the climate for competition in Russia are welcomed by the business community. Officials at FAS are highly qualified and have been willing to speak publicly against some powerful interests, which all investors find encouraging. n

Summer 2012

resources sector of the Russian economy. The first one is nondiscriminatory access; its rules are issued by the Russian government and controlled by the Federal Anti-Monopoly Service. So far, these rules have been applied to railway infrastructure services, airport services, oil product transportation, and the electricity sector. There are also draft rules for other sectors such as telecommunications, the postal service, the harbor service, and gas transportation. The second one is FAS’ ability to control the standards of information disclosure to allow consumers and regulators access to some forms of market information.

Russia Business Watch

In 2009, five oil companies appealed other FAS sanctions, which resulted in the fines being reduced. Gazpromneft continued to fight the case in the Supreme Arbitrazh Court and, in the end, the court sided with FAS and

Mr. Tsyganov explained that one of FAS’ main duties is to control economic concentration without creating an excessive administrative burden on businesses. To that end, FAS has introduced higher thresholds, and every amendment to the law on competition raises the thresholds for transactions that FAS must approve. FAS has also introduced clarifications to the task of calculating assets in the case of mergers and acquisition that aims to eliminate the administrative burden for companies. Nevertheless, companies are required to disclose information about the final beneficiaries in any merger or acquisition. The manner in which FAS can collect and use this information is guided by certain rules and provisions. Russian competition law addresses violations committed by both businesses and state authorities. Last year, FAS reviewed 5,700 violations of competition rules by state, local and regional authorities.

Next, Mr. Tsyganov noted the positive changes that have been occurring in the behavior of dominant oil companies over the past few years. He said that in 2008-2009, there were numerous cases against oil companies both on the federal and local levels. In 2008, four big oil companies were subject to FAS investigations because they were setting monopolistically high prices and creating discriminatory conditions. Although the companies appealed FAS’ decision in the Supreme Arbitrazh Court, the court sided with FAS. Consequently, the companies were ordered to pay fines for these infractions.

with respect to goods, works and services of specific types of entities such as natural monopolies, state corporations and companies with state participation. For all of these companies, the rules of procurement became similar to the rules of procurement related to public purchases. The guiding principles are transparency, fairness, the objective and effective allocation of funds, and the measurability of a company’s requirements.

new members activities

>

9


new members activities

Roundtable on JacksonVanik and PNTR with Vladimir Milov April 4, 2012 ● Washington, DC

V

ladimir Milov, leader of the Democratic Choice movement and founder of Solidarity, briefed U.S.Russia Business Council members on the Russian opposition’s support for repealing the Jackson-Vanik Amendment, noting that he and a group of prominent Russian opposition figures had signed onto a letter supporting Permanent Normal Trade Relations for Russia on March 12, 2012. Mr. Milov stressed that the continued application of Jackson-Vanik has poisoned bilateral relations for some time. Vladimir Milov added that U.S. concerns over human rights abuses in Russia, which have stalled the repeal of the amendment, are well founded. He noted that some opposition leaders, importantly some fellow signatories to his letter, support U.S. pressure on Russian leaders over human rights issues as addressed by legislation like the Justice for Sergei Magnitsky Act. Mr. Milov stressed that he personally advocates pursuing human rights concerns separately after the repeal of Jackson-Vanik. USRBC members followed Milov’s introduction with questions about the U.S. Magnitsky legislation, the presidential election of Vladimir Putin and the Russian business climate. Question & Answer

Russia Business Watch

Summer 2012

Q. Will the Magnitsky issue cloud over efforts to improve trade between the U.S. and Russia?

10

Mr. Milov responded that the issues are different and that linking them is counterproductive. He also noted that President Vladimir Putin is comfortable telling the Russian public that the U.S. is discriminating against Russia through the continued application of Jackson-Vanik. He concluded that the U.S. should not allow the repeal of Jackson-Vanik to be held hostage by the Magnitsky bill. Q. Could the Magnitsky legislation prompt a retaliation from the Russian

side, particularly against U.S. businesses in Russia? Mr. Milov responded that he was not willing to discuss the specifics of how the Russian government might respond, but noted that it might involve a visa war between the two countries. He also said that even when Presidents Bush and Putin were in office and their relationship was good, Russia still feared U.S. sanctions for human rights abuses. Q. Do the signatories to your letter advocating for the repeal of the Jackson-Vanik Amendment prefer its repeal without the Magnitsky legislation? Mr. Milov answered that the signatories favor the repeal of the JacksonVanik Amendment before the passage of the Magnitsky bill. He said that, generally, Russians don’t want sanctions and are having a strong debate about the Magnitsky legislation and its efficacy. He also admitted that there was a bit of confusion in Russia as to the central point of the human rights debate in the United States.

Q. Why didn’t Grigory Yavlinsky receive strong support as an opposition candidate in the 2012 presidential election? Mr. Milov said that some opposition leaders still support Mr. Yavlinsky. There has been a lot of polling done in Russia about Yavlinsky and other opposition figures and, based on the results, the opposition should have fallen in behind one of those candidates but they could not get organized in time for the election. He said that elections for regional and municipal posts would be the next battleground. Q. Some companies are concerned about the state of democracy, human rights and government accountability in Russia, and are therefore concerned about the future of doing business there. Is there likely to be change in the near future? Mr. Milov answered that, even with the repeal of the Jackson-Vanik Amendment, doing business in Russia will continue to be difficult. He said that there is low confidence in the Russian market but that it is the responsibility of Russians to change

>>


this, not sanctions imposed by another country.

of thinking, which does not promote diversity and initiative.

Q. What is your assessment of Mr. Putin’s commitment to diversifying the economy and modernization?

Q. What level of support does the opposition enjoy in the regions?

Mr. Milov said that Mr. Putin would always exercise control over innovation in Russia. He noted that the current Russian system does not create an atmosphere for small- and mediumsized businesses to innovate. The greatest challenge is the centralization

Milov said that the aim of the opposition is to win at least 50 percent of the votes in several regions. The Tver region, for example, is increasingly supportive of the opposition. He also said that the opposition is looking to gain support in the Kursk and Rostov regions as well. The Saratov

region is a challenge because its government was recently overturned and unpopular leadership was put in place. Yekaterinburg city, in the Sverdlovsk region, is a large battleground as it is possible for the opposition to gain 50-80 percent of the votes there. Regions in Siberia are also increasingly supportive of the opposition agenda. Additionally, the Moscow City Duma elections will be happening soon and it is possible for the opposition to gain support there because many Moscowbased activists will help them. n

new members activities

>

USRBC Discussion on Development of University-Industry Partnerships April 27, 2012 ● Washington, D.C.

On

April 27, the USRBC hosted a roundtable discussion of the development of university-industry partnerships to drive innovation in Russia with a delegation of Russian academic and research specialists. The delegation was in the United States as part of the State Department’s International Visitors Leadership Program and included: • Dr. Mikhail Bizyaev, Associate Professor, Department of Instrumentation Engineering, South Urals State University (Chelyabinsk); • Dr. Dmitry Dvoretskiy, Chair and Assistant Professor, Food Technology Unit, Nanotechnologies Department, Tambov State Technical University; • Dr. Aleksey Eremkin, Deputy Dean for Research, Department of Pharmaceutical Chemistry, Chuvash State University; • Dr. Alexey Pokrovskiy, Deputy Chair and Associate Professor, Applied Mechanics Department, Bauman Moscow State Technical University;

• Dr. Sergei Turusov, First Deputy Director, Electrical Machine Building, Research Institute for Electrical Engineering Design and Technology (St. Petersburg)

Mr. Verona illustrated this point by noting that the recent agreement between ExxonMobil and Rosneft to cooperate on projects on the Russian shelf includes the creation of a Research Center in St. Petersburg that would

Dr. Turusov explained that the Research Institute for Electrical Engineering Design and Technology is among a number of institutions that focus on the extraction of natural resources, and that the main player in this field is the Arctic and Antarctic Research Institute in St. Petersburg. He said that although at this moment there is no plan for his Institute to collaborate with the ExxonMobil Research Center, he would certainly encourage experts from his university as well as other institutions in St. Petersburg to work with the Research Center when such an opportunity becomes available. >>

Summer 2012

USRBC President & CEO Ed Verona began the event by stating that research universities form an important foundation for the development of innovative

focus on the extraction of energy resources on the Arctic shelf.

Russia Business Watch

• Dr. Aydar Sabirzyanov, Director and Vice Rector for Research, Center for Academic Industry Partnership, Kazan State Technological University;

industries within an economy by preparing the next generation of workers to meet the challenges and needs of the high-tech sector. These nextgeneration leaders undertake groundbreaking research and experimentation that then can be commercialized and lead to the advancement of the economy. He also noted that Russia has an established tradition of applied sciences and mathematics that renders Russia of great interest to U.S. companies that wish to establish a research and development presence abroad.

11


new members activities

USRBC Briefing with the Volgograd Region Business Delegation O

n June 18, the USRBC hosted a briefing for a business delegation led by the Volgograd Chamber of Commerce and Industry. The delegation was comprised of Volgograd CCI leadership and business executives working in sectors such as software development; real estate development; construction; hydro, hydropower and hydromechanical equipment servicing; food processing; consumer products; and trading. The entrepreneurs presented to the USRBC members their businesses, and identified sectors and areas of potential cooperation with U.S. companies. USRBC President & CEO Ed Verona gave a brief overview of the Council’s services provided to small- and medium-sized enterprises (SMEs) and discussed recent Russian government initiatives to boost the share of SMEs in the Russian economy. He also outlined the impact of Russia’s WTO accession for the Russian business community, and specifically for small- and medium-sized enterprises. The USRBC and the Volgograd Chamber of Commerce and Industry agreed to continue cooperation, particularly in the area of SME development.

Russia Business Watch

Summer 2012

>

12

June 18, 2012● Washington, DC

Turning to a discussion of the Skolkovo Innovation Center, Dr. Turusov noted that it is renowned for its contribution to the modernization of science in Russia. However, it is one among many excellent research institutions in the country. For instance, the town of Petergof hosts one of two campuses of the St. Petersburg State University that is recognized for work related to research, development, and technology transfer. Dr. Turusov explained that he has not had the opportunity to work with the Skolkovo Center, but would be interested, as there are plenty of opportunities for cooperation with experts in St. Petersburg, which is the cornerstone of scientific research in Russia. Dr. Sabirzyanov stressed the importance of developing sufficient sources of funding for university research projects. He talked about two projects in which the Kazan State Technological University attempted to develop, but that were cancelled or shifted elsewhere due to a lack of funding. The first project involved the development of a promising new material that would have proved of great value to various industry sectors, particularly the airplane industry. Although it passed several developmental stages, it was never completed because financial support was lacking. The university’s second project, after it passed the initial stages, was taken over by the Skolkovo Innovation Center as it received the necessary funding from

the business community.

Question & Answer

Dr. Sabirzyanov explained that his university has acquired approximately 500 million rubles for research in the form of both private and federal grants for which its programs competed. In some cases, the government simply hires a university known for its technological research to work on a project. Many national universities, including the Kazan State Technological University, have 10-year development programs. The federal budget covers five of these years, and regional projects offer an additional source of income. With this money, universities acquire new research equipment, realize new commercial projects, fund educational programs, and acquire specialists in new technology development.

Q: What are the pros and cons of cooperation between universities and business incubators?

During the past two to three years, research universities have had a growing number of opportunities to work with state and private corporations to develop innovative programs. The Kazan State Technological University, for instance, has cooperated with four such corporations — Gazprom, Rosneft, KAMAZ, and Russian Technologies. It is important that universities have adequate funding to conduct research; however, it is equally important for universities that corporations share with them their problems so the universities can participate in their innovative programs.

Dr. Dvoretskiy said that the Tambov State Technical University has a business incubator that finances a program called Umnik (“Brainiac.”) This kind of cooperation requires that the participating university comes up with a project that receives funding of $10-12,000 per year. The university has a couple of years to attract more funding for the project, to finish it and begin presenting it to potential customers. The Tambov University worked on two projects; one focused on creating materials used for the construction of pipes and the other on building equipment suited for the transportation of these materials. The products were later sold to other countries. Q. What sources of funding are available to researchers in Russia? Dr. Sabirzyanov said that it is difficult for a small business to receive funding. Russia lacks venture capitalists that would be willing to invest in their development. Furthermore, all funding awarded by the government must be approved by the relevant ministry and it comes along with close supervision from parties such as the public prosecutor or the Tax Administration. Soon after beginning their work, research ventures

>>


new members activities

USRBC Roundtable on JacksonVanik and the Magnitsky Act with RF Federation Council Senators T

July 10, 2012 ● Washington, DC

he USRBC hosted a breakfast roundtable for a delegation of RF Federation Council Senators visiting Washington, DC to discuss the Jackson-Vanik Amendment and the Magnitsky Act with high-level U.S. officials and business leaders. The delegation included: Alexey A. Chernyshev, Deputy Chairman, Federation Council Committee on Agriculture and Food Policy; Vitaly B. Malkin, Deputy Chairman, Federation Council Committee on International Affairs; Valery N. Shnyakin, Deputy Chairman, Federation Council Committee on International Affairs.

>

must begin paying taxes regardless of whether or not they had the time to come up with a product that would offer them some income. This imposes a counterproductive burden on the innovation sector. He added that research universities in Russia have been competing for federal and regional grants for the past 20 years. However, the grantees expect the recipient university to complete these undertakings within two years. Additionally, these projects usually involve improving an existing technology. Investors are typically not interested in funding a project that involves the invention of a new innovation.

Q: Do Russian universities support the idea of sending graduate students to study in the U.S. and Europe? In what

Dr. Turusov supported the idea of sending students to study abroad as such studies would equip them with important experience. He added that sending the students from his university to the U.S. could prove challenging as the process of applying for such a foreign study is complicated, and it is feared that they would want to remain in the U.S. Dr. Dvoretskiy explained that Russia and the EU have a student exchange agreement that is free of charge to the students. Students must compete in order to participate in the exchange programs. The U.S. does not offer such programs or scholarships that would facilitate similar exchange opportunities. Dr. Pokrovskiy said that many departments at the Bauman Moscow State Technical University have relationships with universities abroad. However, a major obstacle to encouraging more frequent exchanges among Russian students is the fact that the university does not accredit foreign studies. Consequently, students who complete a one-year study abroad program are one year behind in their university studies. They have to make-up the year in order to complete the number of class credits required for their graduation. n

Summer 2012

Q. Companies in Silicon Valley often experience bankruptcies, but this is a risk that comes with undertaking innovative research. What happens when Russian research ventures — including a university program — receive government funding for a project that does not succeed?

Dr. Sabirzyanov stated that there are two challenges associated with receiving funding for scientific research at Russian universities. First, universities must compete for federal funding. Second, although many university graduates hold positions in the private sector, Russia lacks the tradition of alumni contributing to their alma mater’s educational programs. While the universities have good working relations with the companies where their former students work, the graduates do not feel obliged to reach out to their universities in any special manner.

kind of programs would the universities like their students to participate while abroad?

Russia Business Watch

Dr. Dvoretskiy added that there are capitalists in Russia willing to invest in research and who have contacts in the West who are also interested in research funding. However, they are interested in grand projects such as those that focus on cancer treatment that would bring them substantial profits. That is why many of these capitalists are not interested in funding research undertaken by universities.

Dr. Turusov responded by explaining that Russia’s business culture differs from that in the U.S. In Russia, neither private nor federal funding programs are interested in investing in ventures/ projects that have failed. At the same time, capitalism in Russia is not as evolved as it is in the U.S.; Russia has been experimenting with it for 20 years, while the U.S. has been working on it for 230 years. Also, some scientific research produces modest results; other research may produce large outcomes over time, but these outcomes may not be as apparent during the initial stages of research. However, officials in Russia do not take these possibilities into consideration when they award research funding.

13


new members activities

Ambassador Kirk addresses the gathering.

Briefing with U.S. Trade Representative Ron Kirk July 24, 2012 ● Washington, D.C.

Russia Business Watch

Summer 2012

O

14

n July 24, 2012, the Council hosted a briefing with U.S. Trade Representative Ron Kirk at the St. Regis Hotel in Washington, DC. Ambassador Kirk discussed Russia’s WTO accession and the efforts to lift Jackson-Vanik and enact Permanent Normal Trade Relations with Russia, and the outcome of his recent official visit to Russia. The Council welcomed comments by Ambassador Kirk regarding the Obama Administration’s commitment to securing PNTR with Russia as soon as possible. USRBC President Ed Verona thanked Ambassador Kirk for the Administration’s leadership in securing a strong deal on Russia’s accession and urged all parties to redouble their efforts to keep U.S. business competitive in Russia. The following is a transcript of Ambassador Kirk’s remarks to the U.S. business community. “I want to offer my thanks to the U.S.Russia Business Council staff and all of the member companies. You provided vital support to USTR during the WTO accession negotiations with Russia.

And you continue to play a critical role as we work together to obtain Congressional action on a bill that will ensure the WTO Agreement applies between the United States and Russia. I am pleased to be with you all at an important moment for the United States, for Russia and for businesses in both countries. Yesterday, Russia notified the WTO that it has accepted its terms of accession to the World Trade Organization (WTO). I don’t need to tell this crowd that this is, without a doubt, a historic event. Fewer than thirty days from now Russia will become the 156th Member of the WTO. In some ways, this is the end of a long road that started almost 20 years ago. Russia has amended and adopted laws, regulations and other measures to create the legal framework needed to implement the WTO rules. Meanwhile, the U.S. Congress is getting closer to completing important steps that will ensure the WTO Agreement applies between the United States and Russia. Last Wednesday (July 18), the United States Senate Finance

Committee reported out of committee legislation that will terminate application of the Jackson-Vanik amendment and authorize the President to extend permanent normal trade relations to Russia. We congratulated Chairman Baucus and Ranking Member Hatch, and applauded the Finance Committee’s unanimous vote to authorize PNTR extension to Russia and Moldova. Similarly, we are pleased that House Ways and Means Committee Chairman Camp and Ranking Member Levin have come together to schedule a full committee markup this Thursday of a bill that is based on what the Finance Committee approved. [Editor’s note: the House Ways & Means Committee approved the legislation by voice on July 26.] As we continue to work with Congress, our priority is to put legislation on the President’s desk for signature as soon as possible. Today, we will talk about what is at stake with the legislation Congress is currently considering. I look forward to hearing directly from you how pas-

>>


new members activities

USRBC Executive VP Randi Levinas speaks with Ambassador Richard Burt.

>

Salans' Randy Breyman poses a question to Ambassador Kirk.

sage of this important trade measure will help support American jobs by boosting your exports of U.S. goods and services to Russia. You all know the benefits of extending PNTR for your businesses, so I will just briefly summarize some of the highlights before we begin the discussion.

such as audio-visual services, telecommunications, computer services, and financial services. Similarly, this bill will help keep America’s IT exporters

As we mark the significant progress made so far, it is important for everyone to stay focused on the positive impact that Russia PNTR will have on U.S. trade and jobs, so that we can pursue a legislative path forward. Thank you.” n

Summer 2012

Ambassador Kirk (l.) with Randi Levinas (c.) and Ed Verona.

All of these benefits are on the table right now. Recent actions by the Senate Finance and House Ways & Means Committees have moved us closer to securing them. But they won’t be in your hands until the WTO agreement applies between the United States and Russia. And failure to pass a Jackson-Vanik/PNTR bill could jeopardize well-paying jobs here at home.

Russia Business Watch

This bill will help protect U.S. intellectual property, which supports wellpaying jobs for innovators and creators across America. This bill will help ensure that U.S. exporters of agricultural products — such as soybeans, corn, pork, poultry, and dairy — benefit from Russia’s WTO commitment to base its sanitary and phytosanitary (SPS) measures on international standards. Similarly, this bill will help support U.S. manufacturers who need the benefits of Russia’s WTO commitments to enhance transparency of mandatory and voluntary standards (technical barriers to trade, or TBTs), and to reduce other nontariff barriers to trade. This bill will help bring U.S. service providers the benefits of Russia’s WTO commitment to open its services markets in sectors

competitive in Russia as it joins the Information Technology Agreement. And finally, of course, this bill will provide the United States with more trade enforcement tools to hold Russia accountable for its WTO commitments. These tools will include the WTO’s function as a multilateral forum, where we will be able to air, address and resolve trade disputes more efficiently and effectively.

15


us-russia relations outlook

u.s.-russia relations USRBC at the St. Petersburg International Economic Forum June 21-23, 2012 ● St. Petersburg, Russia

USRBC President Ed Verona (far left) and USRBC Chairman Klaus Kleinfeld (far right) meet with President Putin (center) and Presidential Aide Elvira Nabiullina.

Russia Business Watch

Summer 2012

O

16

n June 21-23, 2012, USRBC President and CEO Ed Verona and USRBC Head of Representation in Russia Maryia Dauhuliova participated in the St. Petersburg International Economic Forum (SPIEF), during which Mr. Verona and the CEOs of several USRBC member-companies met with President Vladimir Putin and Presidential Aide Elvira Nabiullina. In connection with SPIEF, the Council hosted its third annual CEO Dinner on June 22 and a Breakfast Briefing with the leadership of the U.S. government Delegation to SPIEF on June 23.  The CEO Dinner was joined by over 30 corporate leaders, top U.S. government officials attending SPIEF, Dr. Henry

Kissinger, and then-Deputy of Economic Development Voskresensky (currently Presidential Plenipotentiary Northwest Federal District).

Minister Stanislav Deputy for the

The June 23rd Breakfast Briefing was attended by Deputy U.S. Trade Representative Miriam Sapiro; Assistant Secretary of Commerce for Market Access and Compliance Michael A. Camunez; U.S. Ambassador to Russia Michael McFaul; U.S. Export-Import Bank Chairman Fred Hochberg;m and other members of the U.S. government delegation to SPIEF, as well as USRBC member company executives. Participants discussed Russia’s WTO accession, the importance of granting PNTR status to Russia and other fac-

tors shaping the future of U.S.-Russia commercial relations . The 2012 SPIEF was marked by several important commercial agreements, including a $1 billion Memorandum of Understanding (MOU) signed between the Ex-Im Bank and USRBC member Sberbank to facilitate increasing U.S. exports of goods and services to Russia and other countries in which Sberbank operates and where Ex-Im Bank programs are available. USRBC member Abbott Laboratories signed an agreement with ChemRar, a Russian R&D and investment group, for several R&D projects to improve the health outcomes of Russian patients and to contribute to building an innovative pharmaceutical industry in Russia. n


us-russia outlook relations

Fort Ross Celebrates Its Bicentennial, and Looks to the Future By Sarah Sweedler Sarah Sweedler is President of the Fort Ross Conservancy. History In Brief

I

Event highlights to date include January’s Kashaya Blessing, where the Native Kashaya Indians, the first people of these lands, re-established their good will relationship with the Russians as represented by San Francisco Consul General Vladimir Vinokurov. Also of historical significance was the Russian Orthodox Concelebration, where hierarchs and clergy of the Moscow Patriarchate, Russian Orthodox Church Outside

of Russia, the Orthodox Church in America and other Orthodox jurisdictions together at the Fort Ross chapel (the earliest Russian Orthodox chapel outside of Alaska ) concelebrated the Divine Liturgy in commemoration of the bicentennial. In addition, several academic conferences have brought together scholars from across the globe and across disciplines, and we’ve hosted a series of lectures to get the word out on Fort Ross far and wide. In late July we celebrated Fort Ross Bicentennial Weekend, where we were fortunate to have approximately 5,000 visitors, including numerous delegations from across Russia and Alaska, enjoy a weekend of unseasonably glorious weather, fantastic music, interesting historic crafts and dramatic re-enactments, including the obligatory militia drill and cannon firing. The all-day event started with a Russian Orthodox service in the Fort Ross chapel. This was followed by dozens of performances, including Moscow’s

Summer 2012

In addition to its unique Russian-era history, today’s Fort Ross State Historic Park boasts 3,400 acres, including a pristine coast line, marine reserve,

redwood forests, a campground, and an interesting vantage point atop the San Andreas fault. In partnership with California State Parks, Fort Ross Conservancy has organized a year-long series of events to commemorate the Fort Ross bicentennial and to help bring this site of shared U.S.-Russian history to prominence. As we enter our final season of bicentennial celebrations, we wish to thank all our supporters for bringing Fort Ross to life — and we want to encourage you to join us at the fort!

Russia Business Watch

n 1812, on a stretch of the Pacific Ocean 80 miles north of San Francisco, Ivan Kuskov led Russian explorers to establish Fort Ross, Russia’s deepest vanguard into North America. Ross was settled to produce food needed to support the Russian settlements in Alaska and to expand the valuable sea otter trade, and it evolved into a remarkably peaceful, cross-cultural agricultural settlement. Although the Russian American Company stayed just three decades, their contributions to early California society were vast — they built California’s first ships and windmills, introduced glass-paneled windows, created the first brickyard, catalogued the local flora and fauna (including naming the California poppy), completed detailed maps, and engaged in early California entrepreneurism.

Bicentennial Events

17

>>


us-russia relations outlook

>

famed Pyatnitsky Folk Chorus, performing on a stage in our natural amphitheater overlooking the Pacific Ocean. In particular, we thank Olga Miller and Jay Haft of the Renova Fort Ross Foundation for their incredible support over the past 18 months, including bringing Pyatnitsky to Fort Ross (in collaboration with the Russian Federation’s Ministry of Culture), funding the new historic costumes that debuted at this event, and supplementing staff funding for both California State Parks and the Fort Ross Conservancy. Also thanks to our three Fort Ross Bicentennial event sponsors, Chevron, Sovcomflot and Transneft, for providing significant and much needed support for the weekend events. We are most grateful to the visitors, volunteers, staff, and sponsors who helped bring Settlement Ross to life. Fort Ross Bicentennial Weekend was a resounding success, and we suggest you mark your calendars for the encore on July 27, 2013.

In addition to discussing Fort Ross, the conference focused on the Bilateral Presidential Commission, its work on culture and exchanges, and ways to strengthen its future public-private activities. Other sessions covered the energy, trade and Pacific dimensions of U.S.-Russian relations. Among the speakers were Ambassador Sergei Kislyak, Russian Ambassador to the United States; Ambassador Edward Malayan, the Russian government’s Coordinator for the Bilateral Presidential Commission; Ambassador John Beyrle, former U.S. Ambassador to Russia; Dawn McCall, State Department Coordinator for International Information Programs; and Ambassador Mikhail Shvydkoi, RF Presidential Envoy for International Cultural Cooperation (who led the Russian delegation). From the private sector, we were pleased to be joined by Ed Verona, President and CEO of the USRBC, who spoke about new dimensions in the bilateral relationship, as well as Jay Pryor, Vyacheslav Skvortsov and Nikolai Kolesnikov who led the

delegations from Chevron, Transneft and Sovcomflot, respectively. Necessity of Corporate Partnerships While the bicentennial has given us reason to celebrate, California’s budget crisis weighs heavily on the park’s future; Fort Ross is still closed for over half the calendar year, and more and more responsibility is being given to Fort Ross Conservancy to support interpretation, education and even infrastructure. This presents hardship but also opportunity. The public-private partnerships we have created are a fundamental necessity to compensate for the loss in funding Fort Ross receives from the State of California, a situation which will likely continue for the foreseeable future. For us to improve on the legacy of Settlement Ross, we need your help. Fort Ross Conservancy’s goal is to increase programming and improve the park’s facilities to then create a sustainable business model for the park’s future. Please join our work at Fort Ross, where Russians, Americans and Russian-Americans meet on common ground to ensure that Fort Ross continues to be a symbol of peaceful relations between our two countries. Please do contact us to discuss the ways in which you can help protect this place of shared heritage. n

Russia Business Watch

Summer 2012

On the Monday following the Bicentennial Weekend, Fort Ross Conservancy hosted a special international conference — also co-sponsored by Chevron, Transneft and

Sovcomflot — on Fort Ross, U.S.Russian Relations and the Bilateral Presidential Commission, held in the nearby Russian River Valley. Over 50 senior representatives from government, business and academia, as well as members of California’s RussianAmerican community, attended.

18

Fort Ross Conservancy is a 501(c)(3) public charity formed in the 1970s with an additional legal agreement with the State of California to operate the Fort Ross visitor center and gift shop. For a complete list of upcoming and past events, as well as corporate sponsorship received in 2011 and 2012, visit its website at www.fortross.org.


sector update

sector update Toward Russia’s Energy Future By Thane Gustafson

Thane Gustafson is Senior Director of Research for Eurasia Energy at IHS (formerly Cambridge Energy Research Associates). His latest book, to be published in November 2012, is Wheel of Fortune: the Battle for Oil and Power in Russia (Harvard University Press).

T

he Soviet oil legacy is wearing down. It’s been a good long run: The oil assets Russia inherited from the Soviet Union eased the post-Soviet transition of the 1990s and powered the strong growth of the 2000s. But ultimately the law of diminishing returns prevails. Production from the West Siberian core has been declining since 2007, and if overall Russian oil output continues to inch upward today, it is only thanks to a small handful of new fields in East Siberia. Russian oil production is on track to increase this year by about 1 percent — but only at the price of a skyrocketing rise in upstream capital investment, which was up by 34 percent in 2011 alone to a record $31 billion and could well reach $40 billion this year. This rate of increase — effectively a doubling every two years — cannot be sustained for long, and by 2020 Russian oil production could well begin to decline.

There are many reasons for this state of affairs, but they all come down to one fundamental fact: until now the Russians did not need foreign help.

The first real harbinger of change was in September 2009, when then-premier Vladimir Putin invited the CEO’s of the world’s leading international companies to a conference in Russia’s far north, where he proposed that they join Russia in exploring and developing Russia’s Arctic oil and gas resources. This was shortly followed in 2010 by negotiations between Rosneft and several prospective partners. In 2011 and 2012 came the announcement of a string of strategic alliances, initially involving Rosneft and BP, and subsequently ExxonMobil, Statoil and Eni. What is significant about these initiatives is that they are more sweeping in scope than any agreements concluded by the Russians in the past. They cover not only collaboration in exploring and developing Russian assets but also foreign assets overseas; not only Arctic offshore but also unconventional oil onshore; and not only exploration and production but also training and technology transfer. Moreover, throughout the process of negotiation the Russian political leadership has been actively

Summer 2012

What is the solution? As I argue in Wheel of Fortune, the challenge

Yet they have so far not done so. Foreign oil companies and investors had only a modest part in the postSoviet recovery of the oil industry. International companies today account directly for only about four percent of Russian oil output. The joint ventures of the 1990s have mostly disappeared, and there have been few successors. Production-sharing is limited to the three “grandfathered” PSAs created over 15 years ago. Foreign companies and their Russian partners hold less than one quarter of the total market for oilfield services and equipment. New international entrants have been deterred by the restrictive legislation passed between 2004 and 2008, which effectively confines foreign players to the role of contractors or at best minority shareholders.

So long as the legacy assets from the Soviet Union could support abundant and low-cost production, there was no cause to make basic changes in technology or management, much less to share ownership or control with outsiders. But now that situation is changing, particularly in the Arctic offshore and also, increasingly, in onshore “tight oil.”

Russia Business Watch

Russian policy-makers are well aware of the problem, and also of its growing urgency. The Russian government depends more heavily on oil revenues today than ever before — more than in the Soviet era and more than in the 1990s. Today, oil provides over half of Russia’s export income and nearly 40 percent of the government’s tax revenues (add in natural gas, and it’s over half). Any decline in oil production would be catastrophic.

now for both the oil industry and the government is to move beyond the Soviet legacy to the next generation. There are three possible ways forward, and all three are daunting — the frozen Arctic offshore, the remote East Siberian wilderness and the deeper horizons of West Siberia. One thing is certain: all three will require far more capital and advanced technology than the Russian oil industry has deployed to date. And this is where foreign companies can play a key role.

>>

19


sector update

>

and visibly involved.

ones as well. The government’s tax take is one of the heaviest in the world and leaves the companies with little incentive to invest. Twenty years on, there is still no satisfactory legislative structure to support productionsharing agreements. Two state-owned companies hold a virtual monopoly over offshore licenses. The smaller independent oil companies — the key drivers in the tight-oil boom in the United States — face severe obstacles in Russia and account for less than five percent of Russian oil production. Commendable efforts have been made recently to address these problems, but progress has been slow. Beyond these fiscal and regulatory issues, however, lie two fundamental unresolved questions: first, what is to be the role of the oil industry in the

Thus the latest round of strategic alliances has the potential to open a major new chapter in the roles of the international oil industry in Russia, as well as those of the Russian oil companies overseas. If the last two decades were the era of post-Soviet transition, the next two could mark a new phase, in which the Russian oil industry partners with the global industry to address the challenges of the next generation of oil — a generation of growing cost and difficulty, but also of unprecedented technological promise. But for that to happen, the investment climate must improve — for both the foreign oil companies and the Russian

modernization of Russia? Is it as a passive source of capital to support investment in other sectors? Or is the oil industry itself, which is in the midst of a worldwide technological revolution, potentially a major driver of innovation for the Russian economy? If so — and this is the second question — then how should relations between the Russian and the international oil industry be structured, so as to enable Russia to draw on the skills of the global companies while also developing its own? The answers to these questions will shape the future of Russian oil production and its role in the global energy economy, as Russia moves beyond the era of the Soviet oil legacy. n

An Interview with Sergei Borisov «Small and Medium-Sized Businesses in Russia» Sergei Borisov is Deputy Chairman, Russian Government Commission for Development of Small and Medium Entrepreneurship; President, OPORA RUSSIA — Russian Organization for Small and Medium Entrepreneurship; and Vice-President for Small Business Development, Sberbank of Russia.

Russia Business Watch

Summer 2012

I

20

n 2011, Global Entrepreneurship Monitor’s (GEM) Global Report described a genuine boom of entrepreneurial activities under way in 54 nations. For the first time in decades, Europe and the U.S. have demonstrated growth rates that are comparable to China’s as entrepreneurial activities there shot up by 22 percent. On the other hand, Russia found itself at the bottom of the matrix, with only 3.6 percent of the respondents planning to start a business in the next three years. What explains entrepreneurial apathy in Russia? I disagree that Russians today are not thinking about striking out on their own in business. According to our information, a great many of them would like to try their luck in business. Obviously, people are worried that something may not work out, whereas

>>


they would like to become successful quickly and risk-free... Now, that is a matter of entrepreneurial culture, of business literacy if you will. What we still lack is quality knowledge about entrepreneurship, and this in itself is a separate matter for a meaningful and thorough discussion. Of course, the fears of our fellow countrymen are not entirely unreasonable. There are certain deficiencies in the business environment in this country. They are evidenced by our study “Business Climate in Russia: OPORA’S INDEX FOR 2010-2011.” We interviewed over 6,000 businesspeople in 40 regions of this country and the top issue cited was a lack of skilled labor. Small businesses have a hard time competing for employees against large companies and government entities. One-third of the respondents cited a general decline in demand for products in their industry as an important problem. It concerns insufficient demand for products and services supplied by SMEs, especially in the manufacturing and innovation segment. A lack of funding was the third-most cited problem. Clearly, these and other factors combine to dampen the spirits of potential startup owners. What are the key hurdles for SME growth in Russia? The unique nature of OPORA’s “Business Climate in Russia” study is that it invited entrepreneurs to evaluate the business climate in their respective home regions. The study produced some interesting results. For instance, only a few years ago, administrative barriers were seen as one of the key obstacles. That is no longer the case. While, in 2006, businesses spent 9.6 percent of their revenues to cover nonmanufacturing costs, the ratio has since dropped to 5 percent. This still is a sizable proportion but down almost by half.

Unfair competition remains an important problem faced by SMEs, as it is something that hampers adequate market development in any country, not just in Russia. Some have suggested that the government has no need for a flourishing SME sector since most of the budget’s tax revenue comes from big business and, until oil prices drop, the government will not start promoting SMEs. Do you subscribe to that opinion? Let me offer a different perspective. Despite its “small” moniker, the small business segment is the cornerstone of any developed economy. As you will know, small businesses account for 50-70 percent of employment in the U.S. and in Europe. In Russia, the number is still lower, at 25 percent. However, President Vladimir Putin has set forth the goal of increasing SMEgenerated employment to 50 percent by 2020. This is a specific ratio, a landmark to go after, while, in the process, conducting the requisite social and economic reforms. In a crisis, the small business segment is the first to demonstrate viability. In 2008-2009, small businesses were the first to begin adjusting, adapting to the new conditions, looking for new niches and markets. Think about this: in 2009, despite an overall 22 percent drop in the national tax revenues, small businesses kept up their tax payments and, in the case of the unified tax on income, they even delivered a four percent increase. Moreover, despite layoffs everywhere, small business employment increased by 50,000

Can you provide examples of the more effective measures taken by the Russian government to support entrepreneurial activities in this country; measures that are already in place and have made a positive impact on the SMEs? Over the last few years, the authorities have made a U-turn in their small business policies. There have been increases in the budget for the federal program in support of small business. In 2005, when the program was launched, the budget stood at 1.5 billion rubles ($47 million). This year, more than 20 billion rubles ($625 million) have been allocated to support the SME sector. Importantly, an institute for regulatory impact assessment (RIA) was established, enabling the business community to influence government decision-making even at the stage of preliminary consideration of draft legislation. The system has proven its worth: no piece of legislation or any regulation gets adopted without regard for the business community’s opinion. If they create any kind of obstacles for SME development, such legislation or regulations go back to the drawing board for further elaboration and finetuning. In 2011 alone, more than half of the 500 drafts undergoing the RIA procedure received negative opinions. However, we would like to see a more active application of the so-called “retrospective” assessment of the effective legislation. Such practices need to apply to regulation at the regional level. We believe it is important to perform RIA at the drafting stage, before the second reading of the legislation. Another example of the government’s support of small business is that the procedure of starting a business has been simplified. In addition, we have been able to cut back, by a significant margin, the supervisors’ authority by reducing the number of scheduled audits and inspections and by introducing a clear-cut procedure for conducting random audits. There has also been a significant decrease in the number of licensed activities, from 87 to 49. >>

Summer 2012

I have touched upon the lack of skilled labor and insufficient demand for products offered by small businesses

A very important subject concerns development of infrastructure, especially as far as developing industrial parks, technological clusters and business incubators. The issue of regulating the power industry and access to gas supply is important as well.

jobs. Therefore, one should promote small business on a permanent, systemic basis, regardless of the fact that large companies pay the bulk of the national tax bill. The outcome would be an active and mobile SME sector at a time when the country needs it the most.

Russia Business Watch

In the past, 70 percent of businesspeople complained about the tax authorities. The number is now down to 17 percent. Largely, this is the result of an ongoing constructive dialog between OPORA and the Federal Tax Service.

in the manufacturing sector, and the lack of funding for starting and building up a business. In addition, one unresolved matter concerns production (manufacturing) space and, generally, availability of premises for small businesses. Therefore, small businesses have a great stake in amendments being made promptly to the laws governing access to assets, including amendments to Federal Law No. 159 about so-called “preferential privatization.”

sector update

>

21


sector update

>

A mere decade ago, it was hard to navigate a small business in Russia through an ocean of administrative barriers and obstacles. Today, we have a different picture as one-off support measures have been evolving into a system. Yet we still have our work cut out for us, as evidenced by inadequate SME growth rates, especially in view of the goal to double SME’s contribution to national employment. What else would the federal authorities need to adopt and implement if we are to raise small businesses’ contribution to national employment from 25 percent to 60–70 percent by 2020, as planned by the nation’s leaders?

Russia Business Watch

Summer 2012

First, they should address the obviously inflated insurance contributions applicable to SMEs. It is a very acute and overdue issue, and one that clearly obstructs small business development. It would be helpful to bring the contributions back close to 2010 levels. That would provide a meaningful boost to the business community.

22

OPORA RUSSIA’s initiatives have led to remarkable progress in the tax area and an overall reduction of the tax burden on small businesses. The key is not to stop because there is a great deal more that needs to be done. In particular, regions should be empowered to reduce the tax rate applicable under the simplified tax system (STS) for income tax purposes, from 6 percent to 2 percent. A similar measure has been in effect for a number of years with regard to the 15 percent STS rate. Many RF constituent jurisdictions have already used their right to reduce the tax burden on small businesses. Small businesses operating under specialized treatment should be exempted from business accounting, while maintaining the existing tax accounting practices. It is also important to give some thought to how to tap into the potential of self-employed individuals. We are talking millions of individuals here, among them owners of small farms, private tutors, nannies, web-designers, software developers and many, many others. It is highly important to create an attractive taxation system for them, for instance by issuing self-employment patents. I am confident that more people will be willing to start small businesses if there are programs in place to support individual groups of citizens, a long-

time successful international practice. The U.S. runs an effective program of assistance for retired military personnel and police officers who have opened their own businesses. Sweden administers a separate program for businesswomen, etc. It is important to encourage small businesses to bid on government contracts, including through the “second arm rule” whereby major players, upon winning a tender, are required to subcontract a small enterprise. The Ministry for Economic Development shares this point of view and we expect the necessary government decisions to be made in the near term. Does Russia need some kind of an entity to coordinate support for SMEs? How likely is it that something like that will come about? You know, we have discussed this issue at length both in the business community, and in the context of consultations with the authorities. It probably does not make sense to establish yet another state-run corporation. For many years now, the Ministry of Economic Development has engaged in SME support through one of its departments. In our opinion, they have done so in a productive way and the Ministry has always been in touch with the business community. Many of our comments, as well as those made by our counterparts from other business associations, find their way into the final documents issued by the Ministry of Economic Development and the Russian government. As a reminder, a 2008 Government Resolution requires virtually all government ministries and agencies to promote small and medium-sized businesses. The resolution sets forth detailed authority for the federal executive branch regarding support for SME development. Whether or not this is being done efficiently and as required is a different matter. Frequently, this is not the case, in our opinion. A Government Commission for Promoting SMEs was established in 2008 and is overseen by First Deputy Prime Minister Igor Shuvalov. In our view, it is a very effective decision-making body at the federal level. Perhaps, the Commission could use a boost, but, understandably, Mr. Shuvalov has a very busy schedule. What matters the most is that, when the need arises,

the Commission does sit to discuss urgent matters faced by entrepreneurs and comes up with much-needed and well-thought out decisions. Of course, Igor Shuvalov is also Russia’s Investment Ombudsman, so the effort at upgrading the national business climate and, by that token, facilitating entrepreneurial activities in Russia, is tackled in a comprehensive, systemic manner, which is very important. You are in charge of small business operations at Sberbank. Please tell us about issues involved in lending to SMEs in Russia: trends, problems, prospects. How much access to bank loans do innovation-driven companies and startups have? The OPORA INDEX has indicated that inadequate access to funding remains a challenge for most small businesses. Based on my communications with colleagues in the nation’s regions, I agree that taking out a loan on terms that are acceptable for a small business is frequently a problem. Sberbank is actively working with small businesses. In fact, it is a strategic priority for the bank, as evidenced by its adoption of a “Concept for Small and Micro Business Development for the Period until 2014,” which laid down qualitatively new approaches to dealing with small businesses. First, Sberbank provides loans tailored to the specific needs of small businesses. In doing so, Sberbank emphasizes the development of innovative products and services, as well as the creation of specialized products for small businesses. For instance, aware of the need for small businesses to gain access to funding to expand and modernize production, Sberbank has developed a product called the “Business Project.” Under it, long-term (up to 10 years) loans are available for the purposes of expanding and modernizing borrowers’ existing businesses, as well as for the purposes of diversifying businesses and branching out into new avenues. Interest rates for the product are below or equal to the average market rates for investment-grade credit. Notably, there are virtually no similar products on the market that are capable of competing against it in terms of the key parameters. Speaking of financing innovation and startups, as it is the most risk-prone sector, the vast majority of banks are wary of such projects. As a result,

>>


neurs while still at school. OPORA has been working on this for several years now. First, I am referring to our annual national event, Entrepreneur Day in Russian Secondary School, where successful businesspeople come into the classroom to talk about their businesses to school students.

sector update

>

We have set up specialized chairs at a number of undergraduate schools — including the Bauman Moscow State Technical University, the Moscow Institute of Steel and Alloys, the Kazan State University — that teach the basics of enterprise, including in innovation areas. Sberbank and OPORA have jointly developed a project called Sberbank Business School, which incorporates workshops, specialized educational curricula and broad-based consultations. Our plans include setting up tests to identify entrepreneurial talents in high school and undergraduate students. When are we to expect small business to blossom in Russia? I have mentioned the goal set by President Putin: that small businesses should account for 50 percent of employment by 2020. This is the date we have in mind. One must understand that, unless an adequate business environment is in place, unless the measures that we have discussed above are taken, we will not be able to get this moving. Fifty percent of national employment to be generated by small businesses is a serious goal, which, if met, would provide a chance for raising the economy to a qualitatively different level. OPORA is working hard to meet that goal. We are a public association that brings together proactive individuals willing to take a stand, keen on creating, not just consuming. This is especially relevant today, in the light this ambitious and unprecedented goal. n

Summer 2012

OPORA ROSSII, an all-Russian Non-Government Organization for Small and Medium-Sized Businesses, was established in 2002. Its principal goals are to promote entrepreneurship, protect the rights and interests of entrepreneurs, create a favorable business climate in Russia’s regions, and build a positive image of the businessperson. Branches of OPORA RUSSIA operate in 81 of Russia’s regions. 140 industry unions, associations, and guilds comprise the non-profit partnership OPORA. OPORA RUSSIA and the non-profit partnership OPORA bring together approximately 400,000 entrepreneurs who have created 5 million jobs.

Russia Business Watch

expanded steadily, almost doubling from 30 major Russian cities in early 2012 to 57 today. Currently, the focus is on enabling as many individuals as possible to start a business with Sberbank’s assistance and following a simple procedure. For instance, the bank recently reduced the minimum age for barrowSergei Borisov (third from left) addresses an OPORA ers from 25 to 20 and meeting. the requirement for the entrepreneur’s financing for this niche is limited to personal equity in the project from 30 government subsidies and grants and, percent to 20 percent. predominantly, to secured loans. Starting in September 2012, ready-toAn exception can be found in what use, non-franchise solutions will be is, without exaggeration, a revolutionavailable for beginner entrepreneurs. ary project launched by Sberbank to They are being designed jointly with support business startups, known as OPORA RUSSIA and constitute busi“Business Start.” It became operationness plans featuring the key paramal last December and is still in the beta eters for a new business, as well as mode. If you want to start a business a detailed sequence of steps required but do not know where to start or lack to incorporate, launch and run a busistartup capital, the bank offers off-theness. shelf solutions for a brand-bearing or a non-brand franchise that have already What is the status of training future entrepreneurs proven effective in the market. It in Russia? could be a fast food restaurant, a store, Of course, entrepreneurial literacy is a beauty parlor, a children’s club, etc. lacking. When we asked businesspeoOffered as ready-to-use business soluple to identify reasons for their comtions are movable businesses, such as mercial setbacks, almost half admitmobile trading and service platforms ted that they lacked basic knowledge designed jointly with OPORA RUSSIA about running a business. No specialand industry associations. ized educational products or specialty A would-be entrepreneur can take a curricula are available. It is a serious free training course at Sberbank’s webchallenge and, unless we successfully site, select a ready-to-use solution, and tackle it in the near term, we will not obtain a credit. The basic parameters be able to increase the number of are that the amount should not exceed entrepreneurs. It would be wonder3 million rubles ($94 million) — up to ful to teach the basics of business in 80 percent of the funding required to secondary school, make a course in the start a business — available for a peribasics of small business a mandatory od of up to 3.5 years. Such loans are part of undergraduate curricula. This secured by the assets to be acquired is fundamental knowledge, a must in and by the individual’s personal guartoday’s world. For undergraduate stuantee. dents, it also means a real opportunity to discover their potential as entrepreThis pilot project’s geography has

23


sector update

“Smart" Management Saves Trillions For Governments By Vladimir Yeremin Vladimir Yeremin is First Deputy Director of the Graduate School of Public Administration at Moscow State University.

I

ll-considered laws that were hastily adopted exacerbated the global financial crisis and are a key source of corruption, administrative barriers and losses to business. Inefficient moderation sets back economic development and imposes trillions of rubles of costs in Russia alone. Through a system known as Regulatory Impact Assessment (RIA) the quality of regulatory acts can be improved and at the same time regulatory costs reduced for the state and business. This system is spreading rapidly in Russia.

Russia Business Watch

Summer 2012

Regulatory Impact Assessment is a complex analysis of the regulatory documents being adopted or already in action. It allows for an evaluation of their influence on the economy and social sphere and the prevention of excessive costs to business. The aim of the RIA system is to provide a balance between all stakeholders to a piece of legislation — the government, budget institutions, the commercial sector, and ordinary citizens — so that its purpose can be achieved at a minimal cost.

24

In developed countries, the RIA includes public discussions to take into consideration the opinions of the private sector, state officials, consumers, and any other parties affected by the law so that the level of trust is raised between these interest groups. Laws must have clear and simple language without ambiguities and with a transparent adoption process and a focus on results without adding to the level of bureaucratic red tape — these are the major features of “smart monitoring,” and RIA is the key to achieving it. The RIA procedure as a part of lawmaking was introduced in the U.S. about 30 years ago by the Reagan Administration. The system spread to Great Britain and other developed European countries and later to countries all over the world with the aim

of bringing down business costs and improving the quality of moderation. In Switzerland and France, this tool has been introduced into their respective constitutions, while in the European Commission it is built into the decision making process. The RIA formula is relatively simple — in the process of developing any regulatory document, there are four types of consequences that have to be considered: economic, social, ecological, and budgetary. Global experience shows the effectiveness of this type of regulatory reform. According to the World Bank, countries that conducted reforms to qualitatively improve regulations consistently saw 1 to 2.3 percent gains in GDP. According to a regressive analysis by the Netherlands’ Bureau for Economic Policy in 2004, the reduction of the bureaucratic burden by 25 percent results in 1.1 percent GDP growth in short-term and 1.4 to 1.7 percent growth in long-term. In 2006, the Australian Government Productivity Commission calculated that cutting regulatory costs by 20 percent resulted in GDP growth of 1.3 percent. RIA in Russia — First Steps Toward Success Russia’s road toward “smart management” began just recently but is gaining momentum. In May 2010, the Russian government adopted Regulation #336 “On the Introduction of Changes into Some Acts of the Russian Federation Government,” introducing the predictive RIA procedure to evaluate the possible consequences of regulations. The Ministry of Economic Development then created a separate Department for RIA. In December 2010, the state commission on administrative reforms adopted the methodology of retrospective RIA, allowing for evaluations of regulatory acts already in force. In February 2011, the Ministry

of Economic Development signed an agreement on expert cooperation in the evaluation the Regulatory Impact Assessment with Russia’s leading domestic business organizations — the Russian Union of Industrialists and Entrepreneurs (RSPP), Delovaya Rossiya, the Chamber of Commerce and Industry, and OPORA Russia. The reform continues. According to Daniil Tsygankov, Director of the RIA Center at the Institute of Public Administration and Municipal Management of the Higher School of Economics, “There have been significant positive moves in the development of RIA. At the end of 2011, the development of methodological recommendations on evaluations were begun and a road map of the systematic spread of RIA into the regions and municipalities was created. The Ministry of Economic Development and the Ministry for Open Government Relations created a plan to further introduce the RIA procedure into all stages of legislating, from the first draft to parliamentary amendments in early 2012. Mikhail Abyzov, Minister for Open Government Relations discussed this process at the Consultative Board on RIA Issues in July 2012. He noted that the review of departmental documents for their “harmfulness” should be strengthened and that the RIA framework should be extended. Laws that have already been adopted can be amended if they harm business. The work is ongoing. The Ministry of Economic Development states that in the first half of 2012 alone it issued negative reports on 90 percent of the regulatory acts it received. In 10 out of 11 examined documents there were provisions that complicated entrepreneurial activities. Documents that have been rejected are sent back for revision or are recommended for annulment. These intensive revisions are over-

>>


due. In October 2011, at the “Theory and practice of Regulatory Impact Assessment” conference organized in Russia by the Moscow International Business Association, the depressing facts were made public: the costs of hastily-adopted regulations in Russia constitute about a quarter of GDP annually — about 11 trillion rubles ($344 billion). This compares to 16 percent of GDP in Japan and 20 percent in the United States, according to the Organization for Economic Cooperation and Development (OECD). According to experts, the adoption of poor quality laws and regulations is a definitive sign of a poor investment climate. Investors are apprehensive about the risk that the rules will be changed after they invest their money. If it is impossible to predict what future laws will look like, it is impossible to make a quality business plan. Countries with high regulatory risks push investors into making only shortterm investments. Mr. Tsygankov believes that the rate

and the level of introduction of RIA in Russia exemplifies government officials’ understand of the importance of such a review process and that entrepreneurs are ready to assist with complicated legislative documents. International experience demonstrates that it takes about 10 to 15 years to fully introduce RIA into the legislative process. However, if there is sufficient political will, then Russia will be able to complete this task sooner according to Mr. Tsygankov. Business Support for RIA The business community, as the major beneficiary of transparent rules of the game and clear regulative language, has been engaged in this process. According to Anatoly Goltsov, the President of the Lipetsk Chamber of Commerce and Industry, “Businesses are actively supporting RIA as a tool to create a more favorable business climate. Japan Tobacco International (JTI) is one such example, as it supports educational workshops and conferences for regulators, the business

community and scientists in the field of RIA.” Educational programs and consultative workshops for representatives of regional authorities and entrepreneurs on the introduction and development of an RIA procedure are crucial for its functioning and the strengthening of the investment attractiveness of the regions. “We have to base the program on best business practices in other countries. It is clear that the application of RIA will allow us to avoid hastily-adopted and ill-considered laws and will therefore promote the improvement of the business climate, the growth of investments in the region and the competitive recovery of Russian business,” Goltsov explained.

sector update

>

Moscow State University, with the participation of the Graduate School of Public Administration with private sector support is currently developing a continuing education course on Regulatory Impact Assessment. n

Russia Business Watch Summer 2012

25


new members

new USRBC members CelGene is a global biopharmaceutical company with operations in over 50 countries, including Celgene Russia, located in Moscow. Celgene seeks to change the course of human health through bold pursuits in science and a promise to always put patients first. The company’s mission is to build a major global biopharmaceutical corporation while focusing on the discovery, development and commercialization of disease-altering products for the treatment of cancer and other severe, immune-inflammatory conditions.

ChrYsler Group LLC,

Russia Business Watch

Summer 2012

headquartered in Auburn Hills, Michigan, and formed in 2009 to establish a global strategic alliance with Fiat S.p.A., produces Chrysler, Jeep, Dodge, Ram, Mopar, SRT, and Fiat vehicles and products. With the resources, technology and worldwide distribution network required to compete on a global scale, the alliance builds on Chrysler Group’s culture of innovation — first established by Walter P. Chrysler in 1925 — and Fiat’s complementary technology that dates back to its founding in 1899. Fiat contributes world-class technology, platforms and powertrains for small- and medium-size cars, allowing Chrysler Group to offer an expanded product line including environmentally-friendly vehicles.

26

EaGle International Group LLC, a privately held corporation registered in Maryland, is a supply chain value enhancement and service company. The company’s mission is to develop partnerships with crude oil producers that ensure a stable supply of crude oil and petroleum products into the energy market. The company also serves as a vehicle for swift responses to opportunities in crude oil exploration & petroleum products marketing. Eagle International Group also has interests in pharmaceuticals, manufacturing, mining, commodity trading, real estate, IT, and engineering. Integrity, transparency and accountability are the fundamental driving forces of the company.

With 2011 pro forma sales of $11 billion and more than 40,000 employees, Ecolab Inc. is the global leader in water, hygiene and energy technologies and services that provide and protect clean water, safe food, abundant energy, and healthy environments. Ecolab delivers comprehensive programs and services to the food, energy, healthcare, industrial, and hospitality markets in more than 160 countries.


new members

Feeding the world, protecting health and providing the conveniences of life — this is the mission of FMC Corporation. Ever since its beginning in California in 1883 when John Bean invented the first piston sprayer for agriculture, FMC has continued pioneering solutions for its customers. Today, the company uses an array of advanced technologies in research and development, mining and manufacturing to produce customized products and solutions for three chemical markets: Agricultural, Specialty and Industrial. FMC has been operating in Russia since 2011 as “FMC Chemicals Rus LLC” with an initial focus in agricultural chemicals, waste water treatment and food texture ingredients. The company will move to a new office in October 2012 with a BioPolymer applications laboratory that will serve the Russian and CIS food industry.

GeorGe Mason UniversitY is an innovative, entrepreneurial institution with

global distinction. Ranked among the “World’s Top 100 Universities under 50”, GMU offers 202 degree programs in a wide range of disciplines. GMU is home to the Mason Enterprise Center, a business incubator with global reach, and the Virginia Small Business Development Center. Through partnership with Russian universities, GMU offers executive, professional development, and dual degree programs in Management, Economics, Public Policy, Public Administration, International Commerce, Cybersecurity and other areas. The Higher School of Economics, Moscow State University and St. Petersburg State University are among the growing number of Russian partner universities.

Global PaYments Inc.,

a Fortune 1,000 company, is a leading provider of payment processing services, headquartered in Atlanta, Georgia. The company processes billions of payment card, check and eCommerce transactions annually for over one million merchant locations worldwide. Whether processing for its direct customers or for its Independent Sales Organizations (ISOs), financial institutions or referral partners’ customers — from large multi-national corporations to small- to mid-market merchants — Global Payments Inc. serves a diversified base of retailers, restaurants, automotive and professional services, utilities, education, health care, lodging, and government agencies in the United States, Canada, Europe, United Kingdom, Spain, Russia, and the Asia-Pacific region.

Hewlett-Packard

designs, manufactures and services computers and peripheral products and networking products. HP employs approximately 88,000 people in more than 120 countries. The company entered the European market in 1959 and, in 1968, began its operations in the former USSR. In 1995, HP opened its office in St. Petersburg and since then, offices in Novosibirsk, Yekaterinburg, Samara, Rostov-on-Don, Ufa, and Kazan.

We Take Care of You™

Russia Business Watch Summer 2012

HiGhland Project LoGistics is a sister company of Highland Forwarding, one of the fastest growing logistics providers in the U.S. The company provides international freight forwarding and project management services to the oil & gas, mining, energy, cement, steel, and other industries through its alliance with global shipping lines, airlines and logistics partners worldwide. Highland Project Logistics is a specialist freight forwarder in shipments to Russia and the CIS and can deliver shipments to any location with a customs station — by truck, rail, or air. Daily tracking is a standard feature of the company’s service. Almost half of the office staff in United States consists of native Russian speakers.

27


new members

Japan Tobacco International

has over 25,000 employees around the world at 90 offices, 24 factories (producing cigarettes), 6 research & development centers, 5 tobacco processing facilities, and operations in 120 countries. The company’s headquarters are in Geneva, Switzerland. JTI’s diverse employee base is made up of over 100 nationalities building careers at JTI that span its worldwide operations.

KaZan National Research TechnoloGical UniversitY (KNRTU) is one of the oldest universities in the Republic of Tatarstan Founded in 1890,

— one of the most industrially-developed regions of the country with rich oil resources. Kazan National Research Technological University is the largest center of chemical engineering education, employing more than 1,700 professors and training more than 25,000 undergraduate and graduate students. KNRTU partners with 56 universities, research centers and international educational organizations in 23 countries. The university is an associated member of the International Union of Pure and Applied Chemistry (IUPAC) and a member of the Eurasia Pacific University Network (UNINET).

As an international transport and logistics company with headquarters in the U.S. and branch offices in St. Petersburg and Moscow, Russia, Limco LoGistics provides nearly every kind of transportation, including ocean, air, road, and railway. Limco ships heavy equipment such as construction and agricultural equipment from the U.S. and Canada to anywhere in the world using a sophisticated delivery network. With the help of partners around the world, Limco offers door to door and port to port deliveries including customs clearances.

Mercator XXI

is a professional services firm helping clients engage the global economy. Mercator XXI draws on over 30 years of business and marketplace experience in government and public affairs to best position its clients in the ever-changing globalized world. The firm specializes in providing insights and support to seize opportunities in all hemispheres. Mercator XXI’s principals and affiliates are leaders with honed skills from business and market-oriented organizations. The firm brings clients the operational experience of having executed across borders and among increasingly integrated economies.

PENETRON® is the worldwide registered trademark for a system of professional chemical construction products for waterproofing, protections and repair of concrete. Penetron Russia is the only manufacturer and supplier of the Penetron brand penetrating waterproofing system throughout the Eurasian region. Pettibone International LLC provides consulting services, including advice on corporate governance,

compliance and related issues, to companies engaged in trade and investment with Russia. Peter Pettibone is an arbitrator and mediator concentrating on international commercial disputes involving Russian and Western companies. He is a founding Director of the U.S.-Russia Business Council and was its General Counsel from 1993 to 2009.

Russia Business Watch

Summer 2012

The Timken CompanY keeps the world turning with innovative friction management and power transmission products and services that help machinery perform more efficiently and reliably. With sales of $5.2 billion in 2011 and approximately 21,000 people operating in 30 countries, Timken is Where You Turn® for better performance.

28

Transkor Group

specializes in non-contact diagnostics of the technical condition of ground-surface, subterranean and submerged steel pipelines. The company is based in Moscow and recently opened a subsidiary in the United States.

URALCHEM is one of the largest producers of nitrogen and phosphate fertilizers in Russia and the CIS. The company is the largest ammonium nitrate producer in Russia and the second-largest in the world and is the second-largest nitrogen fertilizer producer in Russia.


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


© 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

RBW: Summer 2012  

Russia Business Watch (RBW) is the quarterly publication of the U.S.-Russia Business Council. RBW is a full-color magazine, available also...