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Russia Business Watch VOL. 20, NO. 3

FALL-WINTER 2012

WASHINGTON, DC

THE JOURNAL OF THE U.S.-RUSSIA BUSINESS COUNCIL

What’s Ahead for U.S.-Russia Commercial Relations? PRESIDENT’S MESSAGE: Edward S. Verona p.1

ANNUAL MEETING 2012: KEYNOTE ADDRESSES:

Discussion: Robert Hormats and Klaus Kleinfeld p.5 Amb. Sergei Kislyak p.9 Alexei Kudrin p.11 Nathan Deal p.14 Sergei Belyakov p.16 Michael Froman p.18 Andrey Tsyganov p.19

PANELS:

Attracting Investment: The Regional and Local Government Case p.21 The Future of U.S.-Russia Relations p.23 CEO Dialogue p.26 Meeting the Needs of Russia’s Growing Consumer Class p.29 The Future of Economic Policy p.42 Intellectual Property Rights and Russia’s WTO Compliance p.44 Training the Next Generation of Russia’s Workforce p.45

ACTIVITIES: Luncheon with John Pepper p.48

U.S.-RUSSIA RELATIONS: Briefings on the New U.S.-Russia Visa Agreement p.51

SECTOR UPDATE: “Russia MINExpo” Dinner p.53

NEW MEMBER PROFILES: p.53


CONTENTS

PRESIDENT’S MESSAGE p. 1 What’s Next in the Bilateral and Multilateral Economic Agenda?

BOARD OF DIRECTORS Klaus Kleinfeld, Chairman of the Board Edward S. Verona, President and Chief Executive Officer 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 Richard Burt, McLarty Associates 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 • 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

Russia Business Watch • Fall-Winter 2012

• • • • • • • • • • •

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

ANNUAL MEETING p. 4 USRBC 20th Annual Meeting p. 5 Gala Dinner Keynote Discussion Between Robert Hormats, Under Secretary of State and Klaus Kleinfeld, Chairman and CEO, Alcoa, Chairman, USRBC p. 9 Keynote Address: Amb. Sergey I. Kislyak, RF Ambassador to the U.S. p. 11 Keynote Address: Alexei Kudrin, Chairman, Committee for Civil Initiatives; Former RF Deputy Prime Minister and Minister of Finance p. 14 Keynote Address: The Honorable Nathan Deal, Georgia State Governor p. 16 Keynote Address: Sergei Belyakov, RF Deputy Minister of Economic Development p. 18 Keynote Address: Michael Froman, Assistant to the President and Deputy National Security Advisor, NSC p. 19 Keynote Address: Andrey Tsyganov, Deputy Head, RF Federal Antimonopoly Service p. 21 Luncheon Discussion: Attracting Investment: The Regional and Local Government Case p. 23 Panel: The Future of U.S.-Russia Relations p. 26 Panel: CEO Dialogue p. 29 Panel: Meeting the Needs of Russia’s Growing Consumer Class p. 31 Panel: Russia’s Reach to the East p. 34 Panel: Russia’s Global Integration Continues p. 37 Panel: Oil & Gas - New Frontiers, New Approaches p. 39 Panel: Agriculture and Food Processing: Russia’s New Growth Sector? p. 42 Panel: The Future of Economic Policy p. 44 Panel: Intellectual Property Rights and Russia’s WTO Compliance p. 45 Panel: Training the Next Generation of Russia’s Workforce ACTIVITIES p. 48 Luncheon with John Pepper, Former Procter & Gamble Chairman of the Board U.S.-RUSSIA RELATIONS p. 51 Briefings on the New U.S.-Russia Visa Agreement SECTOR UPDATE p. 53 USRBC “Russia MINExpo” Dinner p. 54 NEW MEMBER PROFILES

USRBC STAFF

Edward S. Verona President and Chief Executive Officer verona@usrbc.org / 202-739-9181

• 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 • Maryia Dauhuliova Head of RF Repersentation, Moscow Office dauhuliova@usrbc.org / [7] 495-228-5896

Randi B. Levinas Executive Vice President levinas@usrbc.org / 202-739-9196 • Julia Fabens Manager of Membership Affairs and Programs bacon@usrbc.org / 202-739-9189 • 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 journal 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 Novinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893 Editor: Svetlana Minjack • Assistant Editor: Jeff Barnett Graphics, Design and Production: Alina Ruzmetova Research Assistants: Julia Herzog, Karolina Konarzewska, Ben Robbins, Natalia Satygo For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.


PRESIDENT’S PRESIDENT’SMESSAGE

What’s Next in the Bilateral and Multilateral Economic Agenda? PNTR to Russia is to be celebrated by all of us who have been involved in that process and who seek to build upon the opportunities presented by the Russian market the world’s ninth-largest in terms of nominal GDP.  

Bipartisanship in Washington nowadays

Russia Business Watch Fall-Winter 2012

may be as endangered as the ivory-billed woodpecker, but there were two rare sightings in Washington on November 16 and December 6 when the House of Representatives and Senate, respectively, voted overwhelmingly to lift the JacksonVanik Amendment and extend Permanent Normal Trade Relations (PNTR) to Russia (and, for good measure, Moldova).  The House tally was a resounding 365-43, and the Senate vote an equally decisive 92-4, in each case with strong support from both sides of the aisle.  It was the culmination of lengthy international trade negotiations and of our own legislative process, involving an extensive debate on economic matters as well as political and moral values. Extending

Which brings us to the question, What’s next in the bilateral and multilateral economic agenda?    First up is ensuring Russia’s compliance with its WTO commitments.   Membership in the WTO is a quantum leap forward in statutory conformity with international trade rules, bolstering the confidence of Russia’s trading partners and potential investors.  However, certain Russian actions since becoming a member are not encouraging.  Scarcely a month had passed before the Russian government imposed a “recycling fee” on imported automobiles, trucks, earthmoving equipment, and other vehicles.  The justification was that it would cover disposal costs of those goods at the end of their useful lives.  A number of companies immediately questioned the compatibility of the fee with WTO rules, and the EU called upon Russia to withdraw it or modify the fee to make it compliant.  If consultations are unsuccessful the EU could convoke a formal dispute resolution panel.  Yet another contretemps arose over Russia’s ban on live animal imports from the EU, also alleged to be a violation of WTO rules. Altogether, this was not an auspicious beginning to Russia’s WTO membership and will undoubtedly heighten concerns about Russia’s intent to fulfill other obligations, such as protecting intellectual property rights against internet piracy and signing the

International Technology Agreement (ITA).   Second, Russia itself may initiate WTO action to eliminate anti-dumping and countervailing duties applied against Russian steel exports.  The U.S. and Russia have a so-called suspension agreement on hot-rolled steel, limiting both the price and volume of Russian steel exports to the U.S.  That agreement has been in effect since 1999, before Russia was deemed to be a market economy.  Under WTO rules, the U.S. would no longer be able to use inferred costs for calculating those duties, thus putting the onus on complainants to produce actual evidence of dumping.  Similar anti-dumping penalties have been in effect for ammonium-nitrate fertilizer and urea; and both of those dumping orders are up for review in coming months.  This is a timely reminder that WTO rules apply in both directions    The third item on the agenda is a U.S.Russia Bilateral Investment Treaty (BIT).  This would accord national treatment to investors from either country investing in the other, and establish a formal bilateral investment dispute resolution process.  Such agreements reduce political risk and increase confidence that foreign companies will not be subject to discrimination or expropriation without due process and compensation.  The U.S. and Russia had negotiated a BIT in 1992 but it was never ratified by the State Duma.  Since then, the U.S. has concluded BITs with three other former Soviet republics: Georgia, Armenia and Ukraine.  Meanwhile, Russia concluded a Partnership and Cooperation

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PRESIDENT’S MESSAGE

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Agreement (PCA) with the European Union, including national treatment provisions for foreign investments.  Ironically, a number of U.S. companies have invested in Russia via their EU member country subsidiaries in order to benefit from that agreement.  The U.S. recently devised a new model BIT treaty that would facilitate congressional ratification if and when such an agreement with Russia is finalized.  In order for that to happen U.S. and Russian companies will need to apply strong pressure on their respective governments.    The fourth item on the agenda is Russia’s accession to the Organization for Economic Cooperation and Development (OECD), the club of developed industrial economies.  This is a top priority of Russia’s foreign economic policy now that Russia is in the WTO; and senior Russian officials say they are aiming for admission by 2014.  OECD membership would confer an imprimatur from the world’s leading investor and trading nations with respect to the fairness, consistency and predictability of Russia’s commercial law framework, judicial system and enforcement procedures.  Other requirements include anticorruption measures, government transparency, respect for civil society, non-discriminatory treatment of foreign investors and reducing the state’s role in the economy.  The process of admission may be more important than membership itself, as Russia is discovering.  Compliance reviews have been conducted since 2007 and have intensified in the past two years.  While the Russians have shown a high level of engagement, there is a lot of work to be done in the 22 committees overseeing the process, and nobody is in a hurry to negotiate a substandard agreement.   One could certainly add more items to the list, but these are the main ones from

a business perspective.  Russia’s integration into the global economy is proceeding, though at varying rates of speed.  It is important to get the elements right and to ensure that all parties live up to their commitments and obligations.  The USRBC has a keen interest in the outcome of this process and will continue to press for the best possible agreements.  At the same time, we will remain vigilant in ensuring that the

agreements made are effectively enforced. n With warm regards,

Edward S. Verona

  President and CEO The U.S.-Russia Business Council

www.usrussiatrade.org

www.usrbc.org

Final Vote Tallies on Permanent Normal Trade Relations for the Russian Federation

365-43 (House Roll Call 608, November 16, 2012) 92-4 (Senate Vote No. 223, December 6, 2012)

Congratulations

To the Members of the USRBC and The Coalition for U.S.-Russia Trade Who worked tirelessly in a bipartisan fashion To ensure passage of legislation to establish PNTR with Russia We did it! Edward S. Verona President, USRBC

Randi D. Levinas Executive Director, Coalition for U.S.- Russia Trade Executive Vice President, USRBC


It is with great pleasure that we invite you to the USRBC’s 21st Annual Meeting, to take place on October 28-30, 2013, in Houston, TX. The Gala Dinner will be held at the Houston Museum of Natural Science on October 28 with the Annual Meeting taking place at the Four Seasons Hotel on October 29-30.

For more information please visit www.usrbc.org/activities/am/

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annual meeting The U.S.-Russia Business Council’s 20th Annual Meeting Four Seasons Hotel and The World of Coca-Cola ● Atlanta, GA October 22-24, 2012

The USRBC’s 20th Annual Meeting took

Russia Business Watch Fall-Winter 2012

place on October 22-24, 2012, in Atlanta, GA. The event brought together more than 200 business representatives, government officials, analysts, and trade experts. With Russia’s accession to the WTO in August, this year’s Annual Meeting underscored the need for dialogue and cooperation for those wishing to reap the benefits of an improved commercial environment with Russia.

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The meeting opened on October 22 with the Gala Dinner at the World of CocaCola, the showpiece of one of the USRBC’s most successful members in the Russian market. At the dinner, in a dialogue with Alcoa Chairman & CEO and USRBC Chairman Klaus Kleinfeld, U.S. Under Secretary of State for Economic Growth, Energy, and the Environment Robert D. Hormats (p. 5), discussed the past and the future of the U.S.-Russia relations. They agreed that with the obsolete Jackson-Vanik Amendment preventing the U.S. from establishing PNTR with Russia, every day since Russia’s accession to the WTO is an opportunity lost for American businesses. Under Secretary Hormats gave his thoughts on the prospect of the repeal of Jackson Vanik and explained the benefits and implications of PNTR with Russia. The Conference Program continued on October 23-24 at The Four Seasons Hotel. In his opening keynote address, Russian Ambassador to the United States Sergei Kislyak (p. 9), also advocated for the

repeal of Jackson-Vanik Amendment, finding optimism for U.S.-Russia relations through increased trade ties. Russia’s WTO accession proved to be the central topic of conversation throughout the meeting. Former Russian Minister of Finance Alexei Kudrin (p. 11), gave a more technical explanation of Russia’s next steps as a member of the WTO, as well as his own predictions for the global market and Russia’s place within that context. The Honorable Nathan Deal, Governor of the State of Georgia (p. 14), welcomed the meeting’s attendees to Atlanta and gave remarks on the implications of increased trade with Russia for the state of Georgia. Later, Russian Deputy Minister of Economic Development, Sergei Belyakov (p. 16), spoke of the progress being made by the Russian government to liberalize Russia’s economy. Michael Froman, Deputy National Security Advisor to President Obama (p. 18), closed the second day with his perspectives on future U.S.-Russia economic relations, noting the support given by the U.S. government over the years. The agenda of the Annual Meeting featured panel discussions (p. 23-47) on topics such as the future of U.S.-Russia relations, meeting the needs of Russia’s growing consumer class, Russia’s reach to the East, Russia’s global integration, new frontiers and approaches for oil and gas, agriculture and food processing, and the future of economic policy. A highlight of the second day’s

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proceedings was the CEO Dialogue (p. 26) between Karl Johansson of Ernst & Young, Anatoly Chubais of RUSNANO, John Faraci of International Paper, and Klaus Kleinfeld of Alcoa. Each gave an overview of his respective company’s activities in Russia, along with perspectives on diversifying and modernizing Russia’s economy. The final day consisted of two panels on the topics of intellectual property

rights and workforce development, punctuated by a keynote from Andrei Tsyganov, Deputy Head of the Russian Federal Anti-Monopoly Service (p. **). The day ended with a luncheon discussion (p. 21) co-hosted by the World Affairs Council of Atlanta between The Honorable Richard M. Daley, former Mayor of Chicago; Terrence Burns, President of Helios Partners and Denis Tikhonov, Deputy Governor and Minister of Economic Development and Industry

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of the Tula Region. Mr. Daley spoke from a wealth of experience gained during his tenure as Mayor of Chicago, while Mr. Tikhonov described how Tula has become a model of regional development in Russia. Through his experience in helping cities and governments attract major sporting events, Mr. Burns explained how private investment is essential to regional development. n

GALA DINNER KEYNOTE DISCUSSION BETWEEN ROBERT HORMATS AND KLAUS KLEINFELD Robert D. Hormats Under Secretary for Economic Growth, Energy and the Environment, U.S. Department of State Klaus Kleinfeld Chairman and CEO, Alcoa; Chairman, U.S.-Russia Business Council October 22, 2012 ● World of Coca-Cola ● Atlanta, GA

Klaus Kleinfeld:

“…Bob, you were present from the initiation of the “Reset” policy, and I want to start at this point. When you first entered politics, it was a completely different world — Russia was the enemy of the U.S. When you look at the situation today, what do you see has changed, what has remained the same?”

Move forward 50 years, and we have a relationship now that is certainly not perfect, but where there are numerous

From an economic point of view it is particularly interesting. There was virtually no economic relationship between the Soviet Union and the U.S. during the Cold War. In fact, it was the desire of the Soviet Union to set up a totally different international economic system, centered around Moscow and centered around Moscow’s control over satellite countries. But what happened at the end of the Cold War? Russia joined the World Bank, the IMF, it just recently joined the WTO, and it’s in the process of joining the OECD. We work with Russia in the G8, we work with Russia

Robert Hormats (r.) responds to question posed by Klaus Kleinfeld. in the G20 and we have a Bilateral Presidential Commission. In fact, I am going to chair two subgroups of that next week in Moscow where we will talk about energy issues, innovation issues and a whole range of environmental issues. Sure, it’s not perfect, and we do have a wide range of differences and there are areas of tension that come up from time to time; but it’s a very different relationship. We’ve come a very long way. And we now need to take the momentum we have, and go forward. That means, that people have to understand that there are things on both sides that need to be done. Ours for the moment, is getting PNTR.” KK: “Let’s talk about that for a minute. I was in Russia last week, and you see that Russia’s WTO accession is already

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Robert Hormats: “Well, that’s what is striking about the relationship with Russia today. This is a particularly interesting time to talk about it, because we are now at the 50th anniversary of the Cuban Missile Crisis, which is the closest the world came to blowing itself up. We were inches away from a total nuclear holocaust. It didn’t happen, but I think people, particularly those who didn’t grow up during the Cold War, failed to understand what a deadly confrontation that could have been. Fortunately both sides, Khrushchev and Kennedy, decided on a formula that would have avoided that, but we came very close.

areas of very close collaboration. If you put this in perspective, it is quite remarkable how far we have come in 50 years. Then it was the Soviet Union, now it is Russia. Then it was the Cold War, now it is collaboration on numerous issues: Afghanistan, sanctions on North Korea, sanctions on Iran. There are differences, there are certainly differences on Syria, differences on a couple of other issues, but if you compare the relationship as it was 50 years ago and today, they are quite different.

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making a very positive mark. Obviously, Europeans are much closer to it regionally and here we are, sitting on the sidelines and hoping that PNTR will get passed in the United States. What do you see on this front?” RH: “…There is, I think, a fundamental misperception about PNTR among many people in this country and that is that it’s doing Russians a favor to provide PNTR. When, in fact the situation is very different. It’s different in the fundamental sense that, if we do not give Russia PNTR, we do not get the benefits of access to certain parts of the Russian economy. More particularly, we do not get access to the dispute settlement procedures of the WTO that the Europeans get, the Chinese get, the Japanese get and everyone else who is member of the WTO gets. So, not passing PNTR and lifting Jackson-Vanik restrictions, as they relate to Russia, is really a penalty against the American workers, American business, American farmers, and American ranchers. It is detrimental to our interests and particularly in a country, where we all know, both sides know, that we need to create jobs. Passing PNTR will help to create jobs.”

Russia Business Watch Fall-Winter Winter 2010-2011 2012

KK: “This is exactly what we are trying to educate Washington about. Do you think it is working? Do you see PNTR being passed in a lame duck session?”

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RH: “I think, the problem with the lame duck session is that they’ve got to deal with fiscal cliff issue and that will preoccupy members of Congress. It is possible that other pieces of legislation will pass and we are certainly working on it but it’s very hard to predict at that point. And what’s ironic about this that there is a remarkable degree of bipartisanship when it comes to U.S.-Russia relations and there has been for decades. Now there are some differences of opinion on certain issues, but by-in-large both Republican and Democratic administrations have supported Russia joining the WTO. Both Republican and Democratic administrations have waived, with the support of Congress, the application of Jackson-Vanik for over 20 years. So, there is a remarkable bipartisanship with respect to the fundamental economic aspect of this relationship. The key now is to take this issue out of the partisan context, and work on it for what it is, which is a way of enhancing opportunities for American companies.” KK: “Some people say that Bill Browder has taken the U.S.-Russian foreign policy hostage. One aspect has become to

Klaus Kleinfeld (l.) and Robert Hormats at Gala Dinner Keynote Discussion. dominate the whole discussion, basically dragging all the other positives into the background.” RH: “We are working with the Congress on it. There are a couple bills that relate to this subject. We have done a number of things on human rights issues. People who were involved in that were denied access to the United States. Not just in Russia, people who were engaged in human rights violations elsewhere in the world also were denied access to the United States. But on these two particular pieces of legislation we are engaged with the Congress. I think it is a very sensitive issue. All I can say is that we’ve had numerous conversations on the Hill, with a lot of members, who were engaged with them. Ben Cardin, for instance. There are a number of members with whom we speak on a regular basis. But at this point it is hard to say what the outcome is going to be.” KK: “Recently, Secretary of State Clinton has announced a new foreign policy doctrine or an “economic statecraft” doctrine. Can you explain this policy in more detail?” RH: “If you look at the world of 30 or 40 years ago, influence was essentially

based on your military strength and the ability to project it in other parts of the world. Increasingly today, and for most countries, it is about your economic strength and your ability to project it in other parts of the world…. The foreign influence of this country and its military strength has to be based on a strong economy. Otherwise, you do not have the resources to conduct an effective foreign policy or national security policy, and you don’t have the ability to mobilize public support to conduct a strong national security, or foreign policy. People usually want to use more of the resources at home, and there is less available for foreign assistance or other international programs. So, for the State Department, a fundamental aspect of ensuring that this country has an effective foreign policy and national security policy is to utilize our international economic policy to support American business and American jobs. We have done this in a multitude of ways. Ambassador [John] Beyrle, who is here tonight, and others have been extremely effective in supporting the interest of American companies abroad and supporting the interests of American companies that want to export to other parts of the world. We are trying to figure out ways in which we can improve the rules of the global

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trading system to ensure what we call the ‘level playing field.’

KK: “Do you think that this concept is understood on both sides of the isle? In a way it sounds so logical, that logic dictates it no matter which side you are coming from, because, in simplified terms, you’ve got to make money to be able to spend it.” RH: “…I tend to think, that this is something that has become such a fundamental part of American foreign policy, and a fundamental part of our domestic economy, because so many companies

Other governments are very supportive of what their companies are doing abroad. When the president of France, the Chancellor of Germany, the president of China travel abroad they support their companies. We have to do the same…. American companies are also terrific ambassadors. If you look at the United States today there are two significant aspects of our international economic policy that are not focused on the government. One of them is the quality of the American brand. It means, respect for diversity. It’s a commitment to strong environmental practices. It’s respect for workers, in terms of giving them education and upward mobility. It means quality control — American drug companies, American food companies have a strong emphasis on quality control…. The second is innovation. America is still the most innovative country in the world. Now, we have to do more to keep up our innovation image. We have the

KK: “I would like to switch the subject here. One of the things that has changed fundamentally is technology. Sometimes I feel like I live in a 25 hours a day/8 days a week world. I need that much time to get through all the things that my job requires. You have multiple devices and everybody wants to shoot you a massage expecting you to respond in nanoseconds. Interestingly enough, that has also changed politics. Isn’t that in a way also changing society? Almost nothing can be a secret anymore. We face it in the business world, and I wonder what it means to face it in the political world. I was in Russia for a meeting with Mikhail Abyzov, the new Minister for Open Government. The initiatives that he shared with us were very interesting in terms of government transparency. This has only been possible through technology. Technology has been the enabler. Do you have any thoughts on what that means, in terms of society and political systems?” RH: “What it does is give people a vehicle for participating in their political systems and economic systems to a degree that they have never been able to do before. Information about what their government is doing or not doing is transmitted by social media instantly. So, if the government is engaged in a practice that is harmful to the environment in one part of the country, everyone knows about it. If there is an abuse of workers in one country all the potential customers of the company that engages in this abuse are aware of it. It has changed the way people look at their governments and the governments look at their people. The people no longer see themselves as subjects. They see themselves as participating in the gov- >>

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

This relates to protection of intellectual property, to non-discrimination with respect to American investors operating abroad, to a variety of issues that focus on standard setting or regulations, many of which are skewed in favor of local companies as opposed to international companies that want to do business in a given country. So, it is both support for individual investors and individual companies that are trying to sell products abroad and also support for a very effective rules-based global trading system that gives American companies the opportunity to compete in other markets. So, this is the essence — we can’t have a strong foreign policy without a strong economy; we can’t have a strong economy without an effective international economic policy that supports our companies abroad.”

operate abroad, and so many jobs are dependent on sales abroad, that this would be an enduring light to see. I would be shocked if it would not be continued in the future. It’s possible to imagine, that some people would say the role the State Department is more traditional diplomacy and not economic diplomacy. But this is like turning the clock back and saying there is no global economy.

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proper educational system, but we have to put money into research and development. We have to support innovative companies and support government sponsored R&D, support national laboratories, we have to do a whole range of things. The Chinese are working very hard to catch up. In some cases by legitimate competitive measures, in some cases by piracy of intellectual property. But nonetheless, a lot of countries are trying to close the gap with the United States, in some cases to get ahead of us in certain areas. This is inevitable to a degree, as the world changes and becomes more global. But our competitive edge is critical. We bring it to other countries, and they respect our innovative capability. The ecosystem of American innovation is the envy of the rest of the world….”

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ernment process, either through the ballot box, if they have access to it, or if they don’t, by communications in likeminded groups within their own country. That does put a lot of pressure on governments to be responsive to their people. On the other hand, it’s an advantage to governments. Governments can utilize social media to find out what is on the mind of their constituents. So, if governments understand this properly, I think it would be helpful to them in being responsive to their people before tensions build up to a degree as they did in Tunisia, or Egypt or in other parts of the world. It can be a useful vehicle…. There is one other element that makes foreign policy different in the age of the Blackberry or the tablet, and that is, that every government agency has its own State Department — a large group that deals with international issues. There is an international division in the Justice Department, in the Interior Department, in FDA. On the one hand, the State Department’s role is less in terms of interaction with other governments than it was 20 or 30 years ago. On the other hand, it plays a bigger role in coordinating and prioritizing. So, the challenge for us is to work with other agencies to figure out a way in which we can pull together the various views of people involved in international relations in our government and make a coherent policy.”

Russia Business Watch Fall-Winter Winter 2010-2011 2012

KK: “Bob, you have seen many people in your time working on and in U.S.Russia relations — from Kissinger to Clinton. I assume that there are moments in time when you were young and looked at it and wondered: ‘Wow, what is happening here?’ Now with all your knowledge and experience, what do you consider as the marking points or turning points in the relationship?”

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RH: “That is a very good question. When I was in the government, one of those moments was the Cuban Missile Crisis. That was the sobering experience for Americans and Russians and everyone else in the world. I think that the oil crisis of 1973-74 was a major turning point because it made Americans understand that we were no longer protected from economic events outside of our border…. We have to pay attention and develop policies of a more effective nature to address international economic issues. I think the other one was the tearing down of the Berlin Wall. It is very hard

to imagine for people today, what the world was like when Europe was divided and there were American and Soviet military forces on both sides of the border in Germany. This is a very different world from the kind of world that we have today. A lot of what happened between the United States, Europe and rest of the world was dictated by Cold War alliances. The U.S. and Europe worked together out of a military necessity. Now, we work together out of an economic necessity…. The end of the Cold War opened opportunities for collaboration on the economic side that didn’t exist before. The same is true with China. We had no economic relations at all. There was no trade up to the early 1970s. But now you have this powerful new player, not just on a political and military side but also as a major economic player. China has become a critical participant in the economic system. That has required from

the United States to have a foreign economic policy that takes into account the rise of China, India, Russia, and Brazil. We now have to have an international economic policy, not one that focuses on the G8, as had been the case about 15 years ago, but one that engages all these emerging economies. The fact is, when we develop new rules for this system or try to ensure that the current rules of the system are enforced, you cannot do it without active engagement with these large emerging economies. They are part of the system, and they change the whole fundamental set of tendency of American international economic policy. Broadening our relationship with these countries and to make new rules or have new rules enforced or deal with environmental, or financial, or trade or investment issues you have to bring a lot more compromise into the game. They also have to feel they have a stake in those rules if they are going to adhere to them….” n

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OPENING KEYNOTE ADDRESS: Sergei I. Kislyak Ambassador to the United States Embassy of the Russian Federation October 23, 2012 ● Four Seasons Hotel ● Atlanta, GA The following is an excerpt of Ambassador Kislyak’s address to the USRBC.

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“… oday we have a number of mechanisms showing the direction in which both of our countries are moving. We are very much interested in relations with the U.S., both political and economic, but at the same time we are willing to move forward only as long as the U.S. will be willing to do so. Relations between us can develop only if they meet the interests of both countries. And if we look at the interests of our countries during the post-Cold War period in particular, we will see that they have been quickly developing in many respects.

We look at the challenges that we are both facing, challenges like terrorism, weapons of mass destruction and, of course, the global economic crisis that affects us all. We are working on those issues much more closely than we are given credit for. I would say that the current state of affairs is sometimes depicted here in very gloomy images. You know, every day I start my work by reading a pile of clippings called ‘American Press about Russia’ that my staff provides for me.

It’s the most depressing reading one can find and it kind of recharges my batteries for the rest of the day. Once I met the editors of an American newspaper in Washington and I asked them, ‘Why is that the case?’ We have changed, we have achieved a lot, and the newspapers didn’t notice that? Our economy is developing in many relative terms much better than any others. We are almost free from any debt, we have overcome so many negative factors that used to take place in

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Russia Business Watch Fall-Winter 2012 Winter 2010-2011

Amb. Kislyak addresses the USRBC 20th Annual Meeting

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our history. I was wondering whether there is at least one newspaper covering all that…. But the issue is that, even despite the end of the Cold War, we still have to fight against a lot of prejudices in people’s minds. And I can give you another example, Jackson-Vanik and the WTO. We have joined the WTO, and I would like to especially emphasize the importance of the U.S. support in this question and that we really do appreciate it. We had tough negotiations on a number of issues with the U.S. on Russia’s WTO accession but, nevertheless, we managed to find mutual agreements on most of them. The current state of affairs within Russia doesn’t really affect U.S.-Russia relations because everybody understands that the Jackson-Vanik amendment is a vestige of the Cold War period. Everybody recognizes that there are no barriers for Russian Jews going to Israel. Israel and Russia have a visa-free regime; we are close friends. And Jackson-Vanik is still used as an instrument of applying pressure on Russia, even taking into account all the changes that have taken place so far.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Today, both governments are moving in the right direction to develop our relations in a great number of spheres, but we still have this so called ‘Jackson-Vanik luggage’ that is considered to be a real obstacle to better cooperation. And I know that many of you take part in dealing with this issue and I am very grateful to you for that, but at the same time we can also expect Jackson-Vanik to be replaced by another political instrument, the so-called Magnitsky bill.

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I hope that Jackson-Vanik is to be repealed very soon as there isn’t any reasonable evidence for not doing so. Our situation has changed drastically and we no longer have any rational reasons for that. Of course, it would be wrong to replace Jackson-Vanik with the Magnitsky bill as it will only maintain that kind of hostile environment preventing us from further bilateral business development. …U.S. lawmakers are keeping a very close watch on Russia in the WTO. So far, they are not satisfied with China’s functioning there. But Russia has nothing to do with it. Russia is not China; Russia is Russia. I am strongly convinced that our countries have huge potential for development but, taking into account the fact that good news doesn’t sell, nobody talks

USRBC President Edward Verona (r.) thanks Amb. Kislyak for his remarks.

about the fact that we have already achieved so much. We have signed and ratified such important bilateral agreements as the Treaty on Measures for the Further Reduction and Limitation of Strategic Offensive Arms (New START). Now, I watch with great interest the development of the Bilateral Presidential Commission and the subcommittee on nuclear power cooperation. The work they do is commendable. All this shows that we are moving in the right direction and we are looking forward to achieving the goals set by the U.S. and Russian Presidents. I believe these goals will certainly be achieved. We have also just signed an agreement to relax visa requirements for both businessmen and tourists. Russia is in favor of annulling the visa regime, though the U.S. is still thinking about it. Once that happens, it will simplify contacts between people, the contacts that we would like to expand, especially in economics and mutual investment. If we look at the record of the last few years we will see a visible increase in trade. According to American statistics,

we have increased the trade volume of the last year by 30 percent to a total of $42 billion. Our statistics, though, provide smaller figures of $36 billion, with only 0.6 percent of Russia’s total trade volume with the U.S. versus 2.5 percent of U.S. trade to Russia. That actually means that to lose Russia as an importer would not be consequential for America. Though for us to lose the American presence on the Russian market would actually matter, as our companies will have to reconsider their business focus and move closer to Europe. I believe our countries have huge potential for building a healthy investment climate based on mutual trust and stability. Russian investment opportunities are underestimated; they are much more promising than most experts consider them to be. By close cooperation in many fields and new job creation, we will manage to strengthen our economic ties. I am always in favor of events like this one because they promote further development, which is strategically necessary for both our countries.” n


Alexei Kudrin Chairman, Committee for Civil Initiatives Former Deputy Prime Minister and Minister of Finance of the Russian Federation October 23, 2012 ● Four Seasons Hotel ● Atlanta, GA The following is an excerpt of Alexei Kudrin’s remarks at the USRBC Annual Meeting.

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“… would like to once again refer to what our Ambassador Sergei Kislyak said to the effect that we have been closely watching the debates and issues and questions that the Presidential candidates have been raising. We have a vast stake in the U.S. elections taking place in a manner that will enable us to maintain our relationship of partnership, preserve the opportunities we have in business, and help solve certain challenges that remain. On my own behalf, I would like to add that, over time, we have been allies with the U.S. more often than we have been geopolitical opponents. When the going got tough we would come together. The same has been true in recent years, when we made decisions on the war against terrorism. Based on my personal experience working within the G8 and the G8 Council of Finance Ministers, in the G20 and in other formats, I personally have never felt that we are geopolitical opponents....

Moreover, this year Russia is the Chair of APEC and is closely working with APEC members, including the U.S. So, here, again, we are partners. Next year Russia will chair the G20, and we are looking for an agenda that would help solve major global problems caused by the crisis, fight terrorism, poverty, improve the standards of living in our countries, and increase investments into our countries amidst a global crisis that is still capable of surprising us. Naturally, I have to discuss the crisis. My assessment may vary a little from optimistic official forecasts. I shared some of my thoughts in this regard in a Wall Street Journal interview recently. I believe that the Euro area will be in recession this year. The drop will amount to approximately 0.3 percent, perhaps greater. Many expect to see growth in that part of the world by the year’s end, as well as throughout the next year, but, according to my forecasts, the decline will continue, which will create new problems for heavily indebted nations. As far as the global situation, growth will register at 3.5 percent this year, and this is a number that has been

published following two downward revisions of the current forecasts. I believe that another revision of forecasts is appropriate since, in my opinion, one should expect very weak growth worldwide. The situation in China is shaping up in a similar fashion. My forecasts do not take into account scenarios where certain nations leave the Euro area. I think it would trigger even greater challenges for the global economy. I believe that, within the next 12 months, Greece will leave the Euro area. Not only because it lacks the political will and resources necessary to stabilize the situation but also due to a violation of the EU’s fundamental principles. A nation’s currency must be in line with that nation’s fundamental ratios. Unless that condition is met, one should not expect to see any incentives for growth. Unfortunately, cutting expenses and reforming pensions will grow increasingly difficult. We will observe a situation where several critical factors will be at play in the Eurozone: increased cost-cutting in a number of countries, search for additional resources to support those nations, protection of political interests, and the provision of explanations regarding cutting expenses in one sector while increasing them in another. There are so many such factors that it appears extremely difficult to keep the situation stable. Meaning we

The agreement to join the WTO comprises protection of intellectual property rights, which is of special concern to our Western partners.

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

There is yet another circumstance that allows me today to talk about our friendly relations. Only a week ago, Moscow hosted a session of the Commission of the Foreign Investment Advisory Council. My friend Klaus Kleinfeld was in attendance. The Council had conducted a survey that included this question: ‘How many businesspeople are ready to re-invest in Russia after their first experience?’ The response was 75 percent. In 2007, an identical question as part of a similar survey produced a mere 50 percent positive responses. Today there are many more businessmen who are willing to do business with Russia since they do not see it as a geopolitical opponent. It is a very important fact and one that is helping us.

Alexei Kudrin (l.) with Robert Hormats

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KEYNOTE ADDRESS:

must be prepared for anything…. Today many banks and financial institutions have been conducting preventive policies by operating under the worst-case scenario, which significantly complicates the situation. Undoubtedly, the U.S. remains the driver of economic growth. To a large extent the success of the U.S. economy is making a significant impact on Russia. We must give undivided attention to our

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budget, ability to sell oil and gas and energy sector development, and that is why we are waiting for a successful outcome of the efforts to deal with the fiscal cliff entanglement. We also expect an early solution to the issue of the budget deficit. It would be of critical importance for the entire global economy. ... According to forecasts, Russia, too, will experience growth rates considerably below expectations of 4 percent; this year, it will probably amount to a mere 3.5 percent and, next year, as predicted by the Ministry for Economic Development, 3.7percent. A low number for Russia. Over the last decade, growth reached 7 percent with half of it fueled by increased oil production and prices. As of today, this particular potential has been exhausted; therefore the key growth factors will be manufacturing, increased competition and greater efficiency in financial and government institutions. Unless the government makes progress in those areas we could fall behind, once again, in many key indicators. We must grow faster than the world on average, especially because we have a vast potential to do so.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

... A great deal needs to be done in macroeconomics. The World Bank ranks Russia 22nd in macroeconomic ratios and regulatory standards.

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Over the next few years, a set of necessary measures will need to be adopted and approved, including budgetary rules governing proper utilization of oil and gas revenues. That would, to a significant extent, determine the point at which to balance the budget. At the moment, the budget is balanced with oil prices at $115 per barrel. In three years, that number is expected to drop to $95. If we can reduce that dependency it would greatly benefit the macroeconomic situation in Russia, as well as decrease inflation and the volatility of the ruble. The Central Bank has made an official statement to the effect that, over the next three years, it will switch to a policy of setting inflation targets and a fully floating exchange rate, as well as reduced currency interventions. All of this will help mitigate inflation, which, in turn, will affect the interest rate for investments and modernization of our economy on the whole. We should also adjust and fine-tune the domestic lending policies, so that we will not have to count exclusively on external borrowing and investments.

Before I left the Russian government, a legislative plan had been approved to help establish an International Financial Center in Moscow. At the time, I made a decision on establishing a central depositary. In their turn, foreign banks have asked to strengthen laws on pledges, protection of accounts and deposits, and, I am sure, it will be done shortly. Recently, the U.S. adopted the Foreign Account Tax Compliance Act (FATCA), a law that concerns the need for agreements to be entered into with banks outside the U.S. and information to be disclosed about accounts opened by U.S. companies. Now our banks are required to inform the IRS directly. So far, this matter has not been resolved since the law is inconsistent with the Russian law on non-disclosure of bank secrets. ... Implementation of a whole number of obligations would be proof of an improved investment climate. Recently, the Prime Minister noted that the Cabinet was devising roadmaps for issues of greater sensitivity for business. Already four maps are being implemented: support for access to foreign nations’ markets and export support, increased access to energy infrastructure, improved customs administration, and an improved business environment in construction. Twenty such maps are to be completed before 2014. ... I would like to touch on opportunities that open up due to Russia’s accession to the WTO. In my opinion, Russia’s WTO membership has not been sufficiently comprehended. I am convinced that it will have a more positive nature than many see it today. Agreement has been reached with many countries on all the sensitive issues, including regulation in the area of trade tariffs, the size of subsidies for industry and agriculture and services markets, including financial services.

I know how much my friend Klaus Kleinfeld has done for it. ...The agreement to join the WTO comprises protection of intellectual property rights, which is of special concern to our Western partners. The WTO agreement provides a robust basis for further steps in this area. However, based on surveys of compliance with the rights held by U.S. IP owners in foreign countries, Russia — despite an obvious improvement — for several years has been put on the unfavorable list of “Priority Watch List”, alongside Israel, India, Canada, China, Ukraine, and others. While acknowledging largescale measures taken by Russia in legislative and law-enforcement areas to strengthen IP — such as the fact that legal action has commenced against a number of pirate websites — and praising the creation of a specialized court in our country, the U.S. nevertheless has described these steps as insufficient, above all on the internet. I would like to note that our two countries have yet to execute a Bilateral Investment Treaty to encourage and

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From left: Klaus Kleinfeld, Anatoly Chubais, Amb. Sergei Kislyak and Edward Verona.

As we speak, the level of tariff protection in Russia amounts to 11 percent of the effective average rate and will drop to 7 percent in 7-10 years. In the U.S., it is 3 to 4 percent. Clearly, our administrations have done a great deal, but it is very sad to observe that, although all the decisions have been made, they are not working between our two countries. That is why we are hoping for Jackson-Vanik to be lifted... I know just how much the USRBC and its members have done for that to happen.

Ed Verona (l.) talks with Russian Senators Vladimir Plotnikov (c.) and Vladimir Torlopov.


mutually protect capital investments, signed back in 1992 and not ratified by Russia, since it ran counter to positions it stated during WTO negotiations. However we can revisit it now. Let us do so. It would be a new measure to protect investments. ... Next in line is Russia’s membership in the OECD. We have embarked on refining dozens of relevant laws and government decisions. ... The trade between our countries clearly falls short of its economic potential. Following a significant drop in 2009 (32 percent vs. 2008), 2011 saw the pre-crisis numbers bested by 14 percent. Russia’s exports grew by almost 35 percent, imports by 32 percent. The U.S. accounts for 3.8 percent of Russia’s foreign trade, similar to Turkey, Poland and France, or roughly, the 8th position among Russia’s trading partners. Russia only accounts for one percent of the U.S. trade. ... The accumulated U.S. investments in Russia stand today at $7.3 billion, including half in the fuel and energy

sector. Russia has invested $8 billion in the U.S., mostly in modernization of the steel-making industry and hi-tech businesses. ... It is also important to note increased cooperation in information technology and innovation. A multi-faceted program is being devised to promote contacts among small and medium-sized businesses in the hi-tech area; we are hopeful that it will facilitate further development of that sector in a significant way. Russia is currently moving along the difficult road of an evolving civil society. The building of civil society is integral to creating a sustainable market economy. I am confident that a civil society will make reforms irreversible. In conclusion, I would like to note that when First Deputy Prime Minister Igor Shuvalov spoke at the USRBC’s 19th Annual Meeting before presidential elections in Russia, everyone was interested in whether the population would support the authorities’ policies and reforms that would be proposed.

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The elections are now behind us and we can see that the people yearn for significant change. The level of corruption is intolerable, education and public health are in steep decline and significant political reforms are needed. Last winter, new laws were adopted on registering parties and electing governors — a highly positive sign. However, at the very same time, laws were adopted that have narrowed opportunities for holding rallies and for civil rights action. We have our work cut out for us if we are to support civil society and make our political system more transparent. The road along which civil society is coming together in this country is not easy, since a number of generations here have matured in an entirely different culture and system. That is exactly why I have set up the Committee for Civil Initiatives, which trains municipal deputies and those wishing to work in the reform area. I am confident that civil society will ensure sustained reform in this country.”

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Anatoly Chubais (l.) with USRBC member Doran Doeh (c.) and Wayne Lord.

USRBC Executive VP Randi Levinas (left) speaks with Alexei Kudrin.

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

Governor Deal (l.), Clyde Tuggle (c.) and Alexei Kudrin.

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The Honorable Nathan Deal Governor of the State of Georgia October 23, 2012 ● Four Seasons Hotel ● Atlanta, GA The following is an excerpt of Governor Deal’s remarks at the Annual Meeting.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

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“… believe that one of the best ways to become friends across boundaries, across oceans, is to do business with each other. That makes friends. It removes some of the tensions that are sometimes associated in the political arena, and makes those kinds of political judgments much easier for those in elected office when they know that there are economic ties and economic business arrangements that need to be taken into consideration. It is indeed an honor to be invited to be the speaker here at the U.S.-Russia Business Council’s 20th Annual Meeting. And I want to thank you on behalf of all Georgians for selecting our state as the place that you decided to come. Now, one of my jobs as governor is to be the number one bragger of our state. The number one promoter of why we are a great place in which to do business. We think we have a great story and it is certainly borne out by the facts. Let me

give you a little bit of an overview of what Georgia does and what we have to offer. First of all, I know that sometimes when you look at a map of the United States, Georgia may appear to be a rather small state. The reality is, Georgia is, in territory, the largest state east of the Mississippi River. We are the 9th most populous state, now approaching a population of almost 10 million people. Nearly 80 percent of the population of the United States actually lives east of the Mississippi River, and the southeastern United States is one of the nation’s fastest growing regions. The Southeast offers a lot of opportunities for business, both domestic and international. We have a very interconnected transportation and infrastructure network. Our attitudes are pro-business, and we have a lower cost of doing business. Georgia is at the center of this expanding Southeastern region; we are truly the economic leader in the Southeast. Part of that, of course, is that we offer a very

friendly business environment…. At the same time, more than 80 percent of the United States market is within a two hour flight from Atlanta. We also have a port, and it is an important part of our economic infrastructure. The Port of Savannah — which includes deep-water ports at Savannah and Brunswick — is the fourth-largest port, and the fastest growing port, in the United States. We are working very hard to deepen that port in order to accommodate those Super Panamax vessels when they start coming through the Panama Canal in 2014. We think we are well on our way to having that project begin…. I am told that the Port of Savannah is probably the only port in the United States that has two railroads that have terminals at the port, which facilitates the removal of those containers from the cargo vessels…. Georgia also has nine general purpose foreign trade zones, where firms can delay, reduce, or, in some cases, eliminate U.S. customs duties on imported items. Georgia business growth has been accelerated by the workforce that we have here in our state. We have worldrenowned institutions of higher learning, institutions such as the Georgia Institute of Technology, Emory University, The University of Georgia, and Georgia State University. These research institutions provide unique opportunities for business to have a relationship with the higher education community…. >>


From left: Coca-Cola’s Clyde Tuggle, Gov. Deal, Randi Levinas and Ed Verona talk prior to the Governor’s address.

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In fact, Georgia was recently ranked number one in the workforce category by CNBC with regard to America’s top states for business. The Georgia business environment certainly suits both small and large sized companies. We are fortunate to have many Fortune 500 companies that are both national and international located here in our state. Georgia is home to over 3,600 international companies representing some 60 different countries.

As you know, back in August, after 18 years of negotiation, the WTO welcomed the Russian Federation as its 156th member. As one of the world’s largest economies, and with more than 140 million consumers, Russia has a lot to offer. In fact, among the BRIC countries, it has

Georgia is not the only state with good relations with Russia. According to Russian data, the U.S. is Russia’s 10thlargest foreign investor. Though, I am proud to say that a pretty good amount of that investment comes from Georgia companies like Coca-Cola. With accession to the WTO, this market should represent a significant increased opportunity for U.S. companies. Conservative estimates, for instance, put total needed infrastructure spending over the next five years at $500 billion.

Clyde Tuggle introduces Gov. Deal.

Currently, all of the other 155 members of the WTO have been able to fully access Russia’s market liberalizations from new rules related to services to intellectual property protection. But U.S. businesses cannot. U.S. businesses need to be able to address Russian policies that appear inconsistent with WTO member obligations. But without PNTR, the United States has no rights and no recourse in the Russian market. Our competitors in Europe, China and elsewhere might as well thank us for our absence as they step in and take advantage of the opportunities to provide Russia’s needed infrastructure. The modernization of its industrial base and the demands of a highly educated growing consumer class that appreciates quality is a good place for America to do business. In what should be an exciting time — Russia’s market opening to U.S. businesses — executives such as those of you who are here today currently have to stand by and watch as our competitors snap up contracts as they lock in commercial relationships that sometimes span several years…. The United States simply cannot afford to unilaterally cede short- and long-term opportunities as it relates to Russia. I ask as the Governor of the State of Georgia of our Russian friends who are here today, that you consider opening a consulate or trade office here in Georgia. We have many that are located here; in fact we had the formal opening of the consulate for India last evening. I believe that this is one of the ways that we can continue to strengthen our relationship. If both Georgia and Russia fully capitalize on everything that I’ve talked about today, and will be talked about by other speakers, I think we stand to gain a great deal from each other, economically and culturally. I appreciate the fact that you are here today and hope that Georgia has made you feel welcome. We hope that you will come again.” n

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

…Let’s talk about Russia for a minute, because you are the other component of this meeting. And I think this event is timely. As you heard from my introduction, I served as a Congressman from the state of Georgia for many years prior to becoming Governor. Some of my colleagues in Washington tell me that the issue of PNTR is one of the top topics that is being discussed with regard to international trade and some, of course, are optimistic, as I am optimistic, that we will see a vote on that before the end of this calendar year. I have signed a letter along with others supporting and urging Congress to take that action. I believe it is the responsible and the proper thing for us to do.

the highest per capita GDP. Georgia currently has a trade surplus with Russia. We can’t say that about every country with which we do business, so we’re certainly happy that that is the case in regards to Russia. In fact, in 2011, Georgia ranked sixth among all U.S. states in exports to Russia, with two-way trade with Russia totaling more than $620 million. That was a 73 percent increase over the previous year.

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Yet, up until this point, the U.S. market share in Russia has been relatively small. Only about four percent of Russia’s imports last year came from the United States. We have an opportunity to change this by graduating Russia from the Jackson-Vanik amendment to the Trade Act of 1974. With the collapse of the Soviet Union two decades ago, Russia established freedom of immigration for all citizens, and since 1992, U.S. presidents from both parties have issued annual certifications of Russia’s full compliance with the Jackson-Vanik amendment. I believe it is time for an upgrade.

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KEYNOTE ADDRESS: Sergei Belyakov Deputy Minister of Economic Development of the Russian Federation October 23, 2012 ● Four Seasons Hotel ● Atlanta, GA The following is an excerpt of Deputy Minister Belyakov’s remarks.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

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“… oday, I would like to highlight the successful macroeconomic results and continued economic stability that the Russian government has achieved since the crisis. Economic growth is crucial to the government in order to meet the social and economic challenges that are ahead of us. When then-President Medvedev came to office in 2008 he set as his priority the four “I’s”: Institutions, Infrastructure, Investment, and Innovation. My colleagues and I are often asked if these priorities have changed with a new president. I can assure you that all priorities that were established previously have become part of the new administration’s economic planning and will be carried out by President Putin and the government. For example, in May,

President Putin signed an important decree that set up his agenda for the following six years, which also included tasks that were set out by former President Medvedev. There are no contradictions. I can assure you that the change of president does not bring any risks for businesses. …If you look at the World Bank’s latest Doing Business report, Russia improved its ranking for the second year in a row…. I think that this is confirmation that the economic policies we have pursued and our efforts to create favorable conditions for domestic and international business show results. That means that our policies are moving us in the right the direction. It is important to add that the measures that are being implemented right now are not reflected in the research for 2013…. A government official is an optimist,

because he needs to be optimistic about what he is doing in the government. A businessman is an optimist in a different way. He risks his money; his optimism is reflected in his investment. Therefore, the investor’s optimism is very important to us. According to recent research, the number of optimists rose by 25 percent over the last 5 years. These results are very good. What we are going to do next is to strengthen the potential that lies in the Russian economy. The potential of the Russian economy is characterized by a very good macroeconomic situation, low debt, increasing Gross Domestic Product, relatively low inflation, and high consumer demand, which is one of the key factors on whether or not to place a manufacturing facility in a certain country. Based on this potential, a good and comfortable atmosphere for everybody needs to be strengthened in order to minimize the state’s role in the economy. A comfortable business environment should not depend on the involvement of a government official…. This brings us to the government’s plans for privatization. Last week at the annual Foreign Investment Advisory Council (FIAC) conference in Moscow Prime Minister Medvedev was asked whether or not the government has changed its plans on privatization and if yes, than

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why? We consider privatization a priority as well as the reduction of government’s involvement in the economy. This is another task of the privatization process. The priority has not changed. In fact, we have reviewed several privatization plans…. However, current research shows that the number of initial and secondary public offerings has declined due to the current unfavorable conditions. For this reason, we are devoting more attention to the preparations for the privatization process and whom we will select as consultants. You are all welcome to participate in this process. There will be a package of documents in the government that will be open and transparent to everybody in the market. They are completely accessible and transparent for all participants of the market. So we ask ourselves, is the goal of raising our Doing Business ranking by 100 places to 20th realistic? How ambitious and attainable are our plans to attract foreign investors, who are crucial for us to be able to realize the potential of our economy? Is it possible to create 25 million new high-tech jobs?

For this reason we are extremely motivated and optimistic. We know the tasks are very ambitious and complex, but they need to be completed and they can be completed. This we can achieve together with the business community. In conclusion, I have to say that the reputation the Russian economy and the Russian Federation has is probably well deserved. However, we should not pity ourselves for this. I am not going to do that. Our most recent achievements prove that we are not that inefficient. I would like to see our reputation change,

of creating them. Those existing jobs will provide a certain growth. It is possible to measure it through the change of labor productivity, which is a measurable ratio. If we increase productivity, it will mean that we have new jobs. Today’s existing standards are not satisfactory to us….” Q: What does the Russian government think about Russia’s role in the global economy? Besides energy, what is Russia’s major commercial sector?

Jonathan Kimball of PhRMA poses a question to Mr. Belyakov.

not just as a result of presentations like today, but thanks to our achievements and to positive results. And hopefully our policy will be conducive to these changes….” Question & Answer Session Q. How important is a Bilateral Investment Treaty (BIT) with the U.S. and how important is PNTR among the priorities in bilateral talks with the United States? “Well, the BIT is really a priority of our work with the U.S. administration, because it is mutually beneficial for both…. This is an instrument of guarantees against the violation of rights. And of course it is an instrument of reducing risks and will of course enhance the cooperation between companies and will facilitate the arrival of U.S. companies to the Russian market. We have had good experience with such agreements. I hope that we will not make just progress in those agreements but simply execute them in the very near future.” Q: If I understood you correct, President Putin promised to create 25 million new jobs. Currently, 75 million people in Russia are already employed. This is a remarkable number. Therefore, how can you create 25 million new jobs? “This is a very good question. We are not talking about creating new jobs, but modernizing and transforming existing jobs, including the creation of new hightech jobs. This is needed and absolutely necessary to increase labor productivity…. The challenge is to change the jobs and the nature of the jobs themselves and not to make jobs for the sake

“…First, we view everyone as a partner. Second, there is a certain prejudice according to which people consider Russia to be a raw material- and commodities-based economy. But this is not the case. Surely, there is a prevalence of sources of energy. We are not happy about that because we are too dependent on factors such as energy prices that are beyond our control. Some people claim we are stagnating and that we are living with the expectation of a second crisis, which is not true. We live in the conditions of crisis already. So, we gear economic policy toward placing greater importance on manufacturing and we support high-tech exports. We have drafted a wide range of specific proposals…. We will support companies that make certain kinds of products. We will also try to attract investors that organize their production in Russia. There are certain projects that cannot be digested even by such a huge market as the Russian market and should be geared toward Eastern Europe, Central Europe and Asia.” Q. How does the Russian government balance the tension between promoting the growth of the domestic economy and the obligations (under the WTO, for example) to ensure a fair playing field for multinational companies? “Accession to the WTO was rather a mechanism of transforming the economy into an even more attractive economy for foreign companies that will have very clear rules of investment, and also protection from certain rapid changes. Surely, it is easier to live without competition, especially from the standpoint of a small producer. Protection for domestic producers is not only typical of the Russian economy — all countries move along that road, the United States included. Here you have to support the national producer and, of course, we must not run against the rules and commitments of the WTO. We have very good accession terms that allow us to

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We set these targets and pursue them because they need to be fulfilled. We have no doubts that we can achieve these goals…. We have developed a national entrepreneurial initiative. Within this framework, we implemented roadmaps to reform obstacles that companies usually face. For instance, how much time you spend on a certain procedure or which procedures you need to undergo if you want to start a project in Russia. Therefore, we used the method the World Bank is using. This is not just in terms of how well the legislation or regulations are written, but in terms of how the legislation works practically. This way certain indicators can show us how many procedures we can expect this year or next year.

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> adapt not only the legal framework but also all the new requirements for our producers. I do not think we will face any contradictions or conflicts.

We have measures supporting our agricultural workers and the automotive industry. There is a period of transition, especially in terms of duties. I am not aware of tensions within the WTO framework. At least foreign companies unanimously have expressed to us that they see a benefit in Russia’s accession to the WTO, even those who have already placed their facilities within the Russian Federation…. We are not going to close our market in order to avoid competition.” Q. What steps is the government taking to reform customs and resolve the outstanding issues in that area? “That is one of my favorite subjects. We have already demonstrated better conditions for businesses along every indicator, such as time, expenses, tax burden,

and number of payments. In 9 out of 10 indicators, we have demonstrated improvement compared to the year before, which is not bad. Other countries, though, also compete for a decreasing amount of investment capital, where they have shown more efficiency than us. That motivates us to become more competitive. The only indicator that has not improved is international trade, a component that can be seen in customs. In my opinion, the issue can be solved by simplifying the customs clearance procedures. We have a system of preliminary declaration, where part of the information should be presented electronically so that the Customs Service is able to make a decision in advance with regards to a certain cargo. If there is no need for inspections, they will clear the goods expediently. This year, we adopted a roadmap that lists all the obligations and specifies a certain timeframe for implementation as developed by the Agency for Strategic Initiatives. We expect to see the first

results next year…. The roadmap has been approved by the Presidential Advisory Council and has been signed into action by the Prime Minister. The Customs Service will not be able to ignore this paper. We will make sure that they comply fully…. In the past, the general approach was 100 percent inspection, and supposedly it was to protect the interest of the government and the consumer. But now we are changing and revising this concept as it is applied to the Customs Service. We need to change the system in a balanced way. We already have reduced the number of administrative barriers, we have reduced the number of inspections. We have limited the number of barriers but not yet accomplished the desired result. This is just a start…. We have reduced our participation here and there. Now we want to become more efficient. Not by giving more roles and functions to the government but by reducing them; however, keeping the most important ones.” n

Keynote Address: Michael Froman Assistant to the President and Deputy National Security Advisor, National Security Council October 23, 2012 ● Four Seasons Hotel ● Atlanta, GA

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Michael Froman, Assistant to the

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President and Deputy National Security Advisor in the National Security Council, provided an off-the-record address to Annual Meeting participants.  Mr. Froman addressed a range of issues covering U.S.-Russia relations, from geostrategic concerns like counterterrorism cooperation to the importance of increasing the effectiveness of the trade relationship as a stabilizing factor in our overall relations. He addressed the Administration’s efforts to support the lifting of Jackson-Vanik and granting of PNTR status to Russia on Capitol Hill as well as provided an overview of the possible next stage for the bilateral relationship.

Top: Michael Froman addresses the audience. Left: Edward Verona (l.) thanks Michael Froman for his remarks.


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tions of competition law by governmental authorities and officials are recognized and punished by the Federal Antimonopoly Service. …Another of the functions of the Federal Antimonopoly Service is oversight of the rate of concentration of businesses in a given sector. In many cases, FAS must give preliminary regulatory approval for the mergers and acquisitions of companies. During the past decade, the number of applications that are subject to approval by FAS decreased 10 times because of changes in the thresholds for companies that are subject to oversight.

KEYNOTE ADDRESS: Andrey Tsyganov Deputy Head, RF Federal Antimonopoly Service October 24, 2012 ● Four Seasons Hotel ● Atlanta, GA The following is an excerpt of Mr. Tsyganov’s address at the Annual Meeting.

I

The Federal Antimonopoly Service is a multifunctional authority, responsible for issues ranging from compliance with Russian antimonopoly legislation to regulation of natural of monopolies (excluding the establishment and regulation of prices) to legislation on adver-

Russian competition legislation is similar to those found in any country. One of our priorities is strengthening anticorruption activities because we understand and recognize that cartels are the most severe form of anticompetitive actions. The abuse of position by large Russian companies is the most common violation of competition law in Russia, which is not surprising given our experience with a planned economy in Russia. One of the specific features of Russian competition legislation is that it covers not only anticompetitive activities or agreements in the private sector, but also the activities of government authorities on the federal, regional and local levels. Every year there are 6,000 viola-

The special agreement on common competition principles and rules envisions a gradual implementation period. The first stage of implementation is the transitional period, which started in January 2012. During this period, the essential legal framework for control of unified competition rules is to be created. During the first stage, culminating in September 2013, there should be a delegation of powers regarding the unified competition rules. In November 2013, there should be a delegation of competition policy oversight of cross-border agreements within the CIS. The result will be the delegation to the Eurasian Economic Commission of powers to control the abuse of a dominant market position by companies in Belarus, Russia and Kazakhstan. Of course, none of this is possible without the necessary legal framework or the harmonization of the national competition legislation of the member states of the common economic space. The current discussion focuses on what the Eurasian Economic Commission should do. Our position is based on the European Union’s practices and on our

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“… t seems to me that it could be much more interesting not to tell you about what we have done, including recent developments in our legal practice, but to discuss what we are going to do in the mid-term and what are our goals. Yesterday, speakers and analysts talked about competition at great length. No doubt competition is a vital force for development, innovation, consumer benefits, and so on, but, there need to be rules established by the state and institutions that are responsible for the supervision and implementation of these rules. In Russia, this is the job of the Federal Antimonopoly Service (FAS).

tising and control over state, municipal and state-owned enterprise procurement. We are also responsible for oversight of foreign investment in strategic industries and of the bid process for allocation of assets, resources and rights in some sectors. Of course, our main area of focus is competition.

Looking forward, the competition law and policy implementation will be drastically changed because of the creation of the Eurasian Economic Commission (EEC)…. The EEC is a united permanent regulator in the Custom Union and the common economic space, including for competition. The Eurasian Economic Commission began exercising its functions in February 2012 and became the so-called Supranational Competition Authority of the common market of Russia, Belarus and Kazakhstan. This Commission will be responsible for the implementation of competition rules and principles in the common economic space in some sectors.

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The competition law and policy implementation will be drastically changed because of the creation of the Eurasian Economic Commission.

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tion and to implement effective measures of competition on the sectoral level, on the regional level, and so on. …Yesterday, a lot of speakers mentioned different kinds of ratings to judge the openness or effectiveness of the Russian economy. Competition authorities have their own rating — Global Competition Review collects information from different sources about the competition authorities of different countries and rates them annually. Our goal in the medium-term is to be one of the 10-best competition authorities in the world. It is very ambitious because to be one of the top 10 means to be at the same level as the U.S. Department of Justice or the European Commission. But, it seems to me that this goal is achievable because

own experience within the framework of Commonwealth of Independent States. We think that the result of these efforts will not be the acquisition of power by one supranational authority but the synthesis of a supranational authority and three antimonopoly authorities. Of course, it will result in a lot of work for businesses, business consultants and lawyers to manage and abide by the combination of national and multinational rules of competition. I also want to tell you about our goals for the next five to six years. We are now working on the development of a Russian competition strategy that will be an official document, a road map, for our future activities…. Our goal is effective competition policy and competition legislation and effective competition enforcement incorporated into the general social economic policy of the Government of the Russian Federation. We feel that we have very strong support from the Russian government and the President. Both the President and the Prime Minister understand that it is very difficult to solve serious socio-economic problems without the development of competition within the economy. Last month, the special Governmental Commission on Competition and Small Business Development was created by governmental decree. The Head of the Federal Antimonopoly Service, Mr. Artemiev, is a Vice Chair of the Commission and Sergei Borisov, the President of OPORA, is another. So, there is a combination of government and private sector experts and most interestingly, government officials are obligated to follow the decisions of the Commission. This Commission should be a powerful and effective way to promote competi-

U.S. Embassy FCS Official John McCaslin poses a question to Mr. Tsyganov. we started at number 38 out of 100 countries in the rankings 5 years ago…. Today, we are number 17. Therefore, the goal of being among the first 10 is achievable. We also want to be recognizable by the Russian people. And for that we have our own transparency policy. Any decision made by the Russian competition authority should be placed on the website of FAS in two working days. We are in all of the social networks in Russia and you can find us everywhere. We are surrounded by a great number of highly qualified experts and have developed an expert community of 28 Expert Councils. These Expert Councils cover

varying fields of activity, from the financial market and telecommunications to advertising and federal services, for instance. We have a very intensive enforcement practice that is spearheaded by young, educated and ambitious professionals who are learning new enforcement practices both inside Russia and abroad. Keeping in mind the problem of capacity building, this year we established a special non-commercial organization training center in Kazan that is supported by the government and the President of the Republic of Tatarstan…. At the same time, we created special programs in Russian universities on competition law and a competitive economy.... This helps us in our everyday work. Finally, I am very happy to tell you that we have a growing community of competition professionals outside the Federal Antimonopoly Service who are our strongest opponents in individual case resolution and disputes. But, at the same time, the same people are our most reliable partners in legislative initiatives and policy development. Many of these specialists recently created a non-profit organization dedicated to improving competition policy, the Organization on Defense of Competition. During their last meeting in Moscow, the main goal was to discuss the first version of FAS’ mid-term strategy. We are going to finalize this draft by the end of 2012. The draft is on our website and everyone can look through it and comment on it and participate in the preparation of this very interesting project.” n

Both the President and Prime Minister understand that it is very difficult to solve serious socio-economic problems without the development of competition within the economy.


Denis Tikhonov

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Hon. Richard Daley

Terrence Burns

LUNCHEON DISCUSSION:

ATTRACTING INVESTMENT: THE REGIONAL AND LOCAL GOVERNMENT CASE Moderator:

Wayne Lord, President, World Affairs Council of Atlanta; Professor of International Executive Education, J. Mack Robinson College of Business at Georgia State University

Panelists:

Terrence Burns, President, Helios Partners The Honorable Richard M. Daley, Former Mayor, City of Chicago Denis V. Tikhonov, Deputy Governor; Minister of Economic Development and Industry, Government of the Tula Region

Wayne Lord opened the panel by

Denis Tikhonov first gave a brief overview of the Tula Region and its efforts to attract foreign investment. He stated that Tula’s competitive edge lies

with its human capital. Tula is involved in creating clusters of industries and promoting relations between educational institutions and businesses. Evidence of the success of its human capital development is the fact that foreign companies have transitioned from using foreign management personnel to relying on local talent in Tula. Tula does not have any oil or gas resources to export. Therefore its economy is very diverse comprising chemical, metallurgical, food, and other sectors. Tula’s economy has experienced a speedy recovery from the global crisis in 2009, with a level of investment to GRP at 25 percent. Mr. Tikhonov

The U.S. is the main investor in the region, a result of incentives provided by the regional government to encourage a positive business environment. Examples of this include a flexible system of tax deductions for new businesses, an active investment foundation and the provision of state funded infrastructure. Two industrial districts have been established to provide infrastructure to attract companies. Further, regional officials place a high priority on being available to investors and managers. In line with these efforts, Tula has taken

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noting Atlanta’s particular interest in Russia with multinational companies like Coca-Cola, GE, UPS, AGCO, and others located in the city. He focused the panel on two topics: the effect of the economic crisis on the present investment climate and the state of the competitive environment in which Russia participates. He suggested that the desire to attract investment in Russia is motivated not only by the desire for growth but also by its accession to WTO.

explained that Tula has a growing consumer class with increasing purchasing power. Export rates in Tula are three times higher than imports, ranking second in Russia only to Moscow. He noted that Forbes ranked Tula as one of the 10 best cities in Russia for doing business due to the regional government’s successful cooperation with foreign companies. The core businesses in the region are U.S. companies like Proctor & Gamble and Cargill, and their projects are considered priorities by the regional authorities. He asserted that politics are minimized in the business environment of Tula while economic problems are a priority, so relationships with companies are not politicized.

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steps to increase transparency in government policymaking. Expounding upon Tula’s efforts to create future investment opportunities, Mr. Tikhonov cited the regions’ plans to create a multimodal transportation center. A cross-polar aviation route crosses directly over the Tula Region, and an airfield constructed in the Soviet period for multi-use spacecraft is readily available. He believes Tula can absorb some of the functions of the transportation system from Moscow. With a pipeline running near the airfield, there is potential for Tula to be a hub for the production and delivery of aviation fuel. Thus the authorities in Tula are taking steps to encourage cooperation to build the necessary infrastructure and develop this project. Another sector of great potential for Tula is tourism. A tourism cluster is being developed that will be anchored by Yasnaya Polyana, Leo Tolstoy’s former estate.

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Responding to Mr. Lord’s question on how cities can best attract investment, Richard Daley explained that the business community has traditionally built and promoted Chicago. He emphasized that this was only possible through close collaboration between businesses and the city government. It is important that mayors assess the needs and desires of the business community and act as its advocate.

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Mayor Daley noted the speed at which today’s global economy evolves. The movement of American profits overseas increases the need for local officials to work to attract businesses back home. He suggested that the next generations of Americans have to change how they view the world. Therefore, he advocated teaching foreign languages in public schools, noting Chicago’s leading role in this effort. Chicago schools teach Arabic, Russian and Chinese, languages not commonly taught but very relevant in today’s world. Megacities are the trend of the future, Mayor Daley said. He found it more pragmatic to view Chicago as an agglomeration, inviting dialogue between officials of surrounding cities across different states to engage in a regional approach. Mayor Daley insisted that universities are assets, and the relationships made across borders in the intellectual community stimulate local economies. A comfortable business environment is essential in today’s

economy due to easier mobility — a business can be here today and gone tomorrow if not nurtured. Mayor Daley closed by reiterating that the business community is an asset, not a liability. Elected officials need to understand the process of running a company and not assume they know better than business leaders. He foresees megacities becoming the norm, growing in economic and political power. Terrence Burns spoke about the benefits of attracting major sports events to a city or country and the potential economic boost that they can provide. Bringing events to Russia is interesting and complicated as Russia is an ancient nation wrapped in a new, modern country. For Sochi, it was impossible to compete on the same terms as European alpine cities. Sochi’s bid was less about sport and tradition as it was about bringing Russia into the modern international community. More important was the question of what Sochi could bring to the Olympic movement. Sochi meant new territory and new revenue, as well as the promotion of sport in a new region. He pointed out how the Sochi bid was a multi-level effort. For him, the overriding goal of such events is to enrich the lives of residents, and that ultimately is an economic concern. Mr. Lord followed up on Mr. Burns’ comments by asking the other panelists what they believe is most essential in making their respective cities and regions attractive for business and projects. Mr. Tikhonov stated that quality of life is vitally important to a region. This is not only embodied in salary, but in access to cultural pursuits, sport, etc. Tula is attempting to balance uneven development patterns through the creation of agglomerations that emulate Moscow. In this manner, Tula is trying to win the right to host the Children’s Olympics. Better quality of life mobilizes resources, which helps economies develop. Mayor Daley noted that without adequate quality of life standards, it is very difficult to attract businesses. Managers from abroad need to have comparable quality of life in Russia in order to want to open new facilities there. He encouraged businesses to advocate for Chicago in order to promote the city as an attractive place to live and do business. Ultimately, businesses will

Mayor Daley (l.) with Randi Levinas (c.) and Atlanta City Council member Kwanza Hall.

question whether it is more beneficial to move profits back to America or keep them abroad, and it is the job of cities to be welcoming to business in order to attract their investment. He asserted that it is the business community that will make a city, not the politicians. Mr. Burns noted the importance of local sponsorship potential in securing a bid for a major event like the Olympics. The business community was strongly behind Russia’s bid for the Winter Olympics, though it was questionable whether this was driven by the market or the government. He pointed out, though, that American cities do not compete on a level playing field when bidding for major events as selection committees want major guarantees that American city, state and federal officials are unwilling to provide. Nonetheless, it is the business community that is the engine for funding and winning major events. Question & Answer Session Responding to a question about the role of small cities in attracting investment, Mayor Daley suggested small cities have been forgotten and need to rebuild themselves. He noted that urban centers will reach a point where they are so large that quality of life is compromised. It is therefore in city leaders’ best interests to work together with smaller cities to provide viable and supportive alternatives to metropolitan life. Mr. Tikhonov explained how Tula works to advance small cities as well as urban centers. He supports local self-governing bodies that make managing the

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development of the region much more practical. This allows citizens to advocate for their own interests more effectively. Asked about his emphasis on language education during his tenure in Chicago, Mayor Daley related how he instructed the Chicago Board of Education to change its language education approach to include a focus on Russian, Chinese and Arabic. He reiterated the need to adopt a global approach in primary education to avoid isolating the next generation workforce from the world economy. When asked how much is too much in terms of concessions given to attract businesses, Mayor Daley responded that government concessions given to new businesses are risky. However, it is better to take that chance than to miss out on

opportunities that might have great impacts on the economy and livelihood of a city or region. He advocated that governments be proactive regarding businesses. In response to a question regarding the long-term economic impacts of major international sporting events on the host city, Mr. Burns explained that events like the Olympics have reached a point where it is simply too expensive for cities to commit to hosting. He cited the London Olympics, which have an outstanding price tag of $27 billion. Russia will spend $19 billion to prepare for the World Cup and the Sochi Olympics will potentially cost more than $30 billion. However, the result will be the complete redevelopment of a region in seven years, a much shorter timeframe

than would happen otherwise. For some countries this is a worthy investment while for others, it can cripple the economy. American cities have to host privately funded Olympic Games. This increases the responsibility of the organizers to avoid waste, making American Olympic Games the few breakeven or profitable examples. He lauded Atlanta for its responsibility in its spending and the strong legacy that has followed in the decades after the 1996 Olympics. Mr. Burns noted that the current evaluation criteria give equal weight to responsible and irresponsible proposals. He believes changes must be made to give advantage to smart planning that will leave a positive, sustainable impact on the city and surrounding region, avoiding another experience like that of Greece. n

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PANEL:

THE FUTURE OF U.S.-RUSSIA RELATIONS

Clockwise from top left: Dimitri Simes, Daniel Russell, Vin Weber, Sam Nunn.

Moderator: Panelists:

Daniel Russell Deputy Assistant Secretary for European and Eurasian Affairs U.S. Department of State Sen. Sam Nunn Co-Chairman and Chief Executive Officer Nuclear Threat Initiative Hon. Vin Weber Noted Political Observer and Commentator

although U.S.-Russia relations are characterized by numerous tensions, they emphasize pursuing common interests with each other. He then asked the panel participants if they think that the U.S.Russia relationship is moving in the right direction. Daniel Russell answered by saying that the relationship is certainly moving in the right direction in the long-term view because both countries have common interest that will not change. The Obama Administration continued the work of the previous four administrations with the aim of improving U.S.-Russia relations as it has been in U.S. interest to do so. >>

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Dimitri Simes, President and CEO, Center for the National Interest

Dimitri Simes started by stating that

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Mr. Simes noted that the Russian President accused the U.S. of instigating the protests that have taken place in Russia during the past several months, USAID is not allowed to function in Russia and the U.S. and Russia have profoundly different views with respect to the situation in Syria. He asked Mr. Russell if he thought that Russian officials believe that the communications between the two countries have deteriorated significantly. Mr. Russell responded by noting that both countries had to face a number of domestic and international issues, such as presidential elections and the Syria crisis. However, although the U.S. has concerns about the situation in Russia with respect to its civil society and high level of corruption and disagrees with Russia’s position on Syria, the U.S. can cooperate with Russia on issues of mutual importance and support its economic and political modernization at the same time. For this reason, the two countries have been able to work together on issues such as the nuclear aspirations of Iran and North Korea, peace and stability in Afghanistan, and trade and investment.

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Mr. Simes mentioned that one of the most recent decisions of the Russian government has been to end its participation in the Nunn-Lugar initiative. This happened although the initiative has not been undermining Russian interests. He asked for comments about the strategic relationship between the U.S. and Russia.

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Sen. Nunn answered that because the Nunn-Lugar initiative serves the interests of both countries, he does not think they will let this program disappear. The framework of this agreement may have to be renegotiated as it dates back to the 1990s. Currently, there are over 30 countries that have nuclear materials and terrorists are seeking nuclear weapons, making the benefits of the program to national security clear. Sen. Nunn also added that Russia has made great progress securing its nuclear weapons since the collapse of the Soviet Union. Mr. Weber added to the discussion by explaining that the fact that Mitt Romney did not criticize President Obama for not adopting a tougher stand against Russia proves that today’s relations between the U.S. and Russia differ from those during the Cold War profoundly. Businessmen in the U.S. consider Russia a valuable business partner and not a

political foe. Nevertheless, serious differences between the two countries remain with the main one being Russia’s suppression of democratic values. While this issue should not hinder bilateral economic relations, the U.S. must remain clear on its stand regarding these concerns. Mr. Simes observed that there are two different narratives regarding how the issue of democracy promotion should be handled in Russia. The U.S. government expects Russia and other countries to move in the democratic direction. Russia, on the other hand, believes that it has the right to choose its system of government given that it is a sovereign country. He asked how the U.S. should handle the tension between respect for sovereignty and democracy promotion. Mr. Weber answered by explaining that the collapse of the Former Soviet Union offered the U.S. a set of false expectations as many of the countries from the

former communist bloc adopted democratic institutions. Therefore, while the U.S. has a lot to contribute to other countries’ democratic efforts, it must learn lessons about sovereignty and the limitations of trying to impose an American model in other parts of the world. Next, Mr. Simes asked the speakers to discuss their perspective on the Magnitsky bill and Russia’s potential response to it. He first called on Russian Ambassador to the U.S. Sergei Kislyak to provide his views on the subject. Amb. Kislyak explained that Russia perceives the Magnitsky bill as U.S. interference in Russia’s internal affairs. It is the Russian government’s responsibility to investigate the case and prosecute any wrongdoing. He said that Russia will retaliate against these measures and the Russian government is considering various options. The Ambassador also criticized the comment about Russia’s repression of democracy, saying that


Mr. Russell responded to Ambassador Kislyak’s comments by stating that the American response is a result of the slow pace of action on the judicial front on the Magnitsky case. With respect to Russian civil society, the development of political institutions should remain in Russian hands. However, the idea that foreign-funded civil society groups pose a threat to Russia seems unconvincing. This is mainly because civil society in Russia will continue to develop whether or not it receives help from outside the country. Mr. Simes noted that Iran has been mentioned as one of the main strategic

threats to the U.S. by some U.S. government officials, and asked about Russia’s position with respect to issues that cause tensions between Iran and the U.S. Mr. Weber explained that the U.S. and Russia are working together on Iran to some extent, and that this cooperation can be continued. The sanctions imposed on the country are working, but there is a need for a universal rule that would prevent nuclear proliferation around the globe. Mr. Simes mentioned that both President Obama and Republican presidential candidate Mitt Romney agreed that President Assad of Syria must resign before any settlement in the country can occur. The Russian leadership believes that President Assad should only leave as a part of a peace settlement. Mr. Simes asked how these two positions can be reconciled. Mr. Weber answered by stating that eas-

ing out dictators is a challenging task compounded by the fact that the situation in Syria is threatening its neighbors. Both the U.S. and Russia are concerned about the outcome of this crisis, but at a certain point the situation will have to be addressed. It is clear that there are no easy solutions to it. Mr. Russell added that the U.S. is most concerned with the fact that Russia prevented the UN Security Council from addressing the Syrian crisis in a united way despite the fact that both the U.S. and Russia have shared interests in the region. Russia also wants to be able to sell arms to Syria, a decision that the U.S. does not welcome.

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Russia is ensuring that its political processes are defined by Russians in a lawful form without violence. Therefore, institutions operating in Russia with foreign funding must be transparent and work within the limits of Russian law in order to be allowed to continue their presence there.

Mr. Simes pointed out that there is considerable potential for the development of U.S.-Russia relations in the commercial sphere. He asked about the extent to which the economic relationship between the two countries can become a stabilizing factor in their difficult relations. Mr. Russell agreed that the economic ties between the U.S. and Russia will help the two countries through difficult political times. Russia’s WTO accession — which was strongly supported by the U.S. — is a positive step forward, but there is more work to be done. The U.S. wants to negotiate a new Bilateral Investment Treaty with Russia and supports Russia’s accession to the OECD. The U.S. and Russia can achieve a lot together to create a framework that could improve business and trade between the two, but achieving these goals requires more work.

Sen. Nunn added that it is critical to the health of the U.S. economy that the Congress addresses the fiscal cliff. There is an opportunity for the U.S. government to arrest the problem as long as Congress acts in a bipartisan fashion. Once the U.S. puts its economy on the right track, it will be more successful at addressing the economic problems in the global arena. n

Amb. Sergei Kislyak (l.) offers his perspective on the Magnitsky Act to the panelists.

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Mr. Weber emphasized that achieving the two countries’ common economic goals requires both the U.S. and Russia to first address their own economic problems. The U.S.’s first priority should be addressing its debt crisis, because removing this obstacle would make it easier for the U.S. to work with other countries on global economic issues.

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PANEL:

city to another. So, the challenge of infrastructure is enormous….

CEO DIALOGUE Moderator: Karl Johansson, Managing Partner, CIS, Ernst & Young

Panelists:

Anatoly Chubais, Chief Executive Officer, RUSNANO John Faraci, Chairman and CEO, International Paper Klaus Kleinfeld, Chairman and CEO, Alcoa; Chairman, U.S.-Russia Business Council

The following are excerpts of the CEO Dialogue addresses.

John

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Faraci, Chairman and CEO, International Paper

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“…I believe that business can play an enabling role in helping Russia modernize, grow and diversify and I think foreign direct investment and global economic integration are vitally linked…. I’ll use an analogy in speaking about some of my views on Russia — the Russian Troika, which is three horses pulling together. I think there are three issues that Russia must improve in order to create a more attractive climate for direct investment. The first is skills development. Having been in Russia for 13 years, I see that Russia’s got very competent, technically trained people. The issue is there are not enough of them…. This is an issue for a lot of emerging markets, and is also an issue somewhat in the U.S.; we need to develop more global leaders. Russia needs more business people capable of seeing not just the country they grew up in, but the world that they compete in and the customers they serve outside the country where they live. So developing global leadership talent is really key for Russia. That’s why IP’s become

involved in the Skolkovo School of Management to try to do what we can to bring some of our expertise to helping that process and we’re going to learn at the same time. So, I think number one is skills development. The second issue is infrastructure. We took our board of directors this past

The last is transparency: less bureaucracy and simplification of the rules for competition. If you’ve ever been involved in trying to do a big project that involves a lot of people and a lot of equipment in a faraway place in the world — getting visas, goods through customs, getting permits, finding labor, etc., are all relatively more difficult in Russia. At the end of the day, countries around the world compete for foreign direct investment (FDI). Nobody’s got a monopoly on FDI. So, as we see it, the returns in Russia are good, but the risks in Russia are relatively high. I think the Russian government recognizes this and to the extent that they can accelerate doing something about it is going to further set the stage for more FDI. Two decades ago there was a question mark about Russia’s future on the economic side. I don’t think there’s a question mark any longer. I think Russia is here to stay, I think they’re here to compete, I think they want to diversify their economy away from energy. The busi-

From left: Karl Johansson with Anatoly Chubais, John Faraci and Klaus Kleinfeld.

June to China and Siberia… And the contrast between the infrastructure was just enormous. China is building roads, bridges, airports, cities, highways, etc., and here we were in the middle of Siberia with one big project coming to a conclusion and another one on the drawing board, and we’re talking to the governor about building one road to get from one

ness we’re in, forest products, is certainly natural for that as Russia is blessed with — natural resources, renewable resources. I was at the APEC Summit in Vladivostok, and Russia is now looking to the East where there are growing markets rather than their traditional markets in the West. I think with Russia’s accession to the WTO there’s no question it

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in the U.S. That’s absolutely fantastic. Most of the technology we’ve found is on the West Coast, not the East Coast ­— sorry, but that’s the reality of America. Here are two examples just to give you an idea of what types of investments we make. One of the companies we invest in is named Joule, which is working on a fantastic technology to transform CO2 into diesel. They’re making it by using genetically-modified bacteria that consume CO2 and transform it into real diesel…. Another example is in life science research by a very well-known and respected cancer researcher in the U.S.

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Russia needs more business people capable of seeing not just the country they grew up in, but the world that they compete in and the customers they serve outside the country where they live.

blockbusters in a very important field like the fight against cancer…. …If I were to draw some conclusions from our experience, I would say just the following. First, in these and other cases, I never faced any kind of political obstacles even with the understanding that at least some of these technologies are sensitive. Second, I’m absolutely convinced that the potential for cooperation in this sector is absolutely fantastic. What we’ve made is just the first steps. This is an example of a sector that was never a point of cooperation between Russia and the U.S. The story

can extend its global reach. FDI is going to be a key part of that. But those three issues need to be addressed.” Anatoly Chubais, Chief Executive Officer, RUSNANO “…We all know that one of the fundamental problems of the Russian economy is its reliance on oil and gas, which now accounts for more than 70 percent of Russian exports and more than 50 percent of budget revenues. It’s a kind of unbalanced structure of the national economy and that’s why for the last four or five years the Russian government has made a lot of effort to try to diversify the Russian economy. You can see these efforts in the Skolkovo project, the Russian Venture Corporation and Rusnano, which is a $10 billion government-backed fund to invest in nanotechnology.

We’re a young company, but we’re finding very, very good partners in the U.S. — actually, the U.S. is Rusnano’s largest partner. Today, we’ve committed up to $2 billion of investment in 11 projects

named Bob Langer. Dr. Langer established two companies — BIND Biosciences and Selecta — whose cancer treatment technologies are based on the idea of targeted delivery of nano-scale medicines to specific cancer cells. This is an absolutely fantastic technology that is now in the second stage of clinical trials. We are investing in this technology not only in the U.S., but have also created an R&D center in Russia that is supporting the development of the technology. I hope that we will be able to start Russian clinical testing and manufacturing in Russia and distribution in Russia. So, that’s maybe one of the

has always been about Russia selling oil and gas and importing technology. What we’re discussing now is joint development of high-tech products and cuttingedge business that we can do together. I believe that this is possible because of the very reasonable steps of the Russian government to diversify the economy and because of the positive reaction of the United States….”

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We’re investing mainly in Russia, and our main goal is to establish a Russian nanotechnology sector, but we’re investing abroad as well.... If you have a high tech business and you’re interested in expanding that business to Russia, we may co-invest. We never try to control the business — we’re always a minority shareholder. We are definitely able to find technological partners, R&D support, to find the right staff, local governors’ support, things like that. We’re also able to open the Russian market to a company. We know how to do business with the largest Russian companies like Gazprom or Russian Railways, and we know how to sell a product to government agencies like the Defense Ministry.

Klaus Kleinfeld, Chairman and CEO, Alcoa; Chairman, U.S.-Russia Business Council “…I dug up some statistics because I think it’s important when we judge

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Russia today that we remind ourselves how recent it was that today’s Russia came into existence and what the circumstance were around it. Just to throw a few at you: the Reserve Fund is now 7 percent of GDP, in real terms it’s more than $60 billion. The income per capita has increased by 508 percent since 2000. More than 10 million households now have incomes over $50,000. That’s substantial compared to what it was before. And according to an Ernst & Young report from last year, 82 percent of all households in Russia will be part of the middle class by 2015. This is important for all of us in busi-

Russia Business Watch Fall-Winter Winter 2010-2011 2012

President Putin’s support for OECD accession is crucial and I think we as an international business community have to encourage and make sure that this happens sooner rather than later.

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ness, because we are talking about a country that has a pretty strong balance sheet and we’re talking about a country that has a growing consumer class. When you ask why Coca-Cola and others have invested heavily in this market, you clearly see that that’s one of the big drivers. And that’s also been an attractive thing for us at Alcoa. It is not surprising that, I think it was, 75 percent of all foreign investors in Russia said they are very excited about the development of the Russian market. We should remind ourselves of that because that’s a very, very strong foundation. There are also some concerns and I won’t go through all of them. Alexei Kudrin mentioned many of them, but he didn’t mention one that I would add as a concern, which is inflation…. I’ve come up with this thought that the only sustainable competitive advantage in today’s world is talent — the people that you have on board and the way they work together. I’m totally convinced

that that’s the only mechanism if you want to be successful pretty much with anything, and certainly with business. My view of Russia, and certainly the Soviet Union, was that they had one of the best talent detection mechanisms and education systems that I’ve seen in the world. I’ve seen it probably only be surpassed by what the Chinese have established and even on a larger scale. Just to give you an indication, about a year ago, we moved the headquarters of one of our businesses to Russia. It’s a global business. The driver for that was not because the Russian market is the biggest one; the driver is that the talent that we made the head of this business is located in Moscow. And it’s working fabulously well. The concern that I hear and I share with my Russian colleagues is that they say, well, Klaus, you’re looking in the rear view mirror. You’re talking positively about something that used to be very good. You have to be very careful…. One of the things we have to be mindful of is investing in Russian talent. What does that mean? The education system is one, but the other thing is the management culture, because obviously this is relatively new. That is also where my second point comes in — privatization and the transfer of management culture. I was very happy to be in a meeting two weeks ago with President Putin and last week with Prime Minister Medvedev where both put privatization on the top of their agenda. President Putin…said the list that’s been around for three or four years, the long list of privatizations, is going to be executed. We can see the Sberbank privatization as the first step. It’s less important, in my view, for the financial inflow, because Russia doesn’t need the inflow. However, it is extremely important for the inflow of manage-

ment culture to Russia. That is what is holding Russia back right now, along with necessary technological improvements. Importantly, there’s a lot of industrial knowhow there that the country can build on…. One thing that Anatoly has done in the nanotech sector is to build more entrepreneurship and give more entrepreneurs the opportunity to grow. We need to have some more of those kinds of efforts. Unfortunately, Russian society is not at a stage, in my view, to support entrepreneurship in a systemic way. If you are a lonely entrepreneur somewhere in Volgograd and you have a great idea and you want to get started, it is more likely that that person is going to go to the U.S. than start the business in Russia. And that has some structural significance. So, that’s why I think these things like Rusnano provide this, I call it an accelerator opportunity, and that’s very important, I think. Infrastructure, as John mentioned, is also critical. There is only one access road to our plant in Samara. In the spring thaw, the road doesn’t hold up, and we are not able to fully load our trucks. That basically means we have to use 70 percent more trucks during that time of the year. It’s not only that the costs go up but productivity goes down. It’s ridiculous, absolutely ridiculous. …Of course, WTO accession is a big deal as it will create a level playing field, as well as give us recourse to dispute resolution mechanisms. But we must get PNTR done now. OECD accession is also a big deal in my view. President Putin’s support for OECD accession is crucial and I think we as an international business community have to encourage and make sure that this happens sooner rather than later.” n


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PANEL:

MEETING THE NEEDS OF RUSSIA’S GROWING CONSUMER CLASS Moderator:

Stephen Biegun, Vice President, International Governmental Affairs, Ford Motor Company

Panelists:

Marina Jigalova-Ozkan, Managing Director, The Walt Disney Company CIS LLC Zdenek Turek, Country Officer, Russia; Division Head, Central and Eastern Europe, Citi Zoran Vucinic, President, Russia, Ukraine & Belarus Division, The Coca- Cola Company

Stephen Biegun opened the panel by

noting that, despite the number of downturns and dramatic events over its 100 year presence in Russia, Ford remains active in the country because the opportunities still outweigh the risks. He noted that Russia is on track to be the leading new car sales market in Europe, surpassing Germany. The consumer goods business in Russia is a good one, and Russians want globally-recognized brands and are fully open to American products. This is not only true for automotive sales, but across a range of consumer sectors.

Disney analyzed the new consumer class very carefully and developed a strategy that has made it the number one entertainment company in Russia. It has a leading presence in each of the divisions it is developing in Russia. However, this success has helped Disney understand it has immense responsibilities before Russian consumers. Its strategy is to bring the best of Disney with deep respect for local Russian culture. Disney

Ms. Jigalova-Ozkan noted that it is not only Disney’s goal to make its heroes understood by Russian consumers, but to make Russian heroes part of the story as well. Disney’s “Book of Masters” film based on Russian fairy tales is its most successful locally-made film of all time and the highest grossing Russian-made family film in recent years. Disney’s computer game “Gardens of Time” is now the number one social game in Russia. The company’s licensed products take into account Russia’s harsh weather conditions. The result of this strategy is that 70 percent of everything Disney sells in Russia is produced in Russia. Community affairs is very important for Disney’s operations in Russia. Zdenek Turek centered his presentation on an in-depth examination of the Russian middle class and Russian consumers. He noted that Russia’s rising middle class is driving sustained growth in consumer demand. Russia’s macroeconomic picture is very positive — its GDP is large and growing and inflation is under control. Russia maintains a trade surplus and is one of the few large economies with a balanced federal bud-

Mr. Turek cited a survey in which onethird of respondents identified themselves as “middle class.” This shows an emergence of conscious middle class behavior. Other statistics show Russia’s middle class is growing, with 70 percent of Russians having $500 of disposable income each month. A sign that Russia’s population is becoming more technologically savvy is that one-third of Russians have internet access. The penetration of internet banking has reached four percent of the population, which is good news for bankers. This increase in technology savvy is, of course, reflected in the younger segment of the consumer class. Unfortunately for Russia, a major part of its middle class is aging. Statistics also show that the majority of middle class growth is urban, meaning there is work to be done to broaden the middle class presence in the provinces. Regarding the spending habits of Russians, Mr. Turek suggested that Russians spend less at supermarkets than consumers in other developed countries, while spending more on groceries in general. Russians spend a relatively large amount on transportation and less on housing. Despite Russia’s reputation, spending on alcohol and tobacco is modest. Citi’s analysis suggests that Russians spend well on clothing and are brand conscious. While Citi’s data may not be the most scientific sample of Russia’s population, it is sizeable and suggests that Russians’ spending habits are not that different from the rest of the world. In summary, Mr. Turek stressed that the Russian middle class is growing and becoming more self-aware. The middle class is highly educated and mostly

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Marina Jigalova-Ozkan began by noting that while Disney’s physical presence in the Russian market is relatively new, its brand has been recognized by Russians for a number of years, even winning prizes at Moscow film festivals as early as 1932. Disney is developing four divisions in the Russian market: Disney Media Networks, Disney Interactive, Disney Consumer Products, and Walt Disney Studios.

tailors its marketing campaigns to local markets by translating not only the dialogue but the entire environment in which the characters live, i.e. street signs, newspapers, etc.

get. These are all factors that create a good climate for consumer spending to increase. Furthermore, the ratio of household debt to GDP is very low in Russia, meaning there is disposable income to be spent and borrowing can be increased.

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urban, but the aging population, urban concentration, and oil dependence present major challenges for Russia’s consumer growth. Mr. Turek stated that Russia’s economic growth is largely consumer driven, making it sensitive to external shocks. Adding to those concerns are Russia’s weak investment numbers. The current trends in oil and gas production are not sustainable without more investment. At the same time, the heavy government presence in certain sectors results in wage growth taking place mostly in the public sector. Mr. Turek agreed with conventional analyses that the economy is not diversifying quickly enough and is too dependent on oil and gas revenues. However, trends show that there are positive signs for Russia’s middle class.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Zoran Vucinic began by saying that while the outlook as described in the previous presentation is good, foreign investors are still losing out in the Russian market. Coca-Cola has been successful in the Russian market by not worrying about what it cannot control, such as the weather or the economy. Making the most of what it can control — market opportunities — it has invested $2.1 billion in its 16 years in the Russian market and will invest another $3 billion over the next 5 years. He stressed that Coca-Cola tries not to confuse Russian economic volatility with risk. The middle class is largely irrelevant to Coca-Cola apart from the fact that it results in increased consumption. Ultimately, Coca-Cola sells to everyone.

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Mr. Vucinic emphasized five trends that are overlooked by many businesses. First, until 2008, everything was growing. The decade preceding this one was a period in which demand exceeded supply. When this is the case, you are not really selling, you are producing. Now, demand and supply are in equilibrium, except in the cases where industries have oversupplied the market. Businesses must now shift from production and distribution to sales and customer service. Second, there is a shift toward brands; third-tier products are no longer acceptable to Russian consumers. Third, Russia is not as wealthy as often perceived. Russia is still one of the poorest consumer bases in all of Europe, making affordability more important than ever. Fourth is the death of the distributor. Street selling is over and organized trade has arrived. Lastly, those who think of Russia as a “country” are mistaken. It is more appropriate to think of it as a “continent.” When broken down across its different lines, Russia is really 20 countries. It is a fatal mistake

to confuse Moscow with Russia. Navigating these five shifts are crucial to success in the Russian market. Question & Answer Session Mr. Biegun asked Mr. Turek what lessons can be learned from the global economic crisis as it affected Russia. Mr. Turek responded that Russia is particularly vulnerable to economic shocks thanks to its dependence on oil revenues and external financing. Russia recovered well, but external vulnerability is still there. Another year or two of volatility will be very devastating to Russia’s banking sector. Mr. Biegun then asked Ms. JigalovaOzkan her expectations for growth in the Russian market. She replied that Russia is a strategic market for Disney — it is a top priority when it comes to global movie releases. Furthermore, Russia has surpassed all other European countries in terms of population connected to broadband internet. She also sees all the right microeconomic factors in place: the consumer class is primed for entertainment and is willing to spend money on family-friendly products. This places Disney as a priority for Russian consumer spending. In response to a question about Russia’s position in the global supply chain, Mr.

Vucinic replied that Coca-Cola is in a unique position as it is produced and consumed locally. It is therefore not an exporter from Russia. It is able to source 90 percent of its ingredients locally. He noted that if the Customs Union facilitates the flow of goods between Belarus and Kazakhstan, Coca-Cola might begin looking at a more regional supply chain. Ms. Jigalova Ozkan explained that Disney has already begun to export its locallyproduced products. The acculturation of Disney’s products to be truly Russian resonates outside of Russia’s borders to other Russian-speaking and cultural areas. Digital products are being created in Russia for the entire world. Disney also works with local production companies for its programming. Regarding the effect of anti-American rhetoric on American brands in Russia, Mr. Vucinic suggested that Russians do not see brands as belonging to other countries. Therefore, Coca-Cola does not see international political tension as a threat. Ms. Jigalova-Ozkan reiterated that the youngest generation does not identify Disney characters with America. The values espoused in Disney’s products transcend political borders well enough to be adopted by Russian children as their own. Mr. Biegun was asked about the climate

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for fleet sales of foreign automobiles in Russia. He replied that Ford has had some of its greatest success in fleet sales in Russia. Ford won a large procurement contract for the upcoming Olympics and you can already see Ford Focus police cars on the streets of Moscow. The cars are now seen as Russian automobiles, since they are manufactured locally with designs tailored for the Russian market. Yet, Mr. Biegun suggested that this is not emphasized, because it is more important that a car be of good quality than to be a Russian or American car. He went on to explain that when its WTO obligations go into effect for the automotive sector, Russia will have the lowest auto import tariffs of any major emerging market. Addressing a question about the breakdown of middle class economic indicators outside of urban areas, Mr. Turek noted that a better entrepreneurial spirit, as evidenced by the volume of small- and medium-sized enterprises (SMEs) in a region, leads to better indicators for the middle class. This reduces dependence on government salaries and results in more sustainable growth in middle class incomes. Asked about the level of piracy faced by Disney in Russia, Ms. Jigalova-Ozkan noted that the company is first working to make sure it offers its products at the proper price points. The current growth in organized retail also helps. Disney is also working with the Russian government to address piracy, but, overall, the company is looking for business solutions to address piracy in Russia.

RUSSIA’S REACH TO THE EAST Moderator:

Derek Norberg, President, Council for U.S.-Russia Relations; Executive Director, Russian American Pacific Partnership (RAPP)

Panelist:

Alexey Dolinskiy, Head of International Projects, Summa Group C. Cato Ealy, Senior Vice President, Corporate Development, International Paper Bobo Lo, Independent Scholar and Consultant Gennady Ovechko, Ambassador-at-Large, Senior Official for APEC, RF Ministry of Foreign Affairs

From top: Derek Norberg, Alexei Dolinskiy, C. Cato Ealy, Bobo Lo, Gennady Ovechko

Mr. Ovechko began by stating that

Russia’s chairmanship of APEC over the past year has been challenging. However, it is a challenge they have enjoyed, especially the prospects for increased investment in Russia’s Far East. The agenda for Russia’s chairmanship was based on the notion that all APEC members are interested in regional prosperity and sustainable development. With this in mind Russia has made all efforts to promote the set of issues inherited from the U.S. chairmanship the previous year. For 2012, APEC adopted the theme “Integrate to Grow, Innovate to Prosper” with the aim of better trade facilitation in the Asia-Pacific region. Throughout the year, Russia has hosted a number of events involving various levels of APEC leadership, which have fostered lively discussions and resulted in substantial deliverables. Russia put forward 60 new initiatives aimed at increasing its cooperation with APEC. As one example, Mr. Ovechko cited the pledge of APEC members to refrain from implementing protectionist barriers to trade and investment until the end of 2015. Steps were also taken to further the development of an AsiaPacific free trade area. Focusing on nextgeneration trade issues, Russia introduced a model chapter on transparency to guide future regional and free trade areas. Another major achievement during Russia’s chairmanship was APEC leaders’ recognition of the importance of adopting laws that facilitate investment. They also acknowledged the importance of private sector investment in regional infrastructure. >>

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

In answering a question about Russia’s ability to diversify its economy, Ms. Jigalova-Ozkan took a positive view. She pointed to a strong shift in the development of new industries and noted that SMEs are increasingly appearing. Mr. Turek was also positive. He emphasized that less government influence is better and that it is important to improve the business climate. People must want to invest more money in Russia. A decline in oil prices could force Russia to increase its pace of diversification. Mr. Vucinic sees dependence on oil as a blessing and a curse. Right now, the pressure to diversify is low due to high oil prices. Nonetheless, regional governors are competing for foreign investment and retail is a blossoming industry. Education and modern management tools are also necessary. Not to be overlooked is tourism. The upcoming Olympics and World Cup will see a boom in the tourism industry and the services supporting it. n

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APEC also made considerable progress in 2012 to promote green growth and address global environmental challenges. By the end of 2015, tariffs for environmentally-friendly goods will be reduced to less than five percent. Leaders also agreed that green growth should not be used as an excuse to take protectionist measures. Food security was promoted during Russia’s chairmanship. APEC leaders encouraged further cooperation for capacity building on bringing domestic food safety regulations in line with international standards. Leaders also committed to a 10 percent increase in supply chain efficiency by 2015.

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In 2012 APEC economists took steps towards the development of non-discriminatory and market-based innovation policies. A trial dialogue on innovative technological approaches to APEC objectives was held in Kazan. This mechanism was found to be beneficial, and further such dialogues were recommended. Another element of cooperation in this area was the creation of the APEC Higher Education Cooperation Forum, a non-binding mechanism that focuses on educational collaboration and exchange. Finally, APEC leaders discussed the challenges of energy security in Vladivostok. They agreed to take concerted efforts to ensure sustainable energy supplies and stable energy markets.

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Alexey Dolinskiy explained Summa Group’s involvement in APEC activities over the past year. He stated that, though Russia likes to see itself as the world’s largest country, it finds itself on the periphery of APEC countries. He suggested that Russia has not yet realized its full potential of integrating with the Asia-Pacific economy. Population growth trends suggest there will be rapid urbanization in Asia over the coming decades. While this creates challenges, Mr. Dolinskiy believes Russia can be useful in managing this growth in Asia. For example, Russia stands to be a major provider of steel to fuel a construction boom caused by urbanization. It is also important that cities be built to the most modern ecological standards, as infrastructure built today will impact economies for decades and centuries to come. Russia is also one of the few countries with enough room to increase food production to help support Asian population growth. Finally, as Asia’s consumption expands, Russia can act as an alternative land-based transportation route in addition to the world’s already overburdened marine-based infrastructure.

Mr. Dolinskiy noted that Russia emphasized themes to build on previous efforts to promote regional trade facilitation, as well as accomplished its own political goals during its chairmanship. These themes included supply chain connectivity, living cities, food security, and technology transfers. Russia supported measures to harmonize standards for border crossings so less time and money would be spent on customs controls. Russia also supported “living cities,” or the idea of establishing eco-standards for the construction of future cities and improving existing cities. A food security partnership became operational for the first time this year, and technology transfer initiatives focused on providing innovative technologies to developing countries where they can make the largest difference. Mr. Dolinskiy’s business, Summa, has been involved in finding solutions to these issues through various projects.

processing of raw materials inside Russia, noting that this is now a focus of the Russian government as well.

Russia’s work as chair of APEC is largely compatible with its plans for when it assumes chairmanship of the G20 next year, particularly in the areas of food security and supply chain connectivity. Mr. Dolinskiy concluded by saying this is an unprecedented time in Russia’s history as it pursues its own trade inter-

Bobo Lo argued that there are very few signs of a fundamental shift to the East in Russia. While Russia may be reaching to the East, the achievements thus far have been very modest. Mr. Lo explained that Russia’s defense and strategic focus is on the U.S., while its economic and cultural affinity centers on Europe. He described Asia as second class in Russia’s focus.

Russia’s work as chair of APEC is largely compatible with its plans for when it assumes chairmanship of the G20 next year, particularly in the areas of food security and supply chain connectivity. ests in the framework of the multilateral trade system. Cato Ealy related International Paper’s search for a joint venture to establish a plant in Siberia. The result was the largest investment in a pulp and paper facility in Russian history and it takes advantage of Russia’s vast, untapped forestry resources in the East. He stressed that industries need to do more value-added

Mr. Ealy described the unprecedented level of support that International Paper received from the Russian government. This project did not require high-level government approval, an important consideration as the outputs from this facility are all exported to China and depend on transportation facilitation to reach market. International Paper was able to work through normal channels and benefit from transparent rules. Logistical support for the manpower needed to carry out this project has been a major challenge, but cooperation from regional authorities has mitigated these problems. The success of this project makes International Paper even more willing to invest in Siberia in the future. Mr. Ealy hopes that other companies will follow on International Paper’s success.

Another reason Asia takes a backseat to the West is instrumentalism in Russian politics. Policymakers still see Russia’s relationship with China as a counterbalance to its relations in the West. Thus, the strength of Russia’s relationship with Asia waxes and wanes with the conditions of its relationships in the West. Mr. Lo believes this undermines Russia’s credibility in Asia as these countries feel as though they are a derivative of Russia’s relations with the West. A third barrier to closer ties with Asia is Russia’s Sinocentric view of Asia. Mr. Lo described it as a “China” policy rather than an “Asia” policy. Thus relations with other major players in Asia have stagnated or deteriorated. The continued lack of modernization is another problem. Siberia remains, in Mr. Lo’s words, a dysfunctional and backwoods area. He is skeptical that the new Ministry for Far East Development is up to the challenge of modernizing Siberia. There is also an emphasis on style and status rather than substance in Russian policymaking. Rather than attempt to project its status as a power, it first needs to be a contributor. Strategic mistrust

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is an issue as well. While the notion of China as a threat is subsiding, Russia’s reluctance to allow significant Chinese investment in energy infrastructure belies a fundamental mistrust. Compounding this is the fact that Asian elites, largely, do not regard Russia as Asian. Rather, Russia is regarded as a has-been power that has little to contribute to the region. Mr. Lo noted that Russia has not been committed to the Asia-Pacific region

While the notion of China as a threat is subsiding, Russia's reluctance to allow significant Chinese investment in energy infrastructure belies a fundamental mistrust.

Mr. Norberg then turned the conversation to the new Ministry of Far East Development. It was initially planned for a government corporation to carry out the Ministry’s projects, though this has met some criticism. He queried Mr. Ovechko on how this new Ministry works with the Ministry of Regional Development and how jurisdiction is delineated. Mr. Ovechko explained that the new Ministry of Far East Development is organizing itself and determining the mechanisms through which it will carry out its mandate. As with previous concepts, Russia has clearly identified itself as an Asia-Pacific power and as an integral part of this region. Russia’s foreign policy concept for the East is threefold: to protect Russian national interests and security on its eastern borders; to use the economic and political potential of the region to modernize the entire country; and to create decent living conditions for the people living on the East Coast. He believes this concept is similar to the new Ministry’s mandate. Mr. Ovechko believes nothing could be farther from the truth that Russia considers Asia second-class. He cited President Putin’s placement of the Asia-Pacific region second behind only the CIS in his foreign policy platform.

A member of the audience raised the question of the status of Russo-Japanese relations. Mr. Lo suggested that Russia would prefer to have greater strategic diversity. The deterioration of the relationship between Tokyo and Moscow has resulted in greater dependence on China. He mentioned that in 2006, President Putin still had hopes for strategic diversity and that Russia and Japan had a natural economic, strategic and political relationship. He noted that political tensions have led to no progress on territorial questions and that Russia is still not seen as “sexy” in Asia, drawing little attention from Japanese investors. He summarized by saying that Russia would like to diversify its approach to the Asia-Pacific but many obstacles prevent it from doing so. Drawing on years of experience promoting bilateral trade between Russia and Japan, Mr. Ovechko disagreed with Mr. Lo, saying Japan has a very concrete interest in all of Russia’s commodity markets. He underlined this by citing the signature of several major investment agreements between Russia and Japan at the Vladivostok summit. He stressed that the prospects for both political and economic progress with Japan are bright. n

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because it is becoming increasingly competitive. The bar has been set high and will continue to be raised in this region. Mr. Lo did not suggest Russia simply give up on the East, but noted that there are some steps Russia can take to better engage the region. First, Russia must modernize. Moreover, it must sell an image of being a dynamic, modern economy to Asia. Second, it needs to create conditions for better governance in the Russian Far East, especially regarding corruption. Third, Russia needs to encourage small- and medium-sized enterprise activity. Fourth, it needs to allow Chinese involvement in its markets on parity with other foreign investors. Fifth, it needs to diversify its engagement in Asia. Mr. Lo believes Russia can be more active in multilateral trade organizations, being consistent with, and going beyond, APEC and WTO. He thinks Russia should tone down the rhetoric and be less focused on grandiose ideas and address matters of everyday substance. Finally, Mr. Lo said Russia needs to persevere. There will be many unpopular setbacks as Russia opens to world markets, but it must push forward. He questioned whether the APEC summit in Vladivostok is the beginning of a fundamental shift in Russian trade attitudes, or if it is an “Olympic” moment that does not translate to consistent action.

Derek Norberg (l.) introduces the session while Alexey Dolinsky looks on.

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PANEL:

RUSSIA’S GLOBAL INTEGRATION CONTINUES Moderator: Michelle O’Neill, Vice President, Government Affairs and Trade Policy, Alcoa, Inc.

Panelists:

Vadim Grishin, Executive Director for the Russian Federation, The World Bank Brendan McGivern, Partner, White & Case LLP Chiedu Osakwe, Director, Accessions Division, World Trade Organization Vladimir I. Tkachenko, Director, Department of the Americas, RF Ministry of Economic Development

Noting the special role U.S.-Russian

economic relations have played in her own career, Michelle O’Neill highlighted the challenges for this relationship on the horizon, including compliance issues, OECD negotiations, and the prospects for a bilateral investment treaty. She first turned the floor over to Chiedu Osakwe to discuss the WTO accession process.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Mr. Osakwe began by stressing that Russia’s WTO accession and adjustment must be seen as a process, one that began 21 years ago. The nature of the accession process depends on a range of factors: how current members respond, how well the business community works to facilitate the adjustment period, among others. He noted that Russia’s accession to the WTO is seen as a big deal by those in Geneva. The terms and conditions for Russia were more extensive and complicated than for any other member. While the integration process is moving positively forward, Mr. Osakwe cautioned that implementation will remain an issue.

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He pointed out four key questions that should be on the table: What is the significance of Russia’s membership in the WTO? What are the opportunities? How will the binding commitments be implemented? What are the issues that will be challenging for Russia? Regarding the significance of Russia’s accession to the WTO, Mr. Osakwe noted that it is a top 10 economy and a member of the UN Security Council, is included as one of the emerging BRIC nations, and accounts for 2 percent of global trade. By admitting Russia, the WTO increased its rules coverage for the global economic system by more than 2 percent, bringing total coverage to 97 percent — effectively completing the

Members of the panel debate the next steps for Russia’s global integration (from left): Vladimir Tkachenko, Vadim Grishin, Chiedu Osakwe, Brendan McGivern. basic architecture for rules-based trading. Many note that this is the first time in Russia’s storied history that it has become part of an intergovernmental organization based on the rule of law. Mr. Osakwe placed the establishment of a framework for greater international cooperation as the number one opportunity afforded by Russia’s accession to the WTO. This was a major driving force behind members’ negotiations for Russia’s accession. Russia negotiated a record 57 bilateral market access agreements regarding goods, involving nearly 90,000 tariff line concessions. These concessions open the doors to many foreign investors, especially those dealing in information technology, chemicals, wood and paper products, automobiles, wines and beverages, tobacco, dairy, meat, and others. Concerning the services sector, bilateral concessions for telecommunications, distribution, retail,

franchising, financial services, insurance, tourism, and transportation provide great opportunities. Yet the bigger opportunity is for Russia itself — Russia now has a stake in global economic management. WTO accession also provides a platform for Russian economic growth. Mr. Osakwe stressed that it is important to remember that opportunities can be squandered. The health and success of the rules-based trading system will depend on Russia’s ability to develop an effective operational working relationship with members, especially key members of the WTO — the U.S., EU, Brazil, India, and China. He sees a role for Russia as part of the “Big 6” to make sure that the WTO works effectively. Mr. Osakwe concluded by saying that the value of Russia’s membership and maximization of opportunities provided by its accession will depend on the assis-

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tance of members, the business community and organizations such as chambers of commerce. The challenges are greater for Russia as a member who was not grandfathered into the organization.

while preventing domestic industries from being overwhelmed by foreign competition. WTO membership will require Russia’s leadership to make choice on compliance daily. Mr. McGivern highlighted the core obligation of all members to comply from day-one as specified in WTO Article 16-4. This obligation applies regardless of domestic issues. The submission to oversight represented by Russia’s accession to the WTO is unprecedented in Russian history. Trade rules previously accepted by Russia at its borders have now moved inside, meaning Russia now must harmonize its domestic trade and commerce standards with international norms. Mr. McGivern discussed methods of monitoring Russia’s compliance to the WTO, pointing out the increase of multilateral observation as opposed to bilateral observation, exemplified by the EU outcry over Russia’s prohibition on the import of live animals. He warned that the true litmus test of Russian WTO commitment will surface with dispute resolution. He predicted that Russia will be challenged by other members on compliance and most likely found guilty of some infraction. With retaliation as the only serious enforcement tool in the hands of members, it is possible that Russia may simply refuse to comply on the relevant issue, a stance taken in the past by the U.S. and others. Yet, Russia will be acting under a microscope with the world watching to see how serious they are about WTO cooperation.

Alcoa’s Michelle O’Neill sets the stage for the discussion Cooperation will help deliver t.he benefits of WTO membership not only to Russia but to the global commons. Medvedev’s comment that Russia lives in a new dimension shows that Russia is off in the right direction.

Mr. McGivern proceeded to list several issues that are likely to be difficult for Russia in terms of compliance, including intellectual property rights, automobile recycling fees, food safety and sanitation, trade remedies such as anti-dumping duties, obligations to its Customs Union with Belarus and Kazakhstan, transparency, and political pressure from the U.S. due to Russia’s elevated profile in U.S. politics. He drew parallels with the

backlash experienced by Ukraine when it recently attempted to redefine the terms of its accession, saying that Russia will experience a similar reaction but on an even greater scale for any suspected lapse in implementation. While Russia faces immense obligations to the WTO for its own implementation, it now has rights that protect it from the discriminatory actions of other members. Mr. McGivern cited the United States’ victory over China in an antidumping dispute over steel, a case in which Russia had similar claims to abuse. Yet, Russia had no means of recourse as it still lacked the full protection of the WTO. Russia also has the opportunity to shape future WTO rules, particularly concerning dispute resolution. Mr. McGivern expects Russia to want its own representatives in the appellate body, as well as the secretariat. Mr. McGivern reiterated that there will be no grace period for Russia’s implementation of WTO standards. He hoped that every time Russia faces the choice of compliance, the right decision will be clear and Russia will remain on the right path. Vadim Grishin began his remarks by noting that, at this point, compliance will not require many changes in legislation as Russia has already implemented most of the necessary legal reforms. He pointed to the dispute resolution mechanism as a major challenge for Russia, noting that Russia faces a steep learning curve in preparing to take part in the dispute resolution process. He confirmed Mr. McGivern’s suggestion that Russia seek representation in the governing bodies of the WTO. Mr. Grishin explained that Russia wants to avoid another situation such as Russia’s lack of representation in the Bretton Woods system, pointing to the fact that Russia is the least represented country in these institutions. Mr. Grishin characterized Russia’s tariff obligations to the WTO as “standard.” He expressed that exchange rate fluctuations or energy price volatility are more important than tariff variations. Indicating progress in WTO implementation, he spoke of how Russia has taken measures to provide access to foreign investment in the services sector. On a more controversial note, Russia has not agreed to the direct presence of foreign banks in Russia. Mr. Grishin downplayed this as a dilemma by referencing Citi’s comfort with the allowance of branches in Russia. On the other hand, foreign insurance companies will be allowed to

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Brendan McGivern began by raising two questions on the minds of many in Geneva: What’s next for Russia? Are they going to comply with their commitments to the WTO? He pointed out that the Russian government’s post-accession position is in some ways more difficult than it was during the accession negotiations. Russia now has to move from the hypothetical realm of prospective membership to the reality of keeping its promises. Questioning the idea that WTO compliance presents Russia with a “fork in the road,” Mr. McGivern explained that Russia now has to delicately steer between two paths — complying with its commitments to the WTO

Russia now has to move from the hypothetical realm of prospective membership to the reality of keeping its promises.

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The terms and conditions for Russia were more extensive and complicated than for any other member.

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establish subsidiaries in Russia within nine years. Mr. Grishin explained that by agreeing to bound tariff duties Russia has gained transparency and predictability at the expense of regulatory control over imports and exports, which he expects will ultimately be to Russia’s benefit. He also noted the benefits of Russia’s customs reforms, citing Russia’s rise in the rankings for “ease of business.” Regarding bilateral tracks in the context of the WTO, Mr. Grishin proposed that Russia could partner with the U.S. in restarting multilateral trade negotiations. In particular, Russia supports the further removal of agricultural subsidies. He stressed that the U.S. benefits greatly from Russia’s accession. As the volume of trade is presently very low, Russia’s membership provides a framework for a future increase in trade between the two countries. The problem is that the picture of this relationship is not yet clear.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

In discussions to establish a bilateral investment treaty with the U.S., Mr. Grishin hoped that the factors that halted negotiations previously will be remedied now that Russia is a WTO member. He considers flexibility in these negotiations of the utmost importance but questioned the proposed mechanism for investment dispute settlement, noting that the suggested institution for international arbitration, ICSID, was not ratified by Russia and is in questionable standing presently. However, Russia is interested in improving this mechanism.

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Mr. Grishin concluded by saying all these issues are complicated and must be given time to be resolved. Russia is excited about the opportunities afforded by WTO accession, citing the positive effects predicted for the Russian economy by the World Bank. Russia is aware of the challenges ahead and does not want to underestimate them. Commenting on some of the previous statements, Vladimir I. Tkachenko reiterated that Russia has approached its accession to the WTO with great sincerity and is already working to implement its new obligations under WTO membership. Russia is aware of the risk that claims will be made against its policies, but welcomes the opportunity to explain itself under the mechanisms of the WTO. Russia’s commitment to improving transparency in global trade is evidenced by its submission of a draft of a model chapter on transparency to APEC as a

guide for future trade agreements. Despite the negative reaction of some APEC countries who are not members of the WTO to the strict best practices put forth by Russia, the chapter was accepted, suggesting Russia is a model to developing countries for global trade standards. Mr. Tkachenko then moved on to discuss Russia’s negotiations for OECD accession. Like accession to the WTO, the major issue concerning OECD accession is bringing Russia’s legislation in line with international standards. Russia has the choice to either accept the OECD’s proposed changes, seek exemption or refuse to comply, though there are very few issues where this is the case. Presently, roughly two-thirds of Russian legislation meets OECD standards. Russia hopes to complete the necessary reforms by 2013 and finalize accession by 2014.

Russia is aware of the risk that claims will be made against its policies, but welcomes the chance to explain itself under the mechanisms of the WTO. There are some examples where Russian legislation has changed significantly, such as anti-corruption legislation. Russia acceded to the OECD Anti-Bribery Convention in April 2012, under which Russia introduced new legislation for the punishment and criminalization of bribes to foreign officials. In another example, Russia amended its legislation on taxes by addressing transfer pricing and by providing a nexus for bank deposits for the purpose of transparency in international tax investigations. In the area of environmental legislation, Mr. Tkachenko noted that modifications still need to be made. Russian laws on economic incentives and disincentives to remedy environmental problems need reform. For example, environmental requirements should be attached to public procurements. Another area of weakness for Russia is financial services. In principle, Russia agrees with OECD stan-

dards. However, Russia takes issue with the opening of another round of market access negotiations. Russia proposes to remedy this in the framework of the WTO on the basis of mutual concessions rather than through unilateral concessions to the OECD. Regarding corporate governance, Russia is requested to provide more transparency and less state influence in the private sector. The country’s privatization efforts are an example of its attempt to address this issue, though further legislative changes are needed. Other issues include pension reform, officially supported export credits, and chemical production regulation. Mr. Tkachenko concluded by saying that Russia is not starting from scratch in its negotiations with the OECD; it has been working toward meeting the goals established by accession since 2009. There is much work to be done systemically to develop and pass amendments to Russian legislation, but accession to the OECD would benefit Russia and Russian businesses, and American support for this effort will be critical. In response to a question about the implications of Russia’s adoption of a recycling fee for automobiles that is considered by the EU to be discriminatory towards imported vehicles, Mr. Tkachenko stated that the law has been passed and will remain for the time being, though amendments may be necessary. Russia understands the EU’s point of view, but considers the law necessary. Mr. Osakwe noted that as the matter has not reached the WTO, he could not speak directly to the issue. Mr. McGivern pointed out that, while the U.S. has no influence in the matter due to not having established PNTR with Russia, it would benefit from a challenge by the EU that might result in the removal of the discriminatory measures of the tariff for all WTO members. n


Thane Gustafson, Senior Director of Research, Eurasian Energy, IHS

Panelists:

Usman Ahmed, Vice President and Chief Reservoir Engineer, Baker Hughes Ivan Grachev, Chairman, Committee on Energy, RF State Duma Amos Hochstein, Deputy Assistant Secretary for Energy Diplomacy, U.S. Department of State Andrei Tsyganov, Deputy Head, RF Federal Anti-Monopoly Service

Ed Verona (r.) welcomes the panel (from left): Andrei Tsyganov, Amos Hochstein, Ivan Grachev, Usman Ahmed, Thane Gustafson.

PANEL: OIL & GAS — NEW FRONTIERS, NEW APPROACHES

By outlining the details of BP’s recent

sale of its stake in TNK-BP to Rosneft, moderator Thane Gustafson set the focus of the panel on the implications of strategic alliances for Russia’s massive energy sector. He posed the question of whether the BP-Rosneft relationship demonstrates a fundamental shift in Russia’s attitude towards greater international involvement.

Mr. Gustafson stated that Russia needs to move out of its comfort zone in order to remain competitive in the global energy market. Russia will have to go to greater lengths to maintain its supply; oil will have to be extracted from areas that are harsher, more remote, and

Until now, Russia has largely resisted major involvement from foreign companies in its energy sector. This was because Russia did not need much help to maintain its production. With the rapidly changing market conditions mentioned above, it will be necessary for Russia to be more flexible in order to adapt to shifting market dynamics, a fact that is promising to many foreign companies. Usman Ahmed offered a technical perspective on the prospects for implementing Western “tight oil” technology in Russia. He suggested that it is possible to use the hydraulic fracturing, or “fracking,” methods developed in the U.S. elsewhere in the world. However, the cost of drilling will be much higher, he says, because the U.S. is able to drill on a batch basis. Access to drilling sites is also more difficult in Russia as many of the

prospective fields are in Siberia. Further, the U.S.’s excellent infrastructure makes getting the oil to market more cost effective than in Russia where transport infrastructure is lacking. Mr. Ahmed elaborated on some of the important lessons learned through the recent shale gas boom in North America. He strongly emphasized the need to understand the reservoir and rock type being drilled, saying that to be effective, it is necessary to find the “sweet spot” in the reservoir and accurately place the fracking stages within that area. Thus it is imperative to have adequate equipment and services to implement unconventional extraction, as well as highly skilled people, who can carry out the necessary analysis. While only 12 percent of tight gas is located in Russia, more than 50 percent of tight oil is believed to be there, equivalent to about 1.6 trillion barrels. Mr. Ahmed stated that over the next 5 to 10 years more than 100,000 horizontal wells will be drilled in North America, meaning it is crucial for Russia to develop unconventional drilling soon to take advantage of this booming market. He suggested that the key to profitable horizontal wells are placing the fracking stages where natural fractures occur. This requires using innovative technology to correctly identify these fractures and a comprehensive understanding of the rock being drilled. Nanotechnology has paved the way to finding natural fractures. This type of knowledge, experience and technology is vital to the development of unconventional drilling in Russia and the rest of the world. Mr. Gustafson followed up on Mr. Ahmed’s presentation by questioning whether Russia will recognize the potential of tight oil and if this will shift attention away from Arctic offshore

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Mr. Gustafson suggested present circumstances lead one to believe Russia is truly more favorable to foreign investment, representing the beginning of a new chapter. Three factors have ushered in this new chapter: inherited assets from the Soviet Union are beginning to deplete as evidenced by declining output; technological innovation has resulted in the advent of “tight” oil and gas; and the Russian government’s dependence on oil revenue has reached unprecedented levels. These are all new issues with which Russia must now contend.

require innovative techniques that are unfeasible with legacy equipment from the Soviet era. The need for investment means the Russian government will have to share a portion of the rents from energy, the profits of which it previously enjoyed sole rights. Thus profitability must be maintained for Russia to preserve these benefits.

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of LNG exports away from the U.S. due to regulatory changes that paved the way for the boom in unconventional gas. Constructive discussions between the U.S. and Russia on energy are therefore significant and can have great impact on future resource development.

Ivan Grachev (r.) presents his perspective to the audience, with (from left): Amos Hochstein, Usman Ahmed, Thane Gustafson listening.

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development. He brought up the point that the techniques described by Mr. Ahmed seem to best suit very dynamic companies able to adjust to varying conditions on a small scale in contrast to companies positioned for mass production. Given the history of the Russian energy sector, this suggests major adjustment will be necessary in its oil production methodology. Mr. Gustafson clarified that Russia already has fracking technology and the capability to implement unconventional drilling methods. While they are behind North America presently, recent history has shown it will not take very long for them to catch up. Ivan Grachev began his remarks by stating that the decision of whether to give preference to international companies wishing to develop oil and gas fields in difficult areas will be tied to oil prices — without high carbon fuels prices, innovation will not be profitable. The extreme volatility of energy prices over the past 15 years makes it difficult to analyze the viability of developing new methods of extraction. Mr. Grachev believes it will be necessary to make a weighted decision based on fundamental considerations. Mr. Grachev asserted that growth in energy consumption is necessary for extraction innovation. He tied growth in consumption with growth in prosperity, suggesting a vibrant global economy will play a major role in the decision of whether to pursue tight oil. He does not expect renewable energy sources to play a major role in the gas market as they are too expensive. At the same time, cheaper means of energy production will run out and more expensive methods will be necessary. He believes the

combination of these factors will result in increasing energy prices. Russia will need billions of dollars to develop its difficult energy resources in the north. Mr. Grachev discussed the necessity of cooperation with foreign companies to attract foreign capital, technology and expertise. Russia will, therefore, comply with WTO obligations in order to encourage Western involvement. Reforms for customs duties and taxes will also be made to accommodate international standards. Amos Hochstein discussed the U.S. government’s perspective on energy diplomacy. The U.S. State Department created an Energy Resources Bureau just over a year ago with three tasks: manage the geopolitics of today’s energy economy through diplomacy, stimulate market forces for alternative energy technology, and increase access to energy in developing countries. Mr. Hochstein affirmed the State Department’s support for partnerships like ExxonMobil’s with Rosneft, noting the benefits to both countries from such cooperation. Mr. Hochstein explained the State Department’s role in promoting cooperation between U.S. and Russian businesses in the energy sector. Understanding the significance of Russia’s role in the global energy market, the State Department is dedicated to creating a productive diplomatic environment that will ensure stability and vitality to Russian energy production. Both countries are leaders in the hydrocarbon industry and policies within each country affect global markets. An example of this influence is the diversion

Noting the necessity of a fair and predictable business environment to ensure stable production, Mr. Hochstein called for comprehensive tax reform in Russia to end the practice of ad hoc tax concessions for energy development projects. He also called for collaboration on policies regarding newly opened arctic maritime regions due to retreating ice caps. This cooperation is necessary to prevent conflict and to protect the Arctic’s fragile ecosystem. Technical exchanges provide great opportunities for moving forward in areas such as energy efficiency, which can reduce both countries’ domestic dependence on carbon-based energy sources and increase exports. Mr. Hochstein concluded by reiterating the need for partnership and dialogue on the future of energy markets between both public and private sector players in Russia and the United States. Andrei Tsyganov described the mechanisms through which the Russian government regulates foreign companies’ participation in oil and gas exploration projects. Russian law stipulates control mechanisms, lists strategic activities and the types of transactions to be regulated and provides for sanctions in response to infractions by foreign companies. Previously, there were no such laws, causing much anxiety and risk for foreign investors. Mr. Tsyganov noted that the commission in charge of regulating foreign involvement in the energy sector has only turned down five percent of applications submitted thus far. Amendments have been made to improve the regulatory environment, reducing the need for pre-approval of certain transactions and lowering the number of strategic activities regulated by the government. Mr. Tsyganov and others working in the Federal Anti-Monopoly Service have made efforts to simplify procedures for doing business in Russia’s energy sector and have made progress in liberalizing foreign investment laws, thereby increasing transparency. Future developments will include exceptions for foreign companies owned by Russian beneficiaries, equal treatment for stateowned and private companies and further reductions in the list of regulated industries along with certain transactions.

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Question & Answer Session Q: Are the definitions of tight oil and gas the same in the U.S. and Russia? Mr. Ahmed answered that “tight” refers to the need for hydraulic fracking to release energy sources. This term is standard industry-wide in both the U.S. and Russia. Q: Do you believe China’s shale gas reserves will have any impact on the global market? Mr. Ahmed noted that China will still

be a net importer despite its reserves. Furthermore, China’s shale gas is located in drought regions where there is no water to conduct hydraulic fracking. Mr. Grachev added that China’s current energy mix is primitive and dirty. As the middle class evolves, environmental requirements will increase and clean energy will be demanded. Russia will be a major supplier of cleaner energy sources to China. Mr. Hochstein answered that the State Department has worked with China to develop a regulatory framework for shale gas extraction that protects the

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environment and encourages the transition to cleaner energy sources. Q: Where do you place the role of the state in the oil and gas sector? Mr. Grachev answered that his personal view was that the volatility of gas prices would drive government involvement in the sector. While the government’s role is presently excessive, he believes it is a bad time for it to leave the oil and gas sector. Mr. Tsyganov added that any company, state or private, that promotes competition is welcome in the Russian market. n

PANEL:

AGRICULTURE AND FOOD PROCESSING: RUSSIA’S NEW GROWTH SECTOR?

Moderator:

G. Eric Raby, Vice President, Global Marketing & Commercial Development, AGCO Corporation

Panelists:

Konstantin Babkin, Chairman, Novoye Sodruzhestvo Vladimir Plotnikov, Member, Committee on Agriculture and Food Policy, Federation Council of the Russian Federation Eric Trachtenberg, Director, Food & Agriculture Sector, McLarty Associates

ing whether accession to the WTO creates more opportunities or more challenges for Russia’s agricultural sector? How can foreign businesses best position themselves for success in this challenging sector? Will new agricultural technology imports be game changers for the industry? These questions set the stage for a lively discussion of the impacts Russia’s WTO accession are having on its agriculture sector. Konstantin Babkin began by saying that

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Eric Raby opened the panel by questin-

From left: Eric Raby, Eric Trachtenberg, Konstantin Babkin, Vladimir Plotnikov.

WTO accession is not only a benefit to Russia, but a problem as well. His company’s presence in North America as well as Russia provides a perspective of the conditions created by Russia’s WTO accession from both sides. In his opinion, Russia’s new obligations under the WTO create more problems than opportunities for his company. Citing the

absence of a referendum, Mr. Babkin suggested the ratification of the WTO treaty by the Duma did not take into account the wishes of Russian citizens. There was much opposition to WTO accession by agricultural interests in Russia. Mr. Babkin pointed out that the level of Russian agricultural subsidies

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is much lower than similar countries with comparable available arable land. He stressed that this situation is hardly optimal as it puts Russia in a weaker position externally and reduces its competitiveness. Similarly, Russia does not provide tax breaks for agricultural inputs on the same level as other developed countries. While Russia made many efforts to reduce protective tariffs in its own agricultural sector, it has not seen reciprocal moves by other countries. Mr. Babkin considered Russia’s obligations to be one-sided and disadvantageous. For these reasons Russia’s agricultural sector in unattractive to investors and is actually in decline. Mr. Babkin noted that opportunities are being missed in the agricultural sector by Russia as well as foreign investors as the conditions created by the WTO limit Russia’s huge agricultural potential. Russia has massive amounts of arable land that are currently under-cultivated while innovative agricultural techniques would lead to a rise in output on lands currently being cultivated.

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Russia has the opportunity to play a major role in the future if it is able to become competitive in the global agricultural market.

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Mr. Babkin stressed that it is essential to attract foreign investment in Russia’s agricultural sector. Where conditions provide for increasing production, investors are quick to provide funding. However, Russia’s agricultural sector is currently perceived as unattractive, leaving it under-funded and below potential. Given the world’s increasing population and the inevitable growth in food needs, partnerships are increasingly necessary to meet demand. Russia has the opportunity to play a major role in the future if it is able to become competitive in the global agricultural market. Mr. Raby asked Mr. Babkin whether he believes WTO membership will lead to better development of Russian agricultural technology, thereby decreasing

The audience gathers as the panel prepares to begin the discussion.

Russia’s dependence on foreign technology. Mr. Babkin replied that technology goes where industry is developing. Agriculture in Russia is stagnating, resulting in weak investment. The pessimism of Russian farmers means agricultural technology will likely not reach its full potential in the Russian market. Responding to a question regarding recycling fees imposed on foreign automobiles, Mr. Babkin explained that Russia has needed for a long time to make changes that improve the environment for investment in the auto industry. The government’s failure to address these issues has led them to take protective measures such as the controversial recycling fee targeted toward foreign manufacturers. There will most likely be a similar fee for foreign agricultural equipment, but the details on this matter are not known presently. Eric Trachtenberg began his presentation by reviewing the history of Russian agriculture, beginning with the planned structure of the Soviet economy. Russia struggled after the collapse of the Soviet Union and was largely dependent on foreign aid to support its agriculture. Progress has been made after 2000 as Russia ended price controls and the devaluation of the ruble made Russian

exports more competitive, a benefit to agriculture. Mr. Trachtenberg reiterated Mr. Babkin’s point that Russia is well placed to be an agricultural powerhouse thanks to its vast land, water and energy resources. Even more positive is the progress being made in the food processing industry. Output increased 13 percent in 2011 and product quality is on the rise. Major outside investors such as Kraft, Mars and Coca-Cola have played a role in improving the quality of food commodities in Russia. However, much of this progress is dependent on imported inputs. Mr. Trachtenberg suggested that WTO membership provides advantages in this regard as it will reduce costs and attract further investment into this sector. He drew attention to the fact that oil money is fueling the consumer boom in Russia and that buying power has increased not just in Moscow, but in lesser cities as well. As Russia is the largest importer of meat and dairy, these and other products are favorable opportunities for foreign exporters. Also notable is the shift in Russians’ preferences away from cheap goods and toward better, value-added products. Mr. Trachtenberg lamented the failure of the U.S. to establish PNTR with Russia.

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Not only does the U.S. miss out on the reduced tariffs, but also on all other concessions available due to Russia’s accession to the WTO. Exporters got a good deal through Russia’s tariff reductions, and sanitary quality has been improved through WTO standards. An increasingly powerful and savvy consumer class provides a bright outlook

Disagreements over sanitary standards could be one of the first disputes faced by Russia in the WTO. for exporters to Russia. However, there are challenges. Disagreements over sanitary standards could be one of the first disputes faced by Russia in the WTO. Antidumping and the Customs Union are also major concerns, not to mention intellectual property rights. Ukraine’s restrictions on grain imports lead one to wonder if Russia will retaliate with its own restrictions. Finally, political issues such as corruption and currency and economic volatility also pose challenges to Russia’s path forward as a WTO member. Mr. Trachtenberg summarized his remarks by saying both sides stand to gain from investment and cooperation in the Russian market. Modernization of Russian production through the acceptance of and investment in innovative technologies such as biotechnologies will make it possible for Russia to export on an even greater scale at significant profits to foreign investors.

Vladimir Plotnikov stated that while Russia sees accession to the WTO as a major step forward, there are certain conservatives who view accession very cautiously. However, realists understand that without increasing Russia’s competitiveness in the agricultural sector there will be no progress. Mr. Plotnikov stressed that joining the WTO was in Russia’s own interest, not just those of foreign exporters, and that it wants to produce and sell on an equal basis. While there are risks for Russia through its obligations to the WTO, there are also certain advantages. He urged that time be given for the transition to properly take place. Russia still needs to harmonize its legal system with WTO standards and define the terms of reference for standards of cooperation. In the area of veterinary standards, for example, a vaccination used in one country but not available in Russia initially acts as a barrier to trade for Russia until it can adjust. Russia’s transition to the multilateral trade system cannot happen overnight. He asked for foreign advice and consultation, but most of all, patience. Only in this way can Russia’s WTO membership be mutually advantageous. Concerning issues that may call for dispute resolution at the WTO, Mr. Plotnikov asked for tolerance. He insisted that parties who disagree first discuss their problem before resorting to arbitration. Agreements made out of mutual respect and understanding are most likely to produce a positive result that benefits both sides. Mr. Plotnikov suggested that agriculture is a very sensitive industry. The fact that this sector provides the most basic of human needs underlines its importance. The agricultural sector is closely tied to inflation and price formation. Therefore, it is necessary to find ground for cooperation in this sector more than any other. Russia should be honest, patient and tolerant about its compliance with its obligations. Mr. Plotnikov asserted that Russia will succeed in achieving the goals it set out to gain through WTO membership. Mr. Raby asked what measures the Duma

might take to further engage the WTO, or whether little action is expected. Mr. Plotnikov responded that Russia is interested in creating the conditions that will encourage cooperation with its partners and show that Russia is making real steps forward, especially in addressing its legislation. Regarding the general public’s opinion of WTO accession, Mr. Plotnikov suggested it is very simple — if American products in local stores are cheaper because of reduced trade barriers, they will have a favorable opinion; if American goods are more expensive, consumers will resent Russia’s WTO accession. Responding to a question about how to boost Russia’s agricultural productivity, Mr. Trachtenberg proposed that if Russia accepted more biotechnology and made it easier to import modern equipment, it would easily be a net exporter of agricultural goods. In meeting the demands of the rapidly growing world population, under-producing regions like southern Russia stand to benefit from increased employment and incomes. The same is true for the food processing sector. In response to a question about how Russian opposition to genetically-modified products will affect the acceptance of biotechnologies in Russia, Mr. Trachtenberg replied that efficient output to feed the world is impossible without the use of genetically modified products. While he noted that consumers deserve sovereignty in the products they buy, the world must face the reality that there have been no documented cases of sickness attributed to genetically modified foods. It will be very difficult for Russia to reach its potential without the use of biotechnologies. Though the WTO sided in favor of biotech in the U.S. dispute with the EU, Mr. Trachtenberg suggested it is not good to bulldoze over consumers. It is better to have an honest debate about the tradeoffs of such practices. Mr. Plotnikov stated that it is the role of science to definitively prove the safety of genetically modified products and convince the general public that such products are safe. In Russia there is increasing acceptance of genetically modified products. The Russian people see the rest of the world using these products safely, which will gradually improve their opinion of them. However, it is necessary to thoroughly test them to ensure the highest safety standards.

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When asked why his outlook seemed much more positive in comparison to Mr. Babkin’s assessment, Mr. Trachtenberg responded that opening markets to world trade results in winners and losers. Those companies poised to export will experience significant gains while smaller companies will most likely lose, at least until the economy is able to adjust. Most importantly, consumers stand to gain the most. He noted that while some will be hurt by WTO accession, the net gain will outweigh the harmful effects. At the same time, efforts should be made to reduce the pain for the losers. The meat industry is one sector that will be attractive to foreign

investors due to the increased competitiveness offered by the WTO. Furthermore, the accountability provided by Russia’s membership in the multilateral trading system will reduce risk premiums and improve the investment climate.

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PANEL: THE FUTURE OF ECONOMIC POLICY Moderator: Charles Ryan, Chairman, UFG Asset Management

Panelists:

Anders Åslund, Senior Fellow, Peterson Institute for International Economics Sergei Borisov, President, OPORA Russia Bernard Sucher, Board Member, ATON LLC

Charles Ryan opened the session by

commenting on Russian economic reform. Depending on how investors look at it, Russia’s economy presents a glass either half empty or half full. On the one hand, there has been significant wage growth in combination with fiscal control and slowing inflation. On the other hand, the link between the price of commodities and the price of oil makes for a treacherous market that leaves foreign investors wary of underlying fragility.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Anders Åslund began his remarks by stating that Russia is one of the most economically normal countries in the world today. Russia is macroeconomically sound and there is basically no public debt. Even were there to be a drop in oil prices the deficit would not reach more than six percent of GDP. Russia’s foreign exchange reserves are the third-largest in the world. A major positive change was Russia’s move to a floating exchange rate, which brought inflation under control and provided a cushion in the event of falling oil prices. It can be argued that Russia’s macroeconomic situation could be better or worse, but it is good nonetheless.

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Mr. Åslund suggested that a major concern is the growth rate, and a broad consensus has developed among Russia’s economic policymakers on this issue. The discussion is not about jobs, it is about growth and what the government sees as the two drivers of Russia’s growth: human capital and international economic integration. Concerning the former, Russia boasts a massive pool of educated workers with 51 percent of Russian youth completing higher education, compared to 36 percent in the U.S. This demonstrates the strength and potential of the Russian middle class, a

key component in a competitive global market. Regarding global economic integration, Mr. Åslund noted that it is not only fostered by Russia’s accession to the WTO but also by general trade expansion. He stated that Russia not only wants improved conditions for foreign companies, but also improved competitiveness of its own economy. Competition will lower prices and control inflation while better integration will cause Russia to reallocate its labor where it is most needed. The issue facing Russia’s economic future is the question of whether it will leverage its abundant human capital or get stuck in a middle income trap dependent on energy. Mr. Åslund suggested Russia is less dependent on energy than it appears, with energy production’s share of GDP expected to fall to 13 percent by 2020. This diversification will be another driver of economic growth. If Russia follows a trend of energy dependent growth, it will continue to grow at

Sergei Borisov presents his perspective on the future of economic policy.

3 to 4 percent. If it diversifies its economy, it could see growth reach 6 percent. Mr. Åslund spoke briefly on the issue of state capitalism, noting that Russia’s government plays a major role in the energy, transportation, banking, and defense manufacturing sectors. The sector with the most state control and the most problematic sector is energy. State-owned Gazprom is a poorly managed company that dominates Russia’s gas sector. However, Europe’s focus on LNG imports and North America’s shale gas boom may mean gas prices drop permanently and with it Gazprom’s profits. In this case Gazprom would become irrelevant, a positive development in Mr. Åslund’s opinion. Russia’s oil industry has been well functioning with four major companies operating independently, and only one of them owned by the state. However, Russia’s recent nationalization of TNK-BP presents a major risk for the economy. While it is good for the oil companies receiving state money, Mr. Åslund doubts it is good for Russia. The scrutiny Russia will face from the WTO gives Mr. Åslund hope for further liberalization of Russia’s economy. He pointed out that the small size of other CIS members in the WTO allows them to escape discipline to the detriment of their economic reform. The standards that will be imposed by OECD accession will further hold Russia to its path of liberalization. Mr. Åslund also welcomes the passage of PNTR with Russia in the U.S. as well as the completion of a Bilateral Investment Treaty. He argued that U.S. administrations have simply not given enough attention to this treaty, which should have been finalized in 2000. Finally, Russia’s chairmanship of the G20 in 2013 will give it the oppor-

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He suggested that business in Russia is good and the prospects bright, though ratings and image suggest otherwise. To emphasize this point, Mr. Sucher noted that businesses in Russia posted a net profit of approximately $120 billion over the past 12 months compared to $90 billion by German companies. He agreed with Mr. Borisov that SMEs are stunted in Russia, yet based on his own experience as an entrepreneur in Russia, he has never seen opportunities so bright.

Aton’s Bernard Sucher makes a point as Sergei Borisov, Anders Aslund and Charles Ryan listen.

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tunity to play an active role in setting the multilateral trade agenda.

Mr. Borisov spoke about obstacles that hinder SME development in Russia. While corruption is often cited as the biggest obstacle, he believes there are others that are more pressing. According to surveys conducted by OPORA in partnership with other experts, staffing problems are the biggest concern of Russian SMEs. He explained that it is difficult for small businesses to find skilled personnel. Low demand and poor access to financing and credit rank next as major worries. Only 13 percent say they feel negative pressure from corruption.

Mr. Borisov proposed creating anchor companies around which small businesses can have better access to the resources that will help them grow. This concept has already seen some success in Tatarstan, for example, but more work is needed. He stated that competition is the key to growth, but his organization is yet to find the exact obstacles that prohibit competition. Though various initiatives have been attempted to spur innovation, it is the development of competition that will bring innovation to its full potential. Mr. Borisov believes that organizations like OPORA can play a greater role in the development of SMEs, and hopes to see its impact grow in the future. Bernard Sucher characterized himself as an activist for the professional community in Russia for the past 20 years.

Drawing on broader themes from Russia’s economic development, Mr. Sucher echoed Mr. Åslund’s analysis that global integration will move Russia’s economy forward. Membership in the WTO will benefit consumers almost immediately, he pointed out. Russia’s pent up demand is being unlocked and driving growth and innovation. Another theme of note is import substitution. Russia is investing in itself and establishing value chains that reduce its dependence on the import of goods it should be producing for itself. A third theme is efficiency. Russia’s inefficient use of railways for shipping is just one example of how great opportunity exists for whoever can begin the transition to modern modes of transport. Looking forward to major events like the Olympics and World Cup being hosted by Russia, the potential for profit by having a stake in the tourism value chain is enormous. But there are some problems, Mr. Sucher admitted. He placed a lack of trust and, ultimately, transparency at the heart of Russia’s economic problems. The feeling that information is power to be guarded is stifling to the economy when combined with inherent skepticism of outsiders. Russia’s reliance on the state for investment in infrastructure results in gross inefficiency and diminished growth potential. At the same time, a lack of

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

Sergei Borisov related his efforts to support Russian small- and medium-sized enterprises (SMEs). Through Sberbank’s and OPORA’s efforts and governmental reform, small businesses are increasing their share of the overall economy, which is crucial to economic diversification. However, the situation is not stable and is complicated. For example, he pointed to the crackdown on kiosks as a negative development for SMEs. Systemic changes to promote SME growth have been included in previous socio-economic development road maps, but only 40 percent have been carried out so far. The road maps being formed today look similar, so it is questionable whether any real progress will be made. Reforms to promote SME development often take a backseat to budgetary reforms.

Small businesses in Russia view declarations of governmental support with a wary eye. While the reforms implemented and institutions created are promising, Mr. Borisov argued that stronger measures need to be taken. One promising idea is the practice of clustering. However, the heavy involvement of government in the private market holds back progress. He cited the lack of public involvement in pension reform as an example of this. The high cost of and access to necessary infrastructure also prohibit small companies from developing.

There is a surge of interest in Russia to position businesses to take advantages of future trends by venture capital firms like RUSNANO. But he does not believe opportunity only exists for “creatives” like RUSNANO in Russia. Mr. Sucher argued that the inefficiencies in Russia’s economy provide ample room for what he calls “copycat” companies. Using his startup of a wholesale bakery as an example, he pointed to the disproportionate profits that can be made by starting a simple business that fills in the gaps of Russia’s economy as it catches up to the developed world. He emphasized that Russia is still a young economy.

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internal competitiveness is evidenced by poor worker efficiency, which Mr. Sucher tied to a lack of political competition. He closed his remarks by predicting that while those in the room listening to his presentation will make considerable profits in the Russian market, the Kremlin will gloomily watch the gap between Russia and its competitors grow. Mr. Ryan then asked each panelist to discuss the possibilities for economic reform under optimistic circumstances. Mr. Åslund commented on the potential for reducing corruption. In contrast to the 1990s, corruption now exists mainly at the top rather than at the bottom of the political structure. This allows for the opportunity to fully address corruption at the lower levels since it does

not disturb interests at the top, as demonstrated by anti-corruption taking a high priority in Putin’s agenda. He believes WTO and OECD standards will be implemented by Russia, and “uninteresting” state companies will be privatized. Mr. Borisov spoke about the measures being taken to improve Russia’s business climate. The reduction in complaints about audits and the tax regime shows significant progress. He suggested that moral disincentives should be used to reduce corruption, such as the exclusion from associations of businesses accused of taking bribes. Furthermore, officials’ salaries should be linked with performance. Those who are sound financially will find little need to resort to illegal

means for income. He proposed these measures be tried out on a regional basis. Mr. Sucher noted that it is a positive development that Dmitry Medvedev’s proposal to build a global financial center in Moscow still exists despite an economic crisis and regime change. However, he pointed out that the concentration of Russia’s banking sector under state control presently makes a financial center unfeasible. He suggested that comprehensive pension reform that reduces the government’s burden for individuals’ retirement savings will provide for the necessary local capital needed to finance the proposed center. Without this reform he does not see the establishment of a financial center in Moscow being possible. n

PANEL:

Intellectual Property Rights and Russia’s WTO Compliance Measures Moderator: Tom Thomson, Executive Director, Coalition for Intellectual Property Rights

Participants:

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Jonathan Kimball, Deputy Vice President for Europe, the Middle East and Africa, Pharmaceutical Research and Manufacturers of America (PhRMA) Frank Landgraff, Senior Intellectual Property Counsel, GE Power & Water David J. Ohrenstein, Director, Global Trade Policy, BSA/The Software Alliance George York, Deputy Assistant USTR for Intellectual Property and Innovation, Office of the United States Trade Representative

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The fundamental issue of protecting

intellectual property rights was the focus of this off-the-record panel moderated by Tom Thomson. The lively discussion among industry and government representatives expounded upon various perspectives of the opportunities and challenges regarding Russia’s intellectual property rights enforcement. With accession to the WTO, new mechanisms are available to enhance intellectual property protection for foreign businesses, as well as Russian businesses. The panelists discussed Russia’s progress in strengthening the enforcement of IPR laws and regulations and the steps that still need to be taken.

The role of intellectual property in fostering investment was analyzed in the software, pharmaceutical and industrial sectors. A major question raised was the effect of Russia’s Customs Union with Belarus and Kazakhstan on this issue. Much attention was paid to the rapid evolution of technology, namely “cloud” computing, and the efforts being made by companies to keep up with the pace of technological advances. There was consensus that without adequate protection for intellectual property, investment will be deterred and innovation stunted, both crucial factors in the development of Russia’s economy. n


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PANEL: TRAINING THE NEXT GENERATION OF RUSSIA’S WORKFORCE Moderator: Horton Beebe-Center, President, Eurasia Foundation

Panelists:

Scott Blacklin, Principal, Blacklin Associates LLC John Hurley, Vice President for Programs, CRDF Global Wayne Lord, President, World Affairs Council of Atlanta; Professor of International Executive Education, J. Mack Robinson College of Business at Georgia State University Amb. John O’Keefe, Executive Director, Open World Leadership Center David Patton, Vice President, American Councils for International Education Patrick Holtz, Director of Federal Programs, Bentley Systems Raymond Smilor, Senior Fellow, Center for Entrepreneurship Amb. Kenneth Yalowitz, Senior Advisor and Diplomat in Residence, George Mason University

panel by pointing out that, though Russia has a skilled labor force, it is deficient in qualified managers. With this he set the focus of the panel on how Russia will address its need to train and attract talented young people to support its economic growth. He framed the discussion by suggesting three dimensions be addressed. The first is the educational dimension, particularly the intersection between technological innovation and education, as well as the intersection between businesses and universities. How will these cross-sectoral connections develop in the future?

Viable career paths are the second dimension. Will the Russian job market be able to provide enough incentives to attract young skilled workers and managers? Mr. Beebe-Center cited the international dimension for the third focus of the discussion, stating that Russian talent is in high demand throughout the world. He noted the key role played by partnerships between Russian universities and their international counterparts in training the present stock of managers in Russia. Scott Blacklin began his remarks by asserting that the key to workforce train-

John Hurley described how CRDF Global

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

Horton Beebe-Center opened the

ing is organizational integration. The problem is that a country can only train workers to the extent that the job market is capable of absorbing them. If Russians are trained only for Western needs to work in Western markets, they will have difficulty reintegrating with the Russian job market. Increased organizational integration in Russia can guide the training of workers. Mr. Blacklin placed much optimism in Russia’s developing regionalization. This, combined with the increasing dynamism of Russia’s university system, is a prescription for addressing Russia’s workforce training. One program Mr. Blacklin highlighted was the Enhancing University Research and Entrepreneurial Capacity (EURECA) program, which takes advantage of new Russian legislation that allows universities to own and commercialize their own intellectual property. It is cooperating with universities at home and abroad to maximize this revolutionary step forward. He explained how this concept is being further developed through the “triple helix” of development. This involves the cooperation of the local government, local business and local universities. A project involving the State of Maryland, the University of Maryland, Nizhny Novgorod Oblast, Lobachevsky University, and local businesses is an example of such a cooperative triple helix. He believes this is encouraging and will become more common in the near future.

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works with various Russian ministries to develop educational infrastructure and establish research and development partnerships with U.S. companies and scientists. One program, the Basic Research and Higher Education Program, aims to transform research capabilities at Russian universities. It has established over 20 research and education centers across Russia that have stimulated cooperation among Russian universities and international research centers. Universities were selected on a competitive basis and funding was provided for equipment, travel and training. Programs focused on technology commercialization have been designed to foster an entrepreneurial culture, promote development of relevant skills and expertise, and create linkages between industry, business and the investment community. He hoped that CRDF’s experience in Russia will inform and encourage efforts by American universities to do the same.

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Wayne Lord suggested that a key to successful cooperation in Russia is trust established through a long track record of collaboration. Also important is a clear strategy with concrete goals and objectives. He stressed that it is important to consider the higher purposes of cooperation, being cognizant of the longterm goals of building capacity in Russia. Georgia State University, in cooperation with Moscow State University, created a program called the DNA of Innovation. The goals of this program are to define innovation, examine best practices for commercializing innovation and study the global competitive context for innovation while determining Russia’s place in this context. In the end, the results of such initiatives must have staying power, he said, lasting beyond the tenure of the program and resulting in real progress for Russian innovation.

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Amb. John O’Keefe noted the high level of education of Russian adults, with 88 percent having upper secondary education. However, the Russian system has faced a complicated post-Soviet transition that is difficult to understand. He pointed to significant demographic changes in Russia’s education system with a large drop in the number of upper secondary graduates in recent years. Mr. O’Keefe spoke on the issues of regionalization and brain drain, noting that talented individuals are not just moving abroad, but moving to urban centers, resulting in a dearth of talent in the regions. One implication of this is the challenge of aging professors in the regions. He stated that professors must

Amb. John O’Keefe outlines the demographic challenges facing Russia’s university system.

receive adequate pay in order for regions to attract high quality faculty. He pointed to local partnerships between businesses and universities in Atlanta as a possible model for addressing the challenges of regionalization.

of satisfying the population’s education and training needs. Mr. Patton applauded the NRUs reaching out to American businesses and universities as a step toward building capacity in Russia’s education system.

David Patton spoke on three points: reforms in higher education, the relation of these reforms to workforce development and what is being done to address local capacity building needs. Education reform in Russia has been pragmatic and increasingly focused on modernization and internationalization. He cited the creation of national research universities (NRUs) and the move of research away from the Academy of Science Institutes as a positive example of this pragmatism. This has led to a focus on applied research and an end to “science for science’s sake.” Another indicator of progress is success for research being measured differently. Now the number of startups resulting from a project provides tangible evidence of its success. Workforce development is complicated and harder to measure as there is not an alignment between higher education and market forces. There are plans for the Russian Federation to launch the Russian Global Education program, devoting $160 billion for training students abroad. There will be a large practical aspect to this program, not just academic. However, this belies a sense that domestic institutions aren’t capable

Patrick Holtz described the progress made in Russia’s IT infrastructure and how that helps to underpin developments in education and training. In the first decade of the 21st century, internet use grew dramatically in Russia — particularly in the broadband sector — and Russia became the world’s fourth-largest mobile provider. This suggests Russia is definitely heading in the right direction with its IT infrastructure. Mr. Holtz noted that IT human capital is the takeaway when examining Russian competitiveness and that Russia is a leader in this aspect. While this is a competitive advantage for Russia, it must make sure it does not neglect this sector and allow it to atrophy. Russia has the most students enrolled in general science in the world and more workers in the IT sector than any other country in Europe. Concerning Russia’s research and development environment, Mr. Holtz emphasized that as other sectors develop, this will improve as well. An example of the successful interplay of these factors was Bentley Systems’ combination of the three to decommission a nuclear power plant in a matter of months rather than the usual timeframe of decades. He has

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no doubt there is progress, and human capital is what is special about Russia. Raymond Smilor spoke about entrepreneurial capacity building in Russia, highlighting several initiatives his organization has established for youth. It is important to discern which skills should be developed for successful entrepreneurs as they require different skills than managers. They must recognize and assess opportunities, create value, communicate purposeful vision, and possess the desire to implement something innovative. The Center for Entrepreneurship has implemented a program in Russia to expand infrastructure in entrepreneurship classrooms. This program trains university faculty in innovative capacity building techniques and advocates instructing through dynamic methods, not traditional lec-

ciation for entrepreneurship. These approaches resonate with faculty who like the connections they establish outside their present networks and are striving to inspire their students. Mr. Smilor noted that the transition to entrepreneurship education will further encourage a positive environment for SMEs to spur innovation, create jobs and diversify Russia’s economy. Amb. Kenneth Yalowitz observed that Russia’s WTO accession is a remarkable achievement. However, Russia’s transition is a complex issue with many hurdles. He suggested that the psychological transition has been, and will continue to be, the most difficult for Russia. Russia will have to adapt. Russia’s managers will have to build the capacity to overcome crime and corruption in the global market and work to

tures. Students benefitting from this program have already launched more than 450 companies. Mr. Smilor believes students are driving the transformation of entrepreneurial education by recognizing their own desires and needs. A second program highlighted provides for incubators to better bring entrepreneurs into the marketplace, while a third initiative by the Center for Entrepreneurship has established the model for a professional academic asso-

eradicate such practices. Amb. Yalowitz explained they will have to become well versed in American and OECD statutes to avoid inadvertently creating disputes. Managers will have to recognize that allegations of unfair and illegal activities ruin international reputations, making it difficult to participate in the global market. Finally, Amb. Yalowitz reiterated the importance of international university-to-university collaboration. He advocated the need to coordinate

Question & Answer Session Responding to a question about the lack of Russian students traveling to America to receive secondary education, Mr. Hurley suggested the failure of Russian businesses to recognize the value of American degrees as a major hindrance. He explained that Russian businesses often prefer degrees from Russian state universities. Mr. Patton responded that the Russian government has now provided accreditation for degrees from 68 American universities, which should reduce this as a hurdle for Russian students studying in America. He stated the government is putting emphasis on student mobility and international cooperation by including these factors as criteria for university ratings. Mr. Blacklin responded to a question about human capital flight from Russia by noting that all of Russia’s “treasures” are now open to the rest of the world. The harsh reality is that there will be brain drain until Russia can address the governance issues preventing it from attracting and retaining talent. Changes in the educational environment and ferment at the regional level will keep people in Russia. Mr. Hurley noted the high level of illegal immigration to Russia, suggesting Russia might leverage the factors attracting these people to focus on bringing in skilled individuals. Mr. Smilor proposed the use of role models to encourage transparency and reform, citing Ernst & Young’s Entrepreneur of the Year Award. This shows how some businesses have overcome obstacles to achieve success, and inspires others to persevere. Mr. Lord responded that geographic location for universities is becoming irrelevant with the rise of innovative communication technologies. This could be a promising factor in Russia’s building of a skilled workforce. Regarding the ouster of USAID from Russia, Mr. Beebe-Center stated that the exit of USAID was expected and inevitable. However, the manner in which Russia accelerated its exit belies deeper political tension concerning international development organizations. He believes now is a terrible time for any government to take negative action toward such organizations whose assistance is vital to Russia’s transition to a multilateral trade system. He admitted the full impact of the expulsion of USAID is still uncertain. n

Russia Business Watch Fall-Winter 2012 Winter 2010-2011

Patrick Holtz discusses Russia’s human capital advantages.

research activities to give depth to this type of cooperation.

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activities new members

activities USRBC Member Luncheon with John Pepper Moderator: Speaker:

Ed Verona, President & CEO, USRBC John Pepper, Former Procter & Gamble Chairman of the Board, President

September 27, 2012 ● Washington, DC

Mr. Pepper explained the development

Summer 2010 Russia Business Watch Fall-Winter 2012

of Procter & Gamble’s business in Russia during the tumultuous 1990s as the company pioneered the bumpy road that was Russia’s new economy and new free market at that time.

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Despite several challenges that the company encountered in Russia, today Procter & Gamble employs about 3,000 people in Russia. What made this success possible was the vision of creating the best consumer products, providing career opportunities for Russian’s young professionals and creating a cultural exchange between the U.S. and Russia. In the course of this, P&G followed specific strategies: bring the best product on the market, provide convenient product distribution and commit to the company’s values. After all, as Mr. Pepper remarked, it was the partnerships that helped P&G in achieving its goals. He also stressed that the company’s values attracted and committed skilled workers to P&G’s success in Russia. After the presentation, Mr. Pepper engaged in a conversation with the attendees. One of them asked about how a business can reconcile the legal compliance concerns and establishing a profitable firm in Russia. In response, Mr. Pepper advised that companies should act in accordance with all rules. Therefore, he stressed that a company should make the rules of engagement clear to its

employees. He said that a U.S. business should be mindful of its actions and its objectives while operating in Russia. Certainly, the path of action a Western company takes in Russia would be crucial for its reputation. Another question addressed the differences in establishing a company across various emerging markets, particularly between Russia and China. Mr. Pepper highlighted the value of employees in establishing a successful business. Compared to India, for instance, progress in China and Russia was much more rapid. As a former CEO, Mr. Pepper was astonished especially by the young Russians and their ability to adapt quickly to a new demanding environment. Most of them developed leadership skills easily because they already had experienced cultural diversity through traveling even before they joined P&G. In response to a question about his relationship with the Russian government, particularly with President Putin, Mr. Pepper remarked that Mr. Putin as a person was proficient and straight forward during his dealings with him in the St. Petersburg government in the early 1990s. Although perception of Mr. Putin as a political figure is controversial, Mr. Pepper noted the importance of accepting Russia’s development from 1985 to today. However, the relationship between the U.S. and Russia is crucial especially

in collaboration on issues such as terrorism and nuclear proliferation. In response to a question about whether corruption in Russia has changed, Mr. Pepper argued that there have been no significant changes. Instead, he noted differences in how the private sector and the government work together. Even though bureaucracy has improved it was more difficult to work with government authorities. In comparison, although China has corruption in government circles as well, they are more effective in dealing with foreign private companies. Mr. Pepper also mentioned that the challenges of globalization will play a critical role in Russia’s development for the

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foreseeable future. He highlighted the development of the population, noting that it will be the cultural conditions, the size of population and education that will differentiate Russia from others as a developing or emerging market. In respect to the country’s history, the attendees asked whether Russian consumers prefer branded products compared to the generic products they were used to during the Soviet regime. Mr. Pepper confirmed that the iconic value of brands does exist in Russia. When P&G entered the Russian market, existing Russian products were of bad quality. But if a business considers whether or not go to Russia it should take into

account the need for innovation and the amount of time needed to invest in relationship-building with decision makers. Responding to a question regarding the objections that Mr. Pepper faced from his Board when he announced plans to build a business in Russia, he noted that the members of his Board of Directors were supportive of the move, even at that early post-Soviet time. When asked about investments during the crisis of 1998, Mr. Pepper admitted that his financial targets for that year were extremely low. Although, even during those demanding times Mr. Pepper was in good faith that Russia would overcome the crisis.

Mr. Pepper ended the event by offering a preview of issues that he thought would be of interest for USRBC members conducting business in the Russian market. Accordingly, Mr. Pepper pointed out that the state of the Russian economy looks positive with 3-4 percent GDP growth for the foreseeable future. Business has become easier thanks to more technical regulations. Additionally, Mr. Putin is generally supportive of foreign investment in Russia. Highlighting two topics in particular, Mr. Pepper pointed to the oil price and the political relationship between Russia and the U.S. on issues such as on Syria as areas of great importance to both sides. n

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Creating Our Future in Russia‌

today!

Russia Business Watch Fall-Winter Winter 2010-2011 2012

Alcoa has been part of the Russian landscape since 1993. With the acquisition of two manufacturing facilities in Samara and Belaya Kalitva in 2005, Alcoa started to play a proactive role in the Russian aluminum industry. Having invested over $780 million in total production upgrade of the two major aluminum plants in the country, Alcoa has also become a unique producer of aluminum products in Russia, such as high quality coated sheet for the can industry, new innovative products for aerospace, ground transportation and building and construction markets. And with many social and educational initiatives, including Alcoa Foundation scholarships in technical universities and colleges, Alcoa is committed to providing career opportunities for the young people in Russia.

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Advancing each generation.


u.s.-russia relations u.s. government

u.s.-russia relations Briefings on the New U.S.-Russia Visa Agreement with Senior U.S. and Russian Officials from the U.S. Embassy in Moscow and Russian Embassy in Washington, DC September 20 and October 16, 2012 ● Washington, DC

On September 20 in Moscow and

October 16 in Washington DC, the USRBC held briefings on the new U.S.-Russia Visa Agreement that entered into force on September 9 with senior officials from the U.S. Embassy in Moscow and Russian Embassy in Washington DC. The officials outlined the new procedures for obtaining the three-year, multipleentry business, homestay/private, humanitarian, and tourist visas as stipulated in the agreement. Simplification of Visa Application Process While the three-year, multiple-entry visa is subject to a new simplified process, the previous arrangements regarding one-year, single-, double- and multipleentry visas have not changed and applicants may use the same visa agencies that they have used in the past in order to obtain these visas.

The new three-year, multiple-entry business visa does not require documents to be notarized, but the letter of invitation should contain specific information about the organization that issues the invitation and the person invited (see below).

RUSSIAN VISAS FOR U.S. CITIZENS Russian Visas Available to U.S. Citizens: - One-year, single-, double- and multipleentry business, homestay/private, humanitarian and tourist visas: The requirements for these visas remain in place - Three-year, multiple-entry business visa

Visa holders have the ability to stay in Russia for the full validity of the visa, but can only stay for 180 consecutive days without leaving Russia for at least one day; The visa will be issued for a period of six-months less than the validity of the applicant’s passport (i.e., if the applicant’s passport is valid for only another 24 months, the visa issued will be issued for 18 months). Visits to Russia must not extend beyond the validity of the visa.

The same visa process applies to all Russian embassies around the world. Application for Three-year, Multiple-Entry Business Visa Documents Valid passport; Photo; Visa application form (submit-

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ted online: http://evisa.kdmid.ru) and printed out; Written statement from the host organization or individual. A money order or cashier’s check payable to the Russian Embassy for visa processing in the amount of $180. Please, note that the Russian Embassy does not accept cash, credit cards or personal checks.

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The written statement from the host organization or individual in free form should contain the following information:

• the full name of the host organization; • its official address and contact information; • the full name and position of

the person who signed the statement (if the host organization is a legal entity or enterprise, an institution or their affiliate established in the territory of the Russian Federation — the individual taxpayer number); basic information regarding the visa applicant: the full name, date of birth, citizenship, gender, passport number, multiplicity of the visa (statement that the applicant needs a threeyear multiple-entry business visa), purpose of travel, requested period of entry, location of intended residence of the

Important: The written statement must be issued by organizations or companies operating in Russia that have a Russian Taxpayer Identification number.

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The U.S. government official pointed out that the exception to the new rule applies to individuals working in technical fields such as advanced science and technology. These individuals qualify for oneyear visas only; exceptions to this case may occur. Further, due to global policy, visas with clearance received in the past will remain valid for one year.

Both the U.S. and the Russian governments agreed to process normal visa applications — those that do not require special clearances — within two weeks.

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visa applicant, and the cities to be visited. Point of Contact for Visa Applications Effective April 10, 2012, under the agreement between the Embassy of the Russian Federation to the United States and the Invisa Logistics Services LLC company, U.S. citizens must apply for the Russian tourist, business, humanitarian, work, student, homestay (private), or transit visas to the above-mentioned company’s Visa Center located at: 1680 Wisconsin Avenue, N.W., Washington, D.C., tel. (202) 827-0895, fax (202) 8270896, For more information visit www. ils-usa.com.

Additional Information: Visa Processing Fees For a single and double entry visa: $140 for 4-15 calendar days processing; $250 for 3 business days processing; For a one-year, multiple-entry visa: $150 for 4-15 calendar days processing; $450 for 3 business days processing; For a three-year, multiple-entry visa: $180 for 4-15 calendar days processing; The visa processing fee is not refundable.

Important: U.S. citizens may apply for Russian visas in person directly at the Consular Division of the Russian Embassy anywhere in the world.

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There is no expedited process in place for a three-year, multiple-entry business visa. For urgent business trips, applicants should consider expedited oneyear, single-, double- and multiple-entry business visas, which have a processing time of three business days. The speaker noted that applicants who applied for a three-year, multiple-entry business visa and need to expedite the processing time could contact the Consular Department of the Ministry of Foreign Affairs in Moscow (http://www. kdmid.ru/default.aspx) and communicate their specific situation. The consular officials will make decisions on a case-by-case basis. In certain emergency cases, an instruction from the Ministry of Foreign Affairs can prompt a visa approval within one day. However, there is no guarantee that expedited treatment will be granted.

The only factor that has changed is the application fee. Scientists still have to successfully complete their clearance process in order to receive visas, and this process may last two to three months. The fastest that the American side can process clearances for scientists would be three weeks.

The U.S. government can, at best, issue one-year, multiple-entry visas for scientists. Q: It seems that the issue of invitation letters remains unclear, and must be addressed.

Processing Time

Expedited Business Visa

Q: What has changed with respect to visas for scientists?

Q: Currently scientists can obtain threemonth, single entry visas to the U.S. Will they be able to receive visas for a longer period of time in the future?

The Russian Federation maintains Consular Offices in five locations in the U.S., with each having its own jurisdiction. For more information: http://www. russianembassy.org/Embassy_eng/ Consulate/consulates_us.html

The Russian Embassy website indicates that visa processing time is between 4 and 15 business days, but all applicants should allow at least 12 business days for visa processing.

that offers 12-hour phone support and a 24-hour e-mail support. Information regarding this center can be found on the website www.ustraveldocs.com/ru. This website provides answers to common questions, and the call center offers more detailed information. The center also has an automated e-mail service that can provide an update regarding the status of an application.

U.S. VISAS FOR RUSSIAN CITIZENS Discussing visa renewals, the U.S. government official noted that more than 1 in 5 of the visas issued by the U.S. government do not require a formal interview. Therefore, anyone with an active visa or visa that expired within the past four years can submit their visa renewal application through Pony Express without having to come for a personal interview. The two requirements that must be fulfilled with respect to visa renewals are the submission of a photo that is at most 6 months old, and the payment of the $180 application fee. In emergency situations, such as emergency medical care, a student returning to study in the U.S., death in the family, or urgent business trip, Russian visa applicants may receive their U.S. visas within approximately two weeks. Q: What is the best way to receive assistance regarding visa application issues? The U.S. government has a call center

The U.S. government does not require an invitation letter to be submitted with the visa application. However, it could be helpful to present one particularly for people who do not speak English fluently. Q: With respect to Russians applying for U.S. entry, does the three-year, multientry visa apply to the P3 visas? Or, does it apply to the B1 and B2 visas only? For now, the change applies to the B1 and B2 visas only. Currently, the U.S. Embassy issues up to two-year long entries for P-type visas. This is also the case with the H, L, R, and other visas that require filing a petition with USCIS. Q: Will Russians honor visas in an expired passport along with a new passport? Furthermore, are the airlines fully briefed on the issue so a person possessing two passports is not denied boarding? The official answered that, on the American side, the airlines should be fully briefed on the practice given that it has been in place for several years. However, the Russian government does not issue visas beyond the validity of the passport. n


sector update

sector update USRBC “Russia MINExpo” Dinner September 25, 2012 ● Las Vegas, NV The USRBC hosted a working dinner in Las Vegas during the MINExpo International trade show. The dinner, sponsored by Atlantic Ro-Ro Carriers, Inc., featured remarks from Rick Shannon, President of Atlantic Ro-Ro Carriers, Inc.; Kenneth Duckworth, Principal Commercial Officer at the U.S. Consulate – St. Petersburg; and Mikhail Yurevich, Governor of Chelyabinsk Region. exploration, engineering and obtaining licenses have already been invested. The total investment by 2022 will be about $3.5 billion. I would like to mention one important global trend. The success of any mining project now depends on a number of related factors — from the geographical location to the business climate in the region. The Chelyabinsk region is a border region, and our transcontinental highways provide effective access to deposits as well as to ore reprocessing centers and to consumers. At the same time, we are starting to develop a South Urals International Trade and Logistics Center in the region. The following is an excerpt of Governor Yurevich’s remarks at the USRBC “Russia MINExpo” Dinner.

In this industry, there has been strong annual growth of 20-25 percent. Three hundred mineral deposits have been explored and developed in our region, including ferrous and non-ferrous and rare-earth metals. The deposits vary in quality and volume of ore reserves. They

Currently, a number of large investment projects are being implemented in the mining industry. For example, Russian Copper Mining Company has begun to develop a copper deposit with the volume of 400 million tones. The total investment will be more than $700 million.  One of the main projects is development of the largest titan ferrous magnetite deposit in the region, with reserves of 6.5 billion tones. The project involves the complete production cycle: from ore to finished steel products. Funds for

Overall, the success of the mining industry will depend on successful cooperation between government, businesses and associated industries. Our cooperation will, I am perfectly sure, have a diverse character. Thank you!” n

Russia Business Business Watch Watch Fall-Winter 2012 Russia Summer 2010

I

“ would like to express my deepest gratitude for your invitation to speak at this important and prestigious event. The Chelyabinsk region is one of the leading industrial regions of Russia. We are interested in long-term cooperation, including in the development of the mining industry.

The region has sufficient capacity for metalworking and mechanical engineering. Many regional companies are interested in becoming partners in production or construction. The region has established state-backed guarantee loan programs for potential investors. Additionally, there are regional property and income tax benefits. Investors have priority in obtaining land with infrastructure. Finally, the region is able to meet the demand for engineers and skilled workers.

require new technologies for extraction and enrichment. We are very interested in learning about international best practices on working with such deposits.

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new members

new USRBC members E.J. Krause & Associates, Inc.

E.J. Krause & Associates, Inc. (EJK) is a worldwide leader in exhibition and conference management. EJK, a U.S. organizer with unsurpassed international outreach, provides direct contact with the top industry leaders. The company is committed to helping organizations produce a successful event. EJK is your one stop for professional exhibition management, with unmatched experience of more than 25 years producing world-class international trade shows.

CDNetworks

CDNetworks enables mission critical e-business in the world’s most challenging markets. CDNetworks has expertise and infrastructure in Russia and other emerging markets making it a trusted technology and business advisor to companies across the highly-competitive industries of software, travel, eCommerce, high-tech, manufacturing, media, and gaming. Accelerating performance for more than 17,500 global websites and cloud services, CDNetworks helps businesses get closer to their end users without the limitations of hardware and private networks.

The Fort Ross Conservancy

The Fort Ross Conservancy (FRC) is a public charity 501(c)(3) and California State Park Cooperating Association whose mission is to promote educational activities at Fort Ross State Historic Park and Salt Point State Park. Operating solely on income from grants, membership, donations, and gift shop revenue, FRC staffs the visitor center; funds and supports programming and events at both parks; develops and maintains a library of historic and regionally significant books, manuscripts and photos; promotes interest in Fort Ross; and works to find sustainable long-term solutions to ensure Fort Ross remains a vital and accessible destination in the coming decades.

Russia RussiaBusiness BusinessWatch Watch Fall-Winter Winter 2010-2011 2012

John Tedstrom Associates, LLC

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John Tedstrom Associates, LLC is an international advisory firm that promotes investment, trade and corporate citizenship in the U.S., Russia, Ukraine and other emerging markets. The firm builds strategic partnerships through mergers, joint ventures and acquisitions and supports its clients in the areas of government affairs, risk analysis, communications, and corporate social responsibility. The firm brings nearly three decades of senior-level experience in business, non-profit and government to its clients as it helps them maximize value for their shareholders and stakeholders.

International Research & Exchanges Board

IREX is an international nonprofit organization providing thought leadership and innovative programs to promote positive lasting change globally. IREX enables local individuals and institutions to build key elements of a vibrant society: quality education, independent media, and strong communities. To strengthen these sectors, the organization’s program activities also include conflict resolution, technology for development, gender, and youth. Founded in 1968, IREX has an annual portfolio of more than $70 million and a staff of more than 400 professionals worldwide. IREX employs field-tested methods and innovative uses of technologies to develop practical and locally-driven solutions with its partners in more than 100 countries.


Cheers

The Coca-Cola Company salutes The U.S.-Russia Business Council and all who work to strengthen the economic, social and cultural bonds between Russia and the United States.

No artificial flavors, no added preservatives. Since 1886.

©2012 The Coca-Cola Company. “Coca-Cola,” “open happiness” and the Contour Bottle are registered trademarks of The Coca-Cola Company.


The U.S.-Russia Business Council (USRBC) The U.S.-Russia Business Council (USRBC), a premier trade association based in Washington, DC with an office in Moscow, represents the trade and investment interests of its U.S. and Russian member companies. The USRBC seeks to expand and enhance the U.S.-Russian commercial relationship by engaging in advocacy efforts with both the U.S. and Russian governments on behalf of its members; assisting member companies with troubleshooting and new business development; providing information and analyses to support business decisions; and facilitating access and networking opportunities, including briefings with government officials and private-sector leaders.

www.usrbc.org or www.usrbc.org/ru

Services Business Development/Access

Government Relations

Dispute Resolution

Market Intelligence

• The USRBC offers its members frequent opportunities to relay concerns directly to the highest levels of the U.S. and Russian governments. • We facilitate member input on government policies that directly affect business. • Our powerful relationships benefit members facing market access, tax policy and property rights challenges.

Members caught in commercial disputes with private or government entities benefit from the USRBC’s ability to educate the appropriate decision makers about the issue and effectively communicate its effect on the member, as well as on the overall investment climate.

Membership Questions? Contact Julia Bacon Manager of Membership Affairs and Programs 202-739-9189/ bacon@usrbc.org

The USRBC engages regularly with the U.S. Executive Branch and Capitol Hill to promote a balanced discussion on U.S. policy toward Russia, advance the bilateral commercial agenda, and voice member concerns. We currently lead the broad business community effort associated with Russia’s WTO accession, the Coalition for U.S.-Russia Trade (www.usrussiatrade.org).

• Regular member briefings providing outside expert o pinion and experience on industry- specific topics and broader commercial relations. • Regular e-mail alerts on significant political and eco nomic developments in Russia. • Russia Business Watch — a leading quarterly publi cation on bilateral trade and investment.


Special Room Rates for USRBC Members at Marriott Hotels in Moscow Marriott is pleased to provide members of the U.S.-Russia Business Council with favourable room rates at Marriott Moscow Royal Aurora, Marriott Moscow Grand and Marriott Moscow Tverskaya hotels. With questions regarding this special room rates offer for members of the U.S.-Russia Business Council, please contact Marriott Moscow Cluster Reservations Department at reservation@marriott-moscow.ru or via phone +7 495 937 00 55.

MARRIOTT MOSCOW ROYAL AURORA 11 Petrovka str. Moscow, 107031, Russia Tel.: +7 (495) 937 1000 Fax: +7 (495) 937 1001

MARRIOTT MOSCOW GRAND HOTEL 26/1 Tverskaya str. Moscow, 125009, Russia Tel.: +7 (495) 937 0000 Fax: +7 (495) 937 0001

MARRIOTT MOSCOW TVERSKAYA HOTEL 34 1-st Tverskaya-Yamskaya str. Moscow, 125047, Russia Tel.: +7 (495) 258 3000 Fax: +7 (495) 258 3099


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

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RBW: Fall-Winter 2012