RBW: Winter 2009/10

Vol. 17, No. 2 WiNter 2009-2010 WashiNgtoN, DC the report of the U.s.-rUssia BUsiNess CoUNCil

Russia Business Watch

John r. Beyrle p.10Dennis f. hightower p.12

sergey V. lavrov p.3William r. rhodes p.6

KeYNote aDDressesBy edward s. Verona p.1presiDeNt’s Message

e. Neville isdell p.15Klaus Kleinfeld p.16

speCial reMarKsVladimir golovnev p.18Mary a. laschinger p.21

UsrBC Welcomes its New Chairman Mr. Klaus Kleinfeld, president and Ceo, alcoa inc.

september 24-25, 2009Marriott Marquis, New York, NYUsrBC 17th aNNUal MeetiNg

the United states and russia: rebuilding Confidence, resuming growth

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Contents/Содержание

1/2 nnpresident’s Message/ Обращение Президента 3 nnKeynote Address: Sergei Lavrov, RF Minister of Foreign Affairs 6 nnKeynote Address: William R. Rhodes, Chairman & President, Citibank; Senior Vice Chairman, Citi10 nnKeynote Address: John Beyrle, U.S. Ambassador to the Russian Federation12 nnKeynote Address: Dennis F. Hightower, U.S. Deputy Secretary of Commerce 15 nnIntroduction of the New USRBC Chairman by E. Neville Isdell, former Chairman and CEO, The Coca-Cola Company16 nnRemarks by the New USRBC Chairman, Klaus Kleinfeld, Chairman and CEO, Alcoa, Inc.18 nnLead-In Keynote Address: Vladimir Golovnev, First Deputy Chairman, State Duma Committee on Economic Policy 21 nnLead-In Keynote Address: Mary A. Laschinger, President EMEA, International Paper 24 nnPanel Discussion: Resetting the Relationship 28 nnPanel Discussion: Diversifying the Russian Economy31 nnPanel Discussion: Identifying Opportunities in Russia’s Regions33 nnPanel Discussion: The Future of Financial Services in Russia 36 nnPanel Discussion: Coping with the Crisis38 nnPanel Discussion: Developing an Effective Government Relations Practice in Russia 40 nnsponsors of the U.s.-russia Business Council 17th annual Meeting

44 nnNew Member profiles

Russia Business WatChthe report of the u.s.-Russia Business Council

1110VermontAvenue,NW,Suite350,Washington,DC20005Tel:(202)739-9180•Fax:(202)659-5920•www.usrbc.org

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Editor:SvetlanaMinjack•Assistant Editor:JeffBarnettResearch Assistants: PatrickConnally,ElenaMarkovich,NataliaSaraeva,DavidPlotzDesign:MaryiaDauhuliovaPhotography: YvonneGunnerForadditionalinformationorcopiesofRussia Business Watch,pleasecontacttheUSRBCat(202)[email protected].

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Klaus Kleinfeld Chairman of the BoardEdward S. Verona President and Chief Executive Officer ChairmenEmeritus Robert S. Strauss E. Neville Isdell BoardofDirectors Theodore Austell, III The Boeing CompanySidney W. Bardwell Deere & CompanyOzer Baysal Pfizer Inc.Stephen E. Biegun Ford Motor CompanyScott M. Blacklin Cisco Systems, Inc.Carolyn L. Brehm Procter & GamblePeter A. Charow BP America Inc.Jeffrey R. Costello JPMorgan Chase BankRichard J. Coyle Wal-Mart Stores, Inc.Andrew Cranston KPMGRichard N. Dean Baker & McKenzieNeil W. Duffin Exxon Mobil CorporationDorothy Dwoskin Microsoft CorporationC. Cato Ealy International PaperTerrence J. English Baring Vostok Capital Partners Mark B. Fuller Monitor GroupToby T. Gati Akin, Gump, Strauss, Hauer & Feld, LLPHerman O. Gref Sberbank Christopher Gubbey General Motors CorporationDrew J. Guff Siguler Guff & Company, LLCTrevor Gunn Medtronic, Inc.Jay M. Haft Renova GroupD. Jeffrey Hirschberg Kalorama Partners, LLCKarl Johansson Ernst & Young LLPAlexey Kim Philip Morris Sales and Marketing Ltd.Klaus Kleinfeld Alcoa, Inc.Sergei A. Kuznetsov Severstal North AmericaWilliam C. Lane Caterpillar Inc.Eugene K. Lawson Lawson International, Inc.James J. Mulva ConocoPhillips Peter B. Necarsulmer The PBN CompanyRichard D. Paterson PricewaterhouseCoopers Peter J. Pettibone Hogan & Hartson LLPThomas R. Pickering The Eurasia FoundationJay R. Pryor Chevron CorporationWilliam R. Rhodes CitigroupDaniel W. Riordan Zurich-American Insurance CompanyPaul Rodzianko Hermitage Museum Foundation Charles E. Ryan Deutsche Bank Ltd.Claudi Santiago General Electric CompanyBernard Sucher Merrill Lynch InternationalMaurice Tempelsman Lazare Kaplan International Inc.Peter L. Thoren Access Industries, Inc.Clyde C. Tuggle The Coca-Cola CompanyDaniel H. Yergin Cambridge Energy Research Associates HonoraryDirector James F. Collins Carnegie Endowment for International Peace






























�RussiaBusinessWatchWinter2009-2010

PResiDent’s MessaGe

Dear Council Members and Friends:

As any old salt knows, too much sail and not enough ballast can lead to capsizing or being driven against the rocks. The U.S.-Russia relationship, in this sense, is much like the ship without enough draft to enable it to steer its way through political storms. The lack of shared interests between our two countries too often means that, like a top-heavy ship, we have been easily thrown off course by every ill wind that blows our way. Increasing the stakes we have in each other’s economic pros-perity would be like adding ballast, giving us the ability to steer a straighter course even during squalls and storms. To the credit of Presidents Obama and Medvedev, who in November held their third bilateral meeting in the past four months, the U.S. and Russian govern-ments are taking steps to do just that.

The recently announced U.S.-Russia Bilateral Presidential Commission will have to navigate tensions surrounding Iran policy, the stop-and-go nature of WTO accession talks, and other conten-tious geo-political matters. Even with these headline-grabbing differences between our two nations, the Com-mission has already defined areas of common interest, including building a strong commercial partnership.

To put the economic relationship in per-spective, Russia currently accounts for only about 1 percent of America’s over-all trade, compared to 14 percent for China and 2 percent for the Netherlands. However, the next few years offer our best chance yet to expand two-way

trade and create a meaningful commer-cial partnership. Following the Obama-Medvedev meetings in April and July, and Secretary of State Hillary Clinton’s visit to Moscow in October, both sides seem more willing to engage commer-cially in a constructive and structured way.

When Clinton and Russian Foreign Minister Sergey Lavrov, the co-Coordinators of the Commission, met in Moscow on October 13, they agreed on the Commission’s basic outline and pro-cedures. It will consist of 16 Working Groups covering such economically vital areas as Business Development, Energy, Health, and Agriculture. Other working groups will deal with topics of at least peripheral interest to business, including space exploration and educa-tional and technological exchanges.

Although the working groups will be government-to-government, the busi-ness communities in both countries must play a major role in the process.

The fact is, many American companies have discovered that Russia is open for business — and is an increasingly profitable place to do business. Until the onset of the recent recession, Russia enjoyed average annual growth of almost seven percent. Russian in-dustry has been restructured and, to a considerable degree, privatized. A whole new generation of young Russian leaders, economists and professionals has emerged. They are international, savvy and well-versed in market economics – a common language, or obshchiy yazik, that many of them share with their American counterparts.

They have already demonstrated an ability to achieve results even in the absence of a commission. U.S.-Russia bilateral trade has seen double-digit growth for most of the past decade. In 2001, total trade was just under $9 billion; by the end of 2008 that num-ber had reached $36 billion. This year, that figure is likely to be in the range of $22 billion owing to the global eco-nomic downturn, a roughly 40 percent drop from the previous year but a sig-nificant increase since the beginning of the decade.

Significantly, U.S. foreign direct invest-ment in Russia has grown from $6 bil-lion in 2004 to more than $17 billion to-day. Much of the recent investment has been in sectors outside of oil and gas, formerly the leading area for inbound U.S. investment. This trend reflects growing demand in Russia for U.S.-branded, locally manufactured goods. Even more remarkably, Russian invest-ment into the United States over the last decade has grown from a negligible amount to more than $8 billion. These investments have been largely in steel plants and, thanks to the experience of Russian steel companies in turning around their own troubled plants, a sig-nificant number of American jobs have been saved or created.

An important challenge for the Commission will be restoring the positive trend in bilateral trade that the global recession abruptly halted, and create a business climate conducive to further investment. In the long run, this will require institutional reforms, such as creating an independent judiciary and combating corruption. However, there are several areas where relatively quick progress could be made, including simplification of visa and work permit procedures in both countries, export control liberalization in the U.S., and cus-toms reform in Russia. These fall under the jurisdiction of the executive branch in each country and therefore should be resolvable without legislation.

Increasing the focus on commercial relations may be our best chance of getting the U.S.-Russia relationship right by putting enough ballast in the keel to ensure that we can steer through the storms that inevitably occur. The busi-ness community stands ready to support this process in the hope of improving the standard of living and quality of life for the people of both countries.

With warm regards,

Edward S. Verona

The U.S.-Russia Business Council

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Уважаемые члены Совета и друзья!

Каждому бывалому моряку известно, что при отсутствии должного балласта парус-ник может перевернуться или разбиться о скалы. Американо-российские отноше-ния в этом смысле во многом напомина-ют корабль, недостаточная осадка кото-рого не позволяет ему проложить свой путь в океане политических страстей. Не-длинный список общих интересов наших стран зачастую означает, что подобно не-сбалансированному кораблю, мы легко сбиваемся с курса при любом дуновении сильного ветра. Повышение взаимоза-висимости экономического процветания наших стран могло бы сыграть роль бал-ласта, который позволил бы нам двигать-ся верным курсом во время шторма. Сле-дует отдать должное Президентам Обаме и Медведеву, которые в ноябре провели третью двустороннюю встречу за послед-ние четыре месяца и тем самым проде-монстрировали, что американское и рос-сийское правительства работают именно в этом направлении.

Недавно созданная американо-рос-сийская двусторонняя президентская комиссия займется урегулированием вопросов, касающихся политики Ирана, неустойчивого прогресса переговоров по вступлению России в ВТО и других спор-ных геополитических сфер. Несмотря на разногласия между нашими странами, которыми пестрят заголовки в прессе, Комиссия уже определила сферы общих интересов, включая развитие прочных коммерческих связей.

Если говорить об экономических отно-шениях, в настоящий момент на Россию приходится только около 1 % совокупно-го объема внешней торговли США, в то время как для Китая аналогичный пока-затель составляет 14%, для Нидерландов — 2%. Тем не менее, в течение следующих нескольких лет может возникнуть реаль-ная возможность расширения двусто-ронней торговли и создания значимого коммерческого сотрудничества. После апрельской и июльской встреч Обамы и Медведева, а также визита Госсекретаря Хиллари Клинтон в Россию в октябре, обе стороны демонстрируют растующую готовность выстраивать конструктив-ные и упорядоченные коммерческие отношения.

Госсекретарь Хиллари Клинтон и Ми-нистр иностранных дел Сергей Лавров, координаторы Комиссии, во время встре-чи 13 октября согласовали общую струк-туру и процедуру работы органа. Комис-сия будет состоять из 16 рабочих групп, ответственных за такие напраления, как развитие бизнеса, энергетика, здравоох-ранение, сельское хозяйство, а также за-нимающимися такими немаловажными для бизнеса вопросами, как освоение кос-моса, образование, обмен технологиями и др.

Несмотря на то, что рабочие группы бу-дут осуществлять свою деятельность на межправительственном уровне, бизнес сообщества обоих государств должны иг-рать ведущую роль в этом процессе.

Многие американские компании на прак-тике убедились в том, что Россия — при-быльный и открытый для бизнеса рынок. До начала экономической рецессии еже-годный экономический рост в России в среднем составлял около 7%. Российская промышленность была реструктуризо-вана и, по большей части, приватизиро-вана. Появилось новое поколение моло-дых российских лидеров, экономистов и специалистов. Они космополитичны, прагматичны и хорошо подкованы во всех сферах рыночной экономики, что позволяет им говорить на общем языке c американскими партнерами.

Они продемонстрировали способность добиваться результатов даже до появления Комиссии. Объем американо-российской двусторонней торговли увеличился в десятки раз за последнее десятилетие. В 2001 году совокупный торговый оборот не превышал $9 млрд.; к концу 2008 года эта цифра достигла уже 36 миллиардов долларов. В этом году в связи с экономическим кризисом, данный показатель вероятно составит порядка 22 миллиардов долларов, что на 40% меньше, чем в предыдущем. Однако даже такой показатель свидетельствует о значительном прогрессе, произошедшем с начала десятилетия.

Примечательно и то, что американские прямые инвестиции в Россию возрос-ли с $6 млрд. в 2004 году до $17 млрд. на сегодняшний день. В недавнем про-шлом нефтегазовый сектор являлся ли-дером по привлечению американских инвестиций, но многие инвестиции за

поседнее время были уже осуществлены в неэнергетические сектора. Данная тен-денция свидетельствует о возрастающем спросе на американские бренды, произ-веденные в России. Еще больший повод для оптимизма дает тот факт, что рос-сийские инвестиции в США за послед-ние 10 лет возросли с ничтожно малого количества до $8 млрд. Данные инвес-тиции в основном осуществлялись в ста-лелитейную промышленность и, благо-даря антикризисному опыту российских сталелитейных компаний, российским инвесторам удалось сохранить и создать рабочие места для многих американцев.

Важной задачей для Комиссии станет восстановление позитивных тенден-ций в двусторонней торговле, внезапно приостановленных глобальным эконо-мическим кризисом, а также создание благоприятного делового климата для дальнейшей инвестиционной деятель-ности. В долгосрочной перспективе это потребует институциональных реформ, таких как создание независимых судов и борьбы с коррупцией. Однако существу-ет несколько сфер, в которых может быть достигнут прогресс в ближайшее время, среди которых — упрощение визового режима и облегчение выдачи разреше-ний на работу в обоих странах, либерали-зация экспортного контроля со стороны США и таможенная реформа в России. Данные вопросы находятся в юрисдик-ции исполнительных ветвей власти в обоих государствах и могут быть решены без изменения законодательства.

Повышение роли коммерческих от-ношений может стать единственным верным средством успешного развития американо-российских отношений, по-добно тому как добавление балласта на киле делает корабль легко управляемым и позволяет не сбиться с намеченно-го курса в неизбежный сезон штормов. Деловое сообщество готово оказывать поддержку этому процессу, надеясь, что предпринимаемые усилия будут способс-твовать росту благосостояния и качества жизни народов обеих стран.

С уважением,

Эдвард С. Верона

оБраЩение ПреЗиденТа

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RussiaBusinessWatchWinter2009-2010 �


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Keynote address

“Dear colleagues and friends, I am delighted to welcome you, members, guests and friends of the U.S.-Russia Business Council. Let me take this opportunity to congratulate the President and CEO of Alcoa, Mr. Klaus Kleinfeld, on his election as Chairman of the Council’s Board of Directors and extend my gratitude to the former CEO of The Coca-Cola Company, Mr. Neville Isdell, for his long years of work at the USRBC. I find it very impor-tant that precisely these outstanding and influential representatives of the American business world are part of the Council’s leadership.

For us, the USRBC is a good and long-standing partner. The Council’s events are successfully held in the United States and in Russia. Both the Kremlin and the White House listen to the opinions of Council members,

who are at the helm of the American business community. For many years, the Council has been fruitfully partici-pating in various bilateral initiatives, among them the Chernomyrdin-Gore Commission and the bilateral business dialogue….(continued on next page)

“our bilateral trade, economic and investment relations are among the priorities of Russia’s foreign policy. the development of trade and investment certainly represents the interests of both countries, not to mention that it should become a ‘safety cushion’ for the entire complex of our interaction.”

sergey V. Lavrov MinisterofForeignAffairsoftheRussianFederation(excerpts)


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Meetings between Russian politicians and American business circles have become a good tradition. Not so long ago, many of you took part in the St. Petersburg and Sochi Investment Forums, and listened to the state-ments of President Dmitry Medvedev and President Barack Obama at the Moscow Manezh. I think that these events were very useful for expanding your business interests and new con-tacts and in generating fresh ideas. I would like to underline that if you have any proposals, ideas or concerns, you can always turn to Ed Verona, who can systematize them and who we trust.

…Tomorrow a delegation of representa-tives of the Russian side of the Russian-American Business Dialogue, including the Russian Union of Industrialists and Entrepreneurs (RSPP), is going to Washington for talks on the mecha-nism of interaction with the Bilateral Presidential Commission, which was established during President Obama’s visit to Russia…. Possible areas for cooperation could include participa-tion of the two countries’ business communities in carrying out major transportation, infrastructure and energy-saving projects.

At the moment, the Presidential Commission is being structured, 13 working groups have been created and, perhaps, more will be added. [Ed.’s note: There are now a total of 16 working groups.] The economic issues will be dealt with by the groups on business development, trade and economic relations, energy and environment, agriculture, science and technologies, and space cooperation.

Our bilateral trade, economic and investment relations are among the priorities of Russia’s foreign policy. The development of trade and invest-ment certainly represents the interests of both countries, not to mention that it should become a ‘safety cushion’ for the entire complex of our interaction.

Unfortunately, statistics show that the potential in this area is not being fully utilized. The ‘reset’ of the relationship could have a more energetic start. Our trade turnover increased by more than a third and reached a record $36 bil-lion at the end of last year, but has lost that third in the first half of 2009.

As to investment cooperation indexes, they all show negative dynamics, having dropped by more than $1 bil-lion. The United States, nevertheless, has maintained its position as the eighth-largest investor in Russia.

Clearly, this loss of pace in Russia-U.S. cooperation is primarily an outcome of the global financial and economic cri-sis. This weekend, in Pittsburgh, the G-20 political leaders will discuss eco-nomic problems and outline further steps to overcome the crisis. The Russian side is taking an active part in the discussion of three major prob-lems: overcoming crises developments in the economy, reforming the global financial architecture and improving financial sector regulation.

It appears that we succeeded in many aspects following the G-20 meetings in Washington and London. Indeed, certain statistical indicators, including those in Russia and the United States, have started to become positive. However, we cannot afford to rest on our laurels — it is necessary to sum up the effectiveness of these efforts and work out new decisions. It is important that the meetings are not in a restricted format, but involve the heads of states and international organizations representing the leading economies and virtually the whole spectrum of the modern world in terms of geography and civilizations. We think that it paves the way toward building the basis for a global governance system that would eventually allow a more effective search of responses to modern challenges.

Evidently, the business communities of Russia and the United States have vast resources to help restore the positive trend in our economic part-nership. However, we should take into account that, if we put figures aside, the situation does not appear that depressing. There are good examples of our interaction. In July, Prime Minister Vladimir Putin attended an inauguration ceremony for a new tita-nium processing plant for aircraft parts established in the framework of the VSMPO-AVISMA/Boeing cooperation program. Agricultural equipment pro-ducers, such as John Deere and Case New Holland, work actively on the Russian market. Alcoa and PepsiCo have launched new facilities. General Electric is participating in the estab-lishment of the Power Technology Center in Kaluga. United has launched direct Moscow to Washington flights.

There are some positive examples in the banking sector as well. A memo-randum of understanding was recently signed between the Association of Regional Banks of Russia and the International Finance Corporation,

“Russia is interested in diversifying investment cooperation as much as possible. We attach great importance to the prospects for development of scientific and technological cooperation with the united states in the field of cutting-edge technologies, including nanotechnologies.”



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which forms a good basis for the stabilization of the Russian banking system as well as regional credit insti-tutions during a period of economic recovery. A cooperation agreement is being drafted based on this memoran-dum to provide concrete assistance to finance the real economy. I hope that U.S. financial institutions will support this initiative....

Russia is interested in diversifying investment cooperation as much as possible. We attach great importance to the prospects for development of scientific and technological cooperation with the United States in the field of cutting-edge technologies, including nanotechnologies. Russia has set up the state corporation Rosnano, which is working successfully and whose delegation has recently visited the U.S.

As for a venue for the experts to develop particular scientific and tech-nological interaction, it could be pro-vided by the Moscow State Institute of International Relations (MGIMO).

I recommend it not because I am a graduate, but because it has a lot of experience in communication with state-owned, public, educational, and corporate institutions from different countries….

I am sure that many of you would like an update on Russia’s accession to the World Trade Organization. I would like to stress that WTO acces-sion remains our strategic goal. As you know, Russia made the decision this summer to join this organization simultaneously along with Kazakhstan and Belarus, who are our Customs Union partners and have close histori-cal and economic ties with us. [Ed.’s note: Russia announced on October 15, 2009 that it would again pursue WTO membership individually.] We have set up a joint negotiating team, including experts from all three countries. The first meetings will be held in this new format in the near future in Geneva. This decision was not easy to take, but it was unavoidable — the three coun-tries have been in negotiations on the Customs Union and simultaneously

From left to right: E. Neville Isdell, Former Chairman of the Board, The Coca-Cola Company; Edward S. Verona, President and CEO, The U.S.-Russia Business Council; Sergey Lavrov, Minister of Foreign Affairs of the Russian Federation; Ambassador John R. Beyrle, U.S. Ambassador to the Russian Federation.

with the WTO Secretariat for over a decade. The progress on the Customs Union track was much faster than that on the WTO negotiations. Naturally, Russia’s accrued experience and the legislation that was adopted during the accession process will remain. We still seek WTO accession on a fair, open and equitable basis. So do our Customs Union partners.

…I would also like to note the impor-tant contribution of the business com-munity to the development of Russian-American social and cultural ties that eventually will serve as a foundation for strengthening the friendship and mutual understanding between our peoples. I believe that public-private partnership is a promising form of cooperation in this area. There are many successful examples of such a partnership. In this connection, I would like to bring the following issue to your attention. Due to the acute budget crisis in California, Governor Schwarzenegger has decided to cut funding to the state’s natural and historical parks, which may regretfully include the former Russian fortress and settlement of Fort Ross. This historical landmark today continues to play a major educational role, allowing more than 200,000 Americans annu-ally to experience the history and a way of life of one of the first European settlers in the American West.

The California Park Service estimates that keeping Fort Ross operating normally would require $300,000 to $800,000 annually, depending on the services offered. I would like to ask our business community to support this unique monument to Russian par-ticipation in early American history and symbol of long-standing Russian-American relations. I can assure you that the Russian government is prepared to support this endeavor and President Medvedev, to whom I talked about this issue, supported it strongly.

In conclusion, I would like to wish all those participating in today’s event interesting and productive meetings, effective negotiations and hopefully new promising deals.

Thank you for your attention.”n


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when I was opening these branches in Russia, I also had the opportunity to serve as a member of Prime Minister Chernomyrdin’s Foreign Investment Advisory Council along with Neville Isdell.

Current economic & Financial Crisis…I think the type of dialogue that we have seen and the collaboration that is ongoing in the G-20 is very impor-tant, because if we look at crises such

as the Latin American debt crisis and the Asian financial crisis, the only way we worked our way out was collabora-tion between governments, the IMF, the World Bank, and private creditors. So, this type of working together is what is necessary today, even more so than it was then. However, as the crisis continues, I am fearful that the G-20 dialogue will simply focus on the headline-grabbing issues of stimulus and the perception that the worst is behind us.

Citi’s history in Russia“...Both Citi and I have a long history and familiarity with Russia. We first established a presence in Petrograd, now St. Petersburg, in 1917. However, it was closed, obviously, the following year during the Russian Revolution.... In 1993, I officiated the opening of a new representative office and, in 1994, of the branch in Moscow. We have since opened branches through-out the country. During the 1990s,

William R. RhodesChairman&President,CitibankSeniorViceChairman,Citi(excerpts)



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eetingTo a certain extent, we are all suffering from a form of crisis fatigue, and we risk being lulled into complacency by the long-sought time of improvement and the accompanying proclamations that the recession has ended. For example, it is easy to be comforted by central banks turning to the use of standard monetary tools and retiring the use of the extraordinary measures that we have seen around the world. As we see improvement in capital market performance, the world may weaken its resolve to address very important systemic weaknesses that played a central role in creating the worst financial crisis since the Great Depression.

Crisis Prevention MeasuresSo, what remains to be done as we move beyond immediate crisis management and begin to think about crisis prevention?

First, there is an urgent need to address the increasingly protectionist measures and countermeasures that we have seen. Indeed, in the weeks following the G-20 meeting in London in April, 17 of the 20 participants of that meeting enacted some form of protectionist measure. We need to recall that, during the economic problems of the 1930s, fear spawned the beggar-thy-neighbor trade protectionist approaches. Not only did these approaches fail to secure economic recovery, but they further cemented the Great Depression and simultaneously created extraordinary tensions in international relations.

These lessons of the 1930s led to the establishment of a number of post-World War II institutions like the General Agreement on Tariffs and Trade (which is now the WTO), the IMF, the World Bank, and later the regional development banks. It is imperative that we use these institu-tions to the fullest with specific steps to contribute to economic recovery, build confidence and strengthen international cooperation.

The restoration of trade levels must also be a priority. As an example, trade turnover in Russia with all countries totaled $764 billion in 2008 and fell 44 percent year-on-year to $250 billion in the first seven months

September 24-25, 2009 • New York, NY

of this year. The World Bank and the regional development banks in partnership with export credit agen-cies need to offer expanded lines of trade financing. Diminished global demand is not the sole constraint on world trade — a lack of financing is hampering the global engine as well. As part of the recovery effort, the development institutions should also reinstate co-financing with com-mercial banks and other financial institutions.

Restoring other sources of liquidity is desperately needed as well. For example, action is needed to revive the securitization in markets world-wide. We need new capital, and secu-ritization is one way to achieve that. Obviously, there will be constraints on credit generating capability in bank balance sheets and this is one way to help. Caution is needed, though, to ensure that any proposed revisions of capital accounting and reporting rules do not render securitization unnecessarily costly or difficult to do or undermine microeconomic goals.

Beyond trade protectionism there is financial isolation or fragmentation. Policies developed with a country focus that largely disregard the dependency of major industrial nations on finan-cial flows will be counterproductive. Policies that ignore the importance of capital flows between the mature and emerging market economies will certainly be harmful. We simply cannot cut out international capital flows. This is our lifeblood in the age of globalization. Many emerging market economies, for example, rely on international credit markets to roll over their debt. Finding capital for this important business is more difficult when mature economies put in place domestic deposit guarantees with the requirement that the capital remain in that market. Without the ability to transfer capital, trade flows are further depressed and limit global growth and recovery….

To be sure, significant actions have been taken this year to support capi-tal flows. For example, last October, I wrote a series of op-eds in the Financial Times highlighting the need for the urgency for swap arrange-ments for well-performing emerging

market countries. The U.S. Federal Reserve subsequently created swap arrangements with the central banks of South Korea, Brazil, Mexico, and Singapore. In the case of South Korea, the effect was immediate and helped stabilize that market, which had been drifting down very, very rapidly. Additionally, I, along with many others, worked to convince the IMF to provide a short-term credit facility without excessive conditionality to support emerging market countries. The subsequent creation of the IMF’s new flexible credit line, or FCL, was an important step in persuading market participants that emerging economies would have no problems accessing large amounts of liquidity in rela-tively short order.

Perhaps even more importantly, Mexico’s bold request in March for an arrangement with the facility, which was followed by Poland and Columbia, showed that the FCL was helping to restore confidence and could also be tapped very rapidly without the stigma of all sorts of unnecessary conditionality. The IMF has also been lending aggressively under traditional standby arrangements, and the use of the Fund’s credit by countries in Central and Eastern Europe, in particular the Baltic countries, had reached $35 billion in April and has substantially increased since then.

The combination of stepped up IMF and other multilateral and bilateral official lending has pushed the official sector back into the most prominent role of providing external financing in over a decade. Whereas official lenders had provided funding equiva-lent to only 4 percent of all sources in 2007, this ratio is likely to have risen tenfold to some 37 percent this year. Emerging Europe is the most difficult area, where we see that net-inflows of $38 billion in 2008 are now net-outflows to the private sector of $33 billion. However, more work remains to be done. The combination of finance and trade protectionist measures poses a grave risk that eco-nomic recovery could be slow….

There remains an urgent need to achieve convergence of international accounting standards and regulatory norms in order to strengthen the


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comparability of financial statements for investors and regulars, as well as to prevent what we call accounting arbitrage — finding who your favorite regulator is so you do not have to do what you should be doing. Although mandated at previous G-20 meetings, work currently remains in progress in areas like fair value accounting, and I think it is very important that we get this done as quickly as possible…. These things need to be done now because our experience in the LDC debt crisis of the 1980s and the Asian financial crisis of the late 1990s was that much was promised and nothing was done, which helped to set us up for the present crisis.

Additionally, as regulatory reform progresses, it is essential to have close international cooperation con-sistent with the G-20 commitments. In other words, rather than have every country adhere to their own regula-tory standards — which helped to propel this international crisis we are in — we need an international system. You need consistency and the G-20 has the ability to do it if they want to do it.

the crisis stronger than the so-called developed countries, but a number of emerging market countries are still having problems attracting invest-ment. I think the things that will be looked at even more strongly going forward are the strength of institu-tions within a country, transparency, openness, regional stability, and eco-nomic diversification. For Russia, to attract its share of foreign investment and also to maintain domestic invest-ment so that funds do not leave the country, I think we need a thorough implementation of the rule of law and the sanctity of contracts. This is critical in building confidence not only in foreign investors, but also in domestic investors….

This is a time of opportunity for Russia, and I hope the government notices this because this is a country with so much talent and creativity. I think one of the opportunities available today is to diversify away from Russia’s dependence on oil and gas…. I also think additional work is needed on the Russian banking sector.

The G-20 must continue to work at something that I think interests Russia and certainly interests China, India, Brazil, and other emerging market countries: the governance issues of voting rights. For example, China has the same voting rights as Belgium at the International Monetary Fund, and, as I think we all know, next year China will probably surpass Japan as the world’s second-largest economy. You cannot have that type of relationship and expect international cooperation on crisis prevention.

u.s.-Russia RelationsTurning to U.S.-Russia relations, I believe we have seen a number of encouraging signs. I do not think I have seen a speech on Russia that has not talked about ‘resetting’ the relationship…. I think there is a lot of mutual interest between the two countries, certainly from arms reduction to counterterrorism, as well as the stability of the international financial system.

time of opportunity for Russia …It looks as though several emerging market countries will come out of

At the table: Edward S. Verona , USRBC (foreground); Vladimir Milov, President, Institute for Energy Policy (left); Valery Zakharov, Access Industries, Inc. (right).



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eeting

On my last visit to Russia in March of this year, I spent two hours with Finance Minister Alexei Kudrin and his staff talking about examples of what other countries had done over the years to shore up their banking system in difficult situations. I also spent quite a bit of time with Central Bank Chairman [Sergei] Ignatiev on the same trip. You saw a number of things happen in the banking sector. Capital has been injected directly into a number of large banks and the Central Bank has put forth a number of plans to help the liquidity situation. I think we are going to see another round of consolidation in the banking system as we move forward over the next year….

I was reminded that it has been 17 years since Russia first started talking about the WTO. During that period, dozens of countries were coming into the WTO, most prominently China, and it has made a difference. So, I think it is incumbent on Russia and for us here in the U.S. to work with Russia to become a member of the WTO. The USRBC can be very helpful in that regard.

Year �0�0 and Beyond Looking beyond the end of the year into 2010, I think that the recovery is going to be weaker than some people think, because as we go along a lot of the policy support and liquidity arrangements of central banks will be withdrawn. The global leveraging cycle is not going to be a matter of weeks, but a matter of years.

Now, I want to say something that will probably surprise you, because it is very positive. I think the forecast of U.S. growth over the next two quarters is probably going to work out a lot more than many of you read. I think we have a chance to be somewhere between three and five percent over the next two quarters. Alan Blinder, who is an economist at Princeton and a former Deputy Head of the Federal Reserve System, is one who feels very strongly about this. There are a num-ber of economists who now feel that, because of inventory replenishment and the stimulus taking effect, we will see the markets coming back.

However, having said that was good news, we will see the replenishment of inventory start to phase out in the


first quarter of next year. The stimu-lus package will probably peak in the first quarter. So, I think we are going to see 2010 being slower than a lot of people think, because housing has still not bottomed out completely. We still have a rising unemployment rate, though it is seems to be stabilizing. I also think the consumer, which drives 70 percent of the U.S. economy, over the last decade basically carried the world on its back. Moreover, I think the U.S. consumer is very cautious, that is why you see the rise of savings rates. The U.S. consumer will con-tinue to be cautious next year.

Having said all of that, I think we are struggling out of the worst of it. Things look good the next couple of quarters, but this is the opportunity to make some real changes. I would say when we talk about reset, we should talk about some resets in the international economic arrangements that guide our world economy. If we don not make these changes, we are going to find another crisis on our hands a lot sooner than we think.

Thank you very much.”n

Red Cavaney, ConocoPhillips, gives the Gala Dinner Toast.

�0 RussiaBusinessWatchWinter2009-2010

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Keynote address

prevail, that old ways of thinking are still strong, a conception that power is still rooted in the past rather than in the future.’ There is a 20th century view, the President said, that the United States and Russia are destined to be antagonists. This assumption is wrong. The pursuit of power is no longer a zero-sum game. Progress must be shared. That is why the President called for a reset in relations between the U.S. and Russia. It must be a sustained effort between the American and Russian people to identify mutual interests and expand dialogue and cooperation that can pave the way to progress.

I do not think there is any doubt that a real reset is underway in the U.S.-Russia relationship right now, following a very productive, constructive summit in Moscow in July. I would say this is the most constructive moment I have felt in the relationship surely in the last 10 or even 15 years.

The summit resulted in a number of important agreements that encompass the global strategic nature of this rela-tionship. Negotiations are proceeding quite well now on the replacement trea-ty for the expiring START agreement. U.S.-Russia cooperation on nuclear nonproliferation was highlighted only

“...When I spoke at the USRBC Gala Dinner last year in the Newseum, we were focused on a number of complex issues: negative investment climate, the emerging global financial crisis, the Georgia conflict, an upcoming American election. Not all of these issues are solved, but I think we recognize that we find ourselves in a very different, a very changed, and an improved environment.

The U.S. and Russia are now looking at each other in a very different way than a year ago, and in a different global economic context. I think President Obama’s speech in Moscow in July before the graduates of the New Economic School maybe expressed it most trenchantly, when he said, ‘Unfortunately, there is sometimes a sense that old assumptions must

John BeyrleU.S.AmbassadortotheRussianFederation

“it is a vital strategic interest of the united states that Russia becomes that strong, prosperous country. We do not need weak partners in the ��st century.”

(excerpts)

RussiaBusinessWatchWinter2009-2010 ��


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eetingyesterday by the unanimous adoption of a new Security Council resolution that will make it more difficult to use a peaceful nuclear program as a cover for military ambitions. I think that the news coming out of Iran this morning and the statement that the leaders will issue in Pittsburgh will only underscore the joint nature, the combined cooperative effort of the United States and Russia in addressing that very specific threat.

Russian-American cooperation on Afghanistan continues to expand. Within a few weeks, we will see up to 12 American military flights per day crossing Russian airspace, ferrying troops and military equipment to the fight in Afghanistan to support U.S. and NATO troops in that war-torn country.

In addition, work is well underway on a number of fronts to launch the Bilateral Presidential Commission that was announced in July, as a way to ensure that the more constructive, pro-ductive atmosphere that we feel will be translated into concrete, sustained results.

There has been significant progress in defining the membership and the pre-liminary goals of the different working groups of that Commission. I know the working group of most direct interest to all of us in this room is the Business Development and Economic Relations Working Group, which will be chaired by Minister of Economic Development Elvira Nabiullina and Secretary of Commerce Gary Locke…. I want to stress again, as I have before, how important, how crucial we see the input to that working group from both U.S. and Russian businesspeople. In that respect, I want to thank the U.S.-Russia Business Council, and I want to thank all of you, for the thoughtful recommendations [USRBC’s Recommendations for the Bilateral Presidential Commission Working Group Agendas] that you sent in August as a way to help get things moving for this working group and the new Commission. I hope the flow of ideas continues, and that we can use them as a basis for productive work.

As I reread those recommendations on the plane coming over, I was struck by how often I encountered the following


phrases: Increase transparency. Avoid protectionism. Investment with rules. Stimulating efficiency. Judicial indepen-dence and integrity. Simplified proce-dures. Legal clarity. Harmonization. Streamlining. None of these are new aspirations. Many of us have been working on their realization for almost a couple of decades.

We all saw with dismay this year that Russia dropped 12 places to 63rd out of 133 countries in the World Economic Forum’s Global Competitiveness Report. That report only highlighted many of the same issues that the U.S.-Russia Business Council report did. It empha-sized Russia’s need to tackle structural weaknesses, the lack of government efficiency, judicial independence, and property rights, as well as increased government favoritism. It noted cor-ruption, the lack of access to financing, the prevalence of trade barriers, and poor corporate ethics as problems for Russia. So again, we find ourselves at a critical crossroads for supporting Russia’s efforts to become that stron-ger, more prosperous country that President Obama spoke about in July.

It is a vital strategic interest of the United States that Russia becomes that strong, prosperous country. We do not need weak partners in the 21st century. I believe the Business Development and Economic Relations Working Group of the Bilateral Commission is going to be the ideal forum for the discussions to help move some of this forward. By citing specific problems that businesses are encountering and by explaining how they affect the growth in bilateral trade and the willingness of American com-panies to increase their investments in Russia, we can begin to stop merely listing what the problems are and begin working together toward the real, over-due resolution of those problems. As a result, we will see our economic relationship grow to the benefit of both countries.

This is an absolutely essential goal of that working group, because business and economic ties are perhaps the most enduring and most important element of our bilateral relationships around the world, and in particular this relation-ship. As you have heard me say many times before, I believe they can provide the stable foundation for U.S.-Russia relations. They can serve as that shock absorber that we need to help us ride out some of the political vicissitudes that we are all witness to and know will come again in this relationship.

This is not a one-sided desire now. We are clearly seeing signals from the Russian side that they are ready to tackle these problems for the benefit of future Russian generations. President Medvedev recently stated that economic backwardness and corruption are the key reasons for Russia’s problems. He stated that, ‘Our country has preserved the Soviet Union’s worst flaw: a severe disregard for the peoples’ needs.’

…We have to support Russia in these efforts, both through the Bilateral Presidential Commission, and through the work of the U.S.-Russia Business Council, through our day-to-day working relationships, because the fun-damental interests of the United States and Russia continue. We want to work with the Russian leadership to achieve a stable, prosperous world order that promotes the benefits of democracy, free trade and constructive relation-ships among nations.

Your daily work in Russia contributes to that effort. We have seen a marked increase in U.S. investment in Russia in the past year despite the global eco-nomic downturn. I personally attended the opening of several major plants: General Motors, Alcoa, PepsiCo, as well as the inauguration of United Airlines’ Washington-Moscow direct flight. In addition, we have seen new U.S.-backed factories in the chemical, railroad, food processing, and construction materials sectors, just to name a few, and we have heard announcements of several more large planned investments in Russia.

“We strongly believe the u.s. and Russia can be close business partners whose economies mutually support each other, and lead the world to that better, more prosperous economic future — that is a strategic goal for us.”

https://www.usrbc.org/Presidential_commission_recommendations.html




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across the country and give interviews, much more unites the American and Russian people than divides us.

We strongly believe the U.S. and Russia can be close business partners whose economies mutually support each other, and lead the world to that better, more

prosperous economic future — that is a strategic goal for us. I look forward to working with all of you in this room to that end in the months and years ahead.

Thank you very much.”n

I feel comfortable in saying that we all see Russia as a natural partner in the world economic order, because we believe that the vast majority of Russian people share our interests in democracy, free trade and constructive relationships. As I never tire of saying to my Russian audiences, as I travel

Keynote address

Dennis F. hightower

“...Iamveryproudtobeheretodayonbehalf of [U.S. Commerce] Secretary Gary Locke and to really have the opportunity to talk with you about the U.S.-Russia commercial relation-ship. I understand that some of you are new to the emerging market of Russia, while many of your compa-nies have been in Russia for decades. However, all of you are in a sense pioneers, as you look for better ways

of doing business in an environment where the pace of markets have often outpaced the ability of regulators and governments to adapt. Your Russian

customers, partners and investors are also pioneers in a very real sense, as they remain among the first Russian businesses that have grown up in a global economic context.

“Businesses from both countries are eager to see the u.s. and Russia take a more active role in breaking down obstacles and improving the climate for trade and investment in both directions.”

DeputySecretaryU.S.DepartmentofCommerce(excerpts)



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consumers. Already, we have an announcement today by Mr. Mikhail Prokhorov expressing his intent to buy the New Jersey Nets. So that is a good start.

Businesses from both countries are eager to see the U.S. and Russia take a more active role in breaking down obstacles and improving the climate for trade and investment in both directions. It is not news to most of you in this room that U.S.-Russia trade and investment have suffered, along with the rest of the global economy. In 2008, our two-way trade topped $36 billion, its highest level ever. This year, so far, that combined trade is off about 37 percent. This is not just a bad result for U.S. exports, but it is a clear sign of how much Russian buyers have been impacted by the weaker ruble, by the freeze-up in the financial markets and by the plunge in the commodity revenues on which Russia had come to rely. The weaker cash flow position of most Russian companies has slowed the expansion of Russian businesses into the U.S., which until mid-2008 had been a most noteworthy new trend in our economic relations.

Seeing the flattening of demand in Russia, American companies have slowed their investment there as well. This highlights the need for Russia to continue working on its own toward a more competitive investment climate, as we try to do the same in the United States. President Medvedev’s recent call for economic diversification in Russia is a farsighted recognition of the need to build an innovative economy of the future, a future in which the goods and services that Russia creates, and the innovations that they make, will be no less impor-tant than the natural resources that they take from the ground or from the forest.

From a government standpoint, one key to promoting trade and investment

is to stay on the right side of the line between effectively supporting our domestic economies on one hand, and a shorthanded and counterpro-ductive protectionism on the other. It is a false comfort to think we can cor-don off our markets without harming ourselves in the long run. The United States is the most open market in the world to investment from around the globe. We want to see more com-panies from Russia and elsewhere invest and work in our country. As Secretary Locke remarked during his trip to Moscow, the American compa-nies operating in Russia are creating jobs and opportunities here, at home, and in Russia.

We want to see Russia continue its integration into the global economy and its institutions. Let there be no doubt at all that we do want to see Russia in the WTO. We should be asking ourselves, without such institutions and the standards and disciplines that they establish by agreement of their own members, how much worse would the current economic crisis have been?

When we look at it from this perspec-tive, I think we should all realize that we need to keep pressing hard to strengthen the WTO and the idea of multilateral economic cooperation that it represents. Seeing this vast array of challenges, Presidents Obama and Medvedev created the U.S.-Russia Bilateral Presidential Commission during the Summit in July. Secretary Locke looks forward to working with Minister of Economic Development Elvira Nabiullina as they co-chair a new Business Development and Economic Relations Working Group under that Commission….

While the Working Group will exist at the government-to-government level from a policy perspective, recommendations from the American business community will be welcome and extremely important. Thanks in

For me, there is really a sense of déjà vu as I stand here this morning. Twenty-two years ago exactly, on September 24, 1987, as a Walt Disney Company executive, I left my headquarters in Paris with a team of European country managers and some of my European marketing and publishing staff, and headed to Moscow. There we began discussions with Russian publishers — Fizkul’tura i Sport — that resulted in our introducing Mickey Mouse and his friends to the children of Russia through books in their own language. Over the next eight years, and through many, many trips to Russia, Georgia and Ukraine, we also held European youth tennis cham-pionships in Moscow, and brought Disney toys, branded clothing and food products, and film festivals and television programming to the people of Russia…. Those were very, very exciting times, so I understand the excitement that each of you must feel as we begin a new chapter of U.S.-Russia economic development.

Secretary Locke was indeed honored to be asked by President Obama to accompany him to the July summit. This was the Secretary’s first official foreign trip since being confirmed to office, and it was a sign of the importance that this administration has given to resetting our dialogue with Russia. It is a relationship where we identify mutual interest and expand dialogue and coopera-tion, but also, we must not shy away from speaking forthrightly on areas where we disagree. While in Moscow in July, the Secretary found U.S. CEOs whose companies were remaining very strongly committed to Russia despite the challenges of the global economic and financial climate that we all find, as well as the specific challenges of Russia’s market.

We recognize the opportunities pro-vided by Russia’s increasingly sophis-ticated consumers and its highly capable workers and managers. Our business leaders want to see Russia’s economy develop further. Many Russian business leaders are also interested in accessing the U.S. mar-ket, to the point where they some-day will become a familiar presence, rather than a novelty to American

“the united states is the most open market in the world to investment from around the globe. We want to see more companies from Russia and elsewhere invest and work in our country.”


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part to the diligent work of the U.S.-Russia Business Council and others in marshaling input, we have already received a wide range of suggestions. The U.S. and Russian coordinators from the Commerce Department and the Ministry of Economic Development will be meeting next month in Washington to begin addressing these ideas. I think that many of your recommendations will find reso-nance within the government. For example, Secretary Locke has already

been working on two issues that U.S. businesses have singled out for atten-tion: visas and export controls.

Where there may be new ways to ensure that customers, investors and business partners can visit our country as openly as possible, without harming our nation’s security, we need to work hard to find those ways and put them in place. Where there may be new ways to ensure that American tech-nology and ideas remain the world’s

best and the world’s choice, without putting ourselves and our troops at risk, we owe it to you to examine those options as well, because our security depends on having the best companies with the best technology and the best innovations.

Let me close with these thoughts. We want to make your lives as business-people easier. We will not solve every problem and even most problems with one stroke, for this is not the

From left to right: Ambassador John R. Beyrle, U.S. Ambassador to the Russian Federation; Beryl Blecher, Minister Counselor for Commercial Affairs, U.S. and Foreign Commercial Service; Dennis F. Hightower, U.S. Deputy Secretary of Commerce



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introduction of the new

usRBC Chairmanintroduction by e. neville isdell

“Thank you very much, everyone. I am reminded of a former boss of mine who, when he retired, said, ‘There is a time to lead and there is a time to leave.’ I have chosen this time to leave, because I believe that the organization must and should be led by someone who is active in Russia. And as I have stood down at the end of April as Chairman and CEO of the Coca-Cola Company, I felt it appropriate that I pass the baton.

It is actually in many ways one of the most difficult decisions…as I have been involved with the Council since its inception 16 years ago. It has been a truly wonderful 16 years. If you think back to 20 years ago, no one had any idea that the Russia that exists today would emerge. Many people would have thought it impossible…. When I first went to Moscow, we had to take our own breakfast, because there were no eggs at the Oktyabrskaya Hotel. And it is that perspective, I think, that we absolutely have to have.

…I am thrilled that the person who is going succeed me is my good friend Klaus Kleinfeld. His strategic clarity and his real understanding not just of the business world, but also of Russia, is going to bring real incremental value to the U.S.-Russia Business Council. When we started talking about Klaus succeeding me, he did very significant due diligence, because he wanted to be sure that this was worthwhile doing,

worth applying his time. I know, because I know the man. He only said yes because he is willing to put in the time.

I am very happy to be able to stand here today and say that not only is the USRBC in much better shape, but we now see real growth and real energy back in the U.S.-Russia relationship….” n

FormerChairmanandCEOTheCoca-ColaCompany

time to create unrealistic expecta-tions. However, the shared interest of the American and Russian companies here, as well as the workers they represent and the consumers they serve, should remind us that there is a lot we can achieve when we pursue dialogue and do not insist on a zero-sum view of U.S.-Russia relations. We do not intend to allow inertia from past disagreements to prevent us from pursuing mutually

beneficial agreements today, where there exist opportunities for such improvements.

Despite the challenges posed by today’s economy, the commercial arena is one in which these oppor-tunities are much greater today than they have ever been before. All of us in the Obama Administration look for-ward to working with the U.S.-Russia Business Council to realize and seize

as many of those opportunities as possible. I want to thank you for the work that you have done, the work that you continue to do and the work that you will do in the future as part of this very important Council and all of the activities that are associated with it, and for sharing your time this morning with me.

Spasibo.”n

From left to right: Ambassador John R. Beyrle, U.S. Ambassador to the Russian Federation; Beryl Blecher, Minister Counselor for Commercial Affairs, U.S. and Foreign Commercial Service; Dennis F. Hightower, U.S. Deputy Secretary of Commerce


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Remarksby the new

usRBC ChairmanKlaus Kleinfeld

“Neville, thank you very much…. When you, Neville, talked with me about this for the first time, which was a long conversation, you made it clear to me that you have put a lot of passion into this organization. And it is not only your passion that strikes me, but the foresight of having been one of the founders of this initiative at a time when no one could predict the Russia that we see today….

… I have spent quite a bit of time in Russia and I had the fortune to lead a company that is seen by many in Russia as a Russian company, because it was formed in St. Petersburg more than 150 years ago. Russia has played an enormously important role in the development of that company and that gives you an entirely different perspec-tive on history…. Now, I am running Alcoa, a company that decided 10 years ago to enter Russia and has invested substantially there….

ChaLLenGes anD oPPoRtunities in RussiaNow, coming to the U.S.-Russia Business Council, I think we will continue to see challenges and we will continue to see opportunities….

Rule of LawThere are three important factors that we need to address. The first, and most fundamental one, is that we need to make sure that there is an established rule of law in the country. I was enor-mously pleased to see that, in his first televised speech in office, President Medvedev made this a priority. I think we are on good footing here going forward.

Development of sMesThe second factor is support for the development of small- and medium-sized companies…. It is interesting to see that President Medvedev even set a quantitative target for their develop-ment, noting that today SMEs make up about 15 percent of the GDP and that he wants this figure to grow to 60 percent. I think that this goal is a very good one; it shows a lot of ambition. But I think that this idea is far more important

than it sounds because, when you look at societies and compare them, you see that it is the small- and medium-sized enterprises that bring enormous entrepreneurial spirit and enormous drive for innovation. These small- and middle-sized businesses create a stron-ger middle class. The stronger middle class can stabilize the political system and create a lot of good ground for the positive development of society. I

very strongly believe that this is on the minds of those who are pushing for SME development….

educationThe third point I would mention is education, which goes directly into the point that I mentioned before. You can see again that President Medvedev has set this area as a top priority. I think the business community can


PresidentandCEO,AlcoaChairman,TheU.S.-RussiaBusinessCouncil



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assist on the educational front in order to help people get a better under-standing of good business practices. I was impressed when President Obama spoke at the New Economic School this

year. Before he spoke, every individual that graduated this year was presented. Frankly, I would say that out of the 80 or so people that graduated that day, I would have hired every single one of them. Every single one of them had a CV that would have made it up to the higher ranks, because they all had a combination of some technology edu-cation and some business education or other second degree. All had business experience or some practical experience and all showed something that I look at — depth. All were able to show depth in solving huge problems and staying on a topic instead of just having a shallow, manufactured CV that we unfortunately see so often at other places….

Those in my view are three enormous things that we can begin to assist with right away.

in a more sustainable way... I see this as a positive thing and believe that we need to make sure that we do things together. We can not get all of these things done by ourselves. We need to

make sure that everybody who has the same cause, as we do, acts together….

Let me close with why I have taken on this assignment. My industry is now experiencing the worst crisis it has ever had in history, with our price dropping by 60 percent in just five months. Certainly, I have more than enough work on my hands. I did it because, on the one hand, I am convinced and passionate that this is the right thing.

On the other hand, I am optimistic that we will have the support of both administrations. Let us work on that, let us make that happen and let us see if we can continue with the USRBC founders’ vision going forward….” n

teamwork on Bringing the u.s. and Russia togetherThere is a Russian saying that I like a lot that says, ‘All things are difficult before they are easy.’ I think that truly

describes the situation that we often run into…. Currently, we are in an environment that is more favorable to get things done than it was, as Neville said, half a year ago. I was enormously pleased to see the new tone that was set at the Obama-Medvedev meetings…. Obviously this new tone is important because it sets the foundation for the rest of the work that we have to get done. We can play a really important role.

There is a mantra that I want to share with you that I follow in my life: ‘No one is perfect, but a team can be.’ I believe that there are elements of a team that we have to bring in place to really make this relationship successful. We are all a team here…. There are other organi-zations that follow the same mandate of bringing the U.S. and Russia together

Mr. Kleinfeld presents Mr. Isdell with newly-mintedaluminum bottles of Coca-Cola.


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Lead-in Keynote address

Vladimir GolovnevFirstDeputyChairmanCommitteeonEconomicPolicyandEntrepreneurshipStateDumaoftheRussianFederation

CuRRent eConoMiC CRisis“…A lot has already been said about the crisis but, nevertheless, this topic is still very pressing. Russia was hit twice by the crisis: large investments left the country, and at the same time, revenue-generating sources such as oil and gas have significantly dropped in price. In the summer of 2008, the oil price was $147 per barrel, and it dropped to $35 per barrel in January.

For many Russians, this crisis reminds them of the difficulties of 1998. Why am I referring to 1998 when many of today’s speakers have already men-tioned that this is not an appro-priate parallel? Indeed, because of

Russia’s Stabilization Fund — its level of preparedness and well-organized vertical power structure — this year, it was absolutely another situation compared to the default of 1998. However, I do remember the collapse of the Russian banking system, when no payments were processed for more than two and a half months…. The fact that, in the fall of 2008, we were able to preserve our banking system, in my opinion, is a real breakthrough for the Russian government.

Today, many experts estimate that the federal government spent about $200 billion from the Stabilization Fund and federal budget on anti-crisis measures. Different experts quote different numbers. However, because the banking system is an intermedi-ary for any kind of financial transac-tion, the fact that we were able to preserve the system is an important achievement.

“...we think that the experience of our american friends and partners is necessary today. We need long-term investments... We also need new technologies.”

(excerpts)



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I was listening to many of my Russian colleagues today, and I have concluded that we do not know how to be happy

and pay attention to positive trends. We criticize the government, we criti-cize the bills, and I am sure that some of those bills deserve this criticism. However, since September 15, the government has done a great job in order to ensure that Russia domesti-cally and in the international arena looked authoritative and credible.

the Russian Government’s anti-Crisis MeasuresThat is why I find it necessary to high-light all of the measures that we have implemented.

First of all, we averted the crisis in the banking system. Today my colleague, Mr. [Anatoly] Aksakov, spoke about

regional banks. Let me dig a little bit deeper. Unfortunately, Russian busi-nesses enjoyed extremely favorable

loan conditions where banks pro-vided loans without any collateral. This was a common practice for the last four to five years. Today, nobody pays attention to this fact. Many banks were offering loans to com-panies that had no collateral and no transparent accounting. The fact that many companies cannot acquire loans today is not due to the fact that there is no money in the economy. This happens because companies are not used to the fact that they need to have collateral to obtain a loan, that they need to risk something.

In addition, and this is also not being discussed today, many companies started to diversify through real estate

investment, because the real estate market was growing at 20-30 percent or even 50 percent in some regions.

That is the problem that affected many other countries, including Spain and the United States…. Many com-panies today have this kind of a mind-set. So, I would say that, for Russian businessmen, this crisis turned out to be a ‘cold shower,’ which is good for one’s health. I think that the compa-nies that are looking toward the future have made the right conclusions.

Our second achievement is that we managed to stop the increase of unem-ployment throughout the country. This is a big problem for Russia and it was especially pressing in the fall of last year. The government allocated huge amounts of resources to cope with this challenge and make sure that


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in the monocities — cities dependent on a single industry — the problem would be solved. Through a targeted approach, we were able to transmit this message to the regions…. The governors realized that it was their responsibility to tackle this problem.

The next aspect is safeguarding the national currency. We managed to preserve what had been achieved in this respect and also to strengthen our currency. We already have growth in the number of deposits. More importantly, Russian citizens are moving away from hard currency deposits in dollars and euros because it is no longer profitable. In the beginning of 2009, the exchange rate was up to 35 rubles per U.S. dollar. Today, the exchange rate is approxi-mately 30 rubles per U.S. dollar.

We have also supported strategically important companies. We have iden-tified 295 such companies and given them government guarantees.

For the past few months, we have witnessed the growth of the Russian economy. As some speakers have mentioned, industrial manufacturing in Russia fell by 10 percent in the first half of the year. In general, the trends are positive today.

That is why as a representative of the State Duma, I would evaluate the government’s measures as successful.

Several speakers mentioned that the crisis is behind us. That is not true. On September 16, First Deputy Prime Minister Igor Shuvalov reported to the Duma on the government’s anti-crisis activities and noted that Russia had overcome only the most difficult phase of the crisis. We have hit the bottom and from here, we can start going up. The current forecast is that it will take two to three years to get back to the level of the beginning of 2008….

Lessons Learned and Preventive MeasuresWhat conclusions can we draw from this, and what measures will we introduce in the fall?

Let me say a few words about the innovation economy. The country is addicted to oil. The fact that the oil price is approximately $70 per barrel is a good thing for the budget. Every $10 increase in the oil price brings 600-650 billion rubles ($20.7-22.4 bil-lion) to the budget. That is a lot of money. However, it prevents officials from adopting the right decisions that would allow us to develop value-added industries and to develop the economy.

social Programs in RussiaI would like to thank the government for the fact that all social welfare programs that were budgeted in 2008 are being fully funded and imple-mented. You know that we are con-ducting pension reform. Russia is one of the few countries in the world that, despite the crisis, was able not only to maintain the amount of pen-sions, but also to increase them sig-nificantly. I am happy to report that, by the end of 2009, pensions will exceed the regional minimum subsistence level in all regions of the Russian Federation.

u.s.-Russia CooperationCertainly, we will not be able to solve all these problems on our own. Thus, we think that the experience of our American friends and partners is necessary today. We need long-term investments at low rates, even though it is first to flee whenever a crisis hits. We also need new technologies.

We talked today about Russian citi-zens wanting to leave the country. I can understand that. Today in Russia, an inventor can not utilize his potential. He can not find money to create a test model and start produc-tion. Again, the Russian government and State Duma have a lot to do in this field. However, together with our American partners, we have already launched a number of advanced joint ventures.

I hope that our joint efforts will lead to the achievement of these goals. Thank you for your attention.”n

First of all, we are going to take care of the real sector of the economy. Currently, the real sector of the economy cannot obtain sufficient funding. The interest rate for Russian industry was already mentioned today — it can be as high as 22-25 percent. I do not know a single company that would be able to sustain growth at such an interest rate. The Central Bank has lowered the interest rate down to 10.25 percent [Ed.’s note: the CBR has subsequently lowered the rate to 9.0 percent.]. However, commercial banks have not followed suit.

The second issue is the development of small- and medium-sized enterprises. The Duma is adopting certain bills in this respect. We have increased the amount of gross revenue for companies eligible to use simplified tax forms up to 60 million rubles ($2.1 million). We have reduced the number of inspections for small- and medium-sized businesses — inspections can be conducted not more than once in three years. Of course, we still have a lot to do.

The Russian tax system is often said to be suboptimal. According to the law, the average tax burden is about 35 percent for business. In reality, Russian businesses pay approximately 55 percent in taxes. The added 20 percent is due to corruption. This difference is included into the final price of the product…. This is the framework within which the majority party — United Russia — and the Duma are now trying to act. That is not easy, because many problems are long-standing and because of the fact that democracy in Russia is perhaps only 20 years old. Thus, we have a lot of work to do.

The next aspect that I would like to discuss is infrastructure develop-ment. Let us be honest. We do not even have a road from Vladivostok to Moscow. That is why we need to make major investments into road, airport, seaport, and river port construction. Without this infrastructure, the costs for doing business will be very high for all industries, including mining.



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“Thank you for the opportunity to speak with you today. I am going to share with you some thoughts on investing in the regions outside of St. Petersburg and Moscow, which is the topic of the panel discussion….

international Paper in RussiaInternational Paper has been actively investing in Russia for over a decade. Since our original investment back in 1998, we have invested over $1.2 bil-lion, making us one of the three largest

managing concessions for more than 5 million hectares of forestland. Our investments span the full range of Russia’s provinces from the Finnish boarder to the White Sea to Central Siberia.

Our success in Russia demonstrates that each of these regions have oppor-tunities, but also challenges. Global companies, like International Paper, have limited resources and competing opportunities for investment.

investors in Russia’s manufacturing sector, outside of the oil and gas in-dustry. Our first investment was in the Svetogorsk Pulp and Paper Mill in the Leningrad region, and more recently, we invested in a 50/50 joint venture.

Ilim Group, our joint venture, is the largest pulp and paper manufacturer in Russia, and has facilities located in the Arkhangelsk and Irkutsk regions. Our total investment footprint in Russia is more than $2.5 billion, em-ploying more than 22,000 people and

Lead-in Keynote address

Mary a. LaschingerPresidentEMEAInternationalPaper


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Five Criteria for successful investment We have identified five critical factors that are necessary to consider for in-vestment in any region. I would like to share some thoughts on how these factors are being supported in Russia, and where opportunities still exist.

The first, and most important, is access to a market, either locally or for export through well-developed infrastructure. Russia’s demographics, with a de-clining population, have a dampening affect on growth. However, low but increasing rates of per capita con-sumption will provide growth opportu-nities well into the future. The Russian Federation is encouraging investment in less-developed regions providing jobs and, ultimately, increasing con-sumption. Additionally, Russia is well located to export to the high-growth Chinese market.

The second key criterion for investment is the availability of low cost raw ma-terials for manufacturing. Russia has an abundant supply of low cost wood, making Russia globally competitive for our industry. The Russian government has issued a new Forestry Code, which encourages investment through longer concessions and provides incentives through a priority investors program to make this wood more available for processing value added products in Russia for domestic use and for ex-port. The code is relatively new, and changes are still being implemented to

clarify rights and obligations for inves-tors and to strengthen assurances or guarantees with respect to these rights and obligations. This clarity from the government is necessary to encourage investment.

Russia also has vast energy resources and is trying to balance the goal of using its resources to encourage in-vestment, while trying to achieve world level energy prices. In Siberia, there is an abundance of low cost hydroelectric power, making that region attractive for electricity intensive investments. However, in Western Russia, electricity prices have increased two and three fold, making the region less competi-tive. In the manufacturing sector, a transition is underway from older, in-efficient facilities to more modern and more efficient facilities. The challenge will be to make investments that keep pace with the liberalization of energy prices in Russia.

The third criteria we use to screen global opportunities relates to the availability of human resources. Today, labor rates in Russia are very competi-tive and there is plentiful labor in the regions. In fact, unemployment issues are becoming acute as companies are trying to increase productivity and modernize. The federal and regional governments are encouraging invest-ments to increase diverse employment opportunities. There is labor available, but there is significant shortage of

management and professional em-ployees. Russia offers good technical training opportunities, but has not yet developed enough training programs to improve leadership and manage-ment capabilities.

I mentioned earlier that infrastructure is critical to support manufacturing and to take products to market. Be-cause of the vast distances in Russia, particularly east of the Urals, there is functional but underdeveloped in-frastructure with limited flexibility, making logistics costs less competi-tive globally. The infrastructure de-velopment needed is too large for any company to undertake. Therefore, the pace of investment in the regions will be determined by the speed and scope of government-sponsored infrastruc-ture development.

The last criterion for encouraging investment is a well-defined and predictable regulatory environment and a coordinated industrial policy. Today, many laws and regulations are in place, but interpretation and implementation is not always transparent or consistent. Building relationships with the regional and federal authorities is essential to deal with this lack of transparency. For example, regular engagement with the regional governor can help resolve issues, as has been the case for us with Governor [Valery] Serdyukov, who is supporting us to resolve issues in the Leningrad region. Additionally, because there is not a coordinated industrial policy, it is important to keep contact with other key officials at multiple levels in both the regional and federal governments. With these interactions, companies are expected to develop a public-private partnership in the region to support the regional social agenda, including medical facilities, education and improving living conditions with apartments and cultural activities.

International Paper has a successful business in Russia, and we believe that Russia has the potential to meet all the criteria that I have outlined here to be the first choice for global manufacturing company investments….

Thank you.” n



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Dear Council Members and Friends:

We are pleased to announce that the usRBC’s ��th annual Meeting will take place on october �0-��, �0�0, in san Francisco, Ca. This Annual Meeting will be the first that we have held on the West Coast of the United States in 13 years.

In addition to the scenic and cultural benefits of staging the Annual Meeting in San Francisco, the location has the added advantage of being close to “Silicon Valley,” arguably America’s leading center for high-tech innovative industries. This is of growing interest to Russia as an example of how to promote high-tech industries in that country.

San Francisco is also close to Fort Ross, the commercial trading post established by Russia in 1812 and the southernmost outpost of Russian colonization in North America. This highly symbolic site was described by Foreign Minister Sergey Lavrov during his remarks at our 2009 Annual Meeting as an important link between our two countries worthy of preservation and historical research.

We will provide more information regarding the site of the Annual Meeting as well as the meeting agenda in the near future.

Please visit out website www.usrbc.org for updates.

Save the Date! October 20-21, 2010USRBC’s 18th Annual MeetingSan Francisco, CA



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ambassador thomas Pickering opened the discussion by explaining that, while the U.S.-Russia relationship has improved, there are a host of serious continuing problems that must be addressed. He identified three key elements that have contributed to the improving relationship: the financial crisis has brought the two sides together as both have experienced the severe effects of the crisis; the Obama administra-tion has used a “strategic” approach that focuses on common goals; and our common interests have brought negative factors into perspective. He elaborated that the common interests are disarmament, non-proliferation, Iranian nuclear weapons, and missile defense, among others. Ambassador Pickering emphasized that skillful diplomacy will be key to positive forward progress on these issues, but there is real hope for success and increased cooperation.

Mikhail V. Margelov continued the discus-sion by noting that there is currently more optimism in both governments regarding the reset than there is with U.S. and Russia experts. The fact that

PanelDiscussion

Resetting the Relationship

arms control is back on the agenda is a relief for both governments because they think they know how to tackle those problems, even though many who dealt with those issues are long since retired. Mr. Margelov remarked that one promising sign is that both governments now seem optimistic and willing to work as “whips” to make sure the relationship moves forward.

Thomas Graham then turned to angela stent to give her view on President Dmitry Medvedev’s recent article decrying the state of the Russian economy. Dr. Stent commented that she read the article as a criti-cism of Prime Minister Putin’s lack of modernization and action against corruption. She added that President Medvedev’s suggested reforms are exceedingly ambitious and cannot be accomplished in his remaining time as President. However, she noted that when Putin came in as President he leveled the same criticisms against the economy, with little result.

Dr. Stent said that she is skeptical Medvedev will succeed in reforming Russia due to a number of factors, most importantly the entrenched elites with few incentives to change, lack of a free press, bureaucratic corruption, lack of strong and independent insti-tutions, and insufficient rule of law. She finished by saying that President Medvedev’s success at modernizing Russia may depend on what direction domestic pressures push him over the next two and a half years.

Mr. Graham then turned to nikolai Zlobin and asked if Prime Minister Putin sup-ports President Medvedev’s agenda.

Mr. Zlobin responded that this would have been an unthinkable question five months ago, but now it is intriguing. He noted that Medvedev is acting more presidential than he was several months ago in response to a perceived lack of legitimacy. This is an effort to gain support for Medvedev, as both he and Prime Minister Putin will look bad if Medvedev fails. Mr. Zlobin expressed his conviction that Putin remains in control and Medvedev is not

speaker: Mikhail V. MargelovChairman, Committee on Foreign affairsRF Federation Council

speaker: thomas R. PickeringMember of the Boardeurasia Foundation

Moderator: thomas e. Graham senior DirectorKissinger associates



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this kind of interaction in current U.S. foreign policy.

Mr. Margelov also responded, saying that in the past it was easy for the United States to play professor, but as the image of the United States has been tarnished this is harder now. Any U.S. politician raising these issues will cause irritation within the Kremlin. He said the key is for the Russian people to begin playing a role and deciding to be involved.

Dr. stent added that purely pragmatic relationships will eventually lead to discussion of issues that make the

relationship more difficult. ambassador Pickering agreed, saying that the rela-tionship right now is based on “opera-tionalizing specific tasks” rather than brainstorming solutions to larger problems.

Q. What do you think would be a productive way to discuss the “near abroad” with Russia that does not revert to a zero-sum approach? Do neighboring countries need to be brought into the discussion?

ambassador Pickering responded that the discussion must bypass the stereotype within Russia of the U.S. as seeking to create a restrictive NATO-led belt

around Russia that serves to control and inhibit Russia. He noted that one must acknowledge that proximity makes those states a higher impor-tance to Russia than to the United States. Over the years, situations like these have been handled both well and poorly. If both sides can begin a discussion over general “rules of the road,” that would be useful.

Mr. Margelov added that Russia’s rela-tionship with the EU will do more to influence its interaction with its neigh-bors than will its relationship with the United States. He gave the example of attempts at EU-Russian energy cooperation, which have already led to dialogues regarding transit countries.

Dr. stent said that putting NATO enlarge-ment on hold has given the subject a brief rest but the Ukrainian elections threaten to reignite the situation. All sides, including the Europeans, need to be capable of ongoing multi-level dialogue. Currently, no government has the resources or will to sustain the kind of dialogue necessary.

yet an independent politician. He also mentioned that, by 2012, the Russian President’s position might be quite weakened as executive responsibilities

are increasingly moved to the govern-ment. Lastly, Mr. Zlobin noted that, if Putin wants to run for President again, he cannot afford to have Medvedev look more successful than him. This puts Medvedev in a difficult position as he must decide whether or not to distance himself from Putin.

Mr. Margelov responded to Mr. Zlobin’s comments by saying that he thinks Putin and Medvedev are inter-dependent rather than purely cooperative or antagonistic.

Question & ansWeR session

Q. So far in U.S.-Russia relations, the agenda has been pragmatic. As so much depends on the political configuration (institutions, corruption, etc.) in Russia, how long will the U.S.’s agenda avoid Russia’s serious internal political problems? How will those subjects be brought up?

ambassador Pickering responded that proscriptive American answers for how others should conduct their affairs have run their course. He said that the United States can either go back to being “pedantic and professorial”

or find a way to ask questions in a way that does not aggravate tensions with newfound partners. He observed that he does not see an appetite for

speaker: angela stentDirector, Center for eurasian, Russian and east european studiesGeorgetown university

speaker: nikolai ZlobinDirector, Russia and eurasia Project

World security institute


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Q. Do you believe a political reset between the United States and Russia is possible? Do you believe it is possible to rebuild confidence and resume growth in our bilateral commercial relations?

Mr. Graham responded that he has always thought “reset” was the wrong word as we cannot forget what hap-pened over the past eight years; the relationship has to be built from where it currently is. He commented that “rebuild” is a better word than “reset”.

Mr. Margelov responded by saying that the questions are interconnected. The more interdependent the U.S.-Russia relationship, the better bilateral rela-tions will be.

ambassador Pickering said yes to both questions, but added that the United States and Russia cannot rest and be assured of their success.

Dr. stent said that both questions would require time, concentration and resources to resolve, but that she is confident the economic relationship can improve.

Mr. Zlobin commented that each side seems to list what the other can do to reset the relationship, both countries need to take responsibility for reset-ting relations. Currently, it seems to be the United States pushing the reset on U.S. terms. He said he felt strongly the two countries could rebuild the commercial relationship by beginning to restore trust.

Q. When we meet again a year from now, how will we know if the U.S.-Russia Bilateral Presidential Commission has done a good job on business or economic issues? What specific factors can we point to as evidence?

Mr. Margelov said the indicators will be an increase in bilateral trade, U.S. support for Russia’s WTO bid and the repeal of the Jackson-Vanik amendment.

ambassador Pickering cautioned that the work of the Commission will be dif-ficult, and he noted that there several ways to value it: make judgments when its work is done or set specific target numbers and try to meet them. There is more support for letting



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eeting

the Commission take its course and seeing where it ends up than for setting targets.

Dr. stent cautioned against using the repeal of Jackson-Vanik as an indica-tion of the efficacy of the Commission as that action depends purely on domestic politics.

Mr. Zlobin added that he will be interested to see how much of the Commission’s work will truly focus on building business relations rather than using that front to pursue political goals.

Q. What role does the middle class play in the economic and political situation in Russia?

Mr. Margelov said that the middle class is the driving force for politics and economics. As the main consumer of imported and high quality domestic goods, the main travelers and the most interested in political outcomes, the middle class needs to be more involved politically.

Dr. stent agreed that while defining the middle class is difficult, the middle class seems most influential in developing property rights as exhibited by the recent backlash in Vladivostok by car owners.

Mr. Zlobin agreed that the middle class exists, but said there is currently no political space for them — they are not needed in the current Russian

system. He said that if the middle class can organize itself to affect political and economic decisions, it can be a real force for change.

Mr. Graham concluded the panel by saying that there is a dire need for good news. Toward this end, the Commission’s working groups should have a PR function to let people know the good things that are happening in the U.S.-Russian relationship. The business community should also be looking for ways to emphasize the positive developments, both political and economic. ”n



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PanelDiscussion

Diversifying the Russian economy

on a single industry), expanding the availability of credit, balance clearance for banks, and restructuring of large companies’ debts. The government’s longer-term goals include the need for a stable and independent banking system, diversification of the economy and export support for non-natural resources.

sergei Guriev addressed the question of why the Russian government should undertake a costly diversification policy. He argued that the short-term costs of diversification are great, but not as great as the long-term costs of ignoring the issue. Mr. Guriev noted that Russia has spent the past decade trying and failing to diversify according to any quantitative analysis. In fact, Russia has taken all of the recom-mended steps toward diversification, including both the “vertical industrial policy” of picking winners and betting on investment opportunities, and the “horizontal” approach of creating a business environment that benefits all

sectors through improvements in edu-cation, infrastructure, and finance.

He stressed that Russia has devoted far more effort to diversification than most hydrocarbon-dependent economies. However, Mr. Guriev con-cluded, none of these measures have produced results, because Russia is hobbled by poor governance and in-stitutional weakness. The oil and gas sectors are less sensitive to these problems, and thus they have seen far more growth than other sectors. Mr. Guriev warned that a reliance on energy production undermines long-term economic growth, whereas diver-sification creates incentives to invest in better institutions. He therefore recommended both continuing invest-ment in diversification and a sustained attempt to reform Russia’s underlying institutional structure.

sergei Kravchenko delivered a more optimistic outlook to Russia’s diver-sification efforts. He touted Boeing’s

Dorothy Dwoskin introduced the panel session with a discussion of the risks of Russia’s reliance on natural resources and how foreign investment can play a role in the development of a more di-verse economic base. She pointed to the work that many technology companies, such as Microsoft, were undertaking in Russia as well as other areas with po-tential for investment to help decrease the significance of oil and gas in the economy.

oleg Fomichev started the discussion with an overview of the Russian government’s economic priorities, as well as its main anti-crisis and exit strategy measures. These include the creation of a working group for U.S.-Russian relations, with the goal of attracting more U.S. investment to Russia and applying it to projects that will produce concrete results.

In the short term, Mr. Fomichev called for consumption support, restructuring of the “monocities” (cities dependent

Moderator: Dorothy Dwoskinsenior DirectorGlobal trade Policy and strategyMicrosoft Corporation

speaker: William FarleyVice President of Business Development ChemDiv, inc.

speaker: oleg FomichevDirector, Department of strategic Management and BudgetingRF Ministry of economic Development



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eetinginvolvement in the International Space Station and other projects in Russia as a major success story, noting that Boeing has taken good advantage of

company’s success at developing a lo-cal pharmaceutical industry in Russia. Mr. Farley described what health industry experts call “the valley of

local technical expertise, especially with regard to metallurgical alloys. He recalled that China and India de-veloped interdependent relation-ships with the United States during economic downturns, when American companies turned to outsourcing as a form of badly-needed cost control. Mr. Kravchenko stressed that, during the economic downturn, U.S. companies should look increasingly to Russia to utilize its lower cost, but high quality IT expertise. He also noted that of the $36 billion in trade between the United States and Russia in 2008, only $1 billion consisted of investment in high-tech industry — a paltry figure compared to the investment in natural resource extraction, and an unacceptably low amount. High-tech exchange is therefore an underexploited oppor-tunity between the United States and Russia, and Mr. Kravchenko stressed Boeing as an example of how it can be done profitably for both countries.

William Farley echoed Mr. Kravchenko’s optimism, pointing to his own


death,” a set of economic pressures brought on by a global health crisis that make it impossible for pharma-ceutical companies to efficiently pro-duce drugs at their traditional rates. Companies can no longer support a traditional model that delivers returns on investments within three to five years. Meanwhile, the Russian market is dominated by branded generics, and therefore presents a real opportunity for the development of a local pharma-ceutical industry. ChemDiv has opened a center in Russia and partnered with local research institutions and compa-nies to help bring about what will po-tentially become a self-sustaining sec-tor of the Russian economy, and Mr. Farley called this long-term investment approach a model for other industries to follow.

Vladimir Milov continued the discussion with a more pessimistic look at the economic situation in Russia, regarding both the current state of the Russian business climate and the value of diversification, which he described

as a “convenient phantom” used by the state to “diversify the attention of the public.” Indeed, argued Mr. Milov, diversification is not Russia’s main

problem; Saudi Arabia’s economy is far more dependent on the energy sec-tor, and the Saudis have weathered the global economic crisis far better than Russia. The worst hit sectors of the Russian economy were commercial, residential construction and manufac-turing, not oil and gas. The main prob-lem, according to Mr. Milov, is Russia’s extremely low productivity and ef-ficiency, its weak institutions, and its “disastrous” governance.

Mr. Milov raised concerns about the brain drain, speculating that anyone with the skills to contribute to a high-tech economy in Russia would rather live in California, and that Russia’s high crime rate, underdeveloped in-frastructure and poor education and medical care serve as deterrents to talent and innovation. Rather than investing in new industries, therefore, Russia would be better served by trying to attract and retain the most skilled and educated workers. Furthermore, he argued that the oil and gas sectors should not be regarded as evil; both

speaker: sergei GurievMorgan stanley Professor of economics and Rectornew economic school

speaker: sergei KravchenkoPresident

Boeing-Russia/Cisspeaker: Vladimir Milov

Presidentinstitute for energy Policy


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are becoming increasingly high-tech as they expand to new, often previously inaccessible, fields. He called for con-tinuing foreign investment in these sectors, which he described as “a question of survival and successful development.” Although Mr. Milov spoke critically of Vladimir Putin’s legacy after nearly a decade in power, he did credit Putin with recent efforts to gather both foreign and domestic energy companies and encourage them to invest in new development projects, which provided a welcome contrast to the government’s earlier policy of “squeezing out” foreign investors through resource nationalism.

In response, Mr. Kravchenko dismissed concerns about a brain drain, pointing out that the energy sector has not wit-nessed the same exodus as other high-tech sectors, as it has proven capable of providing opportunities unmatched

in Western countries. Mr. Guriev, on the other hand, seconded Mr. Milov’s fears, describing how the New Economic School actively tries to attract Russians who have earned Ph.D.s in the United States back to Russia, only to find few takers.

Mr. Guriev also stressed the need to pay close attention to skilled workers who do choose to return, because Russia needs to take maximum advan-tage of foreign expertise. He sounded


a worried note about Sberbank’s re-cent acquisition of Opel, arguing that Russian automotive engineers may not be at the level where they can effective-ly improve on such a brand.

On the question of what specific in-dustries are open to foreign invest-

ment, Mr. Fomichev answered that every industry in Russia is in need of restructuring and greater openness to foreign capital. In response to a question regarding Russia’s steps to address its inadequate infrastructure

and high transportation costs, Mr. Milov criticized the government for failing to capitalize on Russia’s potential as a major Eurasian transit hub. He argued

that the obstacle is not geography, as it would be faster to move a con-tainer from St. Petersburg to Shanghai by land. Instead, the problem is the Russian Federal Customs Service and Border Patrol, which imposes so many obstacles that shipping goods by sea is more cost-effective.

The question of whether Russia’s problem is primarily poor governance or a lack of economic diversification was left unresolved, but every panelist agreed that fundamental institutional reform and greater U.S.-Russian busi-ness ties must be a part of any long-term solution to the economic crisis. n



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stephen Kehoe opened the panel by briefly summarizing U.S. investment in Russia. He noted that, for invest-ment purposes, Russia’s regions can be separated into three catego-ries: highly profitable large cities; important regions with large cities such as Krasnodar; and regions with negligible investment potential, such as Ingushetia.

Mr. Kehoe pointed to seven major impediments to investment in Russia’s regions: lack of a legal basis to protect investments, corruption and opaque bureaucratic procedures, undeveloped infrastructure and transport links, complicated tax and tariff regimes, lack of consistent and concerted

PanelDiscussion

identifying opportunities in Russia’s Regions

government policy to attract invest-ment to the regions, lack of informa-tion about investment opportunities, and the need for personal commit-ment from top regional authorities in helping to overcome difficulties.

Maxim akimov began by giving an over-view of the Kaluga Region’s geogra-phy and economic and social statis-tics. He noted that the Kaluga region does not have substantial natural resources and that its main economic sector is manufacturing. Kaluga has the most dynamic economy in Russia according to numerous indices and, while the economy has slowed due to the current downturn in Russia, it is still growing. Although the

region has few natural resources and no history of Soviet industrialization, it excels in manufacturing and eco-nomic production in general due to its systemic approach to shaping the structure of the economy, which has been attractive to investors. Kaluga was among the first to create indus-trial parks, which have proved to be successful: the government plans to direct $6.6 billion of direct invest-ment into these industrial parks by 2012.

Mr. Akimov noted that many leading global companies are already active in Kaluga, including those with the most demanding regulatory frameworks.

He then explained that the Kaluga administration understands where it wants to be over the long-term and has a strong political commitment to realize its strategy. He acknowledged that Kaluga has many reforms left to make and is already looking toward the post-industrial era, hoping to become a center for innovation. In accor-dance with this strategy of creating strong industrial facilities that will

Moderator: stephen Kehoe, VP for international, Public and Government affairs PepsiCo, inc. (far right)

From left to right:

speaker: Maxim akimov, Deputy Governor, Kaluga Region speaker: anatoly aksakov, President, association of Regional Banks of Russia speaker: Vadim ivanov, Director, Department for international, Foreign economic and interregional Relations, nizhny novgorod Region

speaker: olga andreeva, General Manager, Krasnodar Krai Regional Development agency


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spur further development, Kaluga is taking several concrete actions.

The first is a move from original equip-ment manufacturer (OEM) plants to a real automotive cluster. Mr. Akimov explained that a concentration of OEM does not represent real develop-ment and that, in the long run, Kaluga needs more advanced facilities, such as those for research and education. Development of this type would facili-tate the expansion of other industries — such as automotive parts — and spur the creation of local businesses. The second step is to create effective urban environments and guest ser-vices such as hotels, restaurants and leisure facilities.

Mr. Akimov then said that Kaluga’s industrial and investment policies have achieved positive results and that the region now has ambitious targets for the future. He explained that Kaluga’s strategy is sustainable due to several important factors. It is located near Moscow, has excellent transport infrastructure, an advanced labor market, a regional government that proactively supports investment, a strong scientific center in Obninsk, and a developed network of higher education.

Mr. Akimov noted that Kaluga offers investors a clear product: industrial parks with developed infrastructure; access to supplies, logistic connec-tions and a developed transportation network; clear property rights; and preferential tax exemptions.

anatoly aksakov continued the dis-cussion by explaining that Russia’s regions offer more favorable condi-tions for business as there is less bureaucracy and corruption and a greater desire for investments compared to the major cities. Mr. Aksakov then addressed the topic of the financial sector in Russia, say-ing that contemporary financial and banking systems were demonstrating sustainability and consistency even during difficult times. He stated that Russia is planning to develop a modern regulatory framework for the Russian banking system, including the creation of transnational banks

In addition, the oil pipeline transpor-tation industry is growing, with future projects anticipated. Agriculture is also particularly strong in Krasnodar, where 85 percent of Russia’s rice and a substantial percentage of other crops are produced. Food processing is an important industry with a large multinational corporate presence. Ms. Andreeva emphasized that the trade relationship between the U.S. and Krasnodar is developing, but added that there is much room for improvement.

Turning to the Sochi Olympics and the related construction and invest-ment opportunities present there, Ms. Andreeva noted that, in addition to creating sports facilities, Sochi is also trying to create world-class tourist facilities. She emphasized that con-struction contracts and investment opportunities are open to interna-tional companies.

Finally, Ms. Andreeva discussed Krasnodar Krai’s planning strategy for social and economic development. Saying that Krasnodar was one of the only regions with a master develop-ment plan for all urban centers in the region, she explained that planning for the future must take into account multiple domestic and international interests and intentionally incorporate foreign investment, business, NGO’s, and universities in order to establish mutually beneficial relationships.

Vadim ivanov then presented an assess-ment of the Nizhny Novgorod regional investment situation, noting that it is a major business center with 3.3 mil-lion people. He cited the proximity to Moscow and the region’s position in the middle of important trade routes as reasons why Nizhny Novgorod is attractive to investors. A sophis-ticated transport network with an international airport creates addition-al opportunities.

As one of the leading education cen-ters in Russia, Nizhny Novgorod is home to 17 institutions of higher education and 300 high tech com-panies. The region also established several innovative technoparks that large, multi-national corporations utilize. Nizhny Novgorod’s regional

that will operate in the CIS region and gradually extend to other markets.

Mr. Aksakov stressed the increasing importance of regional banks with regard to a new presidential strategy of innovative development for the Russian economy. Regional banks are especially valuable as they work with small- and medium-sized enterprises and have proven to be extremely flexible. Despite a lack of resource allocation to regional banks during the crisis, they demonstrated out-standing viability and managed to escape bankruptcy. To improve the outlook for these banks, Mr. Aksakov noted that the Association of Regional Banks of Russia and the International Finance Corporation recently signed a memorandum of understanding to create a fund for the recapitalization of Russian regional banks.

The drafted program involves foreign investors and consultants — who will help to manage toxic asset problems in the Russian regional banking sys-tem — and increases the transpar-ency and quality of the system. Mr. Aksakov invited American investors to take part in the joint program of the Association and the IFC and affirmed that it would be a profitable deal. In conclusion, Mr. Aksakov mentioned that the Russian Bank for Development (Vnesheconombank) would probably allocate resources for small- and medium-sized businesses to ensure the implementation of the new strategy of innovative economic development.

olga andreeva began her presentation of the Krasnodar Krai with an over-view of the natural resources, his-torical heritage, major industries, and outlook of the region. She empha-sized that Krasnodar’s hosting of the 2014 Winter Olympics in Sochi is particularly interesting to investors. She said the region is creating several Special Economic Zones with public-private partnerships designed to spur particular industries, and noted that the region also has a developed trans-portation complex — Krasnodar’s seaports handle over 35 percent of Russia’s foreign trade.



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administration has also created a Development Strategy 2020, which focuses on specific priority indus-tries. Mr. Ivanov acknowledged that the region needs investors to meet the goals articulated in the strategy document and that the government knows they need a favorable invest-ment climate to attract investors. To cut down on bureaucratic barriers the government has instituted a “one-stop shopping” principle for government-business interaction. He explained that businesses and investors will have a single contact point within

the government, thus eliminating the need to talk to many different depart-ments and officials.

Mr. Ivanov noted that the review and permit process now takes no lon-ger than 142 days, and the region’s advanced, consistent local regulation should be attractive to foreign inves-tors. He also emphasized that Nizhny Novgorod is an active international player at conferences and trade fairs, and uses such opportunities to attract investors.

In response to Mr. Ivanov’s statement that the review and permitting process would not take longer than 142 days, Mr. Kehoe asked how the government could so confidently assure this timeline. Mr. Ivanov answered that barriers can be high, especially when dealing with property. He reaffirmed that using a “one window” mechanism for business-government interaction will assure investors that they have only one point of contact, and thus can efficiently navigate the approval process. n

PanelDiscussion

the Future of Financial services in Russia

natalia orlova opened the panel with a review of Russia’s general financial health over the past two years. She reminding the audience that Russia actually weathered the 2007 global mortgage crisis relatively well, as mort-gages represented a low proportion of Russia’s GDP compared with more developed countries. Likewise, Russian banks were not deeply involved in investing in domestic financial markets,

Moderator: sergei Kotov, Managing Director, and head of eastern europe, BnY Mellon (far right)

From left to right:

speaker: Jeffrey R. Costello, Chief Executive Officer, JP Morgan Bank International speaker: Andrey Gribov, Chairman and Chief Executive Officer, CyberPlat

speaker: Maarten van den Belt, General Manager, Russia, Visa international speaker: natalia orlova, Chief economist, alfa Bank speaker: Andrew Tiffin, Economist, European Department, International Monetary Fund


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in sharp contrast with U.S. banks. In 2008, though, Russia experienced a serious decrease in global confidence in the ruble, and thus a substantial jump in dollarization in the country.

Although the Central Bank of Russia (CBR), like its counterparts around the world, has done a good job of managing the liquidity crisis, Russian banks are now substantially more involved in state assets than they were before. This has adversely affected their profitability, and unless the overall economy recovers, the banks are unlikely to reach their pre-crisis levels. In short, Ms. Orlova predicted weak lending growth in the next few years, which poses an addi-tional obstacle to economic recovery.

andrew tiffin continued the discussion with an explanation that Russia has been hit by two shocks: a significant drop in energy prices (which directly or indirectly account for half of Russia’s economy) and a sharp turnaround of capital flows. Both of these shocks reveal the extent to which Russia depends on foreign financial mar-kets. Before the crisis, the Russian government’s policy was to encourage

in-flows to the point where they held the exchange rate down by subsidizing risk. When the crisis hit, there was an unwinding both of these short-term speculative flows as well as of longer-term investment.

Mr. Tiffin agreed with Ms. Orlova that the CBR responded well to the liquidity crisis, as well as with its decision to guarantee certain interbank loans. This, he argued, is the first example of the CBR acting as a lender of last resort, and it has been very helpful. However, the exchange rate has risen dramati-cally, and the authorities’ resistance to this rise has cost them $200 billion in reserves. Whereas most economies have dropped interest rates as close to zero as possible, Russia’s situation has been more complicated because of the government’s fear of further deprecia-tion of the currency.

The global financial situation is gradu-ally improving, marked by an increase in risk appetite among global investors and a corresponding return to com-modity-based investments. However, while this is good news for Russian giants such as Gazprom, it does not

necessarily help Russia’s broader finan-cial development, and there is no rea-son to expect bank flows into Russia to increase in the near term. Mr. Tiffin cautioned that oil prices would not res-cue Russia, as the current strength of oil prices is highly speculative and volatile. Russia’s next task is to deal with bad loans, and Mr. Tiffin expressed concern that the government’s response has been “ad hoc and reactive.” Moscow should be ordering mandatory stress tests for medium and large banks, and should be planning for future crises rather than just providing long-term financing and hoping banks trade their way out of trouble.

Jeffrey R. Costello, in contrast to the previous speakers, began his presen-tation with a list of positive develop-ments. He noted that Russia, for the first time since 1998, is reentering the sovereign debt market and will seek about $18 billion in loans next year. Privatization is also back on the table with almost every ministry ordered to create a plan to sell state assets. There is also recognition that the Strategic Sectors Law is too restrictive and needs to be limited. Mr. Costello pointed out



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that all of this is good news, but it is all happening because Russia is facing an unprecedented fiscal crisis in the next few years. Assuming oil prices remain in the $70-$90 per barrel range, debt as a percentage of GDP should gradually decline. The larger problem is that foreign capital has largely fueled the Russian economy over the last few years. There is no banking system and no effective intermediation to bring domestic capital into the market to drive economic growth.

Mr. Costello noted that Russia is much less attractive to investors than it was a year ago; the problems (political risk, lack of judicial transparency and capri-cious application of the law) all still exist, while the main attraction (its relative cheapness) is no longer there. Investors can find places just as cheap as Russia and with far fewer headaches today. Russia’s fundamental problem is a lack of long-term money — a fully functioning pension system, insurance companies, banks that can provide capital, and so on. He explained that an emerging market economy needs 6-8 percent annual GDP growth in order to provide social programs and develop infrastructure. However, Russia is unlikely to top three percent growth in the near future, which is not suf-ficient to accomplish the many social tasks that Moscow has enumerated. Until there is fundamental reform of pensions and the banking system, Mr. Costello warned, all available capital will be utilized to recapitalize the banks.

andrey Gribov focused on one area where Russia is excelling despite the downturn, even in comparison with the United States: the dissemination of mobile phones, as well as the infrastruc-ture, needed to perform small financial transactions with them. Russia’s tra-ditional banking system is expensive to use and intended for wholesale pur-chases, not for young or economically disadvantaged people making small-scale purchases. For everyday trans-actions, most banks would need to take a 20 percent commission to be profitable, which is not attractive to consumers. Mobile phones cut out a lot of waste and hassle, allowing ordinary retailers with a single cashier (and with-out bulletproof glass) to handle banking transactions.

financial sector, although Mr. van den Belt claimed that Russia is already quite strong there. Global institutions do come to Russia, but Russian institu-tions need to start going abroad, espe-cially larger banks like Sberbank and Vneshtorgbank (VTB). Third, he stressed the importance of non-cash payment systems, such as banking cards, mobile payments, internet retail, ATMs, and payment kiosks. Recent legislation pro-posed in the Duma could have profound effects, from maintaining competition and promoting transparency, consumer protection and data security to the inte-gration of Russia into global financial and payment systems. Switching from cash to more modern payment systems could save up to one percent of Russia’s GDP.

Still, Russia remains largely a cash-based society, with non-cash payments accounting for roughly eight percent of the total, compared to 80 percent in some parts of Europe. To promote non-cash infrastructure, Mr. van den Belt recommended implementing trans-parent and binding market rules, strong fraud protection, increased emphasis on speed and efficiency, and recogni-tion of the role of all participants in the system.


In response to questions from the audi-ence, the panelists made a number of

additional points. Mr. van den Belt fur-ther defended Moscow’s goal of becom-ing an international financial center, pointing out that economic activity is shifting from the developed world to the BRICs and that local financial infra-structure is needed to regulate such growth.

Ms. orlova spoke about the need for de-dollarization and warned that too much money in Russia is being directed toward financing government expenditures.

Mr. Costello argued that private banks need to diversify and play a larger role for the sake of Russia’s long-term economic health. He also noted that political connections often spell the dif-ference between losing all of one’s assets in a financial crisis and preserving one’s equity. n

Furthermore, the presence of infra-structure to support mobile phone banking causes an increase in foot traffic at retail outlets, which translates into more potential customers for other goods and services. The mobile com-pany Evroset, for example, attracted roughly 400 million individual visits to retailers in 2007. Another company, MTS, is assigning every client a barcode, which makes the whole process faster and more efficient; for one thing, it relieves both customers and retailers of the burden of carrying large amounts of change. With barcodes, customers can get change for separate transactions deposited directly onto their mobile account. Mr. Gribov predicted that this sector is going to grow rapidly over the next year. Phones will be used to pay for a variety of small transactions cur-rently covered by banks, pushing banks out of the small-payment processing market as part of a global shift from the banking sphere to the retail sphere.

Maarten van den Belt discussed the development of Moscow as a financial center — a longstanding goal of the Russian government — and what needs to be done to achieve this goal. Although many say this is an ambitious and unrealistic goal, Mr. van den Belt argued that the market fundamentals that made it a priority before the crisis are still in place today. The Kremlin is attempting to make the ruble a global reserve currency, but what it really needs to do is create a market that can function transparently without overt outside influence. The danger is that Russia’s understandable short-term desire to repair its domestic economy will turn into protectionism in the long-term. This would be counterproduc-tive to the goal of becoming a major financial center, and to building a viable financial services market for Russian consumers and industry.

Mr. van den Belt identified three main goals for Russia. First, the government needs to increase the public’s financial literacy, without which infrastructure counts for nothing. Nearly 40 per-cent of the Russian public does not use banking services, 72 percent has never had an insurance policy, and 99.5 percent does not budget more than one year ahead. Second, there needs to be more competition in the


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PanelDiscussion

Coping with the Crisis

As to government intervention, Mr. Galitzine said that U.S. money has gone primarily to banks and is only very slowly becoming visible on the in-dustrial landscape. In Russia, most of the money went to oligarchic groups and has produced some growth in certain sectors. He noted that the fastest growing economies are the most dirigiste, such as China, France and Germany.

Mr. Galitzine then argued that future downturns are guaranteed because

of globalization. He added that globalization is part of the disease but also part of the cure; only with a broad geographic diversification can you stand up to the buffers of the world economy. On a practical level, he noted that the government could look at a more benign treatment of in-terest income from reserves, so that companies are encouraged to put some aside for a rainy day.

Mr. Galitzine concluded that the bilateral business climate has not fundamentally changed. He said American companies originally came to Russia for potential growth and market share, while Russian compa-nies go to the U.S. for the sheer size of the market. As neither of those fac-tors has changed, he foresees a con-tinued healthy business climate.

Piotr Galitzine opened the panel discus-sion with brief background remarks on his company’s decision to invest in the United States. He noted that TMK has not undertaken any exotic anti-crisis steps, they have simply tried to limit costs and manage inventory. He men-tioned that a positive development is that the crisis has forced his Ameri-can division into looking at expanding into Central America — times of crisis are opportunities to try new products and markets.

Moderator: toby t. Gati, senior international advisor, akin Gump strauss hauer & Feld LLP (second right)

From left to right:

speaker: Piotr Galitzine, Chairman, tMK iPsCo

speaker: evgeny Gontmakher, Member of the executive Board institute of Contemporary Development speaker: Victor sedov, executive Director, the u.s.-Russia Center for entrepreneurship



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eetingVictor sedov spoke next, stating that the crisis hit Russia harder than other emerging markets due to the lack of economic diversification. He noted that small- and medium-sized enter-prises (SMEs) can provide great impe-tus for diversification, but as Russia did not encourage their growth during the boom years, it was vulnerable when oil prices fell and the financial crisis hit. Currently, SMEs contribute only 17-20 percent of Russia’s GDP.

The Russian government failed to see that entrepreneurship is the engine that fuels economic growth and only in the midst of crisis has the govern-ment begun to understand the crucial role of small businesses. Mr. Sedov ex-plained the steps the Russian govern-ment has taken recently to encourage small businesses, saying that $10,000 was offered to anyone with a credible business plan. Although the govern-ment expected a flood of requests, it was able to make only 3,000 grants.

Mr. Sedov then described a recent poll in which 3 percent of the Russian population said they would like to start their own company, while 33 percent said they would like to work for Gazprom. He explained that these numbers for desired self-employment are far lower than in other developed nations.

Compounding this problem is the fact that there is only one program available in Russia that teaches en-trepreneurship to students. On a more positive note, he remarked that, several years ago, no one was teaching entrepreneurship at all. Now, thanks to professorial exchanges and other educational programs, there are about 150 professors in Russia capable of teaching entrepreneurship. He then stated that Russia’s youth must be shown that they can control their own future. In a knowledge- and innova-tion-based economy, entrepreneur-ship is necessary to drive new invest-ment opportunities.

evgeny Gontmakher continued the dis-cussion by asserting that the real cri-sis in Russia has not yet started. He said that a drop in commodity prices would be a small disruption compared to what Russia will experience, if it fails to restructure its economy. About


70 percent of the Russian economy is the old Soviet type — huge indus-trial companies like Avtovaz that lack efficiency and modern machinery.

Mr. Gontmakher emphasized that, if Russia wants to be an advanced economy, it will have to undergo a fun-damental restructuring. While it may be easy to say that many companies should close, the more difficult ques-tion is deciding who should lead the reorganization of the economy. He argued that offering bad assets to the market would be very difficult, but it is the government’s role to privatize a large part of the 50 percent or more of the economy that it currently controls directly or through stock ownership, calling this the second wave of priva-tization. Mr. Gontmakher noted that, despite the complications, the state has a central role to play in moving toward a more privatized economy, as there will be significant expenses for items such as retraining, healthcare and for additional reforms.

Mr. Gontmakher concluded that Russia is not in a financial crisis; it is in a crisis of bad institutions — ineffective institutions and poor gov-ernance are the central problems in Russia. He noted that the country has two options: transform the current in-dustrial economy into a knowledge-, innovation- and entrepreneur-based economy, or be marginalized and backward, relying on the counterpro-ductive practice of tying the economy to oil prices.

Question anD ansWeR session

In response to a question regarding the applicability of East German ex-periences with privatization after the fall of the Berlin Wall for Russia,

Mr. sedov responded that there is no recipe that will clearly work for Rus-sia. In East Germany, the govern-ment relied on the West Germans and Americans for reform guidance and money. In contrast, Russia must rely on itself for the needed reform and impetus. He noted that this makes reform harder and easier at the same time. As Russia has no experience to follow, it will have to rely on its own history and people.

One audience member noted that many Russians feel that working for a state-owned company is the best op-tion, and asked what the government

can do to change that mindset. Mr. sedov replied that administrative bar-riers must be removed, as well as the risk perceptions. He said that govern-ment officials, schools, etc., should promote entrepreneurship as a great way to build an independent and bright future. He then noted that the media reports on private businessmen when they are killed or sent to jail dis-suade the next generation from being innovative. He also said that building a successful business is hard, because if entrepreneurs are successful and a company becomes large, the govern-ment pays attention and tries to get extra taxes out of them. Mr. Sedov said this is a backwards policy: the government should promote people who create jobs and wealth.

Mr. Galitzine noted that, in order to boost entrepreneurship, the simpli-fied tax structure ceiling has been lifted, but it is still difficult to start and run a company. Explaining that it takes 13 months to start a business in Russia, he said that he opened one in 35 minutes from his desk in Delaware. Mr. Galitzine also pointed out that one of his cousins has inspectors at his of-fice in Russia every week, because he is a large taxpayer.

Mr. sedov added that the government is trying to do something about this problem, but has not been effective. He reiterated that education is impor-tant, and that the worldwide trend to teach entrepreneurial skills to all stu-dents and not just to economics and business students is an encouraging trend.

Mr. Galitzine closed the session by de-tailing the successes of small busi-nesses, such as a microfinancing firm, with which he once worked. He noted that entrepreneurial spirit is palpable at the small business level, adding that large companies also work well, because they can afford to deal with the bureaucracy. The middle is what is struggling in Russia and that is where the greatest reform effort is needed. n


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PanelDiscussion

Developing an effective Government Relations Practice in Russia

Mr. Golovatov noted that Russian bu-reaucrats understand the business en-vironment in some of these regions, but American businessmen typically do not. He explained that one might have the capital and the desire to or-ganize a business, but still find it very difficult to start a company. He con-cluded that the key to success is ad-vanced planning and a good idea of the operating environment.

nataly Y. nikolaeva then spoke about government relations from the per-spective of her company, Citi. She said that the main task of govern-ment relations is to advocate priority legislative/regulatory public policy interests with legislators and federal agencies. She emphasized that Citi and other effective lobbyists do not ask for special privileges, but rather changes to the entire industry. In support of the company’s main busi-ness objectives, Citi’s government relations office seeks to shape the operating environment in which the company works. Ms. Nikolaeva then explained that government affairs is important as industry (especially banking) is highly regulated and com-pliance is usually difficult; sometimes regulation is harmful to business and there are always interpretation issues. This is especially true from region to region.

Mikhail Golovatov opened the panel by acknowledging the importance of the regions and regional governments to the success or failure of businesses and then examined a model of busi-ness based on central operations vs. regional operations. He made special note of the reality that some regions have high unemployment and a lack of political responsiveness, while other regions are dealing with crises related to corruption or banditry and do not have the capacity to help busi-nesses.

Moderator: trevor Gunn, Director, international Relations, Medtronic, inc. (far right)

From left to right:

speaker: Mikhail Golovatov, Founder, Consult tP, Ltd.

speaker: Pavel tolstykh, head, Government Relations Research Center speaker: nataly Y. nikolaeva, Director, Government affairs, Citi Russia speaker: Viacheslav tabachnikov, Managing Director, Cassidy & associates Cis



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eetingMs. Nikolaeva pointed out that a more recent issue is globalization, explaining that changes in one coun-try affect other countries, and regu-lators follow new trends around the world. As an example, she cited the recent debates surrounding corporate bonuses. Citi deals with this proac-tively by making its position known to governments around the globe, perhaps even before a government has considered a particular issue.

Ms. Nikolaeva then commented on global trends, saying that policy deci-sions are no longer taken in isolation. Governments watch each other and copy even harmful policies. She em-phasized that while watching global trends, Citi tries to anticipate and affect how governments implement those trends locally.

Ms. Nikolaeva explained that the core issues in Russia are those related to government approvals and support for current operations and regional expansion, legislative and regulatory reforms to create a more favorable business climate, and relationship support designed to make Citi a trusted ally of the government and financial institutions.

Viacheslav tabachnikov continued the discussion by underscoring that many components of government relations have become standard across compa-nies. He explained that his company focuses on lobbying, which they con-sider part of the broad picture of issues management. Clients must anticipate, adapt to and influence changes that will arise in the future, and govern-ment relations is one element of that process. He mentioned that there are already many stakeholders and constituents in Russia, but to a lesser extent than in the United States. How-ever, Mr. Tabachnikov believes that within 10-15 years, Russia’s stakehold-er society will look like that of the U.S. instead of the vertical of power and paternalistic society that he believes currently exists. This is a problem for businesses, but an opportunity for lobbyists who can improve relations and build networks. He said that lobbyists must try to understand the agendas of those in decision-making positions — their goals and political aspirations, the pathway of influence and their background.


Mr. Tabachnikov said there are two steps to successful government relations. The first is targeting regulators or legislators in charge of issues important to client companies. The second step is approaching those people to propose ideas, provide information and, most importantly, to be available for help when they need it.

He continued that a company must frame each issue or idea submitted to the government, so that it is in line with the strategy and vision set by the federal political leadership. It is also important to engage as many people as possible, so that many only have to do a little instead of asking a few for a lot. Companies should also create a natural environment for the issues to move forward on their own. Mr. Tabachnikov stressed that it is important to try to present ideas in ways in which officials are used to thinking. He added that it works best to let officials take credit for ideas and not bring to attention the lobbyist who may have planted the idea. He noted that it is also important to find Russian stakeholders who will benefit, so that the project will be immune to populist outcries. Many groups have no idea that an issue affects them, but will defend a project once they under-stand their own interests are at stake.

Mr. Tabachnikov concluded that the bottom line is for lobbyists to be available to those who make deci-sions. He strongly recommended that foreign companies remain in Russia and become proactive in approaching officials, as they are often open to ideas when they understand the benefits the project will bring to the larger community.

Pavel tolstykh discussed the use of political resources in conflicts with government officials. He began by giving a brief history of property ownership in Russia over the last seven years, from which he concluded that government power over private property has increased greatly. He then asked what hurdles businesses can expect to encounter when operating in Russia and listed many ways the regional and federal govern-ments can gain effective control of private property. For example, offi-cials can bring criminal cases against

any company and seize sensitive documents. Officials also use tax au-dits and environmental agencies can use confusing laws to force project delays and termination. Migration and labor authorities can force per-sonnel decisions or make employees leave the country.

Mr. Tolstykh explained that one of the key issues faced by foreign managers is a basic lack of understanding of the Russian system, saying that many regular business methods do not work in Russia. He concluded that good relationships with officials is not just a competitive advantage, but is also a question of a business’s security in the country. He said that as Russia’s political process is compli-cated, lobbyists could add significant value to the government relations process. Effective consultants can re-solve or even prevent most problems faced by foreign businesses operating in Russia.


In response to an audience ques-tion regarding the rules governing a lobbyist’s access to State Duma depu-

ties, Mr. tolstykh responded that, unlike the U.S., lobbyists do not have direct access to the building and so find other ways to interact with members of the Duma. Some find work with the Duma and others meet mem-bers outside the building in clubs or restaurants.

Asked to describe a substantive achievement through lobbying

government officials, Ms. nikolaeva answered by recounting that credit cards in Russia were not very popular until 2005, when Citi’s government relations team lobbied for changes to the Tax Code. The new code allowed banks to promote credit cards, which dramatically increased the number of credit cards in Russia.

Responding to the question of whether it is a liability for U.S. companies to appeal to the U.S. government for assistance in resolving an issue in Russia or if only domestic lobbyists

should be used, Mr. tabachnikov responded that, while each case is unique, in general a company should

do both. He gave an example of a European client who tendered for an infrastructure project, but lost due to violations of the tendering procedure by the regional government. As there was international financing involved in the project, they were able to appeal to the government of the financing country, who then worked with the Russian federal government to resolve the issue. Mr. Tabachnikov concluded

that using domestic lobbyists could give officials positive incentives to work with your company, while co-operation with your government can give those same officials incentive to treat your company fairly.

In response to a question about how corruption affects lobbying efforts in Russia, the panelists agreed that companies need to take preventative

measures and make sure they watch for situations where the potential for corruption is high. The speakers agreed that foreign companies must also firmly adhere to their domestic anti-corruption laws, because once a company has engaged in corrupt practices, they will be forced to do so repeatedly.n


AttorneysatLaw

the u.s.-Russia Business Council gratefully acknowledges the generosity of the �00� annual Meeting sponsors


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Page ��. alexey Kim, Philip Morris sales and Marketing Ltd., and Vladimir Golovnev, Committee on economic Policy and entrepreneurship, RF state Duma.�. ann Wrobleski, international Paper, Red Cavaney, ConocoPhillips, and Mary Laschinger, international Paper.�. Klaus Kleinfeld, alcoa inc., and e. neville isdell, formerly the Coca-Cola Company.�. Peter a. Charow, BP america inc.�. stephen Kehoe, PepsiCo, inc.�. thomas n. and susan trone, Deere & Company.�. Jay R. Pryor, Chevron Corporation, and Dennis hightower, u.s. Deputy secretary of Commerce.

Page ��0. toby t. Gati, akin, Gump, strauss, hauer & Feld, LLP.��. Lisa M. schroeter, the Dow Chemical Company, Kyle scott, u.s. Department of state, Peter a. Charow, BP america inc., and sergei M. Guriev, new economic school.��. W. horton Beebe-Center, eurasia Foundation, and steven R. Mann, exxon Mobil Corporation.��. olga Miller, Renova Group, edward s. Verona, usRBC, and simonetta B. Verdi, Ford Motor Company.��. sergei Kotov, BnY Mellon, Randi Levinas, the usRBC, and terrence J. english, Baring Vostok Capital Partners.��. Gregory s. Dole, the Boeing Company, William C. Lane, Caterpillar inc., and samir sahgal, the Boeing Company.��. Richard J. Coyle, Wal-Mart stores, inc.��. andrew Cranston, KPMG, and Maarten van den Belt, Visa international.��. Dorothy Dwoskin, Microsoft Corporation.

Page �:�. Peter L. thoren, access industries, inc.�. Valery Zakharov, access industries, inc., and sergey Lavrov, RF Foreign Minister

sponsor Photos Viewing From left to right


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BALTIAAIRLINESBaltia Air Lines will soon introduce non-stop service between JFK and St. Petersburg. It will provide a high quality, three-class passenger service and reliable cargo and mail transportation in the trans-Atlantic market between the major U.S. cities and Eastern Europe, including Russia, Latvia, Ukraine, and Belarus.

THECENTERFORBUSINESSETHICSANDCORPORATEGOVERNANCE(CBE)The Center for Business Ethics and Corporate Governance (CBE) fosters national standards of business conduct in the Russian Federation through innovation and alignment of best practices of ethics, anti-corruption compliance and corporate governance. CBE helps companies apply best practices in a targeted manner that measures improvements in performance and rewards strict compliance. CBE, founded as a Russian non-commercial partnership in 2000, helps Russian government agencies and civil society implement the National Anti-Corruption Action Plan and build the institutional framework of good governance. The CBE record demonstrates know-how and experience in designing and implementing legislative-drafting, ethics training, code-writing, risk-mapping, stakeholder analysis, and other governance projects.

CERTIPORTCertiport is the world leader in standards-based certifications that enable personal and professional advancement through globally portable credentials. Established in 1997, Certiport is a pioneer in validating fundamental computer skills and knowledge through performance-based testing and certification, and delivers exams in 128 countries and 20 languages at some 12,000 Certiport Centers worldwide. As the creator and worldwide distributor of the Microsoft Office Specialist program,

Certiport is responsible for the development, marketing and administration of certification programs for the Microsoft Office suite of products. Certiport also offers Internet and Computing Core Certification (IC³), which validates basic knowledge and ability to use computer hardware, software and the Internet.

CONSULTTP,LTD.Consult TP, Ltd. is a risk management firm dedicated to ensuring the security of its clients’ investments through legal means. The firm is a member of the Union of Independent Services for Commercial Security Assistance. Consult TP provides a range of risk-management services, including due diligence investigation, prevention of hostile takeovers, project monitoring and assistance, investment protection, security for operations in Russia and abroad, staffing (including migration issues), legal consulting, and financial consulting.

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CyberPlat is the leading provider of payment processing services in Russia, controlling over 25 percent of the payment acceptance market. The company’s proprietary technology ensures highly competitive pricing of transaction processing. More than 1.5 billion payments move through CyberPlat’s network annually. The company’s cash acceptance network consists of more than 400,000 outlets around the world accepting cash payments for leading telecommunication companies, commercial television and numerous service providers, including Beeline, MTS, MegaFon, Tele2, NTV-Plus, and others. CyberPlat is a member of the World GSM Association and the Russian

Infocommunication Union. The company’s total turnover was $6.5 billion in 2008.

DECHERTAn international law firm with offices throughout the United States, Europe and Asia, Dechert has top-ranked, world-class practices in corporate and securities, complex litigation, finance and real estate, and financial services and asset management. The lawyers of Dechert’s Russia and CIS practice advise on a wide variety of complex cross-border transactions, encompassing mergers and acquisitions, joint ventures, private equity, and antitrust. The team also advises on banking and finance, including project finance, structured finance and securitization; capital markets; corporate restructuring; taxation; real estate and construction; administrative and customs matters; employment; intellectual

property; and Russian and international litigation and arbitration.

EXECUTIVEACTIONExecutiveAction LLC is a Washington-based international business solutions and risk management firm that has successfully handled difficult and complex problems around the world. Its Chairman and CEO, Neil C. Livingstone, has worked in Russia and the CIS for more than a decade, addressing the problems of U.S. companies there and Russian and CIS companies in the United States and Western Europe. ExecutiveAction’s Senior Advisory Board is chaired by former CIA Director R. James Woolsey, and includes former FBI Director Judge William Sessions (Vice Chairman). The company’s Business Advisory Board is composed of prominent figures from the legal, entertainment, computer, travel,

and auto industries.

FELDMANSCONSULTINGFeldmans Consulting is a boutique business and public relations consulting firm focused on Russian and other Eastern European markets. Feldmans Consulting was established in 2005 and is headquartered in northern New Jersey. Its founding member, Pavel Ivlev, has practiced Russian and international commercial law since 1990. Feldmans possesses unique expertise in providing strategic advice and developing business/legal solutions for U.S. businesses entering the Russian market. In particular, it serves as, and helps clients maintain, a reliable and sustainable bridge between American and Russian counterparts based on trust,

openness and mutual respect.

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INTER-CAPITALInter-Capital, Inc. is a New York-based international executive search consulting firm, which concentrates on a variety of fields including investment banking, private equity, finance, marketing, HR, management, and oil & gas industries in emerging markets. The company has conducted searches in 18 countries and has operated in Russia since 1995 as one of the leading headhunting firms in the region. While Inter-Capital’s candidate base is global, its New York offices give the company an advantage by providing easy access to the largest Russian-speaking professional community outside of Russia.

IRISCAPITALPARTNERSIris Capital Partners is a boutique, independent advisory firm specializing in merger and acquisition advisory services including valuation, joint-venture creation and due diligence in the Russian Federation and the United States. The firm’s breadth of clients includes both public and privately held companies in numerous industries that are interested in growing, restructuring or valuing their business.

Iris Capital Partners believes in creating win-win arrangements that respect both the interests of the investor as well as those of local partners. Such an approach leads to a more effective

post-merger integration, higher profitability and lower costs.

MERCKMerck & Co., Inc., which does business in many countries of the world as Merck Sharp & Dohme (MSD), is a leading research-driven pharmaceutical company dedicated to placing patients first. Established in 1891, Merck discovers, develops, manufactures, and markets vaccines and medicines to address unmet medical needs. In 1993, MSD officially opened its office in Moscow, Russia. Today, Merck Sharp & Dohme carries out significant research work in Russia. The company also devotes extensive efforts to increase access to medicines through far-reaching programs that not only donate Merck medicines but help deliver them to the people who need them.

INTER-CAPITAL, INC.

FSVCThe Financial Services Volunteer Corps (FSVC) is a not-for-profit, private-public partnership whose mission is to help build sound banking and financial systems in transition and developing countries. FSVC’s work includes strengthening commercial banking systems, developing central bank capabilities and building capital markets. FSVC structures practical, results-oriented technical assistance and training missions staffed by financial sector practitioners who serve as unpaid volunteers. By recruiting professionals at the peak of their careers to serve as volunteers, FSVC provides technical assistance that is objective, independent and state-of-the-art. FSVC has worked in Russia for 18 years in close partnership with the Central Bank of Russia, other government agencies and banking associations.

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TDINTERNATIONALTD International (TDI) is a boutique consulting firm that provides strategic advisory and risk management services tailored specifically to meet client objectives. Clients rely on TDI’s services to protect and secure their assets, their reputation and their bottom line. The sensitive nature of each project for which TDI is engaged requires the highest standards of professionalism, confidentiality, accuracy, and responsiveness to client requirements.

TMKIPSCOOAO TMK (TMK) is Russia’s largest manufacturer and exporter of steel pipes and ranks among the global top three pipe producers. Founded in 2001, TMK includes the Volzhsky, Seversky, Sinarsky, and Taganrog plants along with TMK Oilfield Services in Russia, TMK-Kaztrubprom in Kazakhstan, TMK-Artrom and TMK-Resita in Romania and TMK IPSCO in the U.S. In 2008, consolidated net sales totaled $5.8 billion and EBITDA stood at $1 billion. Products include seamless threaded pipes for oil and gas fields (OCTG), seamless line pipes for infield pipelines, seamless pipes for industrial use, large-diameter welded pipes, energy tubulars (welded OCTG),

and welded pipes for industrial use.

UFGASSETMANAGEMENTUFG Asset Management (UFG AM) is a leading alternative asset manager in Russia with $1.11 billion in assets and commitments serving onshore and offshore institutional and private investors. The co-founders of Russia’s prominent investment bank UFG, Charles Ryan and the late Boris Fedorov, set up UFG AM in 1996.

In 2005, UFG sold its investment banking business to Deutsche Bank (DB), but UFG AM remained independent. In 2008, UFG AM sold 40 percent of its onshore mutual funds business to DB (Deutsche UFG Capital Management) but independently runs offshore hedge funds, private equity and real estate funds, and has a profitable wealth management business.

WICKSGROUPThe Wicks Group, PLLC (TWG) provides specialized legal and consulting services to clients with aviation-related interest. Clients from all aspects of the aviation sector rely on TWG to help them meet their business development, operations improvement and problem resolution needs. Industries served include governments; airlines; airports, airport management firms, and service providers; aircraft manufacturers; corporate and business jets; and research institutes.

TWG is committed to providing the expertise and solutions needed to produce exceptional results and value for each client. The company’s depth of aviation experience, commitment to excellence and client satisfaction and global reach place TWG at the

forefront of aviation legal and consulting firms.

servicesBusiness Development/Access •TheUSRBCoffersitsmembersfrequentopportunitiestorelayconcernsdirectlyto thehighestlevelsoftheU.S.andRussiangovernments.•Wefacilitatememberinputongovernmentpoliciesthatdirectlyaffectbusiness.• Our powerful relationships benefit members facing market access, tax policy, and propertyrightschallenges.

Government RelationsTheUSRBCengagesregularlywiththeU.S.ExecutiveBranchandCapitolHilltopromoteabalanceddiscussiononU.S.policytowardsRussia,advancethebilateralcommercialagen-da,andvoicememberconcerns. Wecurrently lead thebroadbusinesscommunityeffortassociatedwithRussia’sWTOaccession,The CoalitionforU.S.-RussiaTrade(www.usrussiatrade.org).

Dispute ResolutionMembers 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

Market Intelligence• Regular member briefings providing outside expert opinion and experience on industry- specific topics and broader commercial relations.• Regular e-mail alerts on significant political and eco nomic developments in Russia.•RussiaBusinessWatch—aleadingpublicationonbilateraltradeandinvestment.

the u.s.-Russia Business Council (usRBC)

Membership Questions? Contact Lucy Rojansky Director of Membership affairs�0�-��-��0/ [email protected]

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.

services

special room rates for UsrBC Members

at Marriott hotels in Moscow

MarriottispleasedtoprovidemembersoftheU.S.-RussiaBusinessCouncilwithdiscountedroomratesatMoscowMarriottRoyalAurora,

MoscowMarriottGrandandMoscowMarriottTverskayahotels.

WithquestionsregardingthisspecialroomratesofferformembersoftheU.S.-RussiaBusinessCouncil,

pleasecontactMoscowMarriottClusterReservationsDepartmentatreservations@marriott-moscow.ru

orviaphone+74959370055.

RBW: Winter 2009/10

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