Russia was the subject of an annual conference organised by the newspaper Handelsblatt.
During the past twenty years Europe has travelled a path from Gorbachev-mania to Putin-phobia. These were the opening words at the 20th Berlin Conference of the German economic and financial newspaper Handelsblatt uttered by the noted journalist Gabriele Krone-Schmalz, who had for many years worked as German television's Channel 1 correspondent in Moscow. That, she said, was a major mistake made by European politicians. When Mr Putin came to power he put the stake on Europe, specifically on Germany. But the current head of the German Government has missed the chance, Ms Krone-Schmalz believes. The Chancellor has allowed herself to be led by East European EU members who still bear grudges against Russia. Europe should proceed from its own priorities, the speaker believes. But it would be a mistake to ascribe one's own priorities to others. These words of a German journalist sum up the essence of today's tensions in the relations between Europe and Russia.
On the first day three German journalists presented their views on the political and economic situation in Russia. Matthias Schepp of the prestigious weekly Der Spiegel, like Krone-Schmalz, stressed that the West had a poor grasp of the processes taking place in Russia. He said that over the centuries Russia had tended to be either underestimated or overestimated. At the same time he said that ordinary people both in Germany and in Russia knew a good deal about each other and were in a position to take a sober view of developments in both countries (unlike the politicians).
Today, in the words of Alexander Rahr, a prominent German expert on Russia, the West is dealing with "the fourth Russia". The first Russia was communist, the second, Yelstin's Russia, was market-oriented and the third, Putin's Russia, was consolidated. Under Medvedev the country entered the phase of modernisation. But he did not presume to predict where Russia would end up because the current crisis and the new situation in the world after Barack Obama came into power in the US could substantially change Russia's policy.
Another German journalist, Elke Windisch, who works in Moscow, cast her mind back to the fall of Rome under Emperor Diocletian to show that the current Russian power structure with President Medvedev and Prime Minister Putin does not fit into Western ideas of Moscow which has always had a single ruler beginning with Joseph Stalin and ending with Boris Yeltsin. It is not by chance that journalists, including Mr Rahr, a connoisseur of Russia, opened the conference. They set the tone by trying to draw a general political picture before economists and businessmen could delve into particulars.
Concrete business
Kicking off the debate were Michael Harms, the head of the Russian-German Chamber of Commerce, and Professor Reiner Lindner, the head of Germany's Eastern Economic Committee, easily the most influential group of German businessmen in terms of trade with Russia and China. Mr Harms, who is permanently stationed in Moscow, spoke about the consequences of the crisis. Predictably, the German businessman did not say anything new. He noted the falling purchasing power of Russians in the context of the crisis. He predicted massive layoffs in the first half of the year and a fall of wages by up to 40%. All this may change the social mood. He also spoke about the Government's attempts to deal with the crisis. He mentioned the 200 billion dollars injection of government money into the economy, the growing share of the state in the country's economy and the resulting shrinking of the currency reserves. According to Mr Harms, for foreign businessmen in Russia all that spelled worsening credit conditions for the Russian partners, closure of some projects and renunciation of earlier signed transactions, deterioration of payment discipline, the adoption of a protectionist policy by the Russian Government and, as a consequence, higher customs duties and costlier exports to Russia. All this has negative consequences such as the withdrawal of international corporations from the Russian market and capital flight from Russia.
An opinion poll conducted by the Russian-German Chamber of Commerce among nearly 600 of its members on the impact of the crisis on business merits attention. At the end of 2008 only 36% of respondents said it had had no impact. And yet as of November 2008, 67% described their financial position as "good". 46% hope the business climate in the country will improve in the next 12 months and 62% even plan to invest in the Russian economy. True, 30% believe that the business climate in Russia will deteriorate further.
However, the German businessmen have also noted what to them looks like a positive impact of the crisis on Russian business. Incidentally, nearly all the German firms present in the Russian market intend to stay in Russia, according to the Chamber. The positive impact, according to Mr Harms, is the possibility to buy companies and increase stakes in them thus expanding business in Russia, reducing pressure from competition and using such opportunities as: falling prices of real estate and rent, less tension in the labour market and a broader framework for negotiations with subcontractors and partners.
Rainer Lindner named the Russian industry sectors that have been hit hardest by the crisis. They include the banking sector which badly needs consolidation, the car industry and construction. He noted that Russia was short of innovative dynamics. That is the number one problem for an economy this size. In this connection he cited OECD data for 2008, which show that Russian had taken out no hi-tech patents. In nanotechnologies the share of Russian patents is 0.5% (compared with Germany's 8.8%) reaching 3% only in the sphere of nuclear technologies.
Assessing the future spheres of cooperation that are most interesting for the German know-how, Mr Lindner mentioned modernisation of the medical sector, utilities infrastructure and social institutions. The stimulus was provided by the demographic crisis which manifested itself in falling birth rate, high mortality rate and shortening life expectancy. That, according to Mr Lindner, has a direct impact on the country's stability. The country is ceasing to be competitive in the world. That is why Brussels must negotiate with Russia a new treaty on partnership and cooperation in the field of know-how. Such cooperation must range from assistance in training managers and engineers to joint research projects and the creation of industrial parks. The crisis should encourage the EU and Russia to seek compromises. The EU must quickly sign a partnership and cooperation treaty with Russia and eliminate the barriers to economic cooperation on both sides. Among the barriers Mr Lindner named the rise of customs duties on cars, including used cars, agricultural machinery and planes imported by Russia. On the other hand, Germany, in his opinion, must make broader use of state guarantees in the framework of Germes and expedite the procedure of payment of money under that scheme. All that would help boost German exports to Russia.
Mr Lindner could not help mentioning the recent Russian-Ukrainian price dispute which led to a suspension of natural gas supplies to Europe. The German managers, he said, believe the problem should be solved through strengthening the legal framework and closer cooperation between Russia and the German firms in making the Russian economy more energy efficient.
Strategic sectors
The forum paid considerable attention to investment in the so-called strategic sectors of the Russian economy. This was the theme of the contributions by two lawyers: Christian von Wistinghausen and Alex Alex Stoljarskij (both from the legal firm Beiten Burkhardt). They focused on two aspects. On the one hand, the strategic sectors such as oil and gas, nuclear energy, the banking sector, insurance and some others are the most profitable in Russia and the most attractive for potential investors. On the other hand, Russia needs modern technologies which can mainly be made available by Western firms.
The law on foreign investments in strategic enterprises that are key to the country's defence and security came into force on May 7, 2008 when the early signs of the crisis appeared on the world horizon. Undoubtedly, the law was prompted above all by Russia's bid to join the WTO and in this connection introduce protective measures for some sectors which could attract foreign companies after Russia's accession. Vladimir Putin is known to have insisted on the adoption of this law since 2005. The long-standing problem for Russian law-makers was that they did not take into account the time factor - the world economic trends - and by passing that law did a disservice to Russia by restricting the flow of badly needed modern technology into the country. The law covers practically 42 sectors of the economy and hampers the inflow of foreign capital and know-how into these sectors. The lawyer noted, however, that such restrictions had existed before 2008 impeding the access of foreign capital to such sectors as air carriage, insurance, banking and agriculture. From the German point of view the existing law is not unlike similar laws in other countries, for example, Germany. It seeks to create greater transparency and set clear-cut rules for the participation of foreign capital in the above sectors. Its shortcoming is excessive bureaucratisation of the process of due diligence and permission both in terms of the agencies involved (from anti-monopoly services to the FSB) and a substantial time lag, between three and six months. As is always the case with Russian legislation, the law leaves many questions essential for the foreign investor unanswered. The law covers not only strategic sectors. It also includes bank electronic systems and radioactive materials in medicine. The thresholds for activities in strategic sectors have not been determined, which is particularly important for the portfolio investor. The law ignores the problem of the creation of new companies in strategic sectors of the economy. For the foreign investor that means delay in making the decision to invest. From the point of view of German firms the law needs to be cast in a more articulate form, to name the strategic sectors to which it applies, to simplify and expedite the procedure of decision-making in response to requests from foreign companies.
The main conclusion prompted by the speeches of German economists and businessmen at the forum is that the Russian market is still attractive for foreign investments. During the crisis period Russia's need for capital and know-how to modernise its economy is particularly acute. Therefore the Russian Government and law makers should quickly pass new laws to facilitate the access of foreign capital to the country.
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During the crisis period our country needs to attract capital and know-how to modernise its economy more than ever before.
By Oleg Nikiforov