Graft continues to bite Kremlin

2011-09-17 13:48

Russia must wipe out corruption if it is to reform its economy after next year’s presidential election and faces years of budget deficits if it fails to do so, bankers and businessmen said this week.

The country’s finance minister Alexei Kudrin told the Reuters Russia Investment Summit that he expected a reform drive after the March election and that state spending should be cut to avoid a sharp increase in taxes.

While investors at the summit, including BlackRock Incorporated – the world’s largest asset manager – said they were optimistic about the prospects for Russia’s economy after the election, ­others offered words of caution.

Said Mikhail Alexeyev, head of the Russian arm of Italian bank UniCredit: “We all know very well that budget funds are being spent inefficiently.
“A huge amount of money will continue to be lost. I think taxes will rise and the budget deficit will stay.”

Corruption is widely seen by investors as the main stumbling block to attempts by the world’s largest energy producer to attract foreign direct investment into areas of its $1.5 trillion (about R11 trillion) economy other than the natural ­resource sector.

The lack of such investment threatens a further delay in Russian efforts to reduce reliance on energy revenue, a dependence which makes it vulnerable to oil price volatility.

The government says Russia needs oil prices to stay above $115 a barrel next year to balance its budget, compared with a spot price of $112 this week.

Corruption, which has dogged Russia for centuries and affects all levels of business and society, is regularly cited as the main reason equities in Russia trade at a big discount to emerging-market peers.

Few believe the government can cut spending even after the presidential election, which follows a parliamentary election in December.

Speaking at the summit, co-owner of metals company Norilsk Nickel, Vladimir Potanin, said: “The government will find it difficult to cut spending regardless of how many votes the next president gets. Therefore, the only way out (for the government) is to raise taxes.

“Business will stop investing and there will be capital outflows.”

Potanin, ranked by Forbes magazine as Russia’s fourth richest man with a fortune of $17.8 billion, expressed dismay at government overuse of oil revenue to support ailing industries.

“No one has spoken about (the fight against) corruption for some time,” he said, referring to one of the main points of President Dmitry Medvedev’s successful 2008 election campaign. Many political analysts expect Vladimir Putin, Medvedev’s mentor, to return to the Kremlin after four years as prime minister. One option for Putin would be to switch positions with Medvedev.

Some of the most bullish investment funds in Russia, such as Prosperity Capital which has $5 billion under management, also said corruption was an ­important risk for development.

Said Prosperity’s chief economist, ­Liam Halligan: “The Russians want corruption to be addressed and are worried about inflation.”

Some analysts put the size of the so-called grey economy in Russia at about the size of the gross domestic product. The Kremlin’s top economic adviser, Arkady Dvorkovich, told the summit it amounted to about 25% of GDP.

“There could be a situation in which we might not be about to move forward in the battle with corruption and I consider that the risk that is more important than any other,” Dvorkovich said.

Some officials have said a privatisation push under way in Russia could help reduce corruption because the private sector was better equipped to deal with it than sprawling state monopolies.

Alexeyev said the situation was more complicated. “Even if the privatisation of state banks takes place, it will be only partial and nothing will change – the state will continue appointing executives and we will not expect changes in the way (the sector) is managed.”

Potanin also said the state needed to give the private sector more chance to benefit from the global shift in economic power away from the West.

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